[Federal Register Volume 65, Number 1 (Monday, January 3, 2000)]
[Notices]
[Pages 143-149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-34014]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24220; File No. 812-11818]


IDS Life Insurance Company, et al.

December 23, 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

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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 1940 Act to the extent necessary to permit the issuance and, under 
specified circumstances, the subsequent recapture of certain credits 
applied to contributions made under: (i) certain deferred variable 
annuity contracts that IDS Life or American Enterprise will issue 
through the Accounts (``Contracts''), and (ii) contracts that the 
Insurance Companies may in the future issue through the Accounts or any 
Future Account that are substantially similar in all material respects 
to the Contracts (``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 the Insurance Companies, 
whether existing or created in the future, that serves as a distributor 
or principal underwriter of the Contracts or any Future Contracts 
offered through the Accounts or any Future Account (collectively 
``Affiliated Broker-Dealers'').

APPLICANTS: IDS Life Insurance Company (``IDS Life''), American 
Centurion Life Assurance Company (``American Centurion Life''), IDS 
Life Insurance Company of New York (``IDS Life NY'') American 
Enterprise Life Insurance Company (``American Enterprise Life'') 
(collectively, the ``Insurance Companies''), American Express Financial 
Advisors, Inc. (``AEFA''), IDS Life Variable Account 10 (``IDS Account 
10''), American Enterprise Variable Annuity Account (``American 
Enterprise Account,'' and together with IDS Account 10, the 
``Account'') (collectively, ``Applicants'').

FILING DATE: The application was filed on October 15, 1999, and amended 
and restated on December 7, 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 January 17, 
2000, 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 IDS Life 
Insurance Company, IDS Tower 10, T27/52, Minneapolis, Minnesota 55440-
0010, Attn: Mary Ellyn Minenko.

FOR FURTHER INFORMATION CONTACT: Zandra Y. Bailes, Senior Counsel, or 
Susan M. Olsen, 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. IDS Life is a stock life insurance company organized under the 
laws of the State of Minnesota. IDS Life 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. IDS Life is a wholly-
owned subsidiary of American Express Financial Corporation (``AEFC''). 
IDS Account 10 was established on August 23, 1994, pursuant to 
authority granted under a resolution of IDS Life's Board of Directors. 
IDS Life is the issuer and principal underwriter of the Contracts 
funded through IDS Account 10 (the ``IDS Account 10 Contracts''). IDS 
Life may in the future issue Future Contracts through IDS Account 10 or 
through Future Accounts, for which IDS Life also may serve as principal 
underwriter.
    2. American Enterprise Life is a stock life insurance company 
organized under the laws of the State of Indiana. American Enterprise 
Life is a wholly-owned subsidiary of IDS Life. American Enterprise 
Account was established on July 15, 1987, pursuant to authority granted 
under a resolution of American Enterprise Life's Board of Directors. 
American Enterprise Life serves as the issuer for the Contracts funded 
through American Enterprise Account (the ``American Enterprise Account 
Contract''). American Enterprise Life may in the future issue Future 
Contracts through American Enterprise Account or through Future 
Accounts.
    3. IDS Life NY is a stock like insurance company organized under 
the laws of the State of New York. IDS Life NY is a wholly-owned 
subsidiary of IDS Life. IDS Life NY may in the future issue Future 
Contracts through Future Accounts.
    4. American Centurion Life is a stock insurance company organized 
under the laws of the State of New York. American Centurion Life is a 
wholly-owned subsidiary of IDS Life. American Centurion Life may in the 
future issue Future Contracts through Future Accounts.
    5. AEFA serves as the principal underwriter for the American 
Enterprise Account Contracts and as distributor of the IDS Account 10 
Contracts. AEFA is registered with the Commission as a broker-dealer 
under the 1934 Act and is a member of the NASD. The IDS Account 10 
Contracts will be offered through registered representatives of AEFA 
and its affiliates who are registered broker-dealers under the 1934 Act 
and NASD members. The American Enterprise Account Contracts will be 
distributed by broker-dealers who are registered under the 1934 Act and 
NASD members and who have entered into distribution agreements with 
AEFA and American Enterprise Life and through AEFA. AEFA, or any 
successor or affiliated entity, may act as principal underwriter for 
any Future Account issued by American Enterprise Life or as distributor 
for any Future Contracts issued by IDS Life in the future.
    6. IDS Account 10 is a segregated asset account of IDS Life, and 
American Enterprise Account is a segregated asset account of American 
Enterprise Life. Each Account and its component subaccounts are 
registered together with the Commission as a single unit investment 
trust under the 1940 Act. The respective Account will fund the variable 
benefits available under the Contracts. The offering of the Contracts 
is registered under the Securities Act of 1933 (the ``1933 Act''). IDS 
Life and IDS Account 10 filed a Form N-4 Registration Statement under 
the 1933 Act relating to the Contracts on September 20, 1999 (Rule 497 
filing). American Enterprise Life and American Enterprise Account filed 
a Form N-4 Registration Statement on August 19, 1999 under the 1933 Act 
relating to the Contracts.
    7. That portion of the respective assets of the Accounts that is 
equal to the reserves and other Contract liabilities with respect to 
the Accounts is not chargeable with liabilities arising out of any 
other business of IDS Life of American Enterprise Life, as the case may 
be. Any income, gains or losses, realized or unrealized, from assets 
allocated to the Accounts are, in accordance with the respective 
Accounts' Contracts, credited to or charged against the Accounts, 
without

