[Federal Register Volume 65, Number 170 (Thursday, August 31, 2000)]
[Notices]
[Pages 53058-53063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22272]


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SECURITIES AND EXCHANGE COMMISSION

[Rel No. IC-24620; File No. 812-11830]


Provident Mutual Life Insurance Company, et al.

August 24, 2000.
AGENCY: The Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to section 6(c) of 
the Investment Company Act of 1940 (``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 contract account value and to premium payments made under certain 
variable annuity contracts.

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    Applicants: Provident Mutual Life Insurance Company (``PMLIC''), 
Provident Mutual Variable Annuity Separate Account (``PMLIC Account''), 
Providentmutual Life and Annuity Company of America (``PLACA''), 
Providentmutual Variable Annuity Separate Account (``PLACA Account''), 
and 1717 Capital Management Company (``1717 Capital'').
    Summary of application: Applicants seek an order of the Commission, 
pursuant to section 6(c) of the Act, exempting them from sections 
2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, 
to the extent necessary to permit the recapture of certain credits 
applied to contract account value and to premium payments made in 
consideration of: (1) certain deferred variable annuity contracts, 
described herein, that PLACA plans to issue (the ``Contracts''), or (2) 
variable annuity contracts that are substantially similar to the 
Contracts in all material respects that PLACA may issue in the future 
(``Future Contracts''). Applicants also seek an order of the 
Commission, pursuant to section 6(c) of the Act, exempting (1) variable 
annuity separate accounts, other than the PLACA Account, that PLACA has 
established or may establish in the future (``Future Accounts''), (2) 
variable annuity separate accounts, including the PMLIC Account, that 
PMLIC has established or may establish in the future (also, ``Future 
Accounts''), and (3) principal underwriters for such Future Accounts 
that are under common control with PLACA or PMLIC and that are 
registered as a broker-dealer under the Securities Exchange Act of 1934 
and a member of the National Association of Securities Dealers, Inc. 
(``NASD'') (``Future Underwriters''), from sections 2(a)(32), 22(c) and 
27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent 
necessary to permit the recapture of certain credits applied to 
contract account value and to premium payments made in consideration of 
variable annuity contracts issued in the future by PLACA or PMLIC 
through a Future Account that are substantially similar in all material 
respects to the Contracts (also, ``Future Contracts'').
    Filing Date: The application was filed on November 1, 1999, and 
amended and restated on February 23, 2000. A second amended and 
restated application was filed on August 22, 2000.
    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 should be received by the 
Commission by 5:30 p.m. on September 18, 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 may request notification of 
a hearing by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609. Applicants, c/o James G. 
Potter, Jr., Esq., Provident Mutual Life Insurance Company, 1000 
Chesterbrook Boulevard, Berwyn, PA 19312.

FOR FURTHER INFORMATION CONTACT: Jane G. Heinrichs, Senior Counsel, at 
(202) 942-0699, or Keith E. Carpenter, Branch Chief, at (202) 942-0679, 
Office of Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. PLACA is a stock life insurance company originally incorporated 
under the laws of the Commonwealth of Pennsylvania in 1958, and 
redomiciled as a Delaware insurance company in 1992. It is a wholly 
owned subsidiary of PMLIC, PLACA is licensed to do business in 48 
states and the District of Columbia. As of December 31, 1998, PLACA had 
assets of approximately $1.5 billion. for purposes of the Act, PLACA is 
the depositor and sponsor of the PLACA Account as those terms have been 
interpreted by the Commission with respect to variable annuity separate 
accounts.
    2. PLACA established Account on May 9, 1991, as a segregated 
investment account under Pennsylvania law.\1\ Under Delaware law, the 
assets of the PLACA Account attributable to the Contracts through which 
interests in the Account are issued are owned by PLACA but are held 
separately from all other assets of PLACA for the benefit of the owners 
of, and the persons entitled to payment under, those Contracts. 
Consequently, such assets are not chargeable with liabilities arising 
out of any other business that PLACA may conduct. Income, gains and 
losses, realized or unrealized, from each subaccount of the PLACA 
Account, are credited to or charged against that subaccount without 
regard to any other income, gains or losses of PLACA. The PLACA Account 
is a ``separate account'' as defined by Rule 0-1(e) under the Act, and 
is registered with the Commission as a unit investment trust.\2\
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    \1\ Because PLACA redomesticated as a Delaware insurance company 
in 1992, the PLACA Account is not subject to regulation by the 
Delaware insurance department.
    \2\ File No. 811-6484.
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    2. The PLACA Account currently is divided into thirty-six 
subaccounts. Each subaccount invests exclusively in shares representing 
an interest in a separate corresponding investment portfolio (each, a 
``Portfolio'') of one of several series-type open-end management 
investment companies. The assets of the PLACA Account support several 
varieties of variable annuity contracts, including the Contracts, and 
interests in the PLACA Account offered through such contracts are 
registered under the 1933 Act on Form N-4.\3\
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    \3\ File No. 333-88163. Two older registration statements are in 
effect for other contracts under the PLACA Account, File Nos. 33-
65195 and 33-65512.
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    PMLIC is a mutual life insurance company chartered by the 
Commonwealth of Pennsylvania in 1865. PMLIC is authorized to transact 
life insurance and annuity business in

