[Federal Register Volume 64, Number 71 (Wednesday, April 14, 1999)]
[Notices]
[Pages 18457-18461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9244]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-23774; File No. 812-11388]


The Equitable Life Assurance Society of the United States, et al.

April 7, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'' or 
``SEC'').

ACTION: Notice of Application for an order under Section 6(c) of the 
Investment Company Act of 1940 (the ``1940 Act'') granting exemptions 
from the provisions of Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 
Act and Rule 22c-1 thereunder to permit the recapture of credits 
applied to contributions made under certain deferred variable annuity 
contracts.

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SUMMARY OF APPLICATION: Applicants seek an order under Section 6(c) of 
the Act to the extent necessary to permit, under specified 
circumstances, the recapture of credits applied to contributions made 
under deferred variable annuity contracts and certificates (the 
``Contracts'') that Equitable will issue through the Separate Accounts, 
as well as other contracts that Equitable may issue in the future 
through Future Accounts that are substantially similar in all material 
respects to the Contracts (the ``Future Contracts''). Applicants also 
request that the order being sought extend to any other National 
Association of Securities Dealers, Inc. (``NASD'') member broker-dealer 
controlling or controlled by, or under common control with, Equitable, 
whether existing or created in the future, that serves as a distributor 
or principal underwriter for the Contracts or Future Contracts offered 
through the Separate Accounts or any Future Account (``Equitable 
Broker-Dealer(s)'').

APPLICANTS: The Equitable Life Assurance Society of the United States 
(``Equitable Life''), The Equitable of Colorado, Inc. (``EOC,'' and 
together with Equitable Life, ``Equitable''), Separate Account No. 45 
of Equitable Life (``SA 45''), Separate Account No. 49 of Equitable 
Life (``SA 49''), Separate Account VA of EOC (``SA VA,'' and together 
with SA 45 and SA49, the ``Separate Accounts''), any other separate 
account established by Equitable in the future to support certain 
deferred variable annuity contracts and certificates issued by 
Equitable (``Future Account''), EQ Financial Consultants, Inc. 
(``EQFC''), and Equitable Distributors, Inc. (``EDI'') (collectively, 
``Applicants'').

FILING DATE: The application was filed on October 30, 1998, and amended 
and restated on March 29, 1999.

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 SEC's Secretary and serving 
Applicant with a copy of the request, in person or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on April 30, 1999, 
and should be accompanied by proof of service on the 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, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609.

[[Page 18458]]

Applicants, c/o The Equitable Life Assurance Society of the United 
States, 1290 Avenue of the Americas, New York, New York 10104, Attn: 
Mary P. Breen, Esq.

