[Federal Register Volume 65, Number 181 (Monday, September 18, 2000)]
[Notices]
[Pages 56347-56351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23898]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24639; File No. 812-11874]


Hartford Life Insurance Company, et al.

September 11, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to section 6(c) of 
the Investment Company Act of 1940 (``1940 Act'' or ``Act'') granting 
exemptions from sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and 
Rule 22c-1 thereunder.

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Applicants

    Hartford Life Insurance Company (``Hartford Life''), Hartford Life 
and Annuity Insurance Company (``Hartford L&A''), Hartford Life 
Insurance

[[Page 56348]]

Company Separate Account Two (``HLA Account Two''), Hartford Life 
Insurance Company Separate Account Seven (``HL Account Seven'') Putnam 
Capital Manager Trust Separate Account (``Putnam Account''), Hartford 
Life and Annuity Insurance Company Separate Account One (``HLA Account 
One''), Hartford Life and Annuity Insurance Company Separate Account 
Seven (``HL Account Seven''), Putnam Capital Manager Trust Separate 
Account Two (``Putnam Account Two'') and Hartford Securities 
Distribution Company, Inc. (``HSDCI'').

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 premium 
payments made in consideration of: (1) Certain deferred variable 
annuity contracts, described herein, that Hartford Life or Hartford L&A 
plans to issue (the ``Contracts''), or (2) variable annuity contracts 
that are substantially similar to the Contracts in all material 
respects that either may issue in the future (``Future Contracts''). 
Applicants also seek an order exempting (1) variable annuity separate 
accounts, other than HL Account Two, HL Account Seven, HLA Account One, 
HLA Account Seven, Putnam Account and Putnam Account Two (together, the 
``Accounts''), that Hartford Life or Hartford L&A has established or 
may establish in the future (``Future Accounts''), and (2) principal 
underwriters for such Future Accounts that are currently under common 
control with Hartford Life or Hartford L&A (``Future Underwriters''), 
and principal underwriters for such Future Accounts (whether currently 
in existence or created in the future) that in the future may come 
under common control with Hartford Life and Hartford L&A (also, 
``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 premium payments made in 
consideration of variable annvity contracts issued in the future by 
Hartford Life or Hartford L&A 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 December 3, 1999, and amended and 
restated on February 15, 2000. A second amended and restated 
application was filed on May 4, 2000, and a third amended and restated 
application was filed on August 31, 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 October 6, 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 Marianne 
O'Doherty, Esq., Hartford Life and Annuity Insurance Company, 200 
Hopmeadow Street, Simsbury, CT 06089.

FOR FURTHER INFORMATION CONTACT: Jane Heinrichs, Senior Counsel, at 
(202) 942-0699, or Keith 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, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. Hartford Life is a stock life insurance company engaged in the 
business of writing life insurance and annuities, both individual and 
group, in all states and the District of Columbia. Hartford Life is 
ultimately controlled by Hartford Financial Services Group, Inc., a 
Delaware corporation whose stock is traded on the New York Stock 
Exchange. Hartford Life is the depositor and sponsor of HL Account Two, 
HL Account Seven and the Putnam Account.
    2. Hartford L&A is a stock life insurance company engaged in the 
business of writing individual and group life insurance and annuity 
contracts in the District of Columbia and all states but New York. 
Hartford L&A is ultimately controlled by Hartford Financial Services 
Group, Inc., a Delaware corporation whose stock is traded on the New 
York Stock Exchange. Hartford L&A is the depositor and sponsor of HLA 
Account One, HLA Account Seven and Putnam Account Two.
    3. Each Account was established either by Hartford Life or Hartford 
L&A as a separate account and is registered under the Act as a unit 
investment trust on Form N-4. Each Account is divided into a number of 
subaccounts that invest 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 each Account support several 
varieties of variable annuity contracts, including the Contracts.
    4. HSDCI is a wholly-owned subsidiary of Hartford Life. It serves 
as the principal underwriter of a number of Hartford Life and Hartford 
L&A separate accounts registered as unit investment trusts under the 
Act, including the Accounts, and is the distributor of the variable 
life insurance contracts and variable annuity contracts issued through 
such separate accounts, including the Contracts. HSDCI is registered as 
a broker-dealer under the Securities Exchange Act of 1934 and is a 
member of the National Association of Securities Dealers, Inc. (the 
``NASD''). In addition, each Future Underwriter will be registered as a 
broker-dealer under the Securities Exchange Act of 1934 and a member of 
the NASD.
    5. The Contracts are flexible premium variable annuity contracts 
that Hartford Life or Hartford L&A 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 ``Code''). The Contracts make available a number 
of subaccounts of an Account to which owners may allocate net premium 
payments and associated credits and to which owners may transfer 
contract value. The Contracts also offer fixed-interest allocation 
options under which Hartford Life or Hartford L&A credits guaranteed 
rates of interest 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 fixed and variable annuity payment options to owners. In the 
event of an owner's or annuitant's death prior to the annuity

