[Federal Register Volume 65, Number 178 (Wednesday, September 13, 2000)]
[Notices]
[Pages 55310-55314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23485]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24635; File No. 812-12120]


Pruco Life Insurance Company, et al.

September 7, 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)

[[Page 55311]]

of the 1940 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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    Applicants: Pruco Life Insurance Company (``Pruco Life''); Pruco 
Life Flexible Premium Variable Annuity Account (``Pruco Life 
Account''); Pruco Life Insurance Company of New Jersey (``Pruco Life of 
New Jersey''); Pruco Life of New Jersey Flexible Premium Variable 
Annuity Account (``Pruco Life of New Jersey Account''); and Prudential 
Investment Management Services, LLC (``PIMS,'' and collectively with 
the Insurance Companies and the Accounts, ``Applicants'').
    Summary of Application: Applicants seek an order of the Commission 
to permit, under specified circumstances, the recapture of certain 
credits applied to purchase payments made under: (1) Certain deferred 
variable annuity contracts (the ``Contracts'') that Pruco Life 
Insurance Company and Pruco Life Insurance Company of New Jersey (the 
``Insurance Companies'') issue through certain separate accounts (the 
``Accounts''); and (2) contracts that the Insurance Companies may in 
the future issue through the Accounts or any other separate account 
established in the future by the Insurance Companies (``Future 
Accounts''), which contracts 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, the 
Insurance Companies, whether existing or created in the future, that 
serves as a distributor or principal underwriter of the Contracts or 
any Future Contracts offered through the Accounts or any Future Account 
(``Affiliated Broker-Dealers'').
    Filing Date: The application was filed on May 26, 2000, and amended 
and restated on September 1, 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 28, 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 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th 
Street, NW., Washington, DC 20549-0609. Applicants, c/o The Prudential 
Insurance Company of America, 100 Mulberry Street, Newark, NJ 07102-
4077, Attn: Lee D. Augsburger, Esq.

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 fee from the 
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC 
20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Pruco Life is a stock life insurance company organized under the 
laws of the State of Arizona. Pruco Life of New Jersey is a stock life 
insurance company organized under the laws of the State of New Jersey. 
Pruco Life of New Jersey is a wholly-owned subsidiary of Pruco Life, 
which is itself a wholly-owned subsidiary of The Prudential Insurance 
Company of America (``Prudential'').
    2. PIMS, a wholly-owned subsidiary of Prudential, is the principal 
underwriter of the Contracts. PIMS is registered with the Commission as 
a broker-dealer under the Securities Exchange Act of 1934, as amended 
(the ``1934 Act'') and is a member of the NASD. PIMS will enter into 
arrangements with one or more registered broker-dealers, which may be 
affiliated with PIMS, to offer and sell the Contracts. PIMS also may 
enter into these arrangements with banks that may be acting as broker-
dealers without separate registration under the 1934 Act pursuant to 
legal and regulatory exceptions. PIMS may distribute the Contracts 
directly. PIMS may enter into similar arrangements for Future 
Contracts.
    3. Pruco Life will be the issuer of the Contracts funded through 
Pruco Life Account and serves as depositor of the account. Pruco Life 
of New Jersey will be the issuer of the Contracts funded through Pruco 
Life of New Jersey Account and serves as depositor of the account. 
Pruco Life and Pruco Life of New Jersey may in the future issue Future 
Contracts through the Accounts, or through Future Accounts for which 
they would also serve as depositor.
    4. Pruco Life Account is a segregated asset account of Pruco Life, 
and Pruco Life of New Jersey Account is a segregated asset account of 
Pruco Life of New Jersey. The respective Accounts will fund the 
variable benefits available under the Contracts. The offering of the 
Contracts will be registered under the Securities Act of 1933 (the 
``1933 Act''). The Insurance Companies may issue Future Contracts 
through their respective accounts or through Future Accounts. That 
portion of the assets of Pruco Life Account and Pruco Life of New 
Jersey Account equal to the reserves and other Contract liabilities 
with respect to those Accounts are not chargeable with liabilities 
arising out of any other business of Pruco Life and Pruco Life of New 
Jersey, respectively. Any income, gains or losses, realized or 
unrealized, from assets allocated to Pruco Life Account or Pruco Life 
of New Jersey Account, as applicable, without regard to other income, 
gains or losses of Pruco Life or Pruco Life of New Jersey. The same 
will be true of any Future Account.
    5. The Contracts are variable flexible premium deferred annuity 
contracts and are substantially similar in all material respects. 
Future Contracts funded by any Account of Future Account will be 
substantially similar to the Contracts in all material respects. 
Registered representatives of PIMS and affiliated or unaffiliated 
broker-dealers with which PIMS enters into selling agreements will sell 
the Contracts. The Contracts may be issued on a non-tax qualified basis 
or in connection with retirement plans that qualify for favorable 
federal income tax treatment under Section 408 of the Internal Revenue 
Code as an individual retirement plan. The Contracts provide a choice 
of features, including a guaranteed minimum death benefit and a 
guaranteed minimum income benefit, which are elected at issue. The 
benefits under each of these features are based on the protected value 
option that is elected. Depending upon the terms of the Contract, the 
protected value is either the highest contract value on any contract 
anniversary (``Step-Up''), purchase payments credited with a 5% 
effective annual rate of interest (``Roll-Up''), or the greater of the 
Step-Up and Roll-Up. The Contracts provide for various withdrawal 
options, annuity benefits and payout annuity options, as well as 
transfer privileges among the investment options, dollar cost 
averaging, and other features.
    6. A Contract may be purchased with a minimum initial payment of 
$10,000. Subsequent purchase payments must be