FOR FURTHER INFORMATION CONTACT: Kevin P. McEnery, Senior Counsel, or 
Susan M. Olson, 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 
SEC's Public Reference Branch, 450 Fifth St., NW, Washington, DC 20549-
0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Equitable Life is a stock life insurance company organized under 
the laws of the State of New York. SA 45 and SA 49 were established in 
August 1994 and June 1996. Equitable Life serves as depositor of SA 45 
and SA 49. Equitable Life may in the future establish one or more 
Future Accounts for which it will serve as depositor.
    2. EOC is a stock life insurance company organized under the laws 
of the State of Colorado. SA VA was established in December 1996, 
pursuant to authority granted under a resolution of EOC's Board of 
Directors. EOC serves as depositor of SA VA. EOC may in the future 
establish one or more Future Accounts for which it will serve as 
depositor.
    3. SA 45 and SA 49 are each a segregated asset account of Equitable 
Life, and SA VA is a segregated asset account of EOC. Each of the 
Separate Accounts is registered with the Commission as a unit 
investment trust series investment company under the Act. SA 45 filed a 
Form N-8A Notification of Registration under the 1940 Act on September 
6, 1994, and SA 49 filed a Form N-8A under the Act on June 7, 1996. SA 
VA filed a Form N-8A on February 16, 1999. Each of the Separate 
Accounts will fund the variblabe benefits available under the Contracts 
funded through it. Units of interest in the Separate Accounts under the 
Contracts they fund will be registered under the Securities Act of 1933 
(the ``1933 Act''). In that regard, SA 45 and SA 49 filed Form N-4 
Registration Statements on September 30, 1998, under the 1933 Act 
relating to the Contracts. SA VA filed a Form N-4 Registration 
Statement on February 16, 1999, under the 1933 Act relating to the 
Contracts. Equitable may in the future issue Future Contracts through 
the Separate Accounts or through Future Accounts. That portion of the 
respective assets of the Separate Accounts that is equal to the 
reserves and other Contract liabilities with respect to SA 45, SA 49 or 
SA VA is not chargeable with liabilities arising out of any other 
business of Equitable Life or EOC, as the case may be. Any income, 
gains or losses, realized or unrealized, from assets allocated to the 
Separate Accounts are, in accordance with the respective Separate 
Accounts' Contracts, credited to or charged against the Separate 
Accounts, without regard to other income, gains or losses of Equitable 
Life or EOC, as the case may be.
    4. EQFC is an indirect, wholly-owned subsidiary of Equitable Life 
and will be the principal underwriter of SA 45 and SA VA and 
distributor of the Contracts funded through SA 45 (the ``SA 45 
Contracts'') and through SA VA (the ``SA VA Contracts''). EQFC is 
registered with the Commission as a broker-dealer under the Securities 
Exchange Act of 1934 (the ``1934 Act'') and is a member of the NASD. 
The SA 45 Contracts and the SA VA Contracts will be offered through 
registered representatives of EQFC and its affiliate who are registered 
broker-dealers under the 1934 Act and NASD members. EQFC, or any 
successor entity, may act as principal underwriter for any Future 
Account and distributor for any Future Contracts issued by Equitable in 
the future. A successor entity also may act as principal underwriter 
for SA 45 and/or SA VA. During May 1999, EQFC will change its name to 
AXA Advisors, Inc.
    5. EDI is an indirect, wholly-owned subsidiary of Equitable Life 
and will be the principal underwriter of SA 49 and SA VA and 
distributor of the Contracts funded through SA 49 (the ``SA 49 
Contracts'') and the SA VA Contracts. EDI is registered with the 
Commission as a broker-dealer under the 1934 Act and is a member of the 
NASD. The SA 49 and SA VA Contracts will be offered through registered 
representative of EDI and its affiliates, as well as through 
unaffiliated broker-dealers who have entered into agreements with EDI. 
All of such affiliates and unaffiliated broker-dealers will be 
registered broker-dealers under the 1934 Act and NASD members. EDI, or 
any successor entity, may act as principal underwriter for any Future 
Account and distributor for any Future Contracts issued by Equitable in 
the future. A successor entity also may act as principal underwriter 
for SA 49 or SA VA.
    6. The SA 45 Contracts and the SA 49 Contracts are part of 
Equitable Life's ``Accumulator'' line of annuity products and they are 
substantially similar in all material respects. They differ principally 
in the mix of mutual funds underlying each of the Separate Accounts and 
in the distribution channels used in the offering of the Contracts; 
otherwise, they are essentially identical. The SA VA Contracts are part 
of EOC's ``Accumulator'' line of annuity products. They are 
substantially similar in all material respects of the SA 45 and SA 49 
Contracts, except that they: (i) Only offer variable investment options 
during the accumulation period of the Contracts, (ii) do not offer a 
``guaranteed period account'' feature that involves a market value 
adjustment; and (iii) do not offer a combined guaranteed minimum income 
benefit and guaranteed minimum death benefit or ``baseBUILDER'' 
feature. EOC may, in the future, add these features to the SA VA 
Contracts. Contracts may be issued as individual retirement annuities 
(``IRAs,'' either ``Traditional IRAs'' or ``Roth IRAs''), or as non-
qualified annuitiess (``NQ'') for after-tax contributions only. NQ 
Contracts also my be used for certain types of qualified plans 
(``QP''). Each of the Contracts consists of (i) a basic form of group 
annuity contract (the ``Group Contract'') issued to a bank or trust 
company whose sole responsibility will be to serve as party to the 
Group Contract, (ii) a basic form of certificate issued under and 
reflecting the terms of the Group Contract, and (iii) forms of 
certificate endorsements to be used for specific forms of benefits 
under the certificates. In some states, the certificates will be issued 
in the form of individual contracts, rather than under a Group 
Contract.
    7. An IRA Contract may be purchased by rolling over or transferring 
a contribution of at least $25,000 or more from one or more individual 
retirement arrangements. Under a Traditional IRA Contract additional 
contributions of $1,000 or more may be added at any time subject to 
certain restrictions. Additional contributions under a Traditional IRA 
Contract are limited to $2,00 per year, but additional rollover or IRA 
transfer amounts are unlimited. In certain cases, additional amounts 
may not be added to a Roth IRA Contract. An NQ or QP Contract can be 
purchased with a contribution of $25,000 or more. Additional 
contributions of $1,000 or more can be made at any time, subject to 
certain restrictions. Certain restrictions also apply to the type of 
contribution Equitable will accept under QP Contracts. Different 
minimum contribution amounts may be established for other retirement 
plan