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regard to other income, gains or losses of IDS Life or American 
Enterprise Life, as the case may be.
    8. An IDS Account 10 Contract may be issued as a non-qualified 
annuity (``NQ'') for after tax contributions only, or as a qualified 
annuity under the following retirement plans: (i) Individual Retirement 
Annuities (``IRAs''), (ii) Simplified Employee Pension (``SEP'') plans, 
(iii) Section 401(k) plans, (iv) custodial and trusteed pension and 
profit sharing plans, or (v) Tax-Sheltered Annuities (``TSAs''). An IDS 
Account 10 Contract may be purchased: (i) with a minimum initial 
payment of $1,000 for qualified plans or $2,000 for nonqualified plans, 
or (ii) in minimum installments or $50 per month or $23.08 biweekly 
under a scheduled plan. Unless payments are made by installments under 
a scheduled payment plan, an owner may make additional payments, 
subsequent to the initial payment (initial payments and subsequent 
additional payments are collectively referred to herein as ``Purchase 
Payments''). Maximum limitations on Purchase Payments are imposed for 
the first year and subsequent years, depending on the age of the owner 
or annuitant.
    9. Owners of IDS Account 10 Contracts may allocate their Purchase 
Payments among a number of subaccounts of IDS Account 10. The 
subaccounts are referred to as ``Investment Funds.'' Each Investment 
Fund will invest in shares of a corresponding portfolio (``Portfolio'') 
of American Express Variable Portfolio Funds (``AXP Funds''), AIM 
Variable Insurance Funds, Inc. (``AIM Funds''), American Century 
Variable Portfolios, Inc. (``American Century VP''), Fidelity Variable 
Insurance Products Funds (Service Class) (``Fidelity VIP Funds''), 
Franklin Templeton Variable Insurance Products Trust (Class 2) 
(``Franklin Templeton VIP Trust''), Goldman Sachs Variable Insurance 
Trust (``Goldman Sachs VIT''), Lazard Retirement Series, Inc. (``Lazard 
RSI''), Putnam Variable Trust (``Putnam VT''), Royce Capital Fund, 
Third Avenue Variable Series Trust, Wagner Advisors Trust, and Warburg 
Pincus Trust. IDS Life, at a later date, may decide to create 
additional Investment Fund(s) to invest in any additional Portfolio(s) 
as may now or in the future be available. IDS Life, from time to time, 
also may combine or eliminate Investment Funds.
    10. The IDS Account 10 Contract provides for various surrender 
options, annuity benefits and annuity payout options, as well as 
transfer privileges among Investment Funds, dollar cost averaging, and 
other features. The IDS Account 10 Contract contains the following 
charges: (i) a contingent deferred sales charge (``CDSC'') as a 
percentage of Purchase Payment surrendered, depending on the surrender 
charge schedule the owner selected at the time of application. With 
respect to a 7-year surrender charge schedule, the CDSC is 7% in years 
1-3, 6% in year 4, 5% in year 5, 4% in year 6, 2% in year 7, and 0% 
thereafter. With respect to a 10-year surrender charge schedule, the 
CDSC is 8% in years 1-3, 7% in years 4-5, 6% in year 6, 5% in year 7, 
4% in year 8, 3% in year 9, 2% in year 10, and 0% thereafter; (ii) a 
$30 annual administrative expense charge; (iii) a mortality and expense 
risk fee of 0.75% for qualified annuities and 0.95% for NQs; and (iv) 
any applicable state or local premium taxes up to 3.5%, depending on 
the owner's state of residence or the state in which the contract was 
sold. In addition, assets invested in Investment Funds are charged with 
the annual operating expenses of those Funds.
    11. Each time IDS receives a Purchase Payment from an owner, it 
will allocate to the owner's IDS Account 10 a credit (``Credit'') equal 
to: (i) 1% of each Purchase Payment received if the owner elected the 
ten-year surrender charge schedule for the IDS Account 10 Contract, or 
if the owner elected the seven-year surrender charge schedule and the 
initial Purchase Payment is at least $100,000; and (ii) 2% of each 
Purchase Payment received if the owner elected the ten-year surrender 
charge schedule and the initial Purchase Payment is at least $100,000. 
IDS Life will allocate Credits according to the allocation instructions 
in effect for the Purchase Payments.
    12. Applicants represent that the percentage amount of the Credit 
under the IDS Account 10 and the American Enterprise Account Contracts 
described in the application could change for enhanced versions of the 
Contracts issued in the future, but will not exceed 8%. In addition, 
the percentage amount of the Credit under Future Contracts may differ 
from the Credit under the Contracts, but will not exceed 8%.
    13. IDS Life will fund Credits from its general account assets. IDS 
Life will recapture certain Credits from an owner under the following 
circumstances: (i) any Credit applied if the owner returns the IDS 
Account 10 Contract for a refund during the 10-day free look period; 
(ii) Credits applied within twelve months preceding the date of death 
that results in a lump sum death benefit under the IDS Account 10 
Contract (as described herein); or (iii) Credits applied within twelve 
months preceding a request for a surrender due to an event where no 
CDSC is incurred (``Contingent Event''). Applicants represent that the 
amount the owner receives in each of these circumstances will always at 
least equal and normally will exceed the surrender value (Contract 
value minus any applicable charges) of the IDS Account 10 Contract.
    14. The free look period is the 10-day period during which an owner 
may return a Contract after it has been delivered and receive a full 
refund of the Contract value, less any Credits up to the maximum 
surrender charge under the Contract. No other charges will apply to the 
refund, but the owner bears the investment risk from the time of 
purchase until he or she returns the contract. The refund amount may be 
more or less than the Purchase Payment the owner made, unless the law 
requires that the full amount of the Purchase Payment be refunded.
    15. A Contingent Event is an owner's or annuitant's confinement to 
a nursing home, disability, terminal illness or unemployment. Under the 
IDS Account 10 Contract, the only Contingent Event currently is for 
nursing home confinement, but the others are expected to be added later 
by endorsements.
    16. The IDS Account 10 Contract death benefit provision states 
that, upon the earlier of the owner's or annuitant's death before 
annuity payouts begin and while the Contract is in force, IDS Life will 
pay the following death benefits less any Credits applied to the 
Contract in the preceding twelve months (to the extent a death benefit 
includes contract value credits): (i) if both the owner and annuitant 
are age 80 or younger on the date of death, the beneficiary receives 
the greatest of (a) the Contract value; (b) Purchase Payments, minus 
any adjusted partial surrenders; or (c) the Contract value of the most 
recent sixth contract anniversary, plus any purchase payments paid, and 
minus any adjusted partial surrenders since that anniversary; or (ii) 
if either the owner or annuitant are age 81 or older on the date of 
death, the beneficiary receives the greater of (a) Contract value; or 
(b) Purchase Payments, minus any adjusted partial surrenders.
    17. An American Enterprise Account Contract may be issued as an NQ 
or as a qualified annuity under the following retirement plans: (i) 
IRAs, including Roth IRAs, or (ii) SEP plans. There are two different 
Contracts supported by American Enterprise Account: Wells Fargo 
Advantage Credit Variable Annuity (``Advantage Contract'') and 
Signature Plus Variable Annuity

