[Federal Register Volume 65, Number 71 (Wednesday, April 12, 2000)]
[Notices]
[Pages 19798-19802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9037]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24378; File No. 812-11884]


The Manufacturers Life Insurance Company of North America, et 
al., Notice of Application

April 5, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order under Section 6(c) of the 
Investment Company Act of 1940 (the

[[Page 19799]]

``1940 Act'' or ``Act'') granting exemptions from the provisions of 
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act, and Rule 22c-1 
thereunder, to permit the recapture of credits applied to purchase 
payments made under certain deferred variable annuity contracts.

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SUMMARY OF APPLICATION: Applicants seek an order to permit the recovery 
of certain credits applied to purchase payments made under: (i) Certain 
deferred variable annuity contracts (``Contracts'') that The 
Manufacturers Life Insurance Company of North America (``Manulife North 
America'') issues through The Manufacturers Life Insurance Company of 
North America Separate Account A (``the Account''), and (ii) contracts 
that Manulife North America may issue in the future through the 
Account, any of its other separate accounts, or any separate accounts 
that it may establish in the future (``Manulife North America Future 
Accounts'') and that The Manufacturers Life Insurance Company of New 
York) ``Manulife New York'') may issue in the future through The 
Manufacturers Life Insurance Company of New York Separate Account A 
(``the Variable Account''), any of its other separate accounts or any 
separate accounts that it may establish in the future) ``Manulife New 
York Future Accounts''; collectively with the Manulife North America 
Future Accounts, the ``Future Accounts''), which contracts are 
substantially similar in all material respects to the Contracts 
(``Future Contracts''). Applicants also request that the order extend 
to any other National Association of Securities Dealers, Inc. 
(``NASD'') member broker-dealer controlling, 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 Accounts (collectively, ``Affiliated Broker-
Dealers'').

APPLICANTS: The Manufacturers Life Insurance Company of North America, 
The Manufacturers Life Insurance Company of New York (collectively, 
``the Insurance Companies''), The Manufacturers Life Insurance Company 
of North America Separate Account A, The Manufacturers Life Insurance 
Company of New York Separate Account A (collectively, ``the 
Accounts''), Manufacturers Securities Services, LLC (``MSS''), and any 
of the Insurance Companies' other separate accounts or separate 
accounts that the Insurance Companies may establish in the future 
(``Future Accounts'') to support Future Contracts issued by the 
Insurance Companies (collectively, ``Applicants'').

FILING DATE: The application was filed on December 14, 1999, and 
amended on March 29, 2000.

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 on April 27, 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 writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, c/o Betsy A. Seel, 
Esq., Manulife Financial, 73 Tremont Street, Boston, Massachusetts 
02108; copy to John W. Blouch, Esq., Jones & Blouch L.L.P., 1025 Thomas 
Jefferson St., NW, Suite 410 East, Washington, DC 20007-0805.

FOR FURTHER INFORMATION CONTACT: Paul G. Cellupica, Senior Counsel, or 
Keith Carpenter, 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 may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 
20549-0102 (tel. (202) 942-8090).