[[Page 53059]]

Pennsylvania and in 50 other jurisdictions. As of December 31, 1998, 
PMLIC had consolidated assets of approximately $8.7 billion and 
consolidated liabilities of approximately $7.8 billion. For purposes of 
the Act, PMLIC would be the depositor and sponsor of any Future Account 
through which is would issue any Future Contract as those terms have 
been interpreted by the Commission with respect to variable annuity 
separate accounts.
    5. PMLIC established the PMLIC Account on May 9, 1999, as a 
segregated investment account under Pennsylvania law. Under 
Pennsylvania law, assets of the PMLIC Account attributable to the 
Contracts through which interests in the PMLIC Account are issued are 
owned by PMLIC but are held separately from all other assets of PMLIC, 
for the benefit of the owners of, and the persons entitled to payment 
under, those Contracts. Consequently, such assets are not chargeable 
with liabilities arising out of any other business that PMLIC may 
conduct. Income, gains and losses, realized or unrealized, from such 
subaccount of the PMLIC Account are credited to or charged against that 
subaccount without regard to any other income, gains or losses of 
PMLIC. The PMLIC Account is a ``separate account'' as defined by Rule 
0-1(e) under the Act, and is registered with the Commission as a unit 
investment trust.\4\
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    \4\ File No. 811-7708.
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    6. The PMLIC Account currently is divided into thirty-six 
subaccounts. Each subaccount invests exclusively in shares representing 
an interest in a separate corresponding investment portfolio (each a 
``Portfolio'') of one of several series-type open-end management 
investment companies. The assets of the PMLIC Account support several 
varieties of variable annuity contracts, including the Contracts, and 
interests in the PMLIC Account offered through such contracts are 
registered under the 1933 Act on Form N-4.\5\
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    \5\ File No. 33-70926.
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    7. 1717 Capital is a wholly owned subsidiary of PMLIC. It serves as 
the principal underwriter of a number of PMLIC and PLACA separate 
accounts registered as unit investment trusts under the Act, including 
the PLACA Account and PMLIC Account, and is the distributor of the 
variable life insurance contracts or variable annuity contracts issued 
through such separate accounts, including the Contracts. 1717 Capital 
is registered as a broker-dealer under the Securities Exchange Act of 
1934 and is a NASD member.
    8. The Contracts are flexible premium variable annuity contracts 
that PLACA may issue to individuals or groups on a ``non-qualified'' 
basis or in connection with employee benefit plans that receive 
favorable federal income tax treatment under sections 401, 403(b), 408, 
408A, or 457 of the Internal Revenue Code of 1986, as amended. The 
Contracts make available a number of subaccounts of the PLACA Account 
to which owners may allocate net premium payments and associated 
credits and to which owners may transfer contract account value. The 
Contracts also offer fixed-interest allocation options under which 
PLACA credits guaranteed rates of interests for periods of one year or 
more. Transfers of contract value among and between the subaccounts 
and, subject to certain restrictions, among and between the subaccounts 
and the fixed-interest options, may be made at any time. The Contracts 
offer a variety of non-variable annuity payment options to owners. In 
the event of an owner's death prior to the annuity date, beneficiaries 
may elect to received death benefits in the form of one of these 
annuity payment options instead of a lump sum. In general, the 
Contracts offer most of the features typically found in variable 
annuity contracts today.
    9. The Contracts may only be purchased with a minimum initial 
premium of $10,000. PLACA may deduct a premium tax charge from premium 
payments in certain states, but otherwise deducts a charge for premium 
taxes upon surrender or annuitization of the Contract or upon the 
payment of a death benefit, depending upon the jurisdiction. The 
Contracts provide for an annual administration fee of $40 that PLACA 
deducts on the Contract Anniversary and a daily annuity charge deducted 
from the assets of the PLACA Account at an annual rate of 1.40% of the 
Account's average daily net assets. The Contracts also provide for a 
charge of $25 for each transfer of contract account value in excess of 
12 per contract year. Lastly, the Contracts entail two surrender 
charges: a contingent deferred sales charge (``CDSC'') and a death 
benefit charge.
    10. The CDSC is equal to the percentage of each premium payment 
surrendered, withdrawn, or annuitized as specified in the table below. 
The CDSC is separately calculated and applied to each premium payment 
at any time that the payment (or part of the payment) is surrendered or 
withdrawn or applied to an annuity payment option. No CDSC applies to 
contract account value representing a free withdrawal amount or to 
contract account value in excess of aggregate premium payments (less 
prior withdrawals of premium payments). The CDSC is calculated using 
the assumption that contract account value is withdrawn in the 
following order: (a) the free withdrawal amount for the contract year, 
(b) the pro-rata amount of any remaining recurring bonus credit 
(explained below), (c) premium payments, and (d) any remaining contract 
account value. In addition, the CDSC is calculated using the assumption 
that premium payments are withdrawn on a first-in, first-out basis.
    11. The CDSC applicable to each premium payment diminishes as the 
payment ages beyond five years. A premium payment ages by contract 
year, such that it is in ``year'' 1 during the contract year in which 
it is received and in ``year'' 2 throughout the subsequent contract 
year and in ``year'' 3 throughout the contract year after that, etc.