[[Page 146]]

(``Signature Contract''). An Advantage Contract sold through AEFA 
currently may be issued only as an NQ. The American Enterprise Account 
Contract differs from the IDS Account 10 contract in that the American 
Enterprise Account Contract offers: (i) a Guaranteed Period Account 
feature that involves a market value adjustment (``MVA''); (ii) 
optional death benefit riders; and (iii) guaranteed minimum income 
riders.
    18. Purchase Payments allocated to Guaranteed Period Accounts are 
held in a ``nonunitized'' separate account established under Indiana 
law. The assets in the Guaranteed Period Account will not be charged 
with the liabilities of any other separate account or of American 
Enterprise Life's general business. Each Guarantee Period will provide 
a guarantee of the Purchase Payment allocated thereto and an interest 
rate that is declared at the time of the allocation. An upward or 
downward adjustment, or MVA, will be applied to a Guaranteed Period 
Account upon a withdrawal or transfer prior to the end of the Guarantee 
Period.
    19. An Advantage Contract may be purchased: (i) with a minimum 
initial payment of $2,000 (the minimum initial payment for an Advantage 
Contract sold through AEFA is $100,000); or (ii) $50 if enrolled in the 
Systematic Investment Program (``SIP''). A Signature Contract may be 
purchased: (i) with a minimum initial payment of $25,000; or (ii) $50 
if enrolled in the SIP. A Guarantee Period Account requires a minimum 
initial payment of $1,000. Subsequent additional Purchase Payments 
require a minimum of $50 for SIP payments and $100 for non-SIP 
payments. The maximum total Purchase Payments under an American 
Enterprise Account Contract is $1,000,000 (without prior approval). The 
owner of an American Enterprise Account Contract also may select a 
withdrawal charge period of six or eight years at the time of 
application. Only the eight-year withdrawal charge period is available 
under an Advantage Contract sold through AEFA.
    20. Owners of the Advantage Contract may allocate the Purchase 
Payments among the Investment Funds under the Contract. Each Investment 
Fund will invest in shares of portfolios of AXP Funds, AIM Funds, 
Franklin Templeton VIP Trust, Goldman Sachs VIT, Putnam VT, Dreyfus 
Socially Responsible Growth Fund, Inc., MFS Variable Insurance Trust 
(``MFS VIT''), and Wells Fargo Variable Trust Funds (``Wells Fargo 
VT'').
    21. Owners of the Signature Contract may allocate their Purchase 
Payments among the Investment Funds under the Contract. Each Investment 
Fund will invest in shares of Portfolios of AXP Funds, AJM Funds, 
Alliance Variable Products Series Funds, Baron Capital Funds, Fidelity 
VIP Funds, Franklin Templeton VIP Trust, Goldman Sachs VIT, J.P. Morgan 
Series Trust 11, Lazard RSI, MFS VIT, Royce Capital Fund, Wanger 
Advisors Trust, Warburg Pincus Trust, and Wells Fargo VT.
    22. An American Enterprise Account Contract provides for various 
withdrawal options, annuity benefits and payout annuity options, as 
well as transfer privileges among Investment Funds, dollar cost 
averaging, asset rebalancing, and other features. The Advantage 
Contracts contain the following charges: (i) $30 annual administrative 
charge (waived at $50,000); (ii) a 0.15% variable account 
administrative charge; (iii) a mortality and expense risk fee of: 1.35% 
for 6-year withdrawal schedule, 1.10% for 8-year withdrawal schedule, 
and an additional charge of 0.20% if the Enhanced Death Benefit Rider 
is selected; (iv) an annual fee based on a modified Guaranteed Income 
Benefit Base (currently at 0.30%) if the Guaranteed Minimum Income 
Benefit Rider is selected; (v) a CDSC as a percentage of Purchase 
Payment withdrawn, depending on the withdrawal charge schedule selected 
(the CDSC is as follows for: (a) a 6-year surrender charge schedule: 8% 