Applicant's Representations

    1. Manulife North America is a stock life insurance company 
organized under the laws of Delaware in 1979. Its principal business is 
offering variable annuity contracts in 48 states (excluding New York), 
the District of Columbia and Puerto Rico. The ultimate parent of 
Manulife North America is The Manufacturers Life Insurance Company, a 
Canadian stock life insurance company (``Manulife''). Manulife 
Financial Corporation is the holding company of Manulife and its 
subsidiaries, collectively known as Manulife Financial.
    2. Manulife New York is a stock life insurance company organized 
under the laws of New York in 1992. Its principal business is offering 
variable annuity contracts in New York. Manulife New York is a wholly-
owned subsidiary of Manulife North America.
    3. The Account was established in 1984 by Manulife North America as 
a separate account under Delaware law and is registered with the 
Commission as a unit investment trust under the Act. The Account funds 
the variable benefits available under the Contracts and other variable 
annuity contracts issued by Manulife North America. The offering of the 
Contracts by Manulife North America is registered under the Securities 
Act of 1933. That portion of the assets of the Account that is equal to 
the reserves and other contract liabilities with respect to the Account 
is not chargeable with liabilities arising out of any other business of 
Manulife North America. Any income, gains or losses, realized or 
unrealized, from assets allocated to the Account are, in accordance 
with the various contracts, credited to or charged against the Account 
without regard to other income, gains or losses of Manulife North 
America.
    4. The Variable Account was established in 1992 by Manulife New 
York as a separate account under New York law and is registered with 
the Commission as a unit investment trust under the Act. The Variable 
Account funds the variable benefits available under the contracts 
issued by Manulife New York. That portion of the assets of the Variable 
Account that is equal to the reserves and other contract liabilities 
with respect to the Variable Account is not chargeable with liabilities 
arising out of any other business of Manulife New York. Any income, 
gains or losses, realized or unrealized, from assets allocated to the 
Variable Account are, in accordance with the various contracts, 
credited to or charged against the Variable Account without regard to 
other income, gains or losses of Manulife New York.
    5. MSS is a Delaware limited liability company controlled by 
Manulife North America and is the principal underwriter of the 
Contracts. MSS is also the principal underwriter of certain contracts 
issued by Manulife New York. MSS is registered as a broker-dealer under 
the Securities Exchange Act of 1934 and is a member of the NASD. Sales 
of the Contracts are made by registered representatives of broker-
dealers authorized by MSS to sell the Contracts. Such registered 
representatives are also licensed insurance agents of Manulife North 
America.

[[Page 19800]]

    6. The Contracts are flexible purchase payment individual deferred 
combination fixed and variable annuity contracts. They may be issued 
pursuant to either non-qualified retirement plans or plans qualifying 
for special income tax treatment such as individual retirement accounts 
and annuities, pension and profit-sharing plans for corporations and 
sole proprietorships or partnerships, tax sheltered annuities, and 
state and local government deferred compensation plans.
    7. The minimum initial purchase payment for a Contract is $10,000. 
The minimum subsequent purchase payment is $30. Manulife North America 
may limit total Contract purchase payments to $1,000,000.
    8. Upon receipt of a purchase payment from a Contract owner, 
Manulife North America adds a payment enhancement or credit to the 
owner's Contract (the ``Credit''). Manulife North America funds Credits 
from its general account assets and allocates Credits among investment 
options in the same proportion as the applicable purchase payment. The 
Credit depends upon the cumulative amount of purchase payments and is 
payable as a percentage of specific purchase payments as set forth in 
the chart below. A higher Credit percentage may be applied to an 
initial purchase payment where the Contract owner has executed a letter 
of intent to make total purchase payments within 13 months of the 
Contract date sufficient to achieve one of the higher breakpoints shown 
below (``Letter of Intent'').

                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                             Credit rates
                                                     -----------------------------------------------------------
                                                                           Promotional rate*
                                                        Guaranteed rate    (contracts issued   Promotional rate*
            Cumulative purchase payments               (contracts issued      on or after      (contracts issued
                                                       prior to January     January 1, 1999    on or after June
                                                           1, 1999)        but prior to June       21, 1999)
                                                                               21, 1999)
----------------------------------------------------------------------------------------------------------------
Less than $500,000..................................                3.0                 4.0                 5.0
$500,000 or more but less than $2,500,000...........                4.0                 5.0                 5.5
$2,500,000 or more..................................                5.0                 6.0                6.0
----------------------------------------------------------------------------------------------------------------
*Promotional Credit rates are being offered for initial and subsequent purchase payments with respect to all
  Contracts issued on or after January 1, 1999, with the higher promotional rates applicable to Contracts issued
  after June 21, 1999. The promotional Credits may be terminated at any time and, if terminated, will not be
  applied to initial or subsequent purchase payments made after the date of termination except in the context of
  a Letter of Intent. The promotional rates applicable to the initial purchase payment under a Letter of Intent
  will continue in effect for the 13-month Letter of Intent completion period regardless of a termination
  generally of the promotional rates during such period.

