[Federal Register Volume 62, Number 17 (Monday, January 27, 1997)]
[Notices]
[Pages 3926-3930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1821]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No: IC-22474; 812-10230]


Principal Mutual Life Insurance Company, et al.

January 17, 1997.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to the Investment 
Company Act of 1940 (``1940 Act'').

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APPLICANTS: Principal Mutual Life Insurance Company (``Principal 
Mutual''), Principal Mutual Life Insurance Company Variable Life 
Separate Account (``Account'') and Princor Financial Services 
Corporation (``Princor'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 11(a) of the 
1940 Act.

SUMMARY OF APPLICATION: Applicants request an order under Section 11(a) 
of the 1940 Act approving an exchange offer in which certain variable 
universal life insurance policies issued by Principal Mutual and 
offered through the Account (``Old Policies'') may be exchanged for new 
variable universal life insurance policies issued by Principal Mutual 
and offered through the Account (``New Policies,'' collectively with 
Old Policies, ``Policies'').

FILING DATE: The application was filed on July 1, 1996, and amended on 
December 20. 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 February 12, 1997, 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 requester'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 Fifth 
Street,

[[Page 3927]]

N.W., Washington, D.C. 20549. Applicants, David J. Brown, Esq., The 
Principal Financial Group, Des Moines, Iowa 50392-0200.

FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Senior Counsel, or 
Kevin M. Kirchoff, Branch 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. Principal Mutual, a mutual life insurance company incorporated 
in Iowa, is authorized to do business in the 50 states of the United 
States, the District of Columbia, the Commonwealth of Puerto Rico, and 
the Canadian Provinces of Alberta, British Columbia, Manitoba, Ontario, 
and Quebec.
    2. The Account, a separate account of Principal Mutual, is 
registered under the 1940 Act as a unit investment trust.
    3. Princor, the principal underwriter for the Policies, is an 
indirect wholly owned subsidiary of Principal Mutual. Princor is 
registered with the Commission under the Securities Exchange Act of 
1934 as a broker-dealer, and is a member of the National Association of 
Securities Dealers, Inc.

Old Policies

    4. The Old Policies are flexible-premium life insurance policies 
that permit accumulation of policy values on a variable basis. The Old 
Policies require premium payments to be made in at least a specified 
amount for the first policy year, and have a minimum face amount of 
$25,000. An Old Policy matures on the policy anniversary following the 
95th birthday of the insured.
    5. Policy values of the Old Policies currently may be allocated to 
six divisions of the Account, each of which invests in an underlying 
fund sponsored by Principal Mutual. Policy values may be transferred 
among the six divisions of the Account, the first four transfers in a 
policy year at no charge, and additional transfers subject to a charge 
of $25 per transfer (with all transfers occurring on the same effective 
date counting as one transfer).
    6. The Old Policies permit partial surrenders and policy loans. 
Interest payable on policy loans is 8%; interest credited on loan 
accounts established in connection with outstanding loans is 6%.
    7. The Old Policies offer a choice of two death benefit options; a 
level death benefit equal to the Old Policy's face amount, or a death 
benefit equal to the face amount plus policy value.
    8. The Old Policies have both a front-end sales load and a 
contingent deferred sales load (``CDSL''). The front-end sales load is 
5.00% of all premiums paid under an Old Policy. A surrender charge 
consisting of a CDSL and a contingent deferred acquisition charge 
(``CDAC'') is deducted upon surrender of an Old Policy. These surrender 
charges vary with the issue age, duration since issue, and, where 
allowed by law, the gender of the insured.
    9. The maximum CDSL under the Old Policies is not greater than 25% 
of the minimum payment required in the first year (which is always less 
than a Guideline Annual Premium, as defined in Rule 6e-3(T)(c)(8) under 
the 1940 Act). The CDAC varies from $0.43 per $1,000 of face amount to 
$10.58 per $1,000 of face amount according to tables set forth in the 
Old Policy. Additional CDAC and CDSL charges are computed upon 
increases in face amount. The surrender charges apply only at the time 
of a full surrender or lapse of an Old Policy. There is a charge of the 
lesser of $25 or 2% of the amount surrendered for processing partial 
surrenders under the Old Policy. The amount of the surrender charges 
decreases over time according to when the surrender or lapse occurs, 
according to the following schedule:

