[Federal Register Volume 64, Number 179 (Thursday, September 16, 1999)]
[Notices]
[Pages 50308-50311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24185]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24006; File No. 812-10792]


The Travelers Insurance Company, et al.; Notice of Application

September 10, 1999.
AGENCY: Securites and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under Section 6(c) of the 
Investment Company Act of 1940 (``Act'') granting relief from Sections 
2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder.

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SUMMARY OF APPLICATION: Applicants request an order to permit the offer 
and sale of variable annuity contracts (``Contracts'') that offer an 
optional principal protection feature. Applicants also request an order 
on behalf of any other person who may become the principal underwriter 
for the Contracts (Future Underwriters'').

APPLICANTS: The Travelers Insurance Company (``The Travelers''), The 
Travelers Life and Annuity Company (``Travelers Life,'' together with 
The Travelers, ``Insurers''), The Travelers Fund BD III for Variable 
Annuities (``Fund BD III''), The Travelers Fund BD IV for Variable 
Annuities (``Fund BD IV.'' together with Fund BD III, the ``Separate 
Accounts''), and Tower Square Securities, Inc. (``Tower Square'').

FILING DATE: The application was filed on September 18, 1997, and was 
amended and restated on June 24, 1998.

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, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on October 1, 1999, 
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 SEC's 
Secretary.

ADDRESSES: Secretray, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, Kathleen A. McGah, Esq., The Travelers Insurance 
Company, One Tower Square, Hartford, CT 06183.

FOR FURTHER INFORMATION CONTACT: Lorna MacLeod, Attorney, or Mark 
Amorosi, Special Counsel, 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 may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth

[[Page 50309]]

Street, NW, Washington, DC 20549 (tel (202) 942-8090).