[[Page 18459]]

markets, including IRAs, or particular NQ markets, or for automatic 
investment programs.
    8. The Contracts offered by Equitable Life permit, and in the 
future the Contracts offered by EOC may permit, contributions to be 
allocated to guarantee periods (``Guarantee Periods'') expiring on 
specified dates. The Guarantee Periods will be funded through an 
Equitable Life ``non-unitized'' separate account (the ``Guaranteed 
Period Account''). The assets in the Guaranteed Period Account will not 
be subject to claims of Equitable Life's general creditors. Each 
Guarantee Period will provide a guarantee of the contribution allocated 
thereto and interest. The guarantee is supported by Equitable Life's 
general account assets, including those allocated to the Guaranteed 
Period Account. An upward and downward adjustment, or ``market value 
adjustment'' (``MVA''), will be made to the annuity account value in a 
Guarantee Period upon a withdrawal, surrender or transfer from a 
Guarantee Period prior to its expiration. Death benefit amounts based 
on annuity account value in a Guarantee Period will reflect only any 
upward MVA. Guarantee Period interests are registered under the 1933 
Act pursuant to a Form S-3 Registration Statement.
    9. SA45 currently is subdivided into 27 sub-accounts, each of which 
will be available under the SA45 Contracts. SA 49 currently is 
subdivided into 22 sub-accounts, each of which will be available under 
the SA 49 Contracts. SA VA currently consists of 22 sub-accounts, each 
of which will be available under the SA VA Contracts. The respective 
sub-accounts are referred to as ``Investment Funds.'' Each Investment 
Fund will invest in shares of a corresponding portfolio (``Portfolio'') 
of The Hudson River Trust (``HRT'') or EQ Advisors Trust (``EQAT,'' and 
together with HRT, the ``Trusts''). The Investment Funds, and in the 
case of the SA 45 and 49 Contracts the Guarantee Periods, will comprise 
the initial ``Investment Options'' under the Contracts. Each Trust is 
an open-end, diversified series management investment company 
registered under the Act, whose shares are registered under the 1933 
Act. Both Trusts are available under the Separate Accounts.
    10. HRT is managed and its Portfolios are advised by Alliance 
Capital Management L.P. (``Alliance''), a publicly traded limited 
partnership. Alliance is an indirect, majority-owned subsidiary of 
Equitable Life. EQFC has overall responsibility for the general 
management and administration of each EQAT Portfolio. Various entities 
serve as the investment advisers to one or more of the EQAT Portfolios. 
Equitable, at a later date, may determine to create an additional 
Investment Fund or Investment Funds of the Separate Accounts to invest 
in any additional Portfolio or Portfolios, or other such underlying 
portfolios or other investments as may now or in the future be 
available. Similarly, Investment Funds of the Separate Accounts may be 
combined or eliminated from time to time.
    11. The Contracts provide for various withdrawal options, annuity 
benefits and payout annuity options, as well as transfer privileges 
among Investment Options, dollar cost averaging, death benefit and 
other features. The SA 45, SA 49 and SA VA Contracts have identical 
charges at the separate account level consisting of (i) a withdrawal 
charge as a percentage of contributions declining from 8% in years one 
and two to 0% in year ten and thereafter, with a 15% ``free corridor'' 
amount, (ii) asset-based charges at the annual rates of 1.10% for 
mortality and expense risks, 0.25% for administration expenses, and 
0.25% for distribution expenses, assessed against the net assets of 
each Investment Fund, and (iii) currently, for SA 45 and SA 49 
Contracts only, an annual 0.30% charge for an optional ``baseBUILDER'' 
benefit feature. The underlying Trusts each impose investment 
management fees, Rule 12b-1 plan fees and charges for other expenses.
    12. Each time Equitable receives a contribution from a Contract 
owner, it will allocate to the owner's annuity account value a credit 
(the ``Credit'') equal to 3% of the amount of the contribution. 
Equitable will allocate Credits among the Investment Options in the 
same proportion as the corresponding contributions are allocated by the 
owner. Equitable will fund the Credits from its general account assets. 
Equitable will recapture Credits from an owner only if: (i) the owner 
returns the Contract during a 10-day (or longer, if required) ``free 
look'' period, or (ii) the owner annuitizes within three years of 
making a subsequent contribution, in which case Equitable will recover 
the amount of any Credit applicable to such contribution. Under the 
terms of the Contracts, Contract owners may not annuitize, i.e., 
commence annuity payments, earlier than five years from the date of the 
Contract.
    13. Applicants seek exemption pursuant to Section 6(c) from 
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder to the extent necessary to permit Equitable to issue 
Contracts and Future Contracts that provide for the recapture of an 
amount equal to any Credits in the following two instances: (i) when an 
owner returns a Contract to Equitable for a refund during the ``free 
look'' period, and (ii) when an owner annuitizes within three years of 
making a subsequent contribution, in which case Equitable will recover 
the amount of any Credit applicable to such contribution.