in years 1-3, 6% in year 4, 4% in year 5, 2% in year 6, and 0% 
thereafter; and (b) an 8-year surrender charge schedule: 8% in years 1-
5, 6% in year 6, 4% in year 7, 2% in year 8 and 0% thereafter); (vi) 
any applicable state or local premium taxes; and (vii) the annual 
operating expenses of the Investment Funds.
    23. The Signature Contracts contain the following charges: (i) $40 
annual administrative charge (waived at $100,000); (ii) a 0.15% 
variable account administrative charge; (iii) a mortality and expense 
risk fee of: 1.45% for 9-year withdrawal schedule (including either the 
Maximum Anniversary Death Benefit Rider or the 5% Accumulation Death 
Benefit Rider), 1.35% for 9-year withdrawal schedule without either of 
the death benefit riders; (iv) an annual fee based on a modified 
Guaranteed Income Benefit Base (currently at 0.30%) if the Guaranteed 
Minimum Income Benefit Rider (5% Accumulation Benefit Base) is 
selected; (v) a CDSC as a percentage of Purchase Payment withdrawn of 
8% in years 1-4, 7% in year 5, 6% in years 6 and 7, 4% in year 8, 2% in 
year 9, and 0% thereafter, (vi) any Applicable state or local premium 
taxes; and (vii) the annual operating expenses of the Investment Funds.
    24. Each time American Enterprise Life receives a Purchase Payment 
from an owner, it will allocate the owner's American Enterprise Account 
a Credit as a percentage of the net current payment (current payment 
less the amount of partial withdrawals that exceed all prior Purchase 
Payments) as follows: (i) with respect to an Advantage Contract: 1% for 
less than $10,000, 2% for $10,000 to less than 1 million, 3% for $1 
million to less than 5 million, and 4% for $5 million and over; and 
(ii) with respect to a Signature Contract: 3% for $25,000 to less than 
$100,000, 4% for $100,000 to less than $1 million, and 5% for $1 
million and over. American Enterprise Life will allocate Credits 
according to the allocation instructions in effect for the Purchase 
Payments.
    25. American Enterprise Life will fund Credits from its general 
account assets. American Enterprise Life will recapture certain Credits 
from an owner under the following circumstances: (i) any Credit applied 
if the owner returns the American Enterprise Account Contract for a 
refund during a 10-day free look period; (ii) Credits applied within 
twelve months preceding the date of death that results in a death 
benefit (including death benefits under the Enhanced Death Benefit 
Rider, Maximum Anniversary Value Death Benefit Rider, and 5% 
Accumulation Death Benefit Rider) under the American Enterprise Account 
Contract; or (iii) Credits applied within twelve months preceding a 
request for a withdrawal due to any Contingent Event. The amount the 
owner receives under these circumstances will always equal or exceed 
the surrender value of the Contract.
    26. The Advantage Contract death benefit provision states that, if 
the owner or annuitant dies before annuity payouts begin while the 
Contract is in force, American Enterprise Life will pay the beneficiary 
the greatest of the following less any Credits added to the Contract in 
the last 12 months: (i) the Contract value; (ii) the total Purchase 
Payments paid, plus Credits, and minus any adjusted partial 
withdrawals; or (iii) the maximum anniversary value immediately 
preceding the date of the death, plus the dollar amount of any Purchase 
Payments since that anniversary, plus Credits, and minus any adjusted 
partial withdrawals since that anniversary.
    27. The Advantage Contract offers an Enhanced Death Benefit Rider, 
which requires the owner or the annuitant to be age 79 or younger on 
the Contract date. The Enhanced Death Benefit Rider provides that if 
the owner or the annuitant dies before annuity payouts