    9. Manulife North America recovers certain Credits from a Contract 
owner under the following circumstances: (i) Any Credit applied if the 
owner returns the Contract for a refund during the 10-day ``free look'' 
period; (ii) any Credits applied within 12 months preceding the date of 
death that results in payment of a death benefit; and (iii) any 
``Excess Credits'' (defined below) applied to purchase payments made 
pursuant to a Letter of Intent where total purchase payments received 
within 13 months from the Contract date do not equal or exceed the 
applicable breakpoint for the Credits applied. In the event of such 
recovery, the Contract owner retains any earnings attributable to the 
Credit or Excess Credit allocated to his or her account value. If there 
is a decline in the value of accumulation units for an investment to 
which a Credit or Excess Credit has been allocated, Manulife North 
America retains the right to recover the original amount of the Credit 
or Excess Credit. The recovery of Credits or Excess Credits will be 
effected by canceling accumulation units equal in value to the full 
amounts to be recovered, the number of such units to be calculated at 
the accumulation unit value next determined. Amounts recovered will be 
withdrawn from each investment option in the same proportion that the 
value of the investment account of each investment option bears to the 
Contract value.
    10. The free look period is the 10-day period during which an owner 
may return a Contract after it has been delivered. Upon such return, 
the owner receives a full refund of the Contract value, less any debt 
and any Credit. No withdrawal charge applies to the refund. The refund 
amount may be more or less than the owner's purchase payment, unless 
the applicable state law requires that the full amount of the purchase 
payment be refunded.
    11. The Contract's death benefit provision states that a death 
benefit will be paid to the Contract owner's specified beneficiary (or 
a surviving Contract owner, if any) if the Contract owner dies before 
annuity payments begin. The death benefit during the first nine 
Contract years will be the greater of: (a) The Contract value less any 
Credits applied in the 12-month period prior to the date of death, or 
(b) the excess of (i) the sum of all purchase payments over (ii) the 
sum of any partial withdrawals. After the ninth Contract year, the 
death benefit will be the greater of: (a) The Contract value less any 
Credits applied in the 12-month period prior to the date of death; (b) 
the excess of (i) the sum of all purchase payments over (ii) the sum of 
any amounts deducted in connection with partial withdrawals; or (c) the 
death benefit on the last day of the ninth Contract year, plus the sum 
of all purchase payments made and any amount deducted in connection 
with partial withdrawals since then. If there is any debt under the 
Contract, the death benefit equals the death benefit as described above 
less such debt.
    12. Manulife North America applies a higher Credit percentage to an 
initial purchase payment where the Contract owner has executed a Letter 
of Intent to make total purchase payments within 13 months of the 
Contract date sufficient to achieve such higher Credit percentage. If 
the total purchase payments received within such 13-month period do not 
equal or exceed the amount of the breakpoint for such higher Credit 
percentage, Manulife North America may recover the ``Excess Credit,'' 
that is, the amount by which the Credit applied to the Contract exceeds 
the Credit that would have been applied to the actual purchase payments 
made had the Contract owner not submitted a Letter of Intent. The 
Contract owner bears the risk that, if the Letter of Intent is not 
fulfilled, the value of the Contract may be less than it would have 
been if the owner had not executed a Letter of Intent. If the amount 
recovered exceeds the Contract value, Manulife North

[[Page 19801]]

