[Federal Register Volume 65, Number 34 (Friday, February 18, 2000)]
[Notices]
[Pages 8455-8461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3872]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24286; File No. 812-11506]


Hartford Life Insurance Company, et al.

February 11, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to Section 11(a) of 
the Investment Company Act of 1940 (the ``Act'') approving the terms of 
an offer of exchange and for an order pursuant to Section 6(c) of the 
Act granting exemptions from Sections 2(a)(32), 22(c) and 27(i)(2)(A) 
of the Act and Rule 22c-1 thereunder for the recapture of certain bonus 
credits.

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APPLICANTS: Hartford Life Insurance Company (``Hartford Life''), 
Hartford Life Insurance Company Separate Account Two (``HL Account''), 
Putnam Capital Manager Trust Separate Account (``HL Putnam Account''), 
Hartford Life and Annuity Insurance Company (``Hartford Life and 
Annuity''), Hartford Life and Annuity Insurance Company Separate 
Account One (``HLA Account''), Putnam Capital Manager Trust Separate 
Account Two (``HLA Putnam Account'', collectively with the HL Account, 
HL Putnam Account and HLA Account, the ``Accounts'') and Hartford 
Securities Distribution Company, Inc. (``HSD'').

SUMMARY OF APPLICATION: Applicants seek an order approving the terms of 
a proposed offer of exchange of new variable annuity contracts issued 
by Hartford Life and Hartford Life and Annuity (collectively 
``Hartford'') and made available through the Accounts (the ``New 
Contracts'') for certain outstanding annuity contracts issued by 
Hartford and made available through the Accounts (the ``Old 
Contracts'', collectively with the New Contracts, the ``Contracts''). 
Applicants also seek an order to permit the recapture, from any New 
Contract canceled during the right to cancel period, a 2% bonus payment 
credited on amounts transferred to the New Contracts under the proposed 
offer of exchange.

FILING DATE: The application was filed on February 12, 1999, and 
amended on October 15, 1999, November 12, 1999, and December 10, 1999.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on March 7, 2000, and should be accompanied by 
proof of service on Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the requester's interest, the reason for the request, and the 
issues contested. Persons who wish to be notified of a hearing may 
request notification by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, Marianne O'Doherty, 
Esq., Hartford Life Inc., P.O. Box 2999, Hartford, Connecticut 06140-
2999.

FOR FURTHER INFORMATION CONTACT: Lorna MacLeod, Senior Counsel, or 
Susan 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 
Public Reference Branch of the Commission.

Applicants' Representations

Applicants

    1. Hartford Life is a stock life insurance company engaged in the 
business of writing life insurance and annuities, both individual and 
group, in all states of the United States and the District of Columbia. 
Hartford Life is ultimately controlled by the Hartford Financial 
Services Group, Inc. (``Hartford Financial Services''), a financial 
services provider in the United States.
    2. The HL Account is the separate account in which Hartford sets 
aside and invests assets attributable to Hartford Life's Director 
variable annuity contracts (``HL Director Contracts''). The HL Account 
is organized and registered under the Act as a unit investment trust 
(File No. 811-4732).
    3. The HL Putnam Account is the separate account in which Hartford 
sets aside and invests the assets attributable to the Hartford Life's 
Putnam Hartford Capital Manager Variable Annuity (``HL Putnam 
Contracts''). The HL Putnam Account is organized and registered under 
the Act as a unit investment trust (File No. 811-6285).
    4. Hartford Life and Annuity is a stock life insurance company 
engaged in the business of writing life insurance and annuities, both 
individual and group, in all states of the United States and the 
District of Columbia, except New York. Hartford Life and Annuity is 
ultimately controlled by Hartford Financial Services.
    5. The HLA Account is the separate account in which Hartford Life 
and Annuity sets aside and invests assets attributable to Hartford Life 
and Annuity's Director variable annuity contracts (``HLA Director 
Contracts,'' collectively with the HL Director Contracts, the 
``Director Contracts''). The HLA Account is organized and registered 
under the Act as a unit investment trust (File No. 811-07426).
    6. The HLA Putnam Account is the separate account in which Hartford 
Life and Annuity sets aside and invests the assets attributable to the 
HLA Putnam Hartford Capital Manager Variable Annuity (``HLA Putnam 
Contracts,'' collectively with the HL Putnam Contracts, the ``Putnam 
Contracts''). The HLA Putnam Account is organized and registered under 
the Act as a unit investment trust (File No. 811-07622).
    7. HSD is registered with the Commission as a broker-dealer and is 
a member of the National Association of Securities Dealers, Inc. HSD is 
the principal underwriter for the Contracts and for other Hartford 
variable insurance products. HSD is an affiliate of Hartford Life and 
Hartford Life and Annuity. Hartford Life's and Hartford Life and 
Annuity's parent company indirectly owns 100% of HSD.