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begin while the Contract is in force, American Enterprise Life will pay 
the beneficiary the greatest of the following specified amounts, less 
any Credits added in the last twelve months: (i) the contract value; 
(ii) the total Purchase Payments paid, plus Credits, and minus any 
adjusted partial withdrawals; (iii) the ``maximum anniversary value'' 
immediately preceding the date of death, plus any Purchase Payments 
since that anniversary, plus Credits, and minus any adjusted partial 
withdrawals since that anniversary; or (iv) the Variable Account 5% 
Floor (the sum of the value in the fixed accounts plus the accumulated 
initial purchase payments allocated to the subaccounts plus 5%).
    28. The Signature Contract death benefit provision states that, if 
the owner or annuitant dies before annuity payouts begin while the 
contract is in force, American Enterprise Life will pay the beneficiary 
the greatest of the following less any Credits added to the contract in 
the last 12 months: (i) the Contract value; or (ii) the total Purchase 
Payments paid, plus Credits, and minus any adjusted partial 
withdrawals.
    29. The Signature Contract has two other death benefit options 
offered as riders, which require the owner or the annuitant to be age 
79 or younger on the Contract date. The Maximum Anniversary Value Death 
Benefit Rider provides that if the owner or the annuitant dies before 
annuity payouts begin while the Contract is in force, American 
Enterprise Life will pay the beneficiary the greatest of the following 
specified amounts, less any Credits added in the last twelve months: 
(i) the Contract value; (ii) the total Purchase Payments paid, plus 
Credits, and minus any adjusted partial withdrawals; or (iii) the 
maximum anniversary value immediately preceding the date of death, plus 
any Purchase Payments since that anniversary, plus Credits, and minus 
any adjusted partial withdrawals since that anniversary.
    30. The Signature Contract also offers the 5% Accumulation Death 
Benefit Rider option, which provides that if the owner or annuitant 
dies before annuity payouts begin while the Contract is in force, 
American Enterprise Life will pay the beneficiary the greatest of the 
following specified amounts, less any Credits added in the last twelve 
months: (i) the Contract value; (ii) the total Purchase Payments paid, 
plus Credits, and minus any adjusted partial withdrawals; or (iii) the 
Variable Account 5% Floor.
    31. 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 the Insurance Companies to 
issue Contracts and Future Contracts that provide for Credits upon the 
receipt of Purchase Payments, and to recapture certain Credits in the 
following instances: (i) any Credit applied when an owner returns a 
Contract to the Insurance Companies for a refund during the free look 
period, and (ii) Credits applied within twelve months preceding the 
date of death that results in a death benefit as described herein 
(including death benefits under the Enhanced Death Benefit Rider and 
Maximum Anniversary Value Death Benefit Rider under an American 
Enterprise Account contract); and (iii) Credits applied within twelve 
months preceding a request for a surrender or withdrawal charge waiver 
due to any Contingent Event.