Applicants' Representations

    1. The Travelers, a Connecticut stock insurance company, is 
licensed to conduct life insurance business in all of the states of the 
United States, the District of Columbia, Puerto Rico, Guam, the British 
and US Virgin Islands, and the Bahamas. The Travelers is an indirect 
wholly owned subsidiary of the Travelers Group Inc.
    2. Travelers Life, a Connecticut stock insurance company, is 
licensed to conduct life insurance business in a majority of states of 
the United States. Travelers Life is a wholly owned subsidiary of The 
Travelers.
    3. Fund BD III and Fund BD IV were established under the laws of 
Connecticut as separate investment accounts by The Travelers and 
Travelers Life, respectively. Assets allocated to each Separate Account 
support benefits payable under group and individual annuity contracts 
offered by the Insurers. Each Separate Account is registered with the 
Commission as a unit investment trust, and meets the definition of 
``separate account'' in Section 2(a)(37) of the Act.
    4. Tower Square, an indirect wholly owned subsidiary of The 
Travelers, is the principal underwriter for the Contracts. Tower Square 
is registered as a broker-dealer under the Securities Exchange Act of 
1934 (``1934 Act'') and is a member of the National Association of 
Securities Dealers, Inc. (``NASD''). Each Future Underwriter will be 
registered as a broker-dealer under the 1934 Act, and will be a member 
of the NASD.
    5. The Contracts are single premium variable annuity contracts that 
may be purchased in connection with certain retirement plans on a tax-
qualified or a non tax-qualified basis. The net premium may be 
allocated to one or more of each Separate Account's sub-accounts, or to 
the general account of The Travelers or Travelers Life, as relevant, 
where such premium is credited with a fixed rate of interest.
    6. The Contracts offer an optional principal protection features 
(``Principal Protection Feature'' or ``Feature''). If purchased, The 
Travelers or Travelers Life, as relevant, will guarantee that upon the 
Feature's expiration date (``Principal Protection Expiration Date''), 
the Contract Value \1\ will at least equal a specified percentage of 
the premium adjusted for withdrawal reductions (i.e., the amount of any 
partial withdrawal plus any charges deducted as a result of any such 
withdrawal) even if the value of the Contract otherwise determined on 
that date is less than the guaranteed amount.
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    \1\ Contract Value equals the amount of premium reduced by all 
charges and partial withdrawals made, and increased or decreased by 
the amount of investment performance credited to the Contract.
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    7. More specifically, on the Principal Protection Expiration Date 
(the last day of the eighth Contract year), The Travelers or Travelers 
Life, as relevant, will contribute to the Contract Value any amount 
needed to bring the Contract Value up to 115%, 100% or 90%, depending 
on the selection, of the premium, as adjusted for any withdrawal 
reductions.
    8. In addition, on the Principal Protection Expiration Date, the 
Insurer will transfer the greater of the guaranteed amount or Contract 
Value from the Protected Funding Option to the sub-account investing in 
the Money Market Portfolio unless the Contract owner informs The 
Travelers or Travelers Life, as relevant, in writing prior to the 
Principal Protection Expiration Date of a different investment choice 
within the Contract. On and after the Principal Protection Expiration 
Date, The Contract owner may remain in the Contract, purchase a new 
Contract with the Principal Protection Feature, annuitize the Contract, 
exchange the Contractor for another annuity contract, surrender the 
Contract, or make a partial withdrawal of the Contract Value.
    9. To qualify for the Principal Protection Feature, at the time of 
purchase the Contract owner must allocate the entire premium to the 
Protected Funding Option. In addition, until the Principal Protection 
Expiration Date, the Contract owner must refrain from: (1) transferring 
any amounts from the Protected Funding Option; and (2) annuitizing the 
Contract. The Insurers will treat any transfer or annuitization from 
the Principal Protection Feature as a surrender of the Contract. The 
Contract owner, however, may surrender or make partial withdrawals from 
the Contract at any time, subject to the withdrawal charges discussed 
below. The amounts withdrawn, including any withdrawal charges assessed 
on the withdrawn amounts, will no longer be protected by the Principal 
Protection Feature, and will reduce the amount of the principal 
guarantee proportionately.
    10. There are two charges associated with the Principal Protection 
Feature. First, there is a Principal Protection Fee, of up to 2.00% 
annually of Contract Value, depending on the level of guarantee chosen. 
The Principal Protection Fee is deducted daily from Contract Value. 
Second, there is a Principal Protection Cancellation Charge. This 
charge is assessed should the Contract owner surrender or partially 
withdraw from the Contract before the Principal Protection Expiration 
Date. The Principal Protection Cancellation Charge equals up to 4% of 
the premium and declines to 0% at the end of eight Contract years.
    11. The Principal Protection Fee and the Principal Protection 
Cancellation Charge compensate each Insurer for the liabilities 
associated with providing the Feature. These include the cost 
associated with the financial hedging instruments or reinsurance 
purchased by each Insurer to hedge against such Insurer's potential 
losses resulting from the Feature. The Principal Protection Fee is 
designed so that if a Contract owner persists until the Principal 
Protection Expiration Date, each Insurer will recover most, if not all, 
of the cost of either purchasing the hedging instruments or the 
reinsurance associated with providing the guarantee. The Principal 
Protection Cancellation Charge is designed so that each Insurer may 
recover its costs if a Contract owner surrenders or withdrawas from the 
Feature prior to the Principal Protection Expiration Date. Insurers 
intend to set the rates for the Principal Protection Fee monthly. The 
rate in effect at the time of Contract purchase will lock in for the 
life of the Feature. The Principal Protection Fee is expected to fall 
within the range set forth below based on current market conditions, 
but will not exceed 2.00 percent:

------------------------------------------------------------------------
                                                       Charge range as a
    Level of guarantee percent of purchase payment         percent of
                                                         contract value
------------------------------------------------------------------------
115..................................................          1.25-2.00
110..................................................           .75-1.50
90...................................................           .50-1.25
------------------------------------------------------------------------

    Similar to the Principal Protection Fee, the Insurers may modify 
the amount of the Principal Protection Cancellation Charge periodically 
but the amount of the charge in effect at the time of Contract purchase 
will lock in for the life of the Principal Protection Feature. The 
maximum levels of Principal Protection Cancellation Charge are:

------------------------------------------------------------------------
                                                           Principal
                                                           protection
                                                          cancellation
                                                          charge (as a
                    Contract year                        percentage of
                                                          premium not
                                                           previously
                                                          surrendered)
------------------------------------------------------------------------
1....................................................                  4
2....................................................                  4

[[Page 50310]]

 
3....................................................                  4
4....................................................                  3
5....................................................                  3
6....................................................                  3
7....................................................                  1
8....................................................                  1
------------------------------------------------------------------------

    12. In addition to the Principal Protection Cancellation Charge, a 
contingent deferred sales charge (``CDSC'') may be imposed on certain 
withdrawals from all Contracts (whether or not they include the 
Principal Protection Feature). The CDSC decreases from 6% to 0% over 
nine years. However, 10% of the premium may be withdrawn each year 
after the first Contract year without the imposition of the CDSC, and 
the Principal Protection Cancellation Charge (when an owner has the 
Feature).