America will terminate the Contract without value.
    13. Contract owners may allocate their purchase payments among a 
number of sub-accounts of the Account. Each sub-account invests in 
shares of a corresponding portfolio of Manufacturers Investment Trust 
(the ``Trust''), an open-end management investment company registered 
under the Act. Manulife North America may, subject to compliance with 
applicable law, add other sub-accounts, eliminate or combine existing 
sub-accounts or transfer assets in one sub-account to another sub-
account established by Manulife North America or an affiliated company.
    14. The Contracts provide for various withdrawal and annuity payout 
options, as well as transfer privileges among sub-accounts, dollar cost 
averaging, and other features. The Contracts provide for the following 
charges: (i) a withdrawal or contingent deferred sales charge 
(``CDSC'') as a percentage of amounts withdrawn attributable to 
purchase payments that have been in the Contract less than ten complete 
years, with the applicable percentage charge declining from a maximum 
of 8.5% in years one and two to 0.0% in year ten and thereafter; (ii) a 
$40 annual administration fee; (iii) a daily administration fee in an 
amount equal on an annual basis to 0.30% of the value of each variable 
investment account, deducted from each sub-account; (iv) a daily 
mortality and expense risks charge in an amount equal on an annual 
basis to 1.25% of the value of each variable investment account, 
deducted from each sub-account; and (v) 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 portfolios of the Trust are charged with the annual 
operating expenses of those portfolios. The CDSC is not applied against 
Credits or Excess Credits.

Applicants' Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from the provisions of the Act and the rules 
promulgated thereunder if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants request that the Commission, 
pursuant to Section 6(c) of the Act, grant the exemptions requested 
below 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 MSS or Affiliated Broker-
Dealers. Applicants undertake that Future Contracts will be 
substantially similar in all material respects to the Contracts. 
Applicants believe that the requested exemptions are appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.
    2. Applicants 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 Manulife North America to 
issue Contracts and Future Contracts, and Manulife New York to issue 
Future Contracts, that provide for the issuance of Credits upon the 
receipt of purchase payments and the subsequent recovery of: (i) Any 
Credit applied if an owner returns a Contract or a Future Contract for 
a refund during the free look period; (ii) any Credits applied within 
12 months preceding the date of death that results in payment of a 
death benefit; and (iii) any Excess Credits applied to purchase 
payments made pursuant to a Letter of Intent where total purchase 
payments received within 13 months from the Contract or Future Contract 
date do not equal or exceed the amount of the applicable breakpoint for 
the Credit applied.
    3. Applicants represent that it is not administratively feasible to 
track asset-based charges against Credits in the Accounts after the 
Credits have been applied. Accordingly, the asset-based charges 
applicable to the Accounts will be assessed against the entire amounts 
held in the Accounts, including Credits, during the free look period, 
the 12-month recovery periods with respect to death benefits, and the 
13-month period for fulfillment of a Letter of Intent. As a result, 
during such period, the aggregate asset-based charges assessed against 
an owner's annuity account value will be higher than they would have 
been if the owner's annuity account value did not include any Credits.
    4. Subsection (i) of Section 27 of the Act provides that Section 7 
does not apply to any registered separate account 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 such contract is a 
redeemable security. Section 2(a)(32) defines a ``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 or her proportionate share of the issuer's current 
net assets, or the cash equivalent thereof.
    5. Applicants submit that the recovery of Credits and Excess 
Credits in the circumstances set forth in the Application do 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 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 Credits allocated to his 
or her annuity account within 12 months preceding the date of death 
resulting in payment of a death benefit, or in the Excess Credit 
allocated to such account within 13 months preceding the fulfillment of 
a Letter of Intent, also is not vested. Until the right to recovery has 
expired and any Credit or Excess Credit has vested, Applicants submit 
that Manulife North America retains the right and interest therein. 
Thus, Applicants argue that when Manulife North America recovers any 
Credit or Excess Credit, it is merely retrieving its own assets. The 
owner is not deprived of a proportionate share of the Account's assets 
because the owner's interest in such Credit or Excess Credit has not 
vested. Moreover, according to Applicants, Manulife North America does 
not recover any earnings attributable to Credits or Excess Credits.
    6. Applicants further submit that permitting an owner to retain a 
Credit upon the exercise of the free look return provision, or a Credit 
allocated within 12 months of the date of death, or an Excess Credit 
under circumstances of non-fulfillment of a Letter of Credit, would be 
unfair and would deny the Insurance Companies a reasonable measure of 
protection against anti-selection. 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 risk here is that, rather than spreading purchase 
payments over a number of years, an owner might seek to manipulate 
Contract provisions in a manner that