Applicants' Legal Analysis

    1. Section 6(c) of the 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 Act and the rules 
promulgated 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 Act. Applicants request that the Commission, 
pursuant to Section 6(c) of the Act, grant the exemptions summarized 
above with respect to the Contracts and any Future Contracts funded by 
the Separate Accounts or Future Accounts, that are issued by Equitable 
and underwritten or distributed by EQFC, EDI or Equitable Broker-
Dealers. Applicants state that Future Contracts funded by the Separate 
Accounts or any Future Account will be substantially similar in all 
material respects to the Contracts. Applicants believe that the 
requested exemptions are 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.
    2. Applicants represent that it is not administratively feasible to 
track the Credit amount in any of the Separate Accounts after the 
Credit is applied. Accordingly, the asset based charges applicable to 
the Separate Accounts will be assessed against the entire amounts held 
in the respective Separate Accounts, including the Credit amount, 
during the ``free look'' period and the three year period prior to 
annuitization. As a result, during such periods, the aggregate asset 
based charges assessed against an owner's annuity account value will be 
higher than those that would be charged if the owner's annuity account 
value did not include the Credit.
    3. Subsection (i) of Section 27 provides that Section 27 does not 
apply to any registered separate account funding variable insurance 
contracts, or to the sponsoring insurance company and principle 
underwriting of such

[[Page 18460]]