------------------------------------------------------------------------
                                                           Charge  (in
     Age of each premium payment in contract years           percent)
------------------------------------------------------------------------
1......................................................             8.0
2......................................................             8.0
3......................................................             8.0
4......................................................             8.0
5......................................................             8.0
6......................................................             6.5
7......................................................             5.0
8......................................................             3.5
9......................................................             2.0
10 and over............................................             0.0
------------------------------------------------------------------------

    During the first contract year, the free withdrawal amount is 10% 
of the premium payments. For all other contract years, the free 
withdrawal amount is 10% of the contract account value at the start of 
that year.
    12. The death benefit charge is deducted when computing the death 
benefit upon the death of any owner prior to the annuity date. The 
death benefit charge is equal to the dollar amount of standard bonus 
credits (described below) granted under the Contract during the twelve 
months preceding the owner's death. During the first nine Contract 
years, the death benefit equals the greater of:
     contract account value less the death benefit charge, or
     the total amount of premiums paid reduced by the amount of 
all withdrawals prior to the date of death.

During contract years ten and later, the death benefit equals the 
greater of:
     contract account value less the death benefit charge,
     total premiums paid as of the ninth Contract anniversary 
reduced by the amount of all withdrawals prior to the ninth Contract 
anniversary plus the premiums paid since that anniversary

[[Page 53060]]

reduced, for each withdrawal since that anniversary, by the withdrawal 
adjustment amount, or
     contract account value on the ninth Contract anniversary 
plus total premiums paid since that anniversary reduced, for each 
withdrawal since that anniversary, by the withdrawal adjustment amount.

