[Federal Register Volume 64, Number 172 (Tuesday, September 7, 1999)]
[Notices]
[Pages 48678-48681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23114]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-23983; File No. 812-11610]


Allmerica Financial Life Insurance and Annuity Company, et al.

August 30, 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 
1940 Act and Rule 22c-1 thereunder to permit the recapture of credits 
applied to contributions made under certain deferred variable annuity 
contracts.

-----------------------------------------------------------------------

    Summary of Application: Applicants seek an order under Section 6(c) 
of the 1940 Act to the extent necessary to permit, under specified 
circumstances, the recapture of credits of up to 5% of contributions 
made under deferred variable annuity contracts and certificates (the 
``Contracts''), that Allmerica will issue through the Separate 
accounts, as well as other contracts that Allmerica may issue in the 
future through the Separate Accounts or any other future Separate 
Account of Allmerica (``Other Separate Account'') to support variable 
annuity contracts and certificates 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, Allmerica, 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 Other Separate 
Account (``Allmerica Broker-Dealer(s)'').

    Applicants: Almerica Financial Life Insurance and Annuity Company 
(``Allmerica''), Separate Account VA-K of Allmerica, Separate Account 
VA-P of Allmerica, Separate Account KG of

[[Page 48679]]

Allmerica, and Allmerica Select Separate Account of Allmerica (together 
with the other Applicant separate accounts, the ``Separate Accounts''), 
and Allmerica Investment, Inc. (collectively, ``Applicants'').
    Filing Date: The application was filed on May 14, 1999, and amended 
and restated on August 4, 1999, and on August 27, 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 Applicants 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 
September 24, 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, N.W., Washington, D.C. 20549-0609. Applicants, c/o Allmerica 
Financial Life Insurance and Annuity Company, 440 Lincoln Street, 
Worcester, Massachusetts 01653, Attn: Shelia B. St. Hilaire, 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., N.W., Washington, D.C. 
20549-0102 (tel. (202) 942/8090).