Applicants' Legal Analysis

    1. Section 6(c) authorizes the Commission, by order upon 
application, to conditionally or unconditionally grant an exemption 
from any provision, rule, or regulation of the Act to the extent that 
the 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. Because the 
provisions described below may be inconsistent with certain aspects of 
the Principal Protection Feature's charge structure, Applicants seek 
exemptions from Sections 2(a)(32), 22(c), 27(i)(2)(A) of the Act and 
Rule 22c-1 thereunder, to the extent necessary, pursuant to Section 
6(c) to assess the Principal Protection Cancellation Charge against 
Contract owners enrolled in the Principal Protection Feature who 
surrender or partially withdraw from the Contracts prior to the 
Principal Protection Expiration Date.
    2. Section 2(a)(32) of the Act defines ``redeemable security'' as 
any security under the terms of which the holder, upon its presentation 
to the issuer, is entitled to receive approximately his proportionate 
share of the issuer's current net assets, or the cash equivalent 
thereof.
    3. As discussed above, the Principal Protection Cancellation Charge 
compensates each Insurer for the risks such Insurer assumes should a 
Contract owner enrolled in the Principal Protection Feature surrender 
or partially withdraw from a Contract prior to the Principal Protection 
Expiration Date. This charge is not assessed at redemption for 
administrative expenses. The Principal Protection Cancellation Charge 
represents a charge for an optional insurance benefit for which each 
Insurer is entitled to receive compensation. In this manner, Applicants 
state that the charge is similar to other charges made by insurers, and 
approved by the Commission, at redemption for optional insurance 
benefits. Accordingly, Applicants assert that the deduction of a 
Principal Protection Cancellation Charge is a legitimate charge for an 
optional insurance benefit under the Contracts, and therefore does not 
reduce the amount of Fund BD III's or Fund BD IV's current net assets 
that a Contract owner otherwise would be entitled to receive.
    4. Moreover, Applicants submit that although Section 2(a)(32) does 
not specifically contemplate the imposition of a charge at the time of 
redemption, such charge is not necessarily inconsistent with the 
definition of ``redeemable security.'' Applicants argue that a 
cancellation charge is little different, for this purpose, from the 
``redemption'' charge authorized in Section 10(d)(4) of the Act. 
Congress, according to Applicants, intended that such a redemption 
charge, which is expressly described as a ``discount from net asset 
value,'' be deemed consistent with the concept of ``proportionate 
share'' under Section 2(a)(32).
    5. Consistent with Section 2(a)(32), therefore, Applicants submit 
that the Contracts will be ``redeemable securities.'' The Contracts 
provide for surrender and partial withdrawal of Contract Value. The 
prospectuses for the Contracts disclose the contingent nature of the 
Principal Protection Cancellation Charge. Accordingly, Applicants 
assert that there will be no restriction on or impediment to, surrender 
or partial withdrawal that should cause the Contracts to be considered 
other than redeemable securities within the meaning of the Act and 
rules thereunder. Upon surrender or partial withdrawal of a Contract 
enrolled in the Principal Protection Feature, a Contract owner will 
receive his ``proportionate share'' of the relevant Separate Account: 
i.e., the amount of the premium reduced by the amount of all charges 
and increased or decreased by the amount of investment performance 
credited to the Contract.
    6. Rule 22c-1, promulgated under Section 22(c) of the Act, imposes 
requirements with respect to both the amount payable on redemption and 
the time as of which such amount is calculated. Specifically, Rule 22c-
1, in pertinent part, prohibits a registered investment company issuing 
a redeemable security and its principal underwriter 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.
    7. Regarding the amount payable, Applicants submit that the 
assessment of the Principal Protection Cancellation Charge, an 
insurance charge, upon surrender or partial withdrawal of a Contract 
enrolled in the Principal Protection Feature, does not alter a Contract 
owner's current net asset value. Furthermore, regarding the timing 
requirement of Rule 22c-1, Applicants, consistent with their current 
procedures, state that they will determine the cash surrender value 
under a Contract in accordance with Rule 22c-1 on a basis next computed 
after receipt of a Contract owner's request for surrender or partial 
withdrawal. Accordingly, Applicants submit that they will comply with 
both the amount payable and timing requirements of Rule 22c-1.
    8. In addition, the deduction of the Principal Protection 
Cancellation Charge is consistent with the policy behind Rule 22c-1. 
Applicants state that the Commission's purpose in adopting Rule 22c-1 
was to minimize (i) dilution of interests of the other security holders 
and (ii) speculative trading practices that are unfair to such holders. 
Applicants assert that the Principal Protection Cancellation Charge 
would in no way have the dilutive effect which Rule 22c-1 is designed 
to prohibit, because a surrendering Contract owner would ``receive'' no 
more than an amount equal to the Contract Value determined pursuant to 
the formula set out in his Contract and after receipt of his request. 
Furthermore, Applicants claim, variable annuities, by nature, do not 
lend themselves to the kind of speculative short-term trading that Rule 
22c-1 was aimed against, and, even if they could be so used, the 
Principal Protection Cancellation Charge would discourage, rather than 
encourage, any such trading.
    9. Applicants also assert that the deduction of the Principal 
Protection Cancellation Charge upon surrender or partial withdrawal 
from Contracts enrolled in the Principal Protection Feature will be 
advantageous to Contract owners for a number of reasons. First, a 
deferred charge structure has long been accepted as an