The withdrawal adjustment amount is determined by multiplying the death 
benefit prior to the withdrawal by the ratio of the amount of the 
withdrawal (including any surrender charge) to the contract account 
value immediately prior to the withdrawal.
    13. PLACA intends to offer two types of bonus credits. One is what 
PLACA refers to as its standard bonus credit provision under the 
Contracts, pursuant to which it credits an owner's contract account 
value with an additional amount in most circumstances when a net 
premium payment is applied. In addition, PLACA intends to offer a rider 
to the Contracts, described below, that offers a recurring bonus credit 
mechanism.
    14. Under the standard bonus credit provision, PLACA credits 
contract account value with an amount that is a percentage of each 
premium payment made by an owner, as shown in the standard bonus credit 
table below. The percentage is a function of the total amount of 
premiums received under a Contract less the total amount of all 
withdrawals (including any CDSC). The amount credited is calculated by 
multiplying the percentage by the excess of (a) over (b), where:
    (a) equals total premiums paid under the Contract (including the 
current premium payment) less the total withdrawals (including any 
CDSC);
    (b) equals the amount computed for (a) at the time that the most 
recent previous credit was made.

                       Standard Bonus Credit Table
------------------------------------------------------------------------
    Total Premiums (Including the Current Premium) Less       Credit (in
          Withdrawals (Including Surrender Charges             percent)
------------------------------------------------------------------------
From $10,000 to $24,999....................................          1.5
From $25,000 to $99,999....................................          3.0
From $100,000 to $499,999..................................          4.0
From $500,000 to $999,999..................................          4.5
$1,000,000 or more.........................................          5.0
------------------------------------------------------------------------

    15. The standard bonus credit provision also entails a ``look-
back'' feature. On each of the first three contract anniversaries, 
PLACA determines a calculated credit amount. To the extent that the 
calculated credit amount exceeds the actual amount credited to contract 
account value, PLACA increases the contract account value by the amount 
of such excess. The calculated credit amount is determined by 
multiplying (a) by (b) where:
    (a) equals the aggregate premiums paid under the Contract minus the 
amount of withdrawals (including any CDSC);
    (b) equals the credit percentage for (a) as shown on the standard 
bonus credit table.
    16. Under the standard bonus credit provision, PLACA recaptures or 
retains the credited amount in the event that the owner exercises his 
or her cancellation right during the cancellation period. In addition, 
the death benefit charge can be viewed as a recapture of certain 
credited amounts under the standard bonus credit provision in as much 
as it is designed to reimburse PLACA for part of the expense of the 
bonus credit.
    17. Under the recurring bonus credit rider, owners may elect, up to 
90 days before the ninth contract anniversary (and separately, 90 days 
before the 18th, 27th, and 36th contract anniversaries and every 9th 
contract anniversary thereafter until ten years prior to the maturity 
date), an additional credit by PLACA to contract account value as of 
the contract anniversary immediately following the election. There is 
no charge for the recurring bonus credit rider. The recurring credit is 
a percentage of the quantity called the recurring credit recapture base 
(``RCRB''). The RCRB is equal to the contract account value on the 
appropriate contract anniversary minus the aggregate premiums paid 
during the five years prior to that contract anniversary. The RCRB is 
multiplied by the percentages shown in the following table:

                      Recurring Bonus Credit Table
------------------------------------------------------------------------
                                                               Recurrig
             Contract account value  (adjusted)              credit  (in
                                                               percent)
------------------------------------------------------------------------
From $10,000 to $24,999....................................          1.5
From $25,000 to $99,999....................................          3.0
From $100,000 to $499,999..................................          4.0
From $500,000 to $999,999..................................          4.5
$1,000,000 or more.........................................          5.0
------------------------------------------------------------------------

    18. Under the recurring bonus credit rider, PLACA recaptures or 
retains the credited amount in the event that the owner exercises his 
or her right to surrender the Contract or withdraw surrender value from 
the Contract or applies all or part of surrender value to an annuity 
payment option.
    19. Although not a charge, in the event of a withdrawal from the 
Contract, a percentage of a pro-rata amount of any recurring credit 
granted during the prior nine contract years is deducted from contract 
account value. The appropriate percentage is determined from the 
following schedule:

                      Recurring Bonus Credit Table
------------------------------------------------------------------------
                                                              Percent of
                                                              recurring
     Contract years since  recurring credit was granted      credit  (in
                                                               percent)
------------------------------------------------------------------------
1-5........................................................          100
6..........................................................           80
7..........................................................           60
8..........................................................           40
9..........................................................           20
10 and greater.............................................            0
------------------------------------------------------------------------