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 Accounts or Future Accounts, that 
are issued by the Insurance Companies and underwritten or distributed 
by IDS Life, AEFA, or Affiliated Broker-Dealers. Applicants undertake 
that Future Contracts funded by the Separate Accounts or any Future 
Account will be 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 Accounts after the Credit is 
applied. Accordingly, the asset-based charges applicable to the 
Accounts will be assessed against the entire amounts held in the 
respective 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 of the 1940 Act 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 such a separate account or sponsoring insurance company 
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 amount in the 
circumstances set forth above 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 Credit amount allocated to his or 
her annuity account value upon receipt of an initial Purchase Payment 
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 Credit amounts allocated to his or her annuity account 
within twelve months preceding a Contingent Event also is not vested. 
Until the right to recapture has expired and any Credit amount is 
vested, Applicants submit that the Insurance Companies retain the right 
and interest in the Credit amount, although not in the earnings 
attributable to that amount. Thus, Applicants argue that when the 
Insurance Companies recapture any Credit, they are merely retrieving 
their own assets, and the owner has not been deprived of a 
proportionate share of the applicable Account's assets because his or 
her interest in the Credit amount has not vested.
    5. In addition, Applicants state that permitting an owner to retain 
a Credit amount under a Contract upon the exercise of the free look 
privilege would not only be unfair, but would also encourage 
individuals to purchase a Contract with no intention of keeping it and 
returning it for a quick profit.
    6. Furthermore, Applicants state that the recapture of Credit 
amounts within twelve months preceding a Contingent Event is designed 
to provide the Insurance Companies with a measure of