Applicants' Representations

    1. Allmerica is a stock life insurance company organized under the 
laws of the State of Delaware. Allmerica is registered with the 
Commission as a broker-dealer under the Securities Exchange Act of 1934 
(``1934 Act'') and is a member of the NASD. Separate Account VA-K, 
Allmerica Select Separate Account, Separate Account VA-P, and Separate 
Account KG were established by resolutions of the Board of Directors of 
Allmerica on November 1, 1990, March 5, 1992, October 27, 1994, and 
June 13, 1996, respectively. Allmerica serves as depositor of each of 
the Separate Accounts. Allmerica may in the future establish one or 
more Other Separate Accounts for which it will serve as depositor.
    2. Each of the Separate Accounts is a segregated asset account of 
Allmerica. Each of the Separate Accounts is registered with the 
Commission as a unit investment trust under the 1940 Act. Separate 
Account VA-K filed Form N-8A Notification of Registration under the 
1940 Act on April 1, 1991. Allmerica Select Separate Account filed a 
Form N-8A on April 15, 1992. Separate Account VA-P filed a Form N-8A on 
November 3, 1994. Separate Account KG filed a Form N-8A on August 9, 
1996.
    3. Units of interest in the Separate Accounts will be registered 
under the Securities Act of 1933 (the ``1933 Act''). In that regard, 
Allmerica Select Separate Account filed a Form N-4 registration 
statement on May 11, 1999, under the 1933 Act relating to the 
Contracts. Separate Account VA-K, Separate Account VA-P, and Separate 
Account KG each filed a Form N-4 registration statement on June 22, 
1999, June 18, 1999, and June 18, 1999, respectively. Allmerica may 
issue Future Contracts through the Separate Accounts and through Other 
Separate Accounts. The assets of the Separate Accounts are not 
chargeable with liabilities arising out of any other business of 
Allmerica. Any income, gains or losses, realized or unrealized, from 
assets allocated to the Separate Accounts are, in accordance with the 
respective Contracts, credited to or charged against the Separate 
Accounts, without regard to other income, gains or losses of Allmerica.
    4. Allmerica Investments, Inc. (``Allmerica Investments'') is a 
wholly-owned subsidiary of Allmerica and will be the principal 
underwriter of the Separate Accounts and distributor of the Contracts 
funded through Allmerica Select Separate Account (``Select 
Contracts''), Separate Account VA-K (``VA-K Contracts''), Separate 
Account VA-P (``VA-P Contracts''), and Separate Account KG (``KG 
Contracts'') (collectively, the ``Contracts''). Allmerica Investments 
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 Contracts will be offered through registered 
representatives of Allmerica Investments, or through unaffiliated 
broker-dealers, which are registered under the 1934 Act and members of 
the NASD, that have selling agreements with Allmerica Investments. 
Allmerica Investments, or any successor entity, may act as principal 
underwriter for any Other Separate Account and distributor for any 
Future Contracts issued by Allmerica. A successor entity also may act 
as principal underwriter for the Separate Accounts.
    5. The Select Contracts, VA-K Contracts, VA-P Contracts, and KG 
Contracts are substantially similar in all material respects. They 
differ principally in the mix of mutual funds underlying each of the 
Separate Accounts, in the distribution channels used in the offering of 
the Contracts, and in the amount of the Credit (currently 5% for the 
Select Contracts and 4% for the VA-K Contracts, KG Contracts, and VA-P 
Contracts). There are minor differences in some contract features. 
Contracts may be issued as individual retirement annuities (``IRAs,'' 
either ``Traditional IRAs'' or ``Roth IRAs''), in connection with 
certain types of qualified or non-qualified plans, or as non-qualified 
annuities for after-tax contributions only. In some states, the 
Contracts may be issued on a group basis, rather than as an individual 
contract. Each of the group contracts consists of (i) a basic form of 
group annuity contract (the ``Group Contract'') issued to an employer 
or to a bank, trust company or other institution 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.
    6. Payments may be made to the Contract at any time prior to the 
Annuity Date, subject to certain minimums. Currently, the initial 
payment must be at least $1,000 ($2000 for KG Contracts and $600 for 
VA-K Contracts), with lower minimum payments under salary deduction or 
monthly automatic payment plans, and for certain employer-sponsored 
retirement plans. The minimum subsequent payment is $50 ($167 for KG 
Contracts).
    7. The Contracts permit the owner to allocate contributions to a 
fixed interest account (``Fixed Account'') of Allmerica's general 
account, to accumulate interest at a fixed, guaranteed rate. 
Contributions may also be allocated to certain guarantee period 
accounts (``Guarantee Period Accounts''). Each Guarantee Period Account 
will provide a guarantee of each contribution plus interest at a 
guaranteed interest rate. Allmerica's general account assets support 
the guarantee of principal and interests. An upward or downward 
adjustment, or ``market value adjustment,'' will be made to the annuity 
account value in Guarantee Period Account upon a

[[Page 48680]]