[[Page 8456]]

    8. Both Hartford Life and Hartford Life and Annuity offer Director 
Contracts and Putnam Contracts. The HL and HLA Director Contracts are 
identical to each other and the HL and HLA Putnam Contracts are 
identical to each other in all respects, except that the Hartford Life 
Contracts are issued through Hartford Life's separate accounts and the 
Hartford Life and Annuity Contracts are issued through Hartford Life 
and Annuity's separate accounts.

Reasons for Exchange Offer

    9. Applicants assert that during the later part of this decade, the 
variable annuity marketplace has become increasingly competitive. Many 
of the purchases of variable annuity contracts in the 1980s and early 
1900s are at, or close to, the expiration of their deferred sales 
charge period, and the contract values of many contracts are no longer 
subject to a deferred sales charge. Holders of such contracts have 
become prime targets for competitors' variable annuity sales efforts. 
One feature offered to variable annuity purchasers by several of 
Hartford's competitors is a ``bonus'' or ``credit'' funded from the 
insurer's general account, generally ranging from 1-4% of contract 
value. Hartford has experienced the effects of these ``bonus offers'' 
through the loss of a substantial portion of its Director and Putnam 
Contract business.
    10. Hartford states that its competitors are permitted to make 
bonus offers to Hartford's Director and Putnam Contract owners because 
offers of exchange to contract owners of unaffiliated insurance 
companies are not prohibited by Section 11 of the Act by virtue of a 
no-action position granted to Alexander Hamilton Funds (pub. avail. 
July 20, 1994) (``Alexander Hamilton''). Applicants state that 
Alexander Hamilton stands for the proposition that, except for limited 
exceptions, exchange offers between unaffiliated investment companies 
are not prohibited under Section 11. Consistent with Section 11(a), 
therefore, a fund may impose a contingent deferred sales charge 
(``CDSC'') on shares purchased by investors with proceeds of shares 
exchanged from an unaffiliated fund.
    11. Applicants assert that, but for the existence of the affiliated 
nature of the exchange, Hartford would be able to offer a bonus program 
to its existing Director and Putnam Contract owners that is similar to 
its competitors' programs. However, unlike its competitors who may make 
bonus offers to Director and Putnam Contract owners, Hartford is 
constrained from making the similar offer without first obtaining 
Commission approval of the terms of the exchange.
    12. Applicants state that in response to this competitive dilemma, 
Hartford has developed and exchange offer (``Exchange Offer'') that 
would give eligible owners of Director and Putnam Contracts the 
opportunity to exchange their existing Contracts for an enhanced 
Contract. On the day the exchange is effected (the ``Exchange Date''), 
eligible owners would also receive a 2% bonus based on the Contract 
value of each Old Contract surrendered in exchange for an enhanced New 
Contract (``2% Bonus''). Withdrawals made after the right to cancel 
period under the New Contract has expired would be governed by the 
terms of the New Contract, including application of the CDSC. If a 
Contract owner exercises his or her right to cancel the New Contract, 
the 2% Bonus will be returned to Hartford and the Old Contract will be 
reinstated with Contract values that reflect the investment experience 
while the New Contract was held. Applicants state that the terms of the 
Exchange Offer are designed to respond to Hartford's competitive 
dilemma and to assure that persisting Contract owners who accept the 
Exchange Offer receive an immediate and enduring economic benefit.