[[Page 19802]]

leaves the Insurance Companies little time to recover the cost of the 
Credit or Excess Credit. For example, permitting an owner to retain a 
Credit upon the exercise of the free look return would encourage the 
purchase of Contracts for a quick profit upon return rather than with 
the intention of making a long-term investment. Similarly, an owner 
would have an incentive to make a very large purchase payment shortly 
before death or to execute a Letter of Intent with no intention of 
fulfilling it in order to obtain Credits or Excess Credits the cost of 
which the Insurance Companies would be unable to recover. As stated 
above, the amounts recovered will equal the Credits or Excess Credits 
provided by the Insurance Companies from general account assets, and 
any gains attributable thereto will remain a part of the owner's 
Contract value. For the foregoing reasons, Applicants submit that the 
provisions for recovery of Credits and Excess Credits under the 
Contracts do 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 
Act, Applicants request an exemption from Sections 2(a)(32) and 
27(i)(2)(A), to the extent deemed necessary, to permit the issuance and 
subsequent recovery of Credits and Excess Credits under the 
circumstances described in the Application with respect to Contracts 
and Future Contracts, without the loss of relief from Section 27 
provided by Section 27(i).
    7. Section 22(c) of the 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. The Insurance Companies' recovery of Credits and Excess 
Credits as ]described in the Application might arguably be viewed as 
involving the redemption of redeemable securities for a price other 
than one based on the current net asset value of the Accounts.
    8. Applicants believe that the recovery of the Credits and Excess 
Credits does not violate Section 22(c) of the Act or Rule 22c-1. Such 
recovery does not involve either of the harms 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.
    9. Applicants submit that the recovery of Credits and Excess 
Credits does not pose such a threat of dilution. In effecting 
recoveries, the Insurance Companies will redeem interests in an owner's 
Contract at a price determined on the basis of the current net asset 
value of the sub-accounts(s) to which the owner's Contract value is 
allocated. The amounts recovered will equal the Credits or Excess 
Credits that the Insurance Companies have paid our of general account 
assets. The owners will be entitled to retain any investment gains 
attributable to the Credits or Excess Credits, and the amounts of such 
gains will be determined on the basis of the current net asset values 
of the applicable sub-accounts. Under these circumstances, in 
Applicants' view, the recovery of the Credits or Excess Credits does 
not involve dilution. Applicants further 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 recovery of Credits or Excess Credits.
    10. Applicants contend that, because neither of the harms that Rule 
22c-1 was meant to address are found in the recovery of Credits or 
Excess Credits, Rule 22c-1 and Section 22(c) should not be construed as 
applicable thereto. However, to avoid any uncertainly in this regard, 
Applicants request an exemption from the provisions of Section 22(c) 
and Rule 22c-1 to the extent deemed necessary to permit them to recover 
Credits and Excess Credits under the Contracts and Future Contracts as 
described in the Application.
    11. Applicants submit that their request for an order that applies 
to Future Accounts and Future Contracts that are substantially similar 
in all material respects to the Contracts and underwritten or 
distributed by MSS or Affiliated Broker-Dealers is appropriate in the 
public interest. 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. Investors will 
not receive any benefit or additional protection if Applicants are 
required repeatedly to seek exemptive relief presenting no issue under 
the Act that has not already been addressed in the Application. Having 
Applicants file additional applications would impair Applicants' 
ability effectively to take advantage of business opportunities as they 
arise. Applicants undertake that Future Contracts funded by the 
Accounts or by Future Accounts which seek to rely on the order issued 
pursuant to this Application will be substantially similar in all 
material respects to the Contracts.

Conclusion

    Applicants submit, based on the grounds summarized above, that 
their exemptive request meets the standards set out in Section 6(c) of 
the Act, namely, that the exemptions requested are necessary or 
appropriate in the public interest, and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provision of the Act, and that, therefore, the Commission should grant 
the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-9037 Filed 4-11-00; 8:45 am]
BILLING CODE 8010-01-M