------------------------------------------------------------------------
                                                               Surreder 
                       Surrender year                           charge  
                                                              percentage
------------------------------------------------------------------------
1-3........................................................        100.0
4..........................................................         87.5
5..........................................................         75.0
6..........................................................         62.5
7..........................................................         50.0
8..........................................................         37.5
9..........................................................         25.0
10.........................................................         12.5
11 or more.................................................          0.0
------------------------------------------------------------------------

    10. An amount equal to 2.00% of premiums received under the Old 
Policies is deducted for state premium tax obligations of Principal 
Mutual in connection with receipt of premiums under the Old Policies.
    11. A charge is deducted from the policy value of each Old Policy 
monthly for administration of the Old Policies. This charge currently 
is $4.75 per month, and is guaranteed not to be more than $5.00 per 
month.
    12. Under the Old Policies, a mortality and expense risks charge is 
deducted from the Account daily at an annual rate of 0.75% of average 
daily Account value (guaranteed not to exceed 0.90%).
    13. A cost of insurance charge that is guaranteed to be no more 
than that permitted under the applicable 1980 Commissioners Standard 
Ordinary Mortality Table (``1980 CSO Table'') is deducted from policy 
value each month.
    14. Several optional insurance riders are offered by Principal 
Mutual in connection with the Old Policies. Among these are riders 
providing for: (i) Increases in face amount every three years based 
upon cost of living increases; (ii) waiver of monthly deductions in the 
event of disability of the insured; (iii) optional increases in face 
amount upon certain dates or the occurrence of certain events; (iv) 
accidental death benefit; (v) term insurance on the lives of insured 
children; (vi) term insurance on an insured spouse; (vii) change of the 
person insured; (viii) accelerated death benefit; and (ix) a death 
benefit guarantee.

New Policies

    15. The New Policies are flexible-premium life insurance policies 
that permit accumulation of policy values on a variable, fixed, or 
combination of variable and fixed basis. The New Policies require 
premium payments to be made in at least a specified amount for the 
first 24 policy months (where permitted by state law), and have a 
minimum face amount of $50,000. The New Policies mature on the policy 
anniversary following the 95th birthday of the insured.
    16. Policy values of the New Policies currently may be allocated to 
divisions of the Account that invest in thirteen different underlying 
funds--ten mutual funds sponsored by Principal Mutual, two investment 
portfolios of Fidelity Variable Insurance Products Fund, and one 
investment portfolio of Fidelity Variable Insurance Products Fund II.
    17. Policy values may also be accumulated on a guaranteed basis by 
allocation to Principal Mutual's general account (``Fixed Account''). 
Interest on accounts invested in the Fixed Account is guaranteed to be 
at least 3% on an annual basis.
    18. Policy values may be transferred among the divisions of the 
Account without charge, although Principal Mutual reserves the right to 
impose a charge of up to $25 per transfer on unscheduled transfers in 
excess of 12 in a policy year. Transfers to and from the Fixed Account 
are permitted, subject to certain restrictions described in the 
prospectus for the New Policies.
    19. The New Policies permit partial surrenders and policy loans. 
Interest

[[Page 3928]]

payable on policy loans is 8%; interest credited on loan accounts 
established in connection with outstanding loans is 6% during the first 
ten policy years and 7.75% thereafter.
    20. The New Policies offer a choice of two death benefit options: a 
level death benefit equal to the New Policy's face amount, or a death 
benefit equal to the face amount plus policy value.
    21. The New Policies have both a front-end sales load and a CDSL. 
The front-end sales load is 2.75% of: (a) premiums paid during each of 
the first ten policy years up to one ``target premium'' for the initial 
face amount of insurance; and (b) premiums up to the target premium for 
an incremental amount of insurance added by a face amount increase 
(``incremental target premium'') paid during each of the first ten 
policy years after a face amount increase that are allocable to the 
increase. Payments after an increase in face amount are allocated 
between the ``base policy'' and the ``incremental policy'' that is 
added by increase according to the relative face amounts of the base 
policy and the incremental policy. Payments in any policy year in the 
first ten policy years in excess of the target premium (or payments in 
the first ten policy years after a face amount increase that are 
allocable to the increase in face amount and are in excess of the 
incremental target premium) are assessed a front-end sales load of 
0.75%. Payments made after ten policy years (if there has been no face 
amount increase), or ten policy years after a face amount increase, are 
not subject to a front-end sales charge.
    22. A surrender charge consisting of the CDSL and a CDAC is 
deducted upon surrender of a New Policy. The maximum CDAC is $3 per 
$1,000 for the first $500,000 of face amount. The maximum CDSL is 
47.25% of the first two target premiums received (and the first two 
target premiums received for any incremental amount of insurance 
coverage added by an increase in face amount) for insureds under age 
66. If the insured is older than 65 at the Policy Date or the date of a 
face amount increase, then the number of target premiums to which this 
charge applies is reduced from two to: (a) 1.5 for ages 66-70; (b) 1.1 
for ages 71-75; (c) 0.8 for ages 76-80; or (d) 0.5 for ages 81-85. The 
surrender charges apply only at the time of a full surrender or lapse 
of a New Policy. There is a charge of the lesser of $25 or 2% of the 
amount surrendered for processing partial surrenders. The amount of the 
surrender charge decreases over time according to when the surrender or 
lapse occurs, according to the following schedule:

------------------------------------------------------------------------
                                                              Surrender 
                      Surrender year                           charge   
                                                             percentage 
------------------------------------------------------------------------
1-5.......................................................        100.00
6.........................................................         95.24
7.........................................................         85.71
8.........................................................         71.43
9.........................................................         52.38
10........................................................         28.57
11 or more................................................          0.0 
------------------------------------------------------------------------

    23. The amount of the CDSL that applies in the event of a surrender 
or lapse in the first two policy years generally will be limited as a 
result of ``refund rights'' required by paragraph (b)(13)(v)(A) of Rule 
6e-3(T). In the event of such a surrender or lapse, the CDSL will be 
limited to an amount that would cause the total sales load (sales load 
deducted from premiums plus the CDSL) paid in connection with premiums 
paid up to the first two guideline annual premiums not to exceed the 
sum of: (i) 30% of the premiums paid up to the lesser of one guideline 
annual premium or the maximum amount of premiums subject to the 
deferred sales charge; plus (ii) 10% of the premiums paid in excess of 
one guideline annual premium, up to the lesser of two guideline annual 
premiums or the maximum amount of premiums subject to the deferred 
sales charge.
    24. Charges are deducted from premium payments under the New 
Policies for state, local, and federal taxes. An amount equal to 2.20% 
of premiums received under the New Policies is deducted for state and 
local premium tax obligations of Principal Mutual in connection with 
receipt of premiums under the New Policies, and 1.25% is deducted for 
Principal Mutual's increased federal income tax obligations because it 
must amortize a portion of its expenses in offering the Policies over 
ten years for federal income tax purposes.
    25. A charge for administration of the New Policies is deducted 
monthly from the policy value of each New Policy. For the first policy 
year, this charge currently is $0.40 per $1,000 of face amount up to 
$500,000, and is guaranteed to be no more than $0.60 per $1,000 of face 
amount up to $500,000. The current minimum monthly administration 
charge in the first policy year is $6.00, and is guaranteed to be no 
more than $16.67. After the first policy year, the monthly 
administration charge currently is $6.00 and is guaranteed to be no 
more than $10.00.
    26. A cost of insurance charge that is guaranteed to be no more 
than that permitted under the applicable 1980 CSO Table is deducted 
from policy value each month.
    27. For the first nine policy years, a mortality and expense risks 
charge is deducted from policy value monthly at an annual rate of 0.90% 
of the value of the amount of policy value allocated to the divisions. 
After the ninth policy year, the mortality and expense risks charge 
will be reduced to a 0.27% annual rate. Principal Mutual reserves the 
right to increase the 0.27% charge to as much as 0.90%, but only for 
Policies issued on or after the date of such an increase and not for 
Policies already in force at the time of the increase. Thus, a New 
Policy acquired in an exchange that had the reduction to 0.27% would 
not be subject to any subsequent increase.
    28. Several optional insurance riders are offered by Principal 
Mutual in connection with the New Policies. Among these riders are 
three that permit face amount increases without new evidence of 
insurability, and accounting benefit riders that are designed to 
minimize the adverse impact on the earnings of a business that 
purchases a New Policy that would otherwise result under generally 
accepted accounting principles.