The Contracts

    13. Certain New Director Contracts (``Director VI'') are offered 
pursuant to registration statements under the Securities Act of 1933 
(the ``1933 Act'') filed on December 23, 1993, and amended on September 
28, 1998 (HL File No. 33-73570; HLA File No. 33-73568). When available, 
other New Director Contracts (``Director VII'') will be offered 
pursuant to registration statements under the 1933 Act filed on 
December 22, 1998 (HL File No. 333-69485; HLA File No. 333-69487).
    14. Applicants state that the New Director Contracts, which 
represent either the sixth (or, when available, the seventh) version of 
Hartford's Director Contract, were designed to enhance the Old Director 
Contracts. Hartford has sold Director VI since June 27, 1994, and is in 
the process of obtaining state approvals to sell Director VII. The New 
Director Contracts are offered as individual and group tax-deferred 
flexible premium variable annuity contracts. They permit Contract 
values to be accumulated on a variable, fixed, or combination of 
variable and fixed basis. They require a minimum initial premium 
payment of $1,000.
    15. Contract values of the New Director Contracts currently may be 
allocated to sub-accounts of the HL Account (with respect to Hartford 
Life Director Contracts) or the HLA Account (with respect to HLA 
Director Contracts) that each invest in 15 different investment company 
portfolios (``Underlying Funds'')--15 mutual funds sponsored by 
Hartford. Under four ``propriety'' versions of the HL Director VI 
Contract and one ``proprietary'' version of the HLA Director VI 
Contract, Contract values also maybe allocated to various additional 
Underlying Funds available under those Contracts.
    16. Values may also be accumulated on a guaranteed basis by 
allocation to Hartford's general account (the ``Fixed Account''). Fixed 
Account interest is currently guaranteed to be credited at a rate of at 
least 3% on an annual basis.
    17. Contract values may be transferred among the sub-accounts of 
the Hartford Accounts without charge, although Hartford reserves the 
right to limit the number of transfers to 12 in a Contract year. 
Transfers to and from the Fixed Account are permitted, subject to 
certain restrictions described in the prospectus for the New Director 
Contracts.
    18. New Director Contract owners may enroll in a special pre-
authorized transfer program known as Hartford's Dollar Cost Averaging 
Bonus Program (the ``DCA Bonus Program''). Contract owners who enroll 
under the DCA Bonus Program may allocate a minimum of $5,000 of their 
premium payment into the DCA Bonus Program and pre-authorize transfers 
to any of the sub-accounts.
    19. Contract values under the New Director Contracts may be 
accessed at any time prior to the annuity commencement date by means of 
partial surrenders or full surrender. The New Director Contracts permit 
withdrawal of up to 10% (15% in the case of Director VII) of premium 
payments per Contract year during the initial CDSC period and, after 
the seventh Contract year, 100% of Contract value less premium payments 
made during the seven years prior to surrender, and 10% (15% in the 
case of Director VII) of premium payments invested for less than seven 
years. The annual withdrawal amount, which is not subject to the CDSC, 
is also referred to herein as the ``free withdrawal amount.''
    20. The New Director Contracts provide an enhanced guaranteed death 
benefit in the event of the death of the annuitant or Contract owner 
before annuity payments have commenced. The death benefit will be 
calculated upon receipt of due proof of death at Hartford's 
Administrative Office and will equal the greatest of: (a) The

[[Page 8457]]