[[Page 50311]]

appropriate feature of variable annuities. The existence of products 
with deferred charges provides investors a valuable choice, and 
according to Applicants, the Commission and its staff have supported 
efforts to expand investor choice without sacrificing investor 
protection. In this context a deferred charge structure also reinforces 
the intention that the product be held as a long-term investment. 
Second, the amount of the Contract owners' premiums that will be 
allocated to the relevant Separate Account, and be available to earn a 
return for the Contract owners, will be greater than it would be if the 
charges were deducted from the premiums. Applicants submit that the 
Commission recognized this in authorizing deferred sales charges for 
variable annuity contracts pursuant to Rule 6c-8 under the Act.
    10. Finally, Applicants assert that their charge structure provides 
equitable treatment to all Contract owners enrolled in the Principal 
Protection Feature. Applicants state that they established the charge 
structure of the Principal Protection Feature so that each Insurer may 
recover its costs over the life of the guarantee. If Contract owners 
who selected the Principal Protection Feature could surrender or 
partially withdraw from the Contracts prior to the Principal Protection 
Expiration Date without the imposition of the Principal Protection 
Cancellation Charge, each Insurer may not be able fully to recover its 
costs. If each Insurer did not assess the Principal Protection 
Cancellation Charge and instead increased the Principal Protection Fee 
or added a front-end charge, the Insurer could be charging persisting 
Contract owners enrolled in the Feature more than may otherwise be 
necessary to recover the costs attributable to such Contract owners. 
Accordingly Applicants submit that the Contracts will satisfy the 
requirements of Rule 22c-1.
    11. Section 27(i)(2)(A) of the Act, in pertinent part, makes it 
unlawful for any registered separate accounting funding variable 
insurance contracts, or for the sponsoring insurance company of such 
account, to sell any such contract unless such contract is a redeemable 
security. Applicants submit that the assessment of a Principal 
Protection Cancellation Charge should not be construed as a restriction 
on redemption. Applicants maintain that the Contracts enrolled in the 
Principal Protection Feature are redeemable securities and that the 
imposition of the Principal Protection Cancellation Charge upon 
surrender or partial withdrawal represents nothing more than the 
deduction of an insurance charge. Moreover, as Applicants previously 
stated, the charge is only assessed if the Contract owner has elected 
the Principal Protection Feature. Accordingly, Applicants submit that 
the Contracts will satisfy the requirements of Section 27(i)(2)(A).
    12. Applicants seek the relief requested herein not only with 
respect to themselves and the Contracts described above, but also with 
respect to Future Underwriters. Applicants represent that the terms of 
the relief requested with respect to any Future Underwriter are 
consistent with standards set forth in Section 6(c) of the Act.
    13. Applicants state that, without the requested class relief, 
exemptive relief for any Future Underwriter would have to be requested 
and obtained separately. Applicants assert that these additional 
requests for exemptive relief would present no issues under the Act not 
already addressed herein. Applicants state that if the Applicants were 
to repeatedly seek exemptive relief with respect to the same issues 
addressed herein, investors would not receive additional protection or 
benefit, and investors and the Applicants could be disadvantaged by 
increased costs from preparing such additional requests for relief. 
Applicants argue that the requested class relief is appropriate in the 
public interest because the relief will promote competitiveness in the 
variable annuity market by eliminating the need for Applicants to file 
redundant exemptive applications, thereby reducing administrative 
expenses and maximizing efficient use of resources. Elimination of the 
delay and the expense of repeatedly seeking exemptive relief would, 
Applicants argue, enhance each Applicant's ability effectively to take 
advantage of business opportunities as such opportunities arise. 
Applicants submit, for all the reasons stated herein, that their 
request for class exemptions 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, and 
that an order of the Commission including such class relief, should 
therefore, be granted.

Conclusion

    For the reasons stated above, Applicants believe that the requested 
exemptions, in accordance with the standards of Section 6(c), 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24185 Filed 9-15-99; 8:45 am]
BILLING CODE 8010-01-M