[[Page 55312]]

at least $1,000. The initial annual purchase payment and aggregate 
maximum purchase payment limit is generally $20 million, and the 
maximum purchase payment in any year subsequent to the first is 
generally $2 million.
    7. Each time an Insurance Company receives a purchase payment under 
the Contracts, it will allocate to the contract value a credit equal to 
a percentage of each purchase payment received (a ``Credit''). The 
Credit percentage will equal 4%. The Credit will be allocated among the 
variable investment options in the same percentages as the purchase 
payment to which it relates. Each Credit is subject to its own vesting 
schedule. If a withdrawal is made of all or part of a purchase payment, 
the non-vested portion of the Credit attributable to that purchase 
payment will be recaptured according to the following schedule:

------------------------------------------------------------------------
   Number of contract anniversaries since date of purchase      Vested
                           payment                            percentage
------------------------------------------------------------------------
0...........................................................          0
1...........................................................         10
2...........................................................         20
3...........................................................         30
4...........................................................         40
5...........................................................         50
6...........................................................         60
7...........................................................        100
------------------------------------------------------------------------

Under some versions of the Contracts, the Credit may vest sooner. In no 
event, however, will the percentage of the Credit that has vested after 
a given number of Contract Anniversaries be less than the percentage 
stated in this paragraph. The Credit recapture is in addition to any 
withdrawal charge that may be applicable. For purposes of the bonus 
recapture, withdrawals of purchase payments are taken on a first-in 
first-out basis, and all purchase payments are withdrawn before 
earnings are withdrawn.
    8. Each Insurance Company will fund Credits from its general 
account assets. An Insurance Company will recapture the non-vested 
portion of the Credits under the following circumstances: (a) A 
withdrawal or surrender is made during the vesting period applicable to 
the Credit, (b) the Contract is canceled under the ``free look'' 
provision; (c) death occurs within one year of a purchase payment; or 
(d) annuitization occurs during the vesting period applicable to the 
Credit. If the calculation of the death benefit occurs within one year 
of a purchase payment, then in calculating the death benefit payable, 
the contract value will be adjusted to recapture the non-vested Credit 
attributable to that purchase payment. Any Credit applied one year or 
more prior to the date of death will not be subject to recapture.
    9. Owners of the Contracts may allocate their purchase payments 
among 25 subaccounts of the Accounts, and each subaccount will invest 
in shares of a corresponding portfolio (each, a ``Portfolio'' of an 
open-end, diversified series management investment company registered 
under the Act (each, a ``Fund,'' and collectively, the ``Funds''). The 
funds currently available under the Contracts are The Prudential Series 
Fund, Inc., and Janus Aspen Series. At a later date, the Insurance 
Companies may create additional subaccounts of the Accounts to invest 
in additional Portfolios, or other such underlying portfolios or other 
investments as may now or in the future be available. Similarly, 
subaccounts of the Accounts may be combined or eliminated from time to 
time. Future Contracts may offer Funds managed by the same as well as 
other investment advisers.
    10. The Contracts provide for a withdrawal charge equal to a 
percentage of purchase payments surrendered that declines according to 
the following schedule.