The pro-rata amount of the recurring credit to which the percentage is 
applied is the product of (a) and (b) where:
    (a) equals the radio of the amount being withdrawn in excess of any 
free withdrawal amount to the lesser of (1) the RCRB, or (2) the 
contract account value as of the withdrawal date; and
    (b) equals the amount of recurring bonus credit that has not 
previously been withdrawn.
    20. Notwithstanding the schedule, the amount of this recapture 
deduction never exceeds the amount of the withdrawal. After any 
withdrawal, if the entire recurring credit has not been recaptured, 
then the remaining amount can be recaptured upon subsequent 
withdrawals. However, the total amount of deductions from contract 
account value for this purpose never exceeds the amount of the 
recurring bonus credit. Likewise, in the event that a Contract is 
surrendered or annuitized, surrender value excludes the same percentage 
of the amount of any recurring credit granted during the prior nine 
contract years.
    21. Because of the recapture provisions discussed above, the value 
of a credit only ``vests'' or belongs to the owner as the recapture 
period for the credit expires. As to standard bonus credits resulting 
from premiums paid before the cancellation period, no part of the 
credit vests for the owner until the expiration of the cancellation 
period. After the expiration of the cancellation period, all standard 
bonus credits vest in full for the owner the year after PLACA grants 
them. Recurring bonus credits vest in full for the owner according to 
the recurring bonus credit schedule.
    22. Under both the standard bonus credit provision and the 
recurring bonus credit rider, PLACA credits amounts to an owner's 
contract account value either by ``purchasing'' accumulation units of

[[Page 53061]]

an appropriate subaccount or adding to the owner's fixed interest 
allocation option values. Both standard and recurring bonus credits are 
allocated according to the owner's current net premium allocation 
instructions.
    23. With regard to variable account value, several consequences 
flow from this. First, increases in the value of accumulation units 
representing standard bonus credits belong to the owner immediately, 
but the initial value of such units only belongs to the owner when, or 
to the extent that, each vests. Similarly, the initial value of 
accumulation units representing recurring bonus credits vests according 
to the schedule, but the difference, if any, at any time between the 
``unvested'' value and the current value of such units belongs entirely 
to the owner. Second, decreases in the value of accumulation units 
representing bonus credits do not diminish the dollar amount of 
contract account value subject to recapture. Therefore, for both 
standard and recurring bonus credits, additional units must become 
subject to recapture as their value decreases. Stated differently, the 
proportionate share of any owner's variable account value (or the 
owner's interest in the PLACA Account) that PLACA can ``recapture'' 
increases as variable account value (or the owner's interest in the 
PLACA Account) decreases. This dilutes somewhat, the owner's interest 
in the PLACA Account vis-a-vis PLACA and in his or her variable account 
value vis-a-vis PLACA.
    24. Lastly, because it is not administratively feasible to track 
the unvested value of bonus credits in the PLACA Account, PLACA deducts 
the daily annuity charge from the entire net asset value of the 
Account. As a result, the daily annuity charge paid by any owner is 
greater than that which he or she would pay without the standard bonus 
credit and is greater still if he or she elects the recurring bonus 
rider.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to section 6(c) of the Act exempting them as well as Future Accounts 
and Future Underwriters from the provisions of sections 2(a)(32), 22(c) 
and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent 
necessary to permit the recapture of certain credits applied to 
contract account value and to premium payments made in consideration of 
the Contracts and Future Contracts.
    2. Subsection (i) of section 27 provides that section 27 does not 
apply to any registered separate account supporting variable annuity 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of 
subsection (i). Paragraph (2) provides that it shall be unlawful for a 
registered separate account or sponsoring insurance company to sell a 
variable annuity contract supported by the separate account unless the 
``contract is a redeemable security; and * * * [t]he insurance company 
complies with Section 26(e). * * *'' Section 26(e)(A)(2) provides that 
it is unlawful for registered separate accounts or sponsoring insurance 
companies to sell any variable insurance contract ``unless the fees and 
charges deducted under the contract, in the aggregate, are reasonable 
in relation to the services rendered, the expenses expected to be 
incurred, and the risks assumed by the insurance company.'' Applicants 
represent that PLACA and PMLIC both comply with section 26(e).
    3. 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 proportionate share of the issuer's current net 
assets, or the cash equivalent thereof.
    4. 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. Rule 22c-1 thereunder imposes 
requirements with respect to both the amount payable on redemption of a 
redeemable security and the time as of which such amount is calculated. 
Specifically, Rule 22c-1, in pertinent part, 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 to sell such 
security.
    5. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security, or transaction or any class of persons, securities, 
or transactions from any provision or provisions of the Act and/or any 
rule under it 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.
    6. Applicants represent 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.
    7. Applicants represent that the recapture of both standard bonus 
credits and recurring bonus credits would not, at any time, deprive an 
owner of his or her proportionate share of the current net assets of 
the PLACA Account. Until the appropriate recapture period expires, 
PLACA retains the right to and interest in each owner's contract 
account value representing the dollar amount of any invested bonus 
credits. Therefore, if PLACA recaptures any bonus credit or part of a 
bonus credit in the circumstances described above, it would merely be 
retrieving its own assets. PLACA would grant bonus credits out of its 
general account assets and the amount of the credits (although not the 
earnings on such amounts) would remain PLACA's until such amounts vest 
with the owner. Thus, to the extent that PLACA may grant and recapture 
bonus credits in connection with variable account value, it would not 
deprive, at the either time, any owner of his or her then proportionate 
share of PLACA Account assets.
    8. Applicants represent that it is the nature of the bonus 
recapture provisions as they apply to variable account value that an 
owner would obtain a benefit from a bonus credit in a rising market 
because any earnings on the bonus credit amount would vest with him or 
her immediately. Over time, of course, this would cause the owner's 
share of both the Contract's variable account value and the PLACA 
Account's net assets to be greater on a relative basis than it would 
have been without the bonus credit. Conversely, in a falling market an 
owner would suffer a detriment from a bonus credit because losses on 
the bonus credit amount would also ``vest'' with him or her 
immediately. As explained above, over time this would cause the owner's 
share of both the Contract's variable account value and the PLACA 
Account's net assets to decrease on a relative basis.
    9. Applicants do not believe that the dynamics of PLACA's proposed 
bonus credit provisions would violate sections 2(a)(32) or 27(i)(2)(A) 
of the Act. To begin with, section 2(a)(32) defines a redeemable 
security as one 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 asset