account, except as provided in paragraph (2) of the subsection. 
Paragraph (2) provides that it shall be unlawful for any registered 
separate account funding variable insurance contracts or a sponsoring 
insurance company of such account to sell a contract funded by the 
registered separate account unless, among other things, such contract 
is a redeemable security. Section 2(a)(32) defines ``redeemable 
security'' as any security, other than short-term paper, under the 
terms of which the holder, upon presentation to the issuer, is entitled 
to receive approximately his proportionate share of the issuer's 
current net assets, or the cash equivalent thereof.
    4. Applicants submit that the Credit recapture provisions of the 
Contracts would not deprive an owner of his or her proportionate share 
of the issuer's current net assets. Applicants state that an owner's 
interest in the amount of the Credit allocated to his or her annuity 
account value upon receipt of an initial contribution is not vested 
until the applicable free-look period has expired without return of the 
Contract. Similarly, Applicants state that an owner's interest in the 
amount of any Credits allocated upon receipt of subsequent 
contributions made during the three years before the owner annuitizes 
also is not vested. Until or unless the amount of any Credit is vested, 
Applicants submit that Equitable retains the right and interest in the 
Credit amount, although not in the earnings attributable to that 
amount. Thus, Applicants argue that when Equitable recaptures any 
Credit it is simply retrieving its own assets, and because an owner's 
interest in the Credit is not vested, the owner has not been deprived 
of a proportionate share of the applicable Separate Account assets, 
i.e., a share of the applicable Separate Accounts assets proportionate 
to the owner's annuity account value (including the Credit).
    5. In addition, with respect to Credit recapture upon the exercise 
of the free-look privilege, Applicants state that it would be patently 
unfair to allow an owner exercising that privilege to retain a Credit 
amount under a Contract that has been returned for a refund after a 
period of only a few days. Applicants state that if Equitable could not 
recapture the Credit, individuals could purchase a Contract with no 
intention of retaining it, and simply return it for a quick profit.
    6. Furthermore, Applicants state that the recapture of Credits 
relating to subsequent contributions made within three years of 
annuitization is designed to provide Equitable with a measure of 
protection against ``anti-selection.'' Applicants state that the risk 
is that, rather than spreading contributions over a number of years, an 
owner will make very large contributions shortly before annuitizing, 
thereby leaving Equitable less time to recover the cost of the Credits 
applied, to its financial detriment. Again, the amounts recaptured 
equal the Credits provided by Equitable from its own general account 
assets, and any gain would remain as part of the Contract's value at 
annuitization.
    7. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put 103% 
of their contributions to work for them in the selected Investment 
Options. Also, any earnings attributable to the Credit will be retained 
by the owner, and the principal amount of the Credit will be retained 
if the contingencies set forth in the application are satisfied.
    8. Further, Applicants submit that the recapture of any Credit only 
applies in relation to the risk of anti-selection against Equitable. 
Applicants state that Equitable's right to recapture Credits applies to 
subsequent contributions made within three years of annuitization 
protects it against the risk that owners will contribute larger amounts 
as they approach an annuitization date to obtain the Credit, while 
avoiding Contract charges over the long term. With respect to refunds 
paid upon the return of Contracts within the ``free-look'' period, the 
amount payable by Equitable must be reduced by the allocated Credits. 
Otherwise, Applicants state that purchasers could apply for Contracts 
for the sole purpose of exercising the free-look fund provision and 
making a quick profit.
    9. Applicants submit that the provisions for recapture of any 
applicable Credit under the Contracts do not, and any such Future 
Contract provisions will not, violate Section 2(a)(32) and 27(i)(2)(A) 
of the Act. Nevertheless, to avoid any uncertainties, Applicants 
request an exemption from those Sections, to the extent deemed 
necessary, to permit the recapture of any Credit under the 
circumstances described herein with respect to the Contracts and any 
Future Contracts, without the loss of the relief from Section 27 
provided by Section 27(i).
    10. Section 22(c) of the 1940 Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company, whether or not members of any 
securities association, to the same extent, covering the same subject 
matter, and for the accomplishment of the same ends as are prescribed 
in Section 22(a) in respect of the rules which may be made by a 
registered securities association governing its members. Rule 22c-1 
thereunder prohibits a registered investment company issuing any 
redeemable security, a person designated in such issuer's prospectus as 
authorized to consummate transactions in any such security, and a 
principal underwriter of, or dealer in, such security, from selling, 
redeeming, or repurchasing any such security except at a price based on 
the current net asset value of such security which is next computed 
after receipt of a tender of such security of redemption or of an order 
to purchase or sell such security.
    11. Arguably, Equitable's recapture of the Credit might be viewed 
as resulting in the redemption of redeemable securities for a price 
other than one based on the current net asset value of the Separate 
Accounts. Applicants contend, however, that recapture of the Credit is 
not violative of Section 22(c) and Rule 22c-1. Applicants argue that 
the recapture does not involve either of the evils that Rule 22c-1 was 
intended to eliminate or reduce, namely: (i) the dilution of the value 
of outstanding redeemable securities of registered investment companies 
though their sale at a price below net asset value or their redemption 
or repurchase at a price above it, and (ii) other unfair results 
including speculative trading practices. See Adoption of Rule 22c-1 
under the 1940 Act, Investment Company Release No. 5519 (Oct. 16, 
1968). To effect a recapture of a Credit, Equitable will redeem 
interests in an owner's annuity account at a price determined on the 
basis of current net asset value of the respective Separate Accounts. 
The amount recaptured will equal the amount of the Credit that 
Equitable paid out of its general account assets. Although owners will 
be entitled to retain any investment gain attributable to the Credit, 
the amount of such gain will be determined on the basis of the current 
net asset value of the respective Separate Accounts Thus, no dilution 
will occur upon the recapture of the Credit. Applicants also submit 
that the second harm that Rule 22c-1 was designed to address, namely, 
speculative trading practices calculated to take advantage of backward 
pricing, will not occur as a result of the recapture of the Credit. 
However, to avoid any uncertainty as to full compliance with the Act, 
Applicants

[[Page 18461]]

request an exemption from the provisions of Section 22(c) and Rule 22c-
1 to the extent deemed necessary to permit them to recapture the Credit 
under the Contracts and Future Contacts.

Conclusion

    Applicants submit that their request for an order is appropriate in 
the public interest. Applicants state that such an order would promote 
competitiveness in the variable annuity market by eliminating the need 
to file redundant exemptive applications, thereby reducing 
administrative expenses and maximizing the efficient use of Applicants' 
resources. Applicants argue that investors would not receive any 
benefit or additional protection by requiring Applicants to repeatedly 
seek exemptive relief that would present no issue under the Act that 
has not already been addressed in their Application described herein. 
Applicants submit that having them file additional applications would 
impair their ability effectively to take advantage of business 
opportunities as they arise. Further, Applicants state that if they 
were required repeatedly to seek exemptive relief with respect to the 
same issues addressed in the Application described herein, investors 
would not receive any benefit or additional protection thereby.
    Applicants submit, based on the grounds summarized above, that 
their exemptive request meets the standards set out in section 6(c) of 
the Act, namely, that the exemptions requested are 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 Act, and that, therefore, the Commission should grant 
the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-9244 Filed 4-13-99; 8:45 am]
BILLING CODE 8010-01-M