[Federal Register Volume 65, Number 183 (Wednesday, September 20, 2000)]
[Notices]
[Pages 56967-56971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24127]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24641; File No. 812-11994]


PFL Life Insurance Company, et al., Notice of Application

September 14, 2000
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an Order of Exemption under Section 
6(c) of the Investment Company Act of 1940 (``1940 Act'') granting 
exemptions from the provisions of Sections 2(a)(32), 22(c), and 
27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to permit the 
recapture of bonus credits applied to premium payments made under 
certain deferred variable annuity contracts.

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    Applicants: PFL Life Insurance Company (``PFL''), PFL Life Variable 
Annuity Account C (``PFL Account''), AFSG Securities Corporation 
(``AFSG''), Transamerica Life Insurance and Annuity Company 
(``Transamerica''), Separate Account VA-6 (``Transamerica Account''), 
Transamerica Securities Sales Corporation (``TSSC''), Western Reserve 
Life Assurance Co. of Ohio (``Western Reserve''), and WRL Series 
Annuity Account (``WRL Account'') (collectively, the ``Applicants''). 
PFL, Transamerica, and Western Reserve are together referenced herein 
as the ``Companies.'' PFL Account, Transamerica Account, and WRL 
Account are together referenced herein as the ``Accounts,'' or 
individually as an ``Account.''
SUMMARY OF APPLICATION: Applicants seek an order of the Commission 
under Section 6(c) of the 1940 Act to the extent necessary to permit, 
under specified circumstances, the recapture of a bonus credit 
previously applied to premium payments made under: (i) deferred 
variable annuity contracts that the Companies will issue through the 
Accounts (``Policies''), and (ii) deferred variable annuity contracts 
that the Companies, and any other separate account of the Companies, or 
their successors in interest, may issue in the future that are 
substantially similar to the contracts in all material respects 
(``Future Policies''). Applicants also request that the order being 
sought extend to certain National Association of Securities Dealers, 
Inc. (``NASD'') member broker-dealers which may, in the future, act as 
principal underwriter of such policies.

FILING DATE: The application was filed on February 24, 2000, and 
amended and restated on August 25, 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 SEC and serving Applicants with a copy of the request, personally 
or by mail. Hearing requests must be received by the Commission by 5:30 
p.m. on October 6, 2000, and should be accompanied by proof of service 
on the Applicants in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Secretary of the SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609. Applicants, c/o Frank A. 
Camp, Esquire, PFL Life Insurance Company, 4333 Edgewood Road, NE, 
Cedar Rapids, Iowa 52499; Thomas E. Pierpan, Esq., Western Reserve Life 
Assurance Co. of Ohio, 570 Carillon Parkway, St. Petersburg, Florida 
33716-1202; and Regina Fink, Esq., Transamerica Life Insurance and 
Annuity Company, 1150 South Olive, Los Angeles, California 90015-2211. 
Copies to Frederick R. Bellamy, Esquire, Sutherland Asbill & Brennan 
LLP, 1275 Pennsylvania Avenue, N.W., Washington, D.C. 20004-2415.

FOR FURTHER INFORMATION CONTACT: Ronald A. Holinsky, Senior Counsel or 
Lorna MacLeod, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

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

Applicant's Representations

    1. PFL, a stock life insurance company incorporated under the laws 
of the State of Iowa, is a wholly-owned indirect subsidiary of AEGON 
USA, Inc., which conducts substantially all of its operations through 
subsidiary companies engaged in the insurance business or in providing 
non-insurance financial services. All of the stock of AEGON USA, Inc. 
is indirectly owned by AEGON N.V. of the Netherlands.
    2. Transamerica, a stock life insurance company incorporated under 
the laws of the State of California, is an indirect subsidiary of AEGON 
N.V.
    3. Western Reserve, incorporated under the laws of Ohio, is wholly-
owned by First AUSA Life Insurance Company, a stock life insurance 
company that is wholly-owned by AEGON USA, Inc.
    4. The PFL Account is registered under the 1940 Act as a unit 
investment trust (File No. 811-09503). The assets of the PFL account 
support certain flexible premium variable annuity policies, and 
interests in the PFL Account offered through such contracts have been 
registered under the Securities Act of 1933 (``1933 Act'') on Form N-4 
(File No. 333-83957).
    5. The Transamerica Account is registered under the 1940 Act as a 
unit investment trust (File No. 811-07753). The assets of the 
Transamerica Account