Contract value; (b) 100% of all premium payments made under the 
Contract reduced by the dollar amount of any partial surrenders since 
the date of issue; or (c) the maximum anniversary value preceding the 
date of death.
    21. The Director VII Contract also provides for an optional death 
benefit which must be applied for at the time of application or 
exchange. For an additional charge at an annual rate of 15% of the 
average daily sub-account value, the optional death benefit is equal to 
the greatest of: (a) The Contract value; (b) 100% of all premium 
payments made under the Contract, reduced by the dollar amount of any 
partial surrenders since the Contract issue date; (c) the maximum 
anniversary value; or (d) the interest accumulation value, which is 
equal to total premium payments, adjusted for partial surrenders, 
compounded daily at an annual interest rate of 5.0%.
    22. The New Director Contracts contain either five (Director VI) or 
seven (Director VII) annuity payment options, including the five 
payment options available under the Old Director Contracts. Annuity 
options are available on a fixed or variable basis, or a combination 
thereof.
    23. The New Director Contracts assess a CDSC against partial or 
full surrenders in excess of the free withdrawal amount. The length of 
time from receipt of a premium payment to the time of surrender 
determines the percentage of the CDSC. During the first seven years 
from each premium payment, a CDSC will be assessed against the 
surrender of premium payments that is a percentage of the amount 
surrendered (not to exceed the aggregate amount of the premium payments 
made). For Director VI, the CDSC ranges from 6% in year 1 to 0% in 
years 8 and after. For Director VII, the CDSC ranges from 7% in year 1 
to 0% in years 8 and after.
    24. The New Director Contracts provide for a waiver of the CDSC if 
the annuitant is confined, at the recommendation of a physician for 
medically necessary reasons, for at least 180 days, to a hospital or a 
nursing facility. Additionally, no CDSC is assessed in the event of 
death of the annuitant, death of the Contract Owner or if payments are 
made under an annuity option.
    25. During the life of the New Director Contracts, Hartford deducts 
a mortality and expense risk charge from Contract value at an annual 
rate of 1.25% of the average daily sub-account value.
    26. A charge for administrative expenses is deducted annually on 
each New Director Contract from the Contract value. The annual 
maintenance fee is $30 per Contract year, and is waived on Contracts 
with a $50,000 or greater Contract value.
    27. Charges are deducted under the New Director Contracts for 
premium tax, if applicable. Certain states impose a premium tax, 
currently ranging up to 3.5%. Hartford pays premium taxes at the time 
imposed and recovers premium taxes upon full surrender, when a death 
benefit is paid or at annuitization.
    28. Certain New Putnam Contracts (``Putnam V'') are offered 
pursuant to registration statements under the 1933 Act filed on 
December 23, 1993, and amended on April 15, 1998 (HL File No. 33-73566; 
HLA File No. 333-73572). When available, other New Putnam Contracts 
(``Putnam VI'') will be offered pursuant to registration statements 
under the 1933 Act filed on December 22, 1998 (HL File No. 333-69439; 
HLA File No. 333-69429).
    29. The New Putnam Contracts, which are either the fifth (or, when 
available, the sixth) version of Hartford's Putnam Capital Manager 
Contract, are identical to the New Director Contracts except for 
differences in the Underlying Funds and the administration charge 
discussed below. Hartford has sold Putnam V since June 27, 1994, and is 
in the process of obtaining state approvals to sell Putnam VI.
    30. There are currently 20 sub-accounts available under the New 
Putnam Contract, each of which invests in an Underlying Fund sponsored 
by Putnam.
    31. Charges under the New Putnam Contracts are identical to charges 
under the New Director Contracts, except that Hartford makes a daily 
charge for administration at the annual rate of .15% against all new 
Putnam Contract values held in the Putnam Account during both the 
accumulation and annuity phases of the Contract.
    32. The Old Director Contracts (four contracts also referred to 
respectively as ``Director II'' through ``Director V'') are offered 
pursuant to registration statements under the 1933 Act (HL Director II 
through Director V: File No. 33-06952; HLA Director II through V: File 
No. 33-56790).
    33. The Old Director Contracts represent the second through fifth 
versions of Hartford's Director Contract. They are offered as flexible 
premium group and individual tax-deferred variable annuity contracts. 
They permit Contract values to be accumulated only on a variable basis 
(Director II) or on a variable, fixed or combination variable and fixed 
bases (Director III through V).
    34. Contract values of the Old Director Contracts currently may be 
allocated to the same 15 sub-accounts of the Hartford Account available 
under the New Director Contract, each of which invests in Underlying 
Funds sponsored by Hartford.
    35. Contract values of an Old Director Contract may be accessed by 
means of partial surrenders or full surrender. Old Director Contracts 
permit an annual 10% free withdrawal amount also available under the 
Director VI Contract.
    36. The Old Director Contracts offer a minimum (no step-up) death 
benefit in the case of Director II and a periodic step-up death benefit 
in the cases of Director III through Director V. In particular, the 
death benefit provided under the Old Director Contracts may be 
calculated based on the Contract value on a specified Contract 
anniversary rather than the maximum anniversary value preceding the 
date of death.
    37. The Old Director Contract has a CDSC. Additionally, a $25 
charge is deducted from Contract value annually for Contract 
maintenance, and a mortality and expense risks charge is deducted from 
Contract value at an annual rate of 1.25% of daily sub-account value. 
Charges for premium taxes, if any, are deducted from premium payments 
under the New Director Contracts. Certain states impose a premium tax, 
currently ranging up to 3.5%. Hartford pays premium taxes at the time 
imposed and recovers the premium taxes upon full surrender, death or 
annuitization.
    38. The Old Putnam Contracts (four contracts referred to 
respectively as ``Putnam I'' through ``Putnam IV'') are offered 
pursuant to registration statements under the 1933 Act (HL Putnam I 
through Putnam III: File No. 33-17207; HL Putnam IV: File No. 33-73566; 
HLA Putnam I through V: File No. 33-60702).
    39. The Old Putnam Contracts represent the first through fourth 
versions of Hartford's Putnam Contract. They are identical to the Old 
Director II through V Contracts except for offering different 
Underlying Funds and assessing an administration charge in the manner 
described below.
    40. Contract values of the Old Putnam Contracts currently may be 
allowed to the same 20 sub-accounts of the Putnam Account available 
under the New Putnam Contract, each of which invests in Underlying 
Funds sponsored by Putnam.
    41. Charges under the Old Putnam Contracts are identical to the 
charges under the Old Director II through V Contracts, except that each 
Old Putnam Contract deducts administration fees at an annual rate of 
.15% of average daily Putnam sub-account value.