------------------------------------------------------------------------
                                                              Withdrawal
        Contract anniversaries since purchase payment         charge (in
                                                               percent)
------------------------------------------------------------------------
 0.........................................................            7
1..........................................................            7
2..........................................................            7
 3.........................................................            6
 4.........................................................            5
 5.........................................................            4
 6.........................................................            3
 7.........................................................            2
 8.........................................................            1
 9.........................................................            0
------------------------------------------------------------------------

    Some Contract may offer lower withdrawal charges. In no event will 
the withdrawal charge after a given number of Contract Anniversaries be 
greater than the percentage set forth in this paragraph. A ``charge-
fee'' amount, generally equal, on an annual basis, to 10% of the excess 
of purchase payments over withdrawals and applied on a first-in first-
out basis, is exempt from the withdrawal charge.
    11. Other charges under the Contracts are: (a) Asset-based 
mortality and expense risk charges at annual rates of 1.40% for the 
base death benefit, 1.60% for the guaranteed minimum death benefit with 
either the Step-Up or the Roll-Up, and 1.70% for the guaranteed minimum 
death benefit with the greater of the Step-Up and the Roll-Up assessed 
pro-rata against the net assets of each subaccount; (b) for Contracts 
where the guaranteed minimum income benefit feature has been elected, a 
charge at a current annual rate of 0.25% of the protected value for 
either the Step-Up or the Roll-Up and 0.35% for the greater of the 
Step-Up and Roll-Up, which is deducted proportionally from the net 
assets of each subaccount on each Contract Anniversary and pro-rata 
upon partial withdrawals (when the remaining contract value is less 
than the amount of the charge), and upon surrender of the Contract; (c) 
an annual contract maintenance charge of up to $60, which is deducted 
proportionally from the assets invested in each subaccount; (d) in 
those jurisdictions in which premium taxes are assessed, a charge to 
cover these taxes, either when the contract is issued or when annuity 
payment begin; and (e) for each transfer among subaccounts after the 
twelfth in a single contract year, a charge of up to $30 assessed pro 
rata from the subaccounts involved in the transfer. The underlying 
Funds each impose investment management fees and charges for other 
expenses.
    12. Applicants seek exemption pursuant to Section 6(c) from 
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder to the extent necessary to permit an Insurance Company that 
issues Contracts that provide for Credits upon the receipt of purchase 
payments, to recapture all or the unvested portion of certain Credits 
in the following instances: (a) A withdrawal or surrender is made 
during the vesting period applicable to the Credit; (b) the Contract is 
canceled under the free look provision; (c) death occurs within one 
year of a purchase payment; or (d) annuitization occurs during the 
vesting period applicable to the Credit.