[[Page 56968]]

support certain flexible premium variable annuity contracts, and 
interests in the Transamerica Account offered through such contracts 
have been registered under the 1933 Act on Form N-4 (File No. 333-
09745).
    6. The WRL Account is registered under the 1940 Act as a unit 
investment trust (File No. 811-05672). The assets of the WRL Account 
support certain flexible premium variable annuity contracts, and 
interests in the WRL Account offered through such contracts have been 
registered under the 1933 Act on Form N-4 (File No. 333-93169).
    7. AFSG, an affiliate of the Companies, is the principal 
underwriter and the distributor of the Policies for the PFL Account and 
the WRL Account. AFSG 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.
    8. TSSC, an affiliate of the Companies, is the principal 
underwriter and the distributor of the policies for the Transamerica 
Account. TSSC is registered with the Commission as a broker-dealer 
under the 1934 Act and is a member of the NASD.
    9. The Policies are flexible premium variable annuity policies 
issued by the Companies through their respective separate accounts. The 
Policies provide for accumulation of values on a variable basis, fixed 
basis, or both during the accumulation period, and may provide 
settlement or annuity payment options on a variable basis, fixed basis, 
or both. The Policies may be purchased on a non-qualified tax basis. 
The Policies may also be purchased and used in connection with plans 
qualifying for favorable federal income tax treatment.
    10. Each Account is comprised of sub-accounts that will invest 
exclusively in a designated series of shares representing an interest 
in a particular portfolio of one or more open-end management investment 
companies of the series type registered with the Commission on Form N-
1A (``Funds''). The owner determines in the application or transmittal 
form for a Policy how the net premium payments will be allocated among 
the sub-accounts of the Accounts and any available guaranteed period 
options or dollar cost averaging options of the fixed account. The 
policy value will vary with the investment performance of the sub-
accounts selected, and the owner bears the entire risk for amounts 
allocated to an Account.
    11. For each premium payment an owner makes, the Companies may add 
a bonus credit equal to a percentage of the premium payment to the 
owner's policy value. PFL's bonus credit equals 5% of each premium 
payment (4% if the Owner is 70 years old or older), Transamerica's 
bonus credit equals 3.25% of each premium payment, and Western 
Reserve's bonus credit equals 4.5% of premium payments. The Companies 
may vary the percentage but acknowledge that the exemptive order 
requested will not provide exemption for a bonus credit recapture in 
excess of 5% for PFL, 3.25% for Transamerica, and 4.5% for Western 
Reserve.
    12. An owner may return his or her Policy for a refund. An owner 
will generally have 10 days to return his or her Policy depending on 
the state where the Policy is issued. PFL will generally return the 
policy value minus any bonus credit to the owner, but may return 
premium payments (not including the bonus credit), if required by state 
law. Transamerica will generally return the purchase payments allocated 
to any general account options (minus withdrawals), plus the variable 
accumulated value, and minus any bonus credit. If required by state 
law, Transamerica will return the purchase payments (minus withdrawal 
and not including any bonus credits) or the greater of purchase 
payments (minus withdrawals and not including any bonus credits) or the 
account value (minus the bonus credits). In all events, Transamerica 