[[Page 56349]]

commencement date, beneficiaries may elect to receive death benefits in 
the form of one of the annuity payment options instead of a lump sum.
    6. The Contracts generally may only be purchased with a minimum 
initial premium of $10,000. Hartford Life or Hartford L&A 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 
contract maintenance fee of $30 that Hartford Life or Hartford L&A 
deducts on each Contract Anniversary and upon a full surrender of a 
Contract, a daily administrative charge deducted from the assets of 
each Account at an annual rate of up to 0.15% of such Accounts' average 
daily net assets and a daily mortality and expense risk charge deducted 
from the assets of each Account at annual rates ranging from 1.45% to 
1.60% of such Accounts' average daily net assets. The Contracts also 
provide for a charge of $25 for each transfer of contract value in 
excess of 12 per contract year. An optional death benefit rider is 
available with the Contracts. If purchased, the charge for the optional 
death benefit is 0.15% of the applicable Account's average daily net 
assets.
    7. The Contracts have a surrender charge in the form of a 
contingent deferred sales charge (``CDSC''). The CDSC is equal to the 
percentage of each premium payment surrendered or withdrawn 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. The CDSC applicable to 
each premium payment diminishes as the payment ages beyond four years. 
No CDSC applies to contract value representing an annual withdrawal 
amount or to contract value in excess of aggregate premium payments 
(less prior withdrawals of premium payments) (``earnings'').

------------------------------------------------------------------------
                                                             Charge  (In
       Number of years since payment of each premium           percent)
------------------------------------------------------------------------
1..........................................................          8.0
2..........................................................          8.0
3..........................................................          8.0
4..........................................................          8.0
5..........................................................          7.0
6..........................................................          6.0
7..........................................................          5.0
8 and over.................................................          0.0
------------------------------------------------------------------------

During the first seven contract years, the CDSC is calculated using the 
assumption that contract value is withdrawn in the following order: (1) 
The annual withdrawal amount for that contract year, (2) premium 
payments, (3) bonus credits (explained below), and (4) earnings. 
Starting in the eighth contract year, the CDSC is calculated using the 
assumption that contract value is withdrawn in the following order: (1) 
The annual withdrawal amount for that contract year, (2) earnings, (3) 
premium payments no longer subject to a CDSC, (4) bonus credits on 
premium payments no longer subject to a CDSC, (5) premium payments 
still subject to a CDSC, and (6) bonus credits on premium payments 
still subject to a CDSC. In all contract years, the CDSC is calculated 
using the assumption that premium payments are withdrawn on a first-in, 
first-out basis. The annual withdrawal amount is 10% of premium 
payments still subject to a CDSC measured at the time of withdrawal.
    8. If an owner or annuitant dies before the annuity commencement 
date, the Contracts provide, under most circumstances, for a death 
benefit payable to a beneficiary. The death benefit is the greatest of 
(1), (2) or (3) (or (4), if the optional death benefit rider is 
purchased), computed as of the date that Hartford Life or Hartford L&A 
receives proof of death, where:
    (1) Contract value reduced by the amount of any bonus credit 
applied during the twelve months prior to the date of computation;
    (2) Total premiums payments reduced by the amount of all 
withdrawals of contact value;
    (3) The maximum anniversary value (as defined in the Contract), 
reduced by the amount of any bonus credits applied during the twelve 
months prior to the date of computation; or
    (4) Interest accumulation value (as defined in the Contract).
    9. The Contracts include a bonus payment provision pursuant to 
which Hartford Life or Hartford L&A credits an owner's contract value 
with an additional amount when a net premium payment is applied. The 
amount of the bonus payment is a percentage of each premium payment 
made by the owner. The percentage is a function of premiums received 
under a Contract, as shown in the following table.

------------------------------------------------------------------------
                                                             Credit  (in
                     Aggregate premiums                        percent)
------------------------------------------------------------------------
From $10,000 to $49,999....................................          3.0
$50,000 or more............................................          4.0
------------------------------------------------------------------------

If a premium payment raises the amount of aggregate payments above 
$49,999, then Hartford Life or Hartford L&A will add another bonus 
credit to the owner's contract value in an amount equal to 1% of the 
prior premium payments.
    10. Hartford Life or Hartford L&A recaptures or retains the 
credited amount in the event that the owner exercises his or her 
cancellation right during the right to examine period. In addition the 
owner elects to annuitize the Contract, the amount applied to purchase 
any annuity payment option is the contract value less bonus credits 
applied during the twenty-four months prior to annuitization. Also, as 
indicated above, in computing death benefits, Hartford Life or Hartford 
L&A may ``recapture'' bonus credits applied within twelve months prior 
to the date as of which the death benefit is computed. Finally, in the 
event of a surrender or withdrawal of contract value where the 
surrender charge is waived due to the owner's or annuitant's 
confinement to a hospital, nursing home or other long-term care 
facility (as defined in the Contract), Hartford Life or Hartford L&A 
will ``recapture'' all bonus credits applied during the period of 
confinement (a ``confinement period'').
    11. As a result of the recapture provisions, increases in the value 
of accumulation units representing bonus credits accrue to the owner 
immediately, but the initial value of such units only belongs to the 
owner when, or to the extent that, the recapture period for the bonus 
payment expires and the units vest. On the other hand, decreases in the 
value of accumulation units representing bonus credits do not diminish 
the dollar amount of contract value subject to recapture. Therefore, 
additional units must become subject to recapture as their value 
decreases and the proportionate share of any owner's variable contract 
value (or the owner's interest in an Account) that Hartford Life or 
Hartford L&A can ``recapture'' increases as variable contract value (or 
the owner's interest in an Account) decreases. This dilutes the owner's 
interest in the Account vis-a-vis Hartford Life or Hartford L&A and in 
his or her variable contract value vis-a-vis Hartford Life or Hartford 
L&A.
    12. Because it is not administratively feasible to track the value 
of bonus credits in an Account that have not vested, Hartford Life or 
Hartford L&A deducts the daily mortality and expense risk charge and 
the daily administrative charge from the entire net asset value of the 
Accounts. As a result, the daily mortality and expense risk charge and 
the daily administrative charge paid by any owner is greater than that 
which he

[[Page 56350]]

or she would pay without the bonus credit.
    13. 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 premium 
payments made in consideration of the Contracts and Future Contracts.

Applicants' Legal Analysis

    1. 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, 
among other things, the contract is a redeemable security. Section 
2(a)(32) defines a ``redeemable security'' as any security, other than 
short-term paper, under the terms of which the holder, upon 
presentation to the issuer, is entitled to receive approximately his 
proportionate share of the issuer's current net assets, or the cash 
equivalent thereof.
    2. 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 or sell such security.
    3. 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.
    4. Applicants assert 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.
    5. Applicants assert that the recapture of bonus credits would not, 
at any time, deprive an owner of his or her proportionate share of the 
current net assets of an Account. Until the appropriate recapture 
period expires, Hartford Life or Hartford L&A retains the right to and 
interest in each owner's contract value representing the dollar amount 
of any unvested bonus credits. Therefore, if Hartford Life or Hartford 
L&A recaptures any bonus credit or part of a bonus credit in the 
circumstances described above, it would merely be retrieving its own 
assets. Hartford Life or Hartford L&A 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 Hartford Life's or Hartford 
L&A's until such amounts vest with the owner. Thus, to the extent that 
Hartford Life or Hartford L&A may grant and recapture bonus credits in 
connection with variable contract value, it would not, at either time, 
deprive any owner of his or her then proportionate share of an 
Account's assets.
    6. Applicants state that the nature of the bonus recapture 
provisions as they apply to variable contract value dictate that an 
owner will obtain a benefit from a bonus credit in a rising market 
because any earnings on the bonus credit amount will vest immediately 
and over time cause the owner's share of both the Contract's variable 
contract value and an 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 will suffer a detriment from a bonus credit 
because losses on the bonus credit amount also will ``vest'' 
immediately and cause the owner's share of both the Contract's variable 
contract value and the Account's net assets to decrease on a relative 
basis.
    7. Applicants do not believe that the dynamics of Hartford Life's 
and Hartford L&A's proposed bonus credit provisions violate sections 
2(a)(32) or 27(i)(2)(A) of the Act. Nonetheless, in order to avoid any 
uncertainty as to full compliance with the Act, Applicants seek 
exemptions from these two sections.
    8. Hartford Life's or Hartford L&A'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 believe that the recapture of the 
bonus credits does not violate section 22(c) of the Act or Rule 22c-1 
thereunder. 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.
    9. Applicants argue that the bonus credit recapture provisions do 
not give rise to the evils that Rule 22c-1 was designated 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. 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. The 
proposed bonus credit recapture provisions pose no such threat of 
dilution.
    10. Recaptures of bonus credits result in a redemption of Hartford 
Life's or Hartford L&A's interest in an owner's contract value or in an 
Account at a price determined on the basis of the Account's current net 
asset value and not at an inflated price. Moreover, Applicants 
represent that the amount recaptured will always equal the amount that 
Hartford Life or Hartford L&A 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.
    11. Applicants assert that even if the proposed bonus credit 
provisions 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 because the bonus credit provisions are generally favorable 
for prospective owners. The bonus credits are beneficial to prospective

[[Page 56351]]

owners. The recapture provisions do not, on balance, diminish the 
overall value of the bonus credit provisions and are fully disclosed in 
the prospectus for the Contracts.
    12. Applicants assert that the bonus credit recapture provisions 
are necessary if Hartford Life or Hartford L&A are to offer the bonus 
credits. it would be unfair to Hartford Life or Hartford L&A to permit 
owners to keep their bonus credits upon their exercise of the 
Contracts' right to examine provision. Because no CDSC applies to the 
exercise of the right to examine provision, the owner could obtain a 
quick profit in the amount of the bonus credit at Hartford Life's or 
Hartford L&A's expense by exercising that right. Likewise, because no 
additional CDSC applies upon death of an owner or annuitant or upon 
annuitization, and no CDSC applies during a confinement period, such a 
death, annuitization or confinement period surrender or withdrawal 
shortly after the award of bonus credits would afford an owner or a 
beneficiary a similar profit. In the event of such profits to owners or 
beneficiaries, Hartford Life and Hartford L&A could not recover the 
cost of granting the bonus credits. This is because Hartford Life and 
Hartford L&A both intend to recoup the costs of providing the bonus 
credits through the charges under the Contract, particularly the daily 
mortality and expense risk charge and the daily administrative charge. 
If the profits described above are permitted, certain owners could take 
advantage of them, greatly reducing the base from which the daily 
charges are deducted and greatly increasing the amount of bonus credits 
that Hartford Life and Hartford L&A must provide. Therefore, the 
recapture provisions are the price of offering the bonus credits. 
Hartford Life and Hartford Life and Hartford L&A simply cannot offer 
the proposed bonus credits without the ability to recapture those 
credits in the limited circumstances described herein.
    13. Applicants assert 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.
    14. 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 will be equally true of Future Contracts. 
Applicants also represent that each material representation made by 
them about Hartford Life and Hartford L&A, each Account and HSDCI will 
be equally true of Future Accounts and Future Underwriters, to the 
extent that such representations relate to the issues discussed in this 
application.

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 
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. 00-23898 Filed 9-15-00; 8:45 am]
BILLING CODE 8010-01-M