[Federal Register Volume 65, Number 93 (Friday, May 12, 2000)]
[Notices]
[Pages 30651-30654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11960]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-2443; File No. 812-11858]


Valley Forge Life Insurance Company, et al.

May 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 ``1940 Act'' or ``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 immediate interest payments applied to purchase payments 
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, under specified 
circumstances, the recapture of immediate interest payments applied to 
purchase payments made under deferred variable annuity contracts (the 
``Contracts'') that Valley Forge Life Insurance Company (``Valley 
Forge'') will issue through Valley Forge Life Insurance Company 
Variable Annuity Separate Account (``VFL Separate Account''), as well 
as other contracts that Valley Forge may issue in the future through 
VFL Separate Account or any other future separate accounts of Valley 
Forge ``Future Accounts'') that are substantially similar in all 
material respects to the Contracts (the ``Future Contracts''). 
Applicants also request that the order being sought extend to any other 
National Association of Securities Dealers, Inc. (``NASD'') member 
broker-dealer controlling or controlled by, or under common control 
with, Valley Forge, whether existing or created in the future, that 
serves as a distributor or principal underwriter of the Contracts or 
Future Contracts offered through VFL Separate Account or any Future 
Accounts (``Valley Forge Broker-Dealers(s)'').

APPLICANTS: Valley Forge Life, VFL Separate Account, the Future 
Accounts and CNA Investor Services, Inc. (collectively, 
``Applicants'').

[[Page 30652]]


FILING DATE: The application was filed on November 17, 1999 and amended 
on April 3, 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 on the application by writing to the SEC's Secretary 
and serving Applicants with a copy of the request, in person or by 
mail. Hearing requests must be received by the SEC by 5:30 p.m. on May 
30, 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 Jonathan 
Kantor, Esq., Valley Forge Life Insurance Company, CNA Plaza, 43 South, 
Chicago, Illinois 60685.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or 
Keith E. 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 is available for a free from the 
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 
20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Valley Forge is a wholly-owned subsidiary of Continental 
Assurance Company. Continental Assurance Company is a wholly-owned 
subsidiary for Continental Casualty Company, which is wholly-owned by 
CNA Financial Corporation. Loews Corporation owns approximately 86% of 
the outstanding common stock of CNA Financial Corporation. VFL Separate 
Account was established on February 12, 1996 by resolutions of the 
Board of Directors of Valley Forge. Valley Forge serves as depositor of 
VFL Separate Account. Valley Forge may in the future establish one or 
more Future Accounts for which it will serve as depositor.
    2. VFL Separate Account is a segregated asset account of Valley 
Forge. VFL Separate Account is registered with the Commission as a unit 
investment trust under the 1940 Act. VFL Separate Account filed a Form 
N-8A Notification of Registration under the 1940 Act on February 20, 
1996.
    3. VFL Separate Account filed a Form N-4 Registration Statement on 
August 18, 1999 under the Securities Act of 1933 (``1993 Act'') 
relating to the Contracts. Valley Forge may in the future issue Future 
Contracts through VFL Separate Account or through Future Accounts. That 
portion of the assets of VFL Separate Account that is equal to the 
reserves and other Contract liabilities with respect to VFL Separate 
Account is not chargeable with liabilities arising out of any other 
business of Valley Forge. Any income, gains or losses, realized or 
unrealized, from assets allocated to VFL Separate Account is, in 
accordance with VFL Separate Account's Contracts, credited to or 
charged against VFL Separate Account, without regard to other income, 
gains or losses of Valley Forge.
    4. CNA Investor Services, Inc. (``CNAISI'') is an affiliate of 
Valley Forge and will be the principal underwriter of VFL Separate 
Account and distributor of the Contracts funded through VFL Separate 
Account (the ``VFL Separate Account Contracts''). CNAISI is registered 
with the Commission as a broker-dealer under the Securities Exchange 
Act of 1934 (the ``1934 Act'') and is a member of the NASD. The VFL 
Separate Account Contracts will be offered through unaffiliated broker-
dealers who have entered into selling agreements with CNAISI. CNAISI, 
or any successor entity, may act as principal underwriter for any 
Future Accounts and distributor for any Future Contracts issued by 
Valley Forge.
    5. The Contract is a part of Valley Forge's line of annuity 
products. The Contract is an individual deferred variable and fixed 
annuity contract. The Contract may be issued under a qualified plan, 
specially sponsored program or an individual retirement annuity or as a 
non-tax qualified contract. Purchase payments may be made at any time 
during the accumulation phase. The minimum initial purchase payment is 
$10,000 for non-tax qualified contracts and $2,000 for a qualified plan 
contract. Additional purchase payments of at least $1,000 can be made 
($100 under the electronic fund transfer program). Unless Valley Forge 
agrees otherwise, the maximum total purchase payments it accepts is 
$1,000,000.
    6. The Contracts permit purchase payments to be allocated to fixed 
accounts of Valley Forge (``Fixed Accounts''). The Fixed Accounts are 
not registered with the Commission.
    7. VFL Separate Account currently is divided into 23 sub-accounts, 
each of which will be available under the VFL Separate Account 
Contracts. The sub-accounts are referred to as ``Investment Options''. 
Each Investment Option will invest in shares of a corresponding 
portfolio of certain underlying investment companies (``Funds''). The 
Investment Options and the Fixed Accounts will comprise the initial 
investment choices under the Contract. The Funds are open-end, 
management investment companies registered under the 1940 Act, whose 
shares are registered under the 1933 Act. Valley Forge, at a later 
date, may determine to create additional Investment Options of VFL 
Separate Account to invest additional underlying portfolios or other 
investments as may now or in the future be available. Similarly, 
Investment Option(s) of VFL Separate Account may be combined or 
eliminated from time to time.
    8. The Contract provides for withdrawal options, annuity payment 
options, as well as transfer privileges among Investment Options, 
dollar cost averaging, automatic transfer option, death benefits and 
other features. The Contract has charges consisting of: (i) an annual 
asset-based product expense charge of 1.40% assessed against the net 
assets of each sub-account; (ii) a withdrawal charge as a percentage of 
purchase payments which starts at 7% in the first year, and declines to 
0% after 8 years with a 10% free withdrawal amount permitted under 
certain circumstances; (iii) a $30 contract maintenance charge for 
Contracts with Contract value of less than $50,000 during the 
accumulation phase; and (iv) a transfer fee of $25 for each transfer in 
excess of 12 in a Contract year during the accumulation period. The 
Funds also incur management fees and operating expenses which vary 
depending upon with Funds are selected.
    9. Each time Valley Forge receives a purchase payment from an owner 
during the first Contract year, Valley Forge will add an additional 
amount to the Contract (``Immediate Interest Payment''). The Immediate 
Interest Payment will equal 3% of the purchase payment. Valley Forge 
will fund the Immediate Interest Payment from its general account 
assets. Valley Forge will allocate the Immediate Interest Payment to 
the Fixed Accounts and/or Investment Options in the same proportion as 
the purchase payment. Valley Forge will recapture Immediate Interest 
Payments only under the following circumstance: if the Contract owner 
makes a withdrawal anytime