[[Page 8458]]

    42. Applicants represent that the features and benefits of the New 
Contracts will be no less favorable than under the Old Contract, except 
for differences in the minimum guaranteed interest rates under the 
Fixed Account option and fixed annuity options. Applicants also 
represent that, with the exception of the CDSC and the annual 
maintenance fee, the fees and charges of the New Contracts will be no 
higher than those of the Old Contract.

Terms of the Exchange Offer

    43. Applicants propose to offer eligible owners of Old Contracts 
the opportunity to exchange their Old Contracts for New Contracts by 
means of the Exchange Offer. Eligible Director II-V Contract owners 
will be permitted to exchange their Old Director Contract for any one 
of five versions of a Director VI Contract, and when available, a 
Director VII Contract. Similarly, eligible Putnam I-IV Contract owners 
will be permitted to exchange their Old Putnam Contract for a Putnam V 
Contract, and when available, a Putnam VI Contract. To be eligible for 
the Exchange Offer, Director and Putnam Contract owners must (a) have 
completed seven or more Contract years under their Old Contract; and 
either (b) have not made deposits of premium under the Contract in the 
prior 24 months; or (c) have remaining surrender charges of less than 
2% of their current Contract value.
    44. Hartford, from its general account, will provide a 2% Bonus to 
each owner of an Old Contract who accepts the offer, which is based on 
the Contract value of each Old Contract surrendered in exchange for a 
New Contract. The Exchange Offer will provide that, upon acceptance of 
the offer, a New Contract will be issued with a Contract value equal to 
2% greater than the Contract value of the Old Contract surrendered in 
the exchange. The Contract value of an Old Contract (``Exchange 
Value''), together with the 2% Bonus and any additional premium 
payments submitted for the New Contract, will be applied to the New 
Contract as of the Exchange Date. No CDSC will be deducted upon the 
surrender of an Old Contract in connection with an exchange.
    45. If a Contract owner exercises his or her right to cancel the 
New Contract values that reflect the investment experience while the 
New Contract was held. After expiration of the New Contract's right to 
cancel period, withdrawals will be governed by the terms of the New 
Contract for purposes of calculating any CDSC. The Exchange Date will 
be the issue date of the New Contract for purposes of determining 
Contract years and anniversaries after the Exchange Date.
    46. After an initial notification of the Exchange Offer in 
quarterly reports or other communications to Director and Putnam 
Contract owners and contacts made by Hartford's registered 
representatives, the Exchange Offer will be made by providing eligible 
owners of Old Contracts who express an interest in learning the details 
of the offer a prospectus for the New Contracts, accompanied by a 
letter explaining the offer (``Offering Letter'') and sales literature 
that compares the Old and New Contracts.
    47. The Offering Letter will advise owners of an Old Contract that 
the Exchange Offer is specifically designed for those Contract owners 
who intend to continue to hold their Contracts as long-term investment 
vehicles. The letter will state that the offer is not intended for all 
Contract owners, and that it is especially not appropriate for any 
Contract owner who anticipates surrendering all or a significant part 
(i.e., more than the 10 or 15% on an annual basis) or his or her 
Contract before five to seven years. In this regard, the letter will 
encourage Contract owners to carefully evaluate their personal 
financial situation when deciding whether to accept or reject the 
Exchange Offer. In addition, the Offering Letter will explain how an 
owner of an Old Contract contemplating an exchange may avoid the 
application CDSC on the New Contract if no more than the annual ``free 
withdrawal amount'' is surrendered and any subsequent deposits are held 
until expiration of the CDSC period. In this regard, the Offering 
Letter will state in clear plain English that if the New Contract is 
surrendered during the initial CDSC period: (a) the 2% Bonus may be 
more than offset by the CDSC; and (b) a Contract owner may be worse off 
than if he or she had rejected the Exchange Offer.
    48. To accept the Exchange Offer, an owner of an Old Contract must 
complete an internal exchange form. Applicants state that no adverse 
tax consequences will be incurred by those Contract owners who accept 
the Exchange Offer and that the exchanges will constitute tax-free 
exchanges pursuant to Section 1035 of the Internal Revenue Code.
    49. The Exchange Offer is meant to encourage existing Contract 
owners to remain with Hartford rather than surrender their Contracts in 
exchange for a competitor's product offering a similar bonus. If the 
New Contract (CDSC) is not permitted on the Exchange Value, Applicants 
believe that some Contract owners might exchange their New Contracts 
with the intent to take advantage of the 2% Bonus and then surrender 
the New Contract without a CDSC. Without the CDSC, Hartford would have 
no assurance that a Contract owner who accepted the Exchange Offer 
would persist long enough for the 2% Bonus and payments to register 
representatives to be recouped through standard fees from the ongoing 
operation of the New Contracts. Applicants state that registered 
representatives will be paid commissions for soliciting exchanges that 
are less than they normally are paid for soliciting sales of New 
Contracts. Applicants assert that compensating HSD's registered 
representatives for these exchanges is necessary in order to provide 
sufficient incentive for them to compete with competitors' registered 
representatives.