Applicant's 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 requested 
exemptions 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 PIMS or 
Affiliated Broker-Dealers. Applicants undertake that Future Contracts 
funded by the

[[Page 55313]]

Accounts or any Future Account 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 represent that it is not administratively feasible to 
track the Credit amount in the subaccounts after the Credit is applied. 
The asset-based charges applicable to the subaccounts will be assessed 
against the entire amounts held in the respective subaccounts, 
including the Credit amount, during the period when the owner's 
interest in the Credit is not completely vested. During such periods, 
the aggregate asset-based charges assessed against an owner's contract 
value will be higher than those that would be charged if the owner's 
contract value did not include the Credit.
    3. Subsection (i) of Section 27 of the Act provides that Section 27 
does not apply to any registered separate account funding variable 
insurance contracts, or to the sponsoring insurance company and 
principal underwriter of such account, except as provided in paragraph 
(2) of the subsection. Paragraph (2) provides that it shall be unlawful 
for such a separate account or sponsoring insurance company to sell a 
contract funded by the registered separate account unless such contract 
is a redeemable security. Section 2(a)(32) of the Act defines 
``redeemable security'' as any security, other than short-term paper, 
under the terms of which the holder, upon presentation to the issuer, 
is entitled to receive approximately his proportionate share of the 
issuer's current net assets, or the cash equivalent thereof.
    4. Applicants submit that the recapture of the Credit amount in the 
circumstances set forth in the application would not deprive an owner 
of his or her proportionate share of the issuer's current net assets. 
An owner's interest in the amount of any Credits allocated upon receipt 
of purchase payments is not fully vested until the vesting period for 
that purchase payment has expired. Until the right to recapture the 
Credit has expired and any Credit amount is completely vested, the 
Insurance Companies retain the right and interest in the Credit amount, 
although not in the earnings attributable to that amount. Thus, when 
the Insurance Companies recapture any Credit, they are merely 
retrieving their own assets, and the owner has not been deprived of a 
proportionate share of the applicable Account's assets, because his or 
her interest in the Credit amount has not vested. With respect to 
Credit recaptures upon the exercise of the free-look privilege, it 
would be unfair to allow an owner exercising that privilege to retain a 
Credit amount under a Contract that has been returned for a refund 
after a period of only a few days. If the Insurance Companies could not 
recapture the Credit, individuals could purchase a Contract with no 
intention of retaining it, and simply return it for a quick profit. The 
recapture of Credits relating to purchase payments made within one year 
prior to death or after death is designed to provide the Insurance 
Companies with a measure of protection against ``anti-selection.'' The 
risk here is that, rather than spreading purchase payments over a 
number of years, an owner will make very large payments shortly before 
death, thereby leaving the Insurance Companies less time to recover the 
cost of the Credits applied, to their financial detriment. Again, the 
amounts recaptured equal the Credits provided by each Insurance Company 
from its own general account assets, and any gain would remain as part 
of the Contract's value when annuity payments begin.
    5. Applicants submit that the provisions for recapture of any 
Credits under the Contracts do not, and any such Future Contract 
provisions will not, violate Section 2(a)(32) and 27(i)(2)(A) of the 
Act. Indeed, Applicants believe that a contrary conclusion would be 
inconsistent with a stated purpose of the National Securities Markets 
Improvement Act of 1996 (``NSMIA''), which is ``to amend the [Act] to 
provide more effective and less burdensome regulation.'' Sections 26(e) 
and 27(i) were added to the Act pursuant to Section 205 of NSMIA to 
implement the purposes of NSMIA and the Congressional intent. Thus, the 
application of a Credit to purchase payments made under the Contracts 
should not raise any questions as to each Insurance Company's 
compliance with the provisions of Section 27(i). Nevertheless, to avoid 
any uncertainties, Applicants request an exemption from Sections 
2(a)(32) and 27(i)(2)(A), to the extent deemed necessary, to permit the 
recapture of any Credit 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).
    6. 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, their redeemable securities 
to accomplish the same purposes as contemplated by Section 22(c). 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.
    7. An Insurance Company's recapture of the Credit might arguably be 
viewed as resulting in the redemption of redeemable securities for a 
price other than one based on the current net asset value of the 
Accounts. Applicants contend, however, that the recapture of the Credit 
does not violate Section 22(c) and Rule 22c-1. Applicants argue that 
the recapture of the Credit does not involve either of the evils that 
Rule 22c-1 was intended to eliminate or reduce as far as reasonably 
practicable, 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 their redemption or repurchase 
at a price above it, and (ii) other unfair results, including 
speculative trading practices. These evils were 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 allowed investors to take advantage 
of increases or decreases in net asset value that were not yet 
reflected in the price, thereby diluting the value of outstanding 
mutual fund shares. The proposed recapture of the Credit poses no such 
threat of dilution. To effect a recapture of a Credit, an Insurance 
Company will redeem interests in an owners' annuity account at a price 
determined on the basis of the current net asset value of the 
respective Accounts. The amount recaptured will equal the amount of the 
Credit that the Insurance Company paid out of its general account 
assets. Although owners will be entitled to retain any investment gain 
attributable to the Credit, the amount of such gain will be determined 
on the basis of the current net asset value of the respective Accounts. 
Thus, no dilution will occur upon the recapture of the Credit. 
Applicants also submit that the second harm that Rule 22c-1 was 
designed to address, namely,