Offer of Exchange

    29. Applicants represent that the offer to exchange Old Policies 
for New Policies will be made by providing owners or Old Policies a 
prospectus for the New Policies, accompanied by a letter explaining the 
offer and a piece of sales literature that compares the two Policies. 
The offering letter will advise the Old Policy owner that personalized 
illustrations comparing the two Policies using the information 
particular to that Policy owner will be available without cost upon 
request.
    30. Applicants state that the exchange offer (which will remain 
open for at least one year) will provide that, upon acceptance of the 
offer, a New Policy will be issued with the same face amount and policy 
value as the Old Policy surrendered in the exchange.
    31. The risk class for a New Policy acquired by exchange will be 
that most similar to the risk class for the exchanged Old Policy. If an 
Old Policy includes a face amount increase at a risk class less 
favorable than that for the Old Policy as originally issued, then the 
New Policy will be issued at the risk class most similar to that for 
the Old Policy as originally issued. Applicants represent that new 
evidence of insurability will not be required as a condition of the 
exchange unless: (i) The Policy owner requests one or more of certain 
optional insurance riders

[[Page 3929]]

under the New Policy that were not a part of the Old Policy; (ii) the 
Policy owner applies to have the insured's rating upgraded to the 
``preferred'' rating that is offered under the New Policies but not 
under the Old Policies; or (iii) the Policy owner requests a face 
amount increase at the time of the exchange. The New Policy's $50,000 
minimum face amount increase will be reduced to $25,000 for increases 
requested at the time of the exchange. If new underwriting is required 
as part of the exchange for reason number (ii) above, a charge of $100 
normally would be imposed. If the Policy owner also requests a face 
amount increase of $25,000 or more at the time of the exchange, 
however, the $100 charge for the new underwriting will be waived. Any 
increase in face amount, upgrade to a preferred rating, and any new 
rider added in connection with an exchange will take effect on the next 
date that monthly charges are deducted under the New Policy after the 
new underwriting is completed.
    32. Applicants represent that no surrender charge will be deducted 
upon the surrender of an Old Policy in connection with an exchange, and 
no front-end sales load will be deducted from the proceeds of that 
surrender when those proceeds are applied to the purchase of a New 
Policy as part of an exchange. If the policy date of the Old Policy is 
the same day of the month as the policy date of the New Policy, then 
surrender charges and front-end sales loads on subsequent premium 
payments for the New Policy will be calculated as if the policy date of 
the Old Policy were also the policy date of the New Policy. If the 
policy date of the Old Policy is on a day of the month different from 
the policy date of the New Policy, then surrender charges and front-end 
loads on subsequent premium payments for the New Policy will be 
calculated as if the monthly date (the day of the month which is the 
same as the day of the policy date) of the New Policy that would have 
immediately preceded the policy date of the Old Policy were the policy 
date of the New Policy (``Adjusted Policy Date''). If an Old Policy 
includes one or more face amount increases, the surrender charge and 
front-end loads of a New Policy acquired in the exchange will be 
calculated using the Adjusted Policy Date as if the Adjusted Policy 
Date had been the effective date of each face amount increase under the 
Old Policy. Any commissions paid to sales representative for sales of 
New Policies by means of the exchange offer will be paid by Principal 
Mutual or Princor (and not by policy owners).
    33. Optional insurance riders attached to an Old Policy surrendered 
in an exchange will be eligible to be included with the New Policy 
acquired in the exchange only if that rider (or a substantially 
equivalent rider) is available under the New Policies.
    34. Applicants state that certain restrictions of the New Policies 
will be waived in connection with New Policies acquired in exchange for 
Old Policies. The $50,000 minimum face amount of the New Policies will 
be waived for New Policies acquired in exchange for an Old Policy with 
less than that face amount. There will be no minimum required premium 
payment for New Policies so acquired (even if the Old Policy exchanged 
was in its first two policy years).
    35. Loans under an Old Policy must be repaid in cash or by means of 
a partial surrender prior to the exchange. Any letters to Old Policy 
owners describing the exchange offer will include the fact that loans 
must be repaid prior to the exchange and disclosure that repayment of a 
loan by means of a partial surrender could have adverse tax 
consequences to the Old Policy owner. Principal Mutual represents that 
it will waive the partial surrender charge that would otherwise be 
applicable to a partial surrender made in connection with accepting the 
exchange offer and that is used solely to pay off an outstanding loan.
    36. Applicants represent that the suicide clause, incontestability, 
and free time periods of the Old Policy will apply to the New Policy 
acquired in an exchange. That is, no new suicide clause, 
incontestability, or free look time periods will commence at the time 
of the exchange, and any such periods for the Old Policy that had not 
expired at the time of the exchange would carry over to the New Policy 
and would expire when they would have expired had no exchange taken 
place.