 Applicant's Conditions

    Applicants agree to the following conditions:
    1. The Offering Letter will contain concise, plain English 
statements that: (a) The Exchange Offer is suitable only for Contract 
owners who expect to hold their Contracts as long term investments; and 
(b) if the New Contract is surrendered during the initial CDSC period, 
the 2% bonus may be more than offset by the CDSC and a Contract owner 
may be worse off than if he or she had rejected the Exchanger Offer.
    2. The Offering Letter will disclose in concise, plain English each 
aspect of the New Contracts that will be less favorable than the Old 
Contracts.
    3. Hartford will send the Offering Letter directly to eligible 
Contract owners. A Contract owner choosing to exchange will than 
complete and sign an internal exchange form, which will prominently 
restate in concise, plain English the statements required in Condition 
No. 1, and return it to Hartford. If the internal exchange form is more 
than two pages long, Hartford will us a separate document to obtain 
Contract owner acknowledgement of the statements required in Condition 
No. 1.
    4. Hartford will maintain the following separately identifiable 
records in an easily accessible place for the time periods specified 
below in this Condition No. 4 for review by the Commission upon 
request: (a) Records showing the level of exchange activity and how it 
relates to the total number of Contract owners eligible to exchange 
(quarterly as a percentage of the number eligible); (b) copies of any 
form of Offering Letter and other written materials or scripts for 
presentations by representatives regarding the Exchange Offer that 
Hartford either prepares or

[[Page 8459]]

approves, including the dates that such materials were used; (c) 
records containing information about each exchange transaction that 
occurs, including the name of the Contract owner; Old and New Contract 
numbers; the amount of CDSC waived on surrender of the Old Contract; 
Bonus paid; the name and CRD number of the registered representative 
soliciting the exchange, firm affiliation, branch office address, 
telephone number and the name of the registered representative's 
broker-dealer; commission paid; the internal exchange form (and 
separate document, if any, used to obtain the Contract owner's 
acknowledgment of the statements required in Condition No. 1) showing 
the name, date of birth, address and telephone number of the Contract 
owner and the date the internal exchange form (or separate document) 
was signed; amount of Contract value exchanged; and persistency 
information relating to the New Contract, including the date of any 
subsequent surrender and the amount of CDSC paid on the surrender; and 
(d) logs showing a record of any Contract owner complaint about the 
exchange; state insurance department inquiries about the exchange; or 
litigation, arbitration, or other proceeding regarding any exchange. 
The logs will include the date of the complaint or commencement of the 
proceeding, name and address of the person making the complaint or 
commencing the proceeding, nature of the complaint or proceeding, and 
the persons named or involved in the complaint or proceeding. 
Applicants will retain records specified in (a) and (d) for a period of 
six years after the date the records are created, records specified in 
(b) for a period of six years after the date of last use, and records 
specified in (c) for a period of two years after the date that the 
initial CDSC period of the New Contract ends.