[[Page 53062]]

value. Taken together, these two sections of the Act do not require 
that the holder receive the exact proportionate share that his or her 
security represented at a prior time. Therefore, the fact that the 
proposed bonus credit provisions have a dynamic element that may cause 
the relative ownership positions of PLACA and a Contract owner to shift 
due to PLACA Account performance and the vesting schedule of such 
credits, would not cause the provisions to conflict with section 
2(a)(32) or 27(i)(2)(A). Nonetheless, in order to avoid any uncertainty 
as to full compliance with the Act, Applicants seek exemptions from 
these two sections.
    10. PLACA's recapture of any bonus credit could be viewed as the 
redemption of such an interest at a price other than net asset value. 
If such is the case, then the bonus credit provisions could be viewed 
as conflicting with section 22(c) of the Act and Rule 22c-1 thereunder. 
Applicants contend, however, that the recapture of the bonus credits 
does not violate section 22(c) of the Act or Rule 22c-1 thereunder. The 
bonus credit recapture provisions do not give rise to the evils that 
Rule 22c-1 was designed to address. The Rule was intended to eliminate 
or reduce, as far as was reasonably practicable, the dilution of the 
value of outstanding redeemable securities of registered investment 
companies through their redemption at a price above net asset value, or 
other unfair results, including speculative trading practices.
    11. The evils prompting the adoption of Rule 22c-1 were primarily 
the result of backward pricing, the practice of basing the price of a 
mutual fund share on the net asset value per share determined as of the 
close of the market on the previous day. Backward pricing permitted 
certain investors to take advantage of increases or decreases in net 
asset value that were not yet reflected in the price, thereby diluting 
the values of outstanding shares. Applicants assert that the proposed 
bonus credit provisions pose no such threat of dilution.
    12. Recaptures of bonus credits result in a redemption of PLACA's 
interest in an owner's contract account value or in the PLACA Account 
at a price determined on the basis of the Account's current net asset 
value and not at an inflated price. Moreover, the amount recaptured 
will always equal the amount that PLACA paid from its general account 
for the credits. Similarly, although owners are entitled to retain any 
investment gains attributable to the bonus credits, the amount of such 
gains would always be computed at a price determined on the basis of 
net asset value.
    13. Because the harms that Rule 22c-1 was intended to address do 
not arise in connection with the proposed bonus credit provisions, the 
Applicants assert that the provisions do not conflict with the Rule or 
section 22(c) itself. Nonetheless, in order to avoid any uncertainty as 
to full compliance with the Act, Applicants seek exemptions from 
section 22(c) and Rule 22c-1.
    14. Applicants also represent that even if the proposed bonus 
crediting provisions would conflict with sections 2(a)(32), 22(c), or 
27(i)(2)(A of the Act or Rule 22c-1 thereunder, the Commission should 
grant the exemptions that they request. This is because the bonus 
credit provisions are generally very favorable for prospective owners. 
The bonus credits are obviously very beneficial to prospective owners. 
The recapture provisions of the Contracts and riders temper this 
benefit somewhat, but owners, unless they die, retain the ability to 
avoid the recapture. In the case of the recurring bonus, owners do not 
have to provide any consideration in return for the bonus. They merely 
elect it and it is granted. Although there is a small downside in 
declining markets to both standard and recurring bonus credits if the 
owner withdraws surrender value from the Contract, surrenders the 
Contract, or annuitizes the Contract, and to the standard bonus credits 