[[Page 30653]]

before the first day of the second Contract year, including if the 
Owner returns the Contract for a refund during the free look period 
(except for withdrawals pursuant to the systematic withdrawal program 
not subject to the withdrawal charge).
    10. Applicants seek exemption pursuant to Section 6(c) of the 1940 
Act from Sections (2)(a)(32), 22(c) and 27(i)(2)(A) of the 1940 Act and 
Rule 22c-1 thereunder to the extent necessary to permit Valley Forge to 
recapture an amount equal to any Immediate Interest Payment in the 
event that a Contract owner makes a withdrawal of Contract value, 
including the exercise of the free-look right, before the first day of 
the second Contract year (except for withdrawals pursuant to the 
systematic withdrawal program not subject to the withdrawal charge). 
The dollar amount of Immediate Interest Payments will be deducted pro-
rata from the amount withdrawn.\1\ Any earnings that resulted from the 
Immediate Interest Payments will not be deducted. After the First 
Contract year, the Immediate Interest Payment will vest and can be 
withdrawn at any time. Valley Forge reserves the right to limit 
Immediate Interest Payments in the future.
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    \1\ When an owner requests a withdrawal any time during the 
first contract year, Valley Forge will deduct the amount of the 
Immediate Interest Payment in proportion to the amount of the 
purchase payment withdrawn.
    Example:
    Purchase Payment: $100,000
    Immediate Interest Payment: $3,000
    Subsequent 1st Year Withdrawal: $10,000
    Immediate Interest Payment Recaptured: $300
    The withdrawal charge is assessed on the amount of the purchase 
payment withdrawn ($10,000). The resulting withdrawal charge is 7% 
of $10,000 which reduces the amount available to $9,300. VFL would 
then deduct the proportionate amount of the Immediate Interest 
Payment to be recaptured ($300) from the amount to be disbursed to 
the owner.
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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 VFL Separate Account or Future Accounts, 
that are issued by Valley Force and underwritten or distributed by 
CNAISI or Valley Forge Broker-Dealers. Applicants undertake that Future 
Contracts funded by VFL Separate Account or any Future Accounts will be 
substantially similar in all material respects to the Contracts. 
Applicants believe that the requested exemptions are appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.
    2. Applicants represent that it is not administratively feasible to 
track the Immediate Interest Payment amounts in VFL Separate Account 
after the Immediate Interest Payment is applied. Accordingly, the 
asset-based charges applicable to VFL Separate Account will be assessed 
against the entire amounts held in VFL Separate Account, including the 
Immediate Interest Payment amount, during the first Contract year. As a 
result, during such period, the aggregate asset-based charges assessed 
against a Contract owner's Contract value will be higher than those 
that would be charged if the Contract owner's Contract value did not 
include the Immediate Interest Payment.
    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 any registered separate account funding variable 
insurance contracts or a sponsoring insurance company of such account 
to sell a contract funded by the registered separate account unless, 
among other things, such contract is a redeemable security. Section 
2(a)(32) of the 1940 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 Immediate Interest Payment recapture 
provisions of the Contract would not deprive a Contract owner of his or 
her proportionate share of the issuer's current net assets. Applicants 
state that a Contract owner's interest in the amount of the Immediate 
Interest Payment allocated to his or her Contract value upon receipt of 
purchase payments in the first Contract year are not vested until the 
first day of the second Contract year. Until or unless the amount of 
any Immediate Interest Payment is vested, Applicants submit that Valley 
Forge retains the right and interest in the Immediate Interest Payment 
amount, although not in the earnings attributable to that moment. 
Applicants argue that when Valley Forge recaptures any Immediate 
Interest Payment it is simply retrieving its own assets, and because a 
Contract owner's interest in the Immediate Interest Payment is not 
vested, the Contract owner has not been deprived of a proportionate 
share of VFL Separate Account assets, i.e., a share of VFL Separate 
Account's assets proportionate to the Contract owner's Contract value 
(including the Immediate Interest Payment).
    5. In addition, with respect to Immediate Interest Payment 
recapture upon the exercise of the free-look privilege, Applicants 
state that it would be patently unfair to allow a Contract owner 
exercising that privilege to retain the Immediate Interest Payment 
amount under a Contract that has been returned for a refund after a 
period of only a few days. Applicants state that if Valley Forge could 
not recapture the Immediate Interest Payment, individuals could 
purchase a Contract with no intention of retaining it, and simply 
return it for a quick profit.
    6. Furthermore, Applicants state that the recapture of the 
Immediate Interest Payment, in the event of a withdrawal before the 
first day of the second Contract year, is designed to protect Valley 
Forge against Contract owners making large purchase payments in the 
first Contract year without affording it sufficient time to recover the 
cost of the Immediate Interest Payment, to its financial detriment. 
Again, the amounts recaptured equal the Immediate Interest Payment 
provided by Valley Forge from its own general account assets and any 
gain would remain as part of the Contract owner's Contract value.
    7. Applicants represent that the Immediate Interest Payment will be 
attractive to and in the interest of investors because it will permit 
Contract owners to put 103% of their purchase payments to work for them 
in the selected Investment Options and Fixed Accounts. Also, any 
earnings attributable to the Immediate Interest Payment will be 
retained by the Contract owner, and the principal