[[Page 55314]]

speculative trading practices calculated to take advantage of backward 
pricing, will not occur as a result of the recapture of the Credit. 
Applicants contend that because neither of the harms that Rule 22c-1 
was meant to address is found in the recapture of the Credit, Rule 22c-
1 and Section 22(c) should have no application to any Credit. 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 Credit 
under the Contracts and Future Contacts.
    8. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put an 
amount greater than their purchase payments to work for them in the 
selected variable investment options. Also, owners will retain any 
earnings attributable to the Credit and, unless any of the 
contingencies set forth on the Application apply, the principal amount 
of all Credit.
    9. Applicants submit that the recapture of any Credit only applies 
in relation to the risk of anti-selection against an Insurance Company. 
``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 each takes into 
account in designing the Contracts. Each Insurance Company provides all 
Credits from its general account on a guaranteed basis. Thus, it 
undertakes a financial obligation that contemplates the retention of 
the Contracts by their owners over an extended period, consistent with 
the long-term nature of retirement planning. The Insurance Companies 
expect generally to recover their costs, including Credits, over an 
anticipated duration while a Contract is in force. An Insurance 
Company's right to recapture Credits applied to purchase payments made 
within a year of death protects the Insurance Company against the risk 
that owners will contribute larger amounts as they approach death to 
obtain the Credit, while avoiding Contract charges over the long term. 
With respect to refunds paid upon the return of Contracts within the 
``free-look'' period, the amount payable by the Insurance Company must 
be reduced by the allocated Credits. Otherwise, purchasers could apply 
for Contracts for the sole purpose of exercising the free-look refund 
provision and making a quick profit.
    10. Applicants submit that their request for an order that applies 
to any Account or any Future Account established by an Insurance 
Company in connection with the issuance of Contracts and Future 
Contracts that are substantially similar to the Contracts described 
herein in all material respects, and underwritten or distributed by 
PIMS 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 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 this Application. Having 
Applicants file additional applications would impair Applicants' 
ability effectively to take advantage of business opportunities as they 
arise.
    11. Applicants undertake that Future Contracts funded by Accounts 
or by Future Accounts that seek to rely on the order issued pursuant to 
this Application will be substantially similar to the Contracts in all 
material respects.

Conclusion

    Sections 6(c) of the Act, in pertinent part, provides that the 
Commission, by order upon application, may conditionally or 
unconditionally exempt under persons security or transaction, or any 
class or classes or persons, securities or transactions, from any 
provision or provisions of the Act, or any rule or regulation 
thereunder, 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 submit that, based upon the facts and 
for the reasons set forth above, their exemptive requests meet the 
standards set out in Section 6(c) and that an order should, therefore, 
be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-23485 Filed 9-12-00; 8:45 am]
BILLING CODE 8010-01-M