if the owner dies, the bonus credit provisions and riders (including 
their dynamic elements) are fully disclosed in the prospectus for the 
Contracts. They recapture provisions, on balance, do not diminish the 
overall value of the bonus credit provisions and riders.
    15. Applicants represent that the bonus credit recapture provisions 
are necessary if PLACA is to offer the bonus credits. Applicants assert 
that it would be obviously unfair to PLACA to permit owners to keep 
their bonus credits upon their exercise of the Contracts' cancellation 
right. Because no CDSC applies to the exercise of the cancellation 
right, the owner could obtain a windfall in the amount of the bonus 
credit at PLACA's expense by exercising that right. Likewise, because 
no additional CDSC applies to a withdrawal of contract account value on 
which a recurring bonus credit is computed, withdrawal or annuitization 
of such contract account value or surrender of a Contract shortly after 
the award of recurring bonus credits would afford an owner a similar 
windfall. In the event of such windfalls to owners, PLACA could not 
recover the cost of granting the bonus credits. This is because PLACA 
intends to recoup the costs of providing the bonus credits through the 
charges under the Contract, particularly the daily annuity charge. If 
the windfalls described above are permitted, many owners will take 
advantage of them, greatly reducing the base from which the daily 
annuity charge is deducted and greatly increasing the amount of bonus 
credits that PLACA must provide. Therefore, for both standard bonus 
credits and recurring bonus credits, the recapture provisions are the 
price of offering the credits. PLACA simply cannot offer the proposed 
bonus credits without the ability to recapture those credits in the 
circumstances described herein.
    16. Applicants represent that the Commission's authority under 
section 6(c) of the Act to grant exemptions from various provisions of 
the Act and rules thereunder is broad enough to permit orders of 
exemption that cover classes of unidentified persons. Applicants 
request an order of the Commission that would exempt them, Future 
Accounts, and Future Underwriters from the provisions of sections 
2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder. 
The exemption of these classes of persons is appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act 
because all of the potential members of the class could obtain the 
foregoing exemptions for themselves on the same basis as the 
Applicants, but only at a cost to each of them that is not justified by 
any public policy purpose. The Commission has previously granted 
exemptions to classes of similarly situated persons in various contexts 
and in a wide variety of circumstances, including future exemptions for 
recapturing bonus credits under variable annuity contracts.
    17. Applicants represent that Future Contracts will be 
substantially similar in all material respects to the Contracts and 
that each factual statement and representation about the bonus credit 
provisions of the Contracts (and any recurring bonus credit riders sold 
with the Contracts) will be equally true of Future Contracts (and any 
recurring bonus credit riders sold with Future Contracts). Applicants 
also represent that each material representation made by them about the 
PLACA Account and 1717 Capital will be equally true of Future Accounts 
and Future Underwriters, to the extent that such representations relate 
to the issues discussed in this application. In particular, each Future 
Account will be established as a segregated asset account under state 
insurance law, meet the

[[Page 53063]]

definition of a ``separate account'' in Rule 0-1(e) under the Act, and 
be registered as a unit investment trust. Likewise, each Future 
Underwriter will be registered as a broker-dealer under the Securities 
Exchange Act of 1934 and be a NASD member.