will not refund the amount of the bonus credit. Western Reserve will 
generally return total purchase payments received (minus any bonus 
credit) plus or minus any gains or losses in the amounts invested in 
the sub-accounts. Western Reserve may return purchase payments (not 
including the bonus credit) if required by state law.
    13. An owner may surrender the Policy or make a partial withdrawal 
from the policy value during the accumulation period. If an owner 
surrenders a Policy or takes a partial withdrawal, a Company may deduct 
a surrender charge. An owner generally may be permitted to withdraw 
certain limited amounts free of surrender charge. The surrender charge 
for PFL Policies as a percentage of premium payments declines from 8% 
in years one, two and three to 0% in year nine and thereafter. The 
surrender charge for Transamerica Policies as a percentage of premium 
payments declines from 8% in years one and two to 0% in year seven and 
thereafter. The surrender charge for Western Reserve Policies as a 
percentage of premium payments declines from 8% in years one, two, and 
three to 0% in year nine and thereafter.
    14. The policies offered by the PFL Account include a Nursing Care 
and Terminal Condition Withdrawal Option, where PFL does not deduct a 
withdrawal charge on a surrender or withdrawal if the Owner has been 
(or whose spouse has been): (i) hospitalized or confined to a nursing 
facility for 30 consecutive days, or (ii) diagnosed with a terminal 
condition and has a life expectancy of 12 months or less. This benefit 
is also available to an annuitant and his or her spouse, if the owner 
is not a natural person.
    15. The policies offered by the PFL Account also include an 
Unemployment Waiver, where PFL will not deduct a surrender charge if 
the owner or his or her spouse is unemployed. To qualify, the owner (or 
spouse) must have been: (i) Employed full time for at least two years 
prior to becoming unemployed, (ii) employed full time at the time PFL 
issued the Policy, and (iii) unemployed for at least 60 days at a time 
he or she makes the withdrawal.
    16. The policies offered by the Transamerica Account offer a living 
benefits rider where, subject to certain conditions, Transamerica will 
not deduct a surrender charge if: (i) An owner receives extended 
medical care in a qualifying institution for at least 60 days, (ii) if 
an owner receives medically required hospice or in-home care for at 
least 60 consecutive days, or (iii) an owner is diagnosed as terminally 
ill and has a life expectancy of 12 months or less.
    17. Subject to certain conditions, Western Reserve will waive the 
withdrawal charge on surrenders or withdrawals if an owner (or joint 
owner) has been confined to a nursing care facility for at least 30 
consecutive days and the confinement began after the policy date. 
Western Reserve will waive the surrender charge only for a surrender or 
withdrawal made during the confinement or within two months after the 
confinement ends. Western Reserve also waives the surrender charge if 
an owner has a non-correctable medical condition which will result in 
death within 12 months from the date Western Reserve receives a written 
statement of such condition.
    18. Policies issued by the PFL Account have a death benefit equal 
to the greatest of: (i) the policy value on the date PFL receives the 
required information; (ii) the cash value on the PFL receives the 
required information, or (iii) the guaranteed minimum death benefit. 
The policy value is the total amount in the Policy but does not reflect 
the application of any excess interest adjustment with respect to the 
fixed account, or any surrender charge, at the time of death. The cash 
value is the policy value, plus or minus any