[[Page 148]]

protection against anti-selection. Applicants state that the risk here 
is that, rather than spreading Purchase Payments over a number of 
years, an owner might make very large Purchase Payments shortly before 
the occurrence of a Contingent Event, thereby leaving the Insurance 
Companies little time to recover the cost of the Credits. As noted 
earlier, the amounts recaptured equal the Credits provided by the 
Insurance Companies from their general account assets, and any gain 
would remain a part of the owner's Contract value. In addition, the 
amount the owner will receive in any of the circumstances where Credits 
are recaptured will always equal or exceed the surrender value of the 
Contract.
    7. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put 101% 
to 105% of their Purchase Payments to work for them in the selected 
Investment Funds. In addition, the owner will retain any earnings 
attributable to the Credit, as well as the principal Credit amount once 
vested after twelve months if the Contingent Events 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 the Insurance 
Companies. In the context of the Contingent Events described in the 
application, anti-selection can generally be described as a risk that 
Contract owners obtain an undue advantage based on elements of fairness 
to the Insurance Companies and the actuarial and other factors they 
take into account in designing the Contracts. The Insurance Companies 
provide the Credits from their general account on a guaranteed basis. 
Thus, the Insurance Companies undertake a financial obligation that 
contemplates the retention of the Contracts by their owners over an 
extended period, consistent with the long-term nature of retirement 
planning. The Insurance Companies generally expect to recover their 
costs, including Credits, over an anticipated duration while a Contract 
is in force. The right to recapture Credits applied to Purchase 
Payments made within twelve months preceding the applicable contingency 
protects the Insurance Companies against the risk that a Contract owner 
will make additional Purchase Payments to or purchase a contract with 
the knowledge that the contingency that triggers payment of a benefit 
is likely or about to occur. With respect to refunds paid upon the 
return of Contracts within the free look period, the amount payable by 
the Insurance Companies must be reduced by the Credit amount. 
Otherwise, purchasers could apply for Contracts for the sole purpose of 
exercising the free look provision and making a quick profit.
    9. Applicants submit that the provisions for recapture of any 
Credit under the Contracts does not, and any such Future Contract 
provisions will not, violate Section 2(a)(32) and 27(i)(2)(A) of the 
1940 Act. However, to avoid any uncertainty as to full compliance with 
the 1940 Act, Applicants request an exemption from those Sections, to 
the extent deemed necessary, to permit the recapture of any Credit 
under the circumstances summarized herein with respect to Contracts and 
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 for redemption or of an 
order to purchase or sell such security.
    11. Arguably, the Insurance Companies' 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 
Accounts. Applicants contend, however, that recapture of the Credit 
does not violate Section 22(c) and Rule 22c-1. Applicants argue that 
the recapture of the Credit 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 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, the Insurance Companies will 
redeem interests in an owner's annuity account at a price determined on 
the basis of current net asset value of the Account. The amount 
recaptured will equal the amount of the Credit that the Insurance 
Companies paid out of their general account assets. Although the owner 
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 Account. 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 All compliance with the 1940 
Act, Applicants request an exemption from the provisions of Section 
22(c) of 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 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

[[Page 149]]

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. 99-34014 Filed 12-30-99 8:45 am]
BILLING CODE 8010-01-M