withdrawal, surrender or transfer from the Guarantee Period Account 
prior to the expiration of its guarantee period. The Market Value 
Adjustment will never be applied against the owner's principal 
investment, and even after application of the Market Value Adjustment, 
earnings in a Guarantee Period Account will not be less than an 
effective rate of 3% annually.
    8. Each Separate Account consists of Sub-Accounts, which invest in 
the portfolios of certain underlying investment companies (``Funds''), 
each of which is registered with the Commission as an open-end, 
management investment company. Other Funds may be made available to the 
Separate Accounts or to the Other Separate Accounts of Allmerica. 
Separate Account VA-K of Allmerica will initially offer seventeen Sub-
Accounts under the VA-K Contracts, each of which invests in a 
corresponding investment portfolio of Delaware Group Premium Fund, 
Inc., managed by Delaware Management Company, Inc. and Delaware 
International Advisers Ltd., or of Allmerica Investment Trust 
(``AIT''), managed by Allmerica Financial Investment Management 
Services, Inc. (``AFIMS''). Allmerica Select Separate Account is 
currently comprised of fourteen Sub-Accounts, each of which invests in 
a corresponding investment series of AIT, Variable Insurance Products 
Fund, managed by Fidelity Management & Research Company, or T. Rowe 
Price International Series, Inc. (``T. Rowe Price''), managed by Rowe 
Price-Fleming International, Inc. Separate Account KG is currently 
comprised of twenty-six Sub-Accounts, each of which invests in a 
corresponding investment series of Kemper Variable Series (``KVS'') or 
Scudder Variable Life Investment Fund (``Scudder VLIF''), both managed 
by Scudder Kemper Investments, Inc. Separate Account VA-P currently 
consists of thirteen Sub-Accounts, each of which invests in a 
corresponding investment portfolio of the Pioneer Variable Contracts 
Trust, managed by Pioneer Investment Management, Inc.
    9. Allmerica in the future may determine to create additional Sub-
Accounts of the Separate Accounts to invest in additional portfolios, 
other underlying portfolios or other investments in the future. In 
addition, Sub-Accounts may be combined or eliminated from time to time.
    10. The Contracts provide for various withdrawal options, annuity 
payout options, as well as transfer privileges among Sub-Accounts, 
dollar cost averaging, death benefits, optional annuitization riders, 
and other features. The Contracts have charges consisting of: (i) a 
withdrawal charge as a percentage of contributions declining from 8.5% 
in years one through four to 0% after year nine, with a 15% ``free 
withdrawal'' amount in certain situations; (ii) asset-based charges at 
the annual rates of 1.25% for mortality and expense risks and 0.15% for 
administration expenses assessed against the net assets of each Sub-
Account; and (iii) an annual contract fee of $35 for Contracts with an 
Accumulated Value of less than $75,000. The underlying Funds each 
impose investment management fees and charges for other expenses.
    11. Each time Allmerica receives a contribution from an owner, it 
will allocate the owner's contract value a credit (``Credit'') of up to 
5% of the amount of the contribution (currently 5% for the Select 
Contracts and 4% for the VA-K Contracts, VA-P Contracts, and KG 
Contracts). Allmerica will allocate Credits among the investment 
options in the same proportion as the corresponding contributions are 
allocated by the owner. Allmerica will fund the Credits from its 
general account assets. Allmerica will recapture Credits from an owner 
only if the owner returns the Contract to Allmerica for a refund during 
the ``free look'' period, which varies by state.
    12. Applicants seek exemption pursuant to Section 6(c) of the 1940 
Act from Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act and 
Rule 22c-1 thereunder to the extent deemed necessary to permit 
Allmerica to recapture Credits when an owner returns a Contract for a 
refund during the ``free look'' period, in which case Allmerica will 
recover the amount of any Credit applicable to such contribution.

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 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 1940 Act. Applicants 
request that the Commission, pursuant to Section 6(c) of the 1940 Act, 
grant the exemptions summarized above with respect to the Contracts and 
any Future Contracts funded by the Separate Accounts or Other Separate 
Accounts, that are issued by Allmerica and underwritten or distributed 
by Allmerica Investments or Allmerica Broker-Dealers. Applicants 
undertake that Future Contracts funded by the Separate Accounts or any 
Other Separate 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 1940 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. As a result, during such period, 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 principal 
underwriter of such 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 recapture of the Credit if an owner 
returns the Contract during the free look period 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. Until or unless the 
amount of any Credit is vested, Applicants submit that America retains 
the right and interest in

[[Page 48681]]

the Credit amount, although not in the earnings attributable to that 
amount. Applicants argue that when Allmerica 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's assets, i.e., 
a share of the applicable Separate Account's assets proportionate to 
the owner's annuity account value (including the Credit).
    5. In addition, Applicants state that it would be patently unfair 
to allow an owner exercising the free-look 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 Allmerica could not 
recapture the Credit, individuals could purchase a Contract with no 
intention of retaining it, and simply return the Contract for a quick 
profit.
    6. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put up to 
105% of their contributions to work for them in the selected Sub-
Accounts. In addition, the owner will retain any earnings attributable 
to the Credit, and the principal amount of the Credit will be retained 
under the conditions set forth in the application.
    7. Applicants submit that the provisions for recapture of any 
Credit if an owner returns a Contract or any Future Contract during the 
free look period under the Contracts will not violate Sections 2(a)(32) 
and 27(i)(2)(A) of the 1940 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 if 
an owner returns a Contract or any Future Contract during the free look 
period, without the loss of the relief from Section 27 provided by 
Section 27(i).
    8. 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 for redemption or of an 
order to purchase or sell such security.
    9. Arguably, Allmerica's recapture of the Credit may 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 
through 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. 519 (Oct. 16, 1968). 
To effect a recapture of a Credit, Allmerica will redeem interests in 
an owner's Contract at a price determined on the basis of current net 
asset value of the respective Sub-Accounts. The amount recaptured will 
equal the amount of the Credit that Allmerica 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 Sub-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 1940 Act, Applicants 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, as 
described herein, 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 1940 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 1940 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 1940 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. 99-23114 Filed 9-3-99; 8:45 am]
BILLING CODE 8010-01-M