Applicants' Conditions

    Applicants represent that PMLIC and PLACA will only offer recurring 
bonus credit riders subject to the following conditions:
    1. Election letter. In connection with the recurring bonus credit, 
PMLIC or PLACA will send a letter (the ``Letter'') that prominently 
discloses in concise plain English that (a) the credit is most suitable 
for owners who expect to continue their Contracts for five or more 
years, and (b) if the Contract is surrendered or if contract account 
value is withdrawn while the recurring bonus remains subject to 
recapture, then the owner may be worse off in certain circumstances 
than if he or she had not elected the recurring bonus credit. The 
Letter will disclose exactly how an owner who surrenders a Contract or 
makes a withdrawal while the recurring bonus credit remains subject to 
recapture could be worse off as a result of poor separate account 
investment performance than if he or she had not elected the recurring 
bonus credit.
    2. Written Election. PMLIC or PLACA will send the Letter directly 
to owners eligible to elect the recurring bonus credit and elections to 
receive the credit will only be effective upon receipt by PMLIC or 
PLACA of an election signed by the owner on a duplicate copy of the 
Letter. PMLIC and PLACA will distribute such duplicate Letters with 
election signature forms along with the Letter. If the Letter is more 
than two pages in length, PMLIC and PLACA will use a separate document 
to obtain owners' elections of the recurring bonus credit; which 
document will prominently disclose in concise plain English the 
statements required in condition one above.
    3. Records. PMLIC and PLACA will maintain the following separately 
identifiable records in an easily accessible place for review by the 
Commission staff: (a) Copies of any form of the Letter and any other 
written materials or scripts for presentations by representatives 
regarding the recurring bonus credit, including the dates used, (b) 
records showing the number and percentage (on a calendar quarter basis) 
of eligible owners that elect the recurring bonus credit, (c) records 
showing the name and Contract number of each owner who elects a 
recurring bonus credit, the amount of that owner's contract account 
value at the time the bonus credit is elected, the amount of the 
credit, the owner's name, address, telephone number and date of birth, 
the date that the owner signed the letter or election form, the signed 
Letters or separate documents that reflect owners' election of the 
recurring bonus credit, and where a commission (or other compensation) 
is paid to a registered representative on or after the date of the 
election of the credit, the amount of such commission (or other 
compensation), and the name of any sales representative involved with 
the solicitation of the election of the credit or who receives any 
compensation in connection with the contract after the date of the 
election of the credit and his or her CRD number, firm affiliation, 
telephone number, and branch office address, (d) records of persistency 
information for Contracts whose owners have elected the recurring bonus 
credit, including the date(s) of any subsequent surrender or withdrawal 
of contract account value and the amount of any recaptured bonus 
credit, and (e) logs recording any owner complaints about the recurring 
bonus credit riders, state insurance department inquiries about the 
same, or litigation, arbitration or other proceedings regarding the 
riders. The logs will include the date of the complaint (or of 
commencement of any proceeding), the name and address of the person 
making the complaint or commencing the proceeding, the nature of the 
complaint or proceeding and the persons involved in the complaint or 
proceeding. The foregoing records will be retained for the longer of: 
(1) six years after the later of their creation or last use, or (2) two 
years after the recapture period ends.

Conclusion

    Applicants request that the Commission issue an order pursuant to 
section 6(c) of the Act exempting them as well as Future Accounts and 
Future Underwriters from the provisions of sections 2(a)(32), 22(c), 
and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent 
necessary to permit the recapture of certain credits applied to 
contract account value and to purchase payments made in consideration 
of the Contracts and Future Contracts.
    Applicants assert, based on the grounds summarized above, that 
their exemptive request meets the standards set out in section 6(c) of 
the 1940 Act, namely, that the exemptions requested 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22272 Filed 8-30-00; 8:45 am]
BILLING CODE 8010-01-M