Applicants' Legal Analysis

Section 11

    1. Section 11(a) of the Act makes it unlawful for any registered 
open-end company, or any principal underwriter for such a company, to 
make or cause to be made an offer to the holder of a security of such 
company, or of any other open-end investment company, to exchange his 
security for a security in the same or another such company on any 
basis other than the relative net asset values of the respective 
securities, unless the terms of the offer have first been submitted to 
and approved by the Commission or are in accordance with Commission 
rules adopted under Section 11.
    2. Section 11(c) of the Act, in pertinent part, requires, in 
effect, that any offer of exchange of the securities of a registered 
unit investment trust for the securities of any other investment 
company be approved by the Commission or satisfy applicable rules 
adopted under Section 11, regardless of the basis of the exchange.
    3. The purpose of Section 11 of the Act is to prevent 
``switching,'' the practice of inducing security holders of one 
investment company to exchange their securities for those of a 
different investment company solely for the purpose of exacting 
additional selling charges. That type of practice was found by Congress 
to be widespread in the 1930s prior to adoption of the Act.
    4. Section 11(c) of the Act requires Commission approval (by order 
or by rule) of any exchange, regardless of its basis, involving 
securities issued by a unit investment trust, because investors in unit 
investment trusts were found by Congress to be particularly vulnerable 
to switching operations.
    5. Applicants assert that the potential for harm to investors 
perceived in switching was its use to extract additional sales charges 
from those investors.
    6. Applicants assert that the terms of the proposed Exchange Offer 
do not present the abuses against which Section 11 was intended to 
protect. The Exchange Offer was designed to allow Hartford to compete 
on a level playing field with its competitors who are making bonus 
offers to its current Director and Putnam Contract owners. No 
additional sales load or other fee will be imposed at the time of 
exercise of the exchange Offer.
    7. Rule 11a-2, by its express terms, provides Commission approval 
of certain types of offers of exchange of one variable annuity contract 
for another. Applicants assert that other than the relative net asset 
value requirement (which is not satisfied because exchanging Contract 
owners will be given a 2% Bonus), the only part of Rule 11a-2 that 
would not be satisfied by the proposed Exchange Offer is the 
requirement that payments under the Old Contracts be treated as if they 
had been made under the New Contracts on the dates actually made. This 
provision of Rule 11a-2 is often referred to as a ``tacking'' 
requirement because it has the effect of ``tacking together'' the CDSC 
expiration periods of the exchanged and acquired contracts.
    8. Applicants assert that the absence of tacking does not mean that 
an exchange offer cannot be attractive and beneficial to investors. 
Applicants state that the proposed Exchange Offer would assure an 
immediate and enduring economic benefit to investors. The 2% Bonus 
would be applied immediately and the fact that asset-based charges 
would not be increased by the exchange would assure that the benefit 
would ensure. An owner of an Old Contract who intends to continue to 
hold the Contract as a long-term retirement planning vehicle will be 
significantly advantaged by the Exchange Offer because this 2% Bonus 
will automatically be added to his or her Contract value upon receipt 
of an enhanced New Contract. No sales charge will ever be paid on the 
amount rolled over in the exchange unless the New Contract is 
surrendered before expiration of the New Contract's CDSC period.
    9. Applicants assert that tacking should be viewed as a useful way 
to avoid the need to scrutinize the terms of an offer of exchange to 
make sure that there is no abuse. Tacking is not a requirement of 
Section 11. Rather, it is a creation of a rule designed to approve the 
terms of offers of exchange ``sight unseen.'' Tacking focuses on the 
closest thing to multiple deduction of sales loads that is possible in 
a CDSC context--multiple exposure to sales loads upon surrender or 
redemption. If tacking and other safeguards of Rule 11a-2 are present, 
there is no need for the Commission or its staff to evaluate the terms 
of the offer. The absence of tacking in this fully scrutinized Section 
11 application will have no impact on offers made pursuant to the rule 
on a ``sight unseen'' basis.
    10. Applicants assert that the terms of Hartford's Exchange Offer 
are better than those of its competitors. No tacking is required when 
Hartford's competitors offer their variable annuity contracts to owners 
of Old Contracts or when Hartford makes such an offer to competitors' 
contract owners. In those exchanges, unlike the Exchange Offer proposed 
by Hartford, exchanging Contract owners must pay any remaining CDSC on 
the exchanged Contract at the time of the exchange.
    11. To the extent there are differences in the Contracts, those 
differences relate to enhanced contractual features and charges that 
are fully described in the prospectuses for the New Contracts. 
Furthermore, the Offering Letter will contain concise, plain English 
statements that: (a) the Exchange Offer is suitable only for Contract 
owners who expect to hold their Contracts as long-term investments; and 
(b) if the New Contract is surrendered during the initial CDSC period, 
the 2% bonus may be more than offset by the CDSC and a

[[Page 8460]]

Contract owner may be worse off than if he or she had rejected the 
Exchange Offer. Applicants assert that Contract owners should have the 
opportunity to decide, on the basis of full and fair disclosure, 
whether the enhancements of the New Contracts and the 2% Bonus justify 
accepting the offer.