Applicants' Legal Analysis

    1. Section 11(a) of the 1940 Act makes it unlawful for any 
registered open-end company, or any principal underwriter for such a 
company, to make or cause to be made an offer to the holder of a 
security of such company, or of any other open-end investment company, 
to exchange his security for a security in the same or another such 
company on any basis other than the relative net asset values of the 
respective securities, unless the terms of the offer have first been 
submitted to and approved by the Commission or are in accordance with 
Commission rules adopted under Section 11.
    2. Section 11(c) of the 1940 Act, in pertinent part, requires, in 
effect, that any offer of exchange of the securities of a registered 
unit investment trust for the securities of any other investment 
company be approved by the Commission or satisfy applicable rules 
adopted under Section 11, regardless of the basis of the exchange.
    3. The Account is registered under the 1940 Act as a unit 
investment trust. Accordingly, the proposed exchange offer constitutes 
an offer of exchange of two securities, each of which is offered by a 
registered unit investment trust. Thus, unless the terms of the 
exchange offer are consistent with those permitted by Commission rule, 
Applicants may make the proposed exchange offer only after the 
Commission has approved the terms of the offer by an order pursuant to 
Section 11(a) of the 1940 Act.
    4. Applicants assert that the legislative history of Section 11 of 
the 1940 Act and the rules thereunder demonstrates that its purpose is 
to prevent 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, a practice found by Congress to be widespread in the 
1930's prior to adoption of the 1940 Act. Applications under Section 
11(a) and orders granting those applications appropriately have focused 
on sales loads or sales load differentials and administrative fees to 
be imposed for effecting a proposed exchange.
    5. Rule 11a-2, adopted under Section 11 of the 1940 Act, provides 
blanket Commission approval of certain types of offers of exchange of 
one variable annuity contract for another, or of one variable life 
insurance contract for another. Applicants believe that there is 
language in the Commission's release adopting the rule that suggests 
that the rule may have been intended to permit exchanges of funding 
options within a single variable life insurance policy but not the 
exchange of one such policy for another.
    6. Under Rule 11a-2, variable life insurance exchanges may vary 
from relative net asset exchanges only by reason of disclosed 
administrative fees, no sale loads or sales load differentials are 
permitted under the rule for such exchanges. Because both the Old and 
New Policies have both front-end and contingent deferred sales loads, 
Rule 11a-2 would be unavailable to the proposed exchanges, even if such 
policy-for-policy exchanges otherwise would be permitted under Rule 
11a-2.

[[Page 3930]]

    7. Adoption of Rule 11a-3 represents the most recent Commission 
action under Section 11 of the 1940 Act. As with Rule 11a-2, the focus 
of the Rule is primarily on sales or administrative charges that would 
be incurred by investors for effecting exchanges. Applicants assert 
that the terms of the proposed offer are consistent with Rule 11a-3 
because no additional sales charges will be incurred as a result of the 
exchange and no administrative fees will be charged to effect the 
exchange. Because the investment company involved in the proposed 
exchange offer is a separate account, and because it is organized as a 
unit investment trust rather than as a management investment trust, 
Applicants believe that they may not rely upon Rule 11a-3.
    8. Applicants assert that the terms of the proposed exchange do not 
present the abuses against which Section 11 was intended to protect. No 
additional sales load or other fee will be imposed at the time of 
exchange other than the $100 that may be imposed in connection with new 
underwriting needed for: (i) Certain optional insurance riders; (ii) an 
upgrade to a preferred rating class; or (iii) a face amount increase.
    9. The policy value and death benefit of a New Policy acquired in 
the proposed exchange will be precisely the same immediately after the 
exchange as that of the Old Policy exchanged immediately prior to the 
exchange. Accordingly, Applicants assert that the exchanges, in effect, 
will be relative net asset value exchanges that would be permitted 
under Section 11(a) if the Account were registered as a management 
investment company rather than as a unit investment trust.
    10. The description of the proposed exchange offer in letters to 
Old Policy owners and in the New Policy's prospectus will provide full 
disclosure of the material differences in the two policies. Those 
letters, and any other sales literature used in connection with the 
exchange offer, will have been filed with the National Association of 
Securities Dealers, Inc. for review. Each Old Policy owner will be 
offered personalized hypothetical illustrations that compare the Old 
and New Policies. Applicants assert that, assuming no premature 
surrender, the New Policies should be less expensive than the Old 
Policies for many, if not most, Policy owners. Applicants believe that 
the disclosure provided and the illustrations provided upon request 
provide Old Policy owners with sufficient information to determine 
which Policy they prefer.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1821 Filed 1-24-97; 8:45 am]
BILLING CODE 8010-01-M