[[Page 30654]]

amount of the Immediate Interest Payment will be retained if a Contract 
owner does not make a withdrawal of Contract value (including the 
exercise of the free-look right) before the first day of the second 
Contract year.
    8. Applicants state that Valley Forge's right to recapture 
Immediate Interest Payments applied to purchase payments in the event 
of a withdrawal before the first day of the second Contract year, is 
designed to protect Valley Forge against Contract owners making large 
purchase payments in the first Contract year without affording it 
sufficient time to cover the cost of the Immediate Interest Payment, to 
its financial detriment. With respect to funds paid upon the return of 
Contracts within the free-look period, the amount payable by Valley 
Forge must be reduced by the allocated Immediate Interest Payment. 
Otherwise, Applicants state that 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 
applicable Immediate Interest Payment under the Contracts or any Future 
Contract as set forth in this Application will not violate Sections 
2(a)(32) and 27(i)(2)(A) of the 1940 Act. Nevertheless, to avoid any 
uncertainties, Applicants request an exemption from those Sections, to 
the extent deemed necessary, to permit the recapture of any Immediate 
Interest Payment under the circumstances described herein with respect 
to the Contracts and any 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, 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.
    11. Arguably, Valley Forge's recapture of the Immediate Interest 
Payment 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 VFL Separate Account. Applicants contend, however, that the 
recapture of the Immediate Interest Payment is not violative of Section 
22(c) and Rule 22c-1. Applicants argue that the recapture does not 
involve either of the evils that Rule 22c-1 was intended to eliminate 
or reduce, as far as reasonably practicable, namely: (1) the dilution 
of the value of outstanding redeemable securities of registered 
investment companies through their sale at a price below net asset 
value or their redemption or repurchase at a price above it, and (ii) 
other unfair results including speculative trading practices. To effect 
a recapture of an Immediate Interest Payment, Valley Forge will redeem 
interests in a Contract owner's Contract value at a price determined on 
the basis of current net asset value of VFL Separate Account. The 
amount recaptured will equal the amount of the Immediate Interest 
Payment that Valley Forge paid out of its general account assets. 
Although Contract owners will be entitled to retain any investment gain 
attributable to the Immediate Interest Payment, the amount of such gain 
will be determined on the basis of the current net asset value of VFL 
Separate Account. Thus, no dilution will occur upon the recapture of 
the Immediate Interest Payment. 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 Immediate Interest 
Payment. 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 Immediate Interest Payment under the Contracts and Future 
Contracts.

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 Act that 
has not already been addressed in the Application described herein. 
Applicants submit that having Applicants file additional applications 
would impair Applicants' ability effectively to take advantage of 
business opportunities as they arise. Further, Applicants state that if 
Applicants 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 Act, namely, that the exemptions requested are necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 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. 00-11960 Filed 5-11-00; 8:45 am]
BILLING CODE 8010-01-M