Sections 2(a)(32), 22(c), 27(i)(2)(A) and Rule 22c-1

    12. 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 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 deemed 
necessary to permit Hartford to issue New Contracts that provide for a 
2% Bonus upon exchange, and to recapture the 2% Bonus when a Contract 
owner returns a New Contract to Hartford for a refund during the right 
to cancel period.
    13. Applicants assert that with respect to refunds paid upon the 
return of the New Contracts within the right to cancel period, the 
amount payable by Hartford must be reduced by the 2% Bonus amount. 
Otherwise, purchasers could apply for New Contracts for the sole 
purpose of exercising the right to cancel provision and making a quick 
profit. Applicants represent that it is not administratively feasible 
to track the 2% Bonus amount in any of the Accounts after the 2% Bonus 
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 2% Bonus amount, during the right to 
cancel period. As a result, during such period, the aggregate asset-
based charges assessed against a Contract owner's account value will be 
higher than those that would be charged if the owner's account value 
did not include the 2% Bonus.
    14. Subsection (i) of Section 27 of the 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.
    15. Applicants submit that the recapture of the 2% Bonus amount if 
an owner returns the Contract during the right to cancel period would 
not deprive an owner of his or her proportionate share of the issuer's 
current net assets. Applicants assert that an owner's interest in the 
2% Bonus amount allocated to his or her account value upon exchange is 
not vested until the applicable right to cancel period has expired 
without return of the Contract. Until the right to recapture has 
expired and the 2% Bonus amount is vested, Applicants assert that 
Hartford retains the right and interest in the 2% Bonus amount, 
although not in the earnings attributable to that amount. Applicants 
assert that when Hartford recaptures the 2% Bonus, it is merely 
retrieving its own assets, and the Contract owner has not been deprived 
of a proportionate share of the applicable Account's assets.
    16. In addition, Applicants assert that permitting a Contract owner 
to retain the 2% Bonus amount under a New Contract upon exercising the 
right to cancel would be unfair and would encourage individuals to 
exchange into a New Contract with no intention of keeping it but of 
retaining it for a quick profit. The amounts recaptured equal the 2% 
Bonus provided by Hartford from its general account assets, and any 
gain would remain a part of the Contract owner's Contract value. In 
addition, the amount the Contract owner receives in the circumstances 
where the 2% Bonus is recaptured will always equal or exceed the 
surrender value of the New Contract.
    17. Applicants submit that the provisions for recapture of the 2% 
Bonus under the New Contracts do not violate Sections 2(a)(32) and 
27(i)(2)(A) of the Act. However, to avoid any uncertainty as to full 
compliance with the Act, Applicants request an exemption from those 
sections, to the extent deemed necessary, to permit the recapture of 
the 2% Bonus if an owner returns the New Contract during the right to 
cancel period without the loss of the relief from Section 27 provided 
by Section 27(i).
    18. 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 to accomplish the same purposes as 
contemplated by Section 22(a). 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.
    19. Hartford's recapture of the 2% Bonus might arguably 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 assert, however, that recapture of the 2% Bonus does not 
violate 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 the 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. The proposed 
recapture of the 2% Bonus does not pose a threat of dilution. To effect 
a recapture of the 2% Bonus, Hartford will redeem interests in a 
Contract owner's account at a price determined on the basis of the 
current net asset value of the Account. The amount recaptured will 
equal the amount of the 2% Bonus that Hartford paid out of its general 
account assets. Although the Contract owner will be entitled to retain 
any investment gain attributable to the 2% Bonus, the amount of the 
gain will be determined on the basis of the current net asset value of 
the Account. Thus, Applicants state that no dilution will occur upon 
the 2% Bonus recapture. 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.
    20. Applicants argue that Section 22(c) and Rule 22c-1 should not 
apply because neither of the harms that Rule 22c-1 was meant to address 
are found

[[Page 8461]]

in the recapture. However, to avoid any uncertainty as to full 
compliance with the 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 2% Bonus under the New 
Contracts.

Conclusion

    For the reasons summarized above, Applicants submit that the 
Exchange Offer is consistent with the protections provided by Section 
11 of the Act, and that approval of the Exchange Offer is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policies and 
provisions of the Act. Applicants further submit that their request for 
exemptions from Sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and 
Rule 22c-1 thereunder meet the standards set out in Section 6(c) of the 
Act. Applicants submit that the requested order should therefore be 
granted.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3872 Filed 2-17-00; 8:45 am]
BILLING CODE 8010-01-M