[[Page 56969]]

applicable excess interest adjustment, less any applicable surrender 
charge. The policy date is the date on which PFL credits the initial 
premium payment to the Policy. The guaranteed minimum death benefit is 
a step-up death benefit equal to the largest policy value (minus any 
bonus credits credited within 12 months of the payment of the death 
benefit) on the policy date or any policy anniversary before the owner 
reaches age 76, plus any premium payments an owner made since then 
(minus any bonus credits credited within 12 months of the payment of 
the death benefit), minus any adjusted partial withdrawals PFL paid an 
owner since then. The step-up death benefit is not available if the 
owner or the annuitant is 75 or older on the policy date. In those 
instances, the guaranteed minimum death benefit will equal total 
premium payments, less any adjusted partial withdrawals as of the date 
of death. In this case, the guaranteed minimum death benefit will not 
include any bonus credit. Future Policies may provide different 
benefits, but such benefits will always be at least the cash value.
    19. The policies issued by the Transamerica Account have a death 
benefit equal to the greater of: (i) the account value minus any bonus 
credits less than 12 months old at the time of payment of the death 
benefit; or (ii) premium payments minus partial withdrawals and any 
premium taxes (not taking into account any bonus credits). If death 
occurs after an owner's or joint owner's 80th birthday, the death 
benefit will equal account value minus any bonus credits less than 12 
months old at the time of payment of the death benefit. Transamerica 
also offers a guaranteed minimum death benefit rider, under which the 
death benefit equals the greater of: (i) the account value, minus any 
bonus credits less than 12 months old at the time of payment of the 
death benefit: (ii) premium payments minus the proportion of partial 
withdrawals taken and any premium taxes (not taking into account any 
bonus credits); or (iii) the highest account value on any policy 
anniversary prior to the earlier of the owner's or joint owner's 85th 
birthday, plus premium payments made, minus the proportion of partial 
withdrawals taken and premium taxes since that anniversary, less any 
bonus credits credited within 12 months of the payment of the death 
benefit. If death occurs after an owner's or joint owner's 80th 
birthday, the death benefit under the rider will equal the greater of 
(i) or (iii) above.
    20. The policies issued by the WRL Account offer both a standard 
death benefit and (for an additional charge) a compounding minimum 
death benefit. The standard death benefit equals the greatest of (i) 
the annuity value (that is, the total amount in a Policy) on the 
valuation day on which Western Reserve receives proof of the 
annuitant's death and the beneficiary's election regarding payment (the 
``death report day'') reduced by the amount of any bonus credits 
credited to the annuity value during the 12 month period before the 
death report day; (ii) total premium payments as of the death report 
day (not including any bonus credits), less partial withdrawals; or 
(iii) an annual step-up. The annual set-up is equal to the highest 
annuity value on any policy anniversary before the annuitant's 81st 
birthday. If the policy anniversary with the highest annuity value 
occurs during the 12 month period before the death report day, then the 
highest annuity value will be reduced by the amount of any bonus 
credits credited to the annuity value from the beginning of this 12 
month period to the death report date. The highest annuity value will 
be increased for premium payments made (but not increased for the bonus 
credits applicable to those premiums), and decreased for any adjustment 
partial withdrawals following the policy anniversary on which the 
highest annuity value occurs. The compounding minimum death benefit 
will pay a benefit equal to the greater of (i) the standard death 
benefit; or (ii) total premium payments made plus the bonus credit 
corresponding to the initial premium payment only, plus interest at an 
effective annual rate of 5% (in most states) from the date of the 
premium payment to the date of death, less adjusted partial surrenders 
(including interest on any partial surrender at the 5% rate from the 
date of the partial surrender to the date of death).
    21. For the PFL Policies, the amount applied to the annuity 
payments is the Policy or account value, increased or decreased by any 
applicable excess interest adjustments and minus any applicable premium 
taxes and minus any bonus credits PFL credited within 12 months of the 
annuity commencement date. Transamerica may deduct a surrender charge 
on annuitizations before the first contract anniversary (or if the 
payment option does not involve life contingencies). Western Reserve 
will apply the annuity value on the maturity date, minus any premium 
tax that may apply. PFL and Western Reserve do not apply a surrender 
charge to annuity payments.
    22. The policies issued by the PFL Account and WRL Account offer an 
optional benefit which assures an owner of a minimum level of income on 
annuitization in the future by guaranteeing a minimum annuitization 
value at certain times, based on the policy value at the date the rider 
is issued. Transamerica plans to offer this option in the future. The 
Companies may also offer owners a dollar cost average program, an asset 
rebalancing program, and a systematic payout option.
    23. The Companies deduct various fees and charges, which may 
include a daily mortality and expense risk fee; a daily administrative 
charge; an annual service or contract charge; premium taxes; surrender 
charges (contingent deferred sales loads); and fees for optional 
benefits or riders. The Companies do not assess a specific charge for 
the bonus credit. The Companies expect to use a portion of the 
mortality and expense risk charge, the administrative fee, and/or the 
surrender charge to pay for the bonus credit.
    24. Applicants seek exemption pursuant to Section 6(c) of the 1940 
Act from Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act and 
Rule 22c-1 thereunder to the extent necessary to permit PFL, 
Transamerica, and Western Reserve to issue Policies that permit 
recapture of bonus credits under certain circumstances. PFL seeks to 
recapture the bonus credit when: (i) an owner exercises the ``free-
look'' option available under the Policies; (ii) an owner exercises the 
Nursing Care and Terminal Condition Withdrawal Option or the 
Unemployment Waiver within one year from the time the credit is 
applied; (iii) PFL pays a death benefit within one year from the time 
it applies the credit; or (iv) an owner annuitizes within one year from 
the date the bonus credit is applied. Transamerica seeks to recapture 
the bonus credit when: (i) an owner exercises the ``free-look'' option 
under the Policies; (ii) an owner exercises the living benefits rider 
within one year from the time Transamerica applies the credit; or (iii) 
Transamerica pays a death benefit within one year from the time it 
applies the credit. Western Reserve seeks to recapture the bonus credit 
when: (i) an owner exercises the ``free-look'' option available under 
the Policies; (ii) an owner exercises the Nursing Care/Terminal 
Condition option within one year from the time the credit is applied; 
or (iii) Western Reserve pays a death benefit within one year from the 
time it applies the credit.

[[Page 56970]]

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule or regulation of the Act to the 
extent that the 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. 
Because the provisions may be inconsistent with a recapture of a bonus 
credit, Applicants request exemptions for the Policies described 
herein, and for Future Policies that are substantially similar in all 
material respects to the Policies, from Sections 2(a)(32), 22(c) and 
27(i)(2)(A) of the 1940 Act, and Rule 22c-1 thereunder, pursuant to 
Section 6(c), to the extent necessary to recapture the bonus credit 
applied to a premium payment in the instances described above. 
Applicants seek exemptions in order to avoid any questions concerning 
the Policies' compliance with the 1940 Act and rules thereunder. 
Applicants assert that the recapture of the bonus credit is necessary 
or appropriate in the public interest and consistent with the 
protection of investors and purposes fairly intended by the policy and 
provisions of the 1940 Act.
    2. Subsection (i) of Section 27 of the 1940 Act provides that 
Section 27 does not apply to any registered separate account funding 
variable insurance contracts, nor to the sponsoring insurance company 
and principal underwriter of such account, except as provided for in 
paragraph (2) of the subsection. Paragraph (2), in pertinent part, 
makes it unlawful for any registered separate account funding variable 
insurance contracts, or for the sponsoring insurance company of such 
account, to sell any such contract unless such contract is a redeemable 
security. Section 2(a)(32) of the 1940 Act defines ``redeemable 
security'' as any security under the terms of which the holder, upon 
its presentation to the issuer, is entitled to receive approximately 
his proportionate share of the issuer's current net assets, or the cash 
equivalent thereof. To the extent that the bonus credit recapture might 
be seen as a discount from the net asset value, or might be viewed as 
resulting in the payment to any owner of less than the proportionate 
share of the issuer's net assets, the bonus credit recapture would 
trigger the need for relief absent some exemption from the 1940 Act.
    3. Applicants state that the Policies are designed to be long-term 
investment vehicles. In undertaking this financial obligation, each 
Company contemplates that an owner will retain a Policy over an 
extended period, consistent with the long-term nature of the Policies. 
Applicants further state that each Company designed their product so 
that it would recover its costs (including the bonus credit) over an 
anticipated duration while a Policy is in force. If an owner withdraws 
his or her money from a Policy before this anticipated period, 
Applicants assert that a Company must recapture the bonus credit in 
order to avoid a loss.
    4. Applicants assert that the recapture of a bonus credit does not 
violate Section 2(a)(32) of the 1940 Act. The Applicants assert that 
the bonus recapture provisions in the Policies do not deprive the owner 
of his or her proportionate share of the issuer's current net assets. 
An owner's right to the bonus credit will vest in full one year after a 
Company applies the bonus credit. Until that time, Applicants assert 
that a Company retains the right and interest in the dollar amount of 
any unvested bonus credit amount. Thus, Applicants argue that when a 
Company recaptures a bonus credit, it is only retrieving its own 
assets, and because an owner's interest in the bonus credit is not 
vested, such owner would not be deprived of a proportionate share of 
the Account's assets (the issuer's current net assets) in violation of 
Section 2(a)(32). Therefore, Applicants assert that such recapture does 
not reduce the amount of each Account's current net assets an owner 
would otherwise be entitled to receive. However, to avoid uncertainty 
as to full compliance with the 1940 Act, the Applicants request an 
exemption from the provisions of Sections 2(a)(32) and 27(i)(2)(A) to 
the extent deemed necessary to permit them to recapture the bonus 
credit under the Policies and Future Policies.
    5. Applicants further contend that it would be inherently unfair to 
allow an owner exercising the free-look privilege in a Policy to retain 
the bonus credit when returning a Policy for a refund after a period of 
only a few days (usually 10 or less). If a Company could not recapture 
the bonus credit, individuals might purchase a Policy with no intention 
of retaining it, and simply return for a quick profit. By recapturing 
the bonus credit, a Company will prevent such individuals from doing 
so.
    6. Furthermore, Applicants assert that a Company's recapture of the 
bonus credit is designed to prevent anti-selection against that 
Company. Applicants state that the risk of anti-selection is that an 
owner could make significant premium payments into a Policy solely in 
order to receive a quick profit from the credit. Applicants state that 
each Company generally protects itself from this kind of anti-
selection, and recovers its costs in situations where an owner 
withdraws his or her money early in the life of a Policy, by imposing a 
surrender charge of up to 8%. However, where an owner withdraws his 
money pursuant to a ``free-look'' provision or an unemployment or 
nursing home waiver, or annuitizes a Policy (or dies), a Company 
generally does not apply this charge. Applicants state that each 
Company is only seeking to recapture the bonus credit (which is less 
than the surrender charge under the Policies) in the circumstances 
where it does not apply the surrender charge.
    7. Applicants assert that the bonus credit provisions are generally 
favorable to the owners. As any earnings on a bonus credit applied 
would vest immediately with an owner, likewise any losses on the bonus 
credit would also vest immediately with an owner. The bonus credit 
recapture provisions do not diminish the overall value of the bonus 
credit. However, to avoid uncertainty as to full compliance with the 
1940 Act, Applicants request an exemption from the provisions of 
sections 2(a)(32) and 27(i)(2)(A) to the extent deemed necessary to 
permit them to recapture the bonus credit under the Policies and Future 
Policies.
    8. Section 22(c) of the 1940 Act states that the Commission may 
make rules and regulations applicable to registered investment 
companies and to principal underwriters of, and dealers in, the 
redeemable securities of any registered investment company to 
accomplish the same ends as contemplated by Section 22(a) of the 1940 
Act. Rule 22c-1, promulgated under Section 22(c) of the 1940 Act, in 
pertinent part, prohibits a registered investment company issuing a 
redeemable security (and a person designated in such issuer's 
prospectus as authorized to consummate transactions in such security, 
and a principal underwriter of, or dealer in, any security) from 
selling, redeeming, or repurchasing any such security except at a price 
based on the current net asset value of such security.
    9. Applicants state that a Company's addition of the bonus credit 
might arguably be viewed as resulting in an owner purchasing a 
redeemable security for a price below the current net asset value. 
Further, by recapturing the bonus credit, a Company might arguably be 
redeeming a redeemable security for a price other than one based on the 
current net asset value of an Account. Applicants assert that the bonus 
credit

[[Page 56971]]

does not violate Section 22(c) and Rule 22c-1. Applicants further state 
that an owner's interest in his or her policy value or in an Account 
would always be offered at a price next determined on the basis of net 
asset value and that the granting of a bonus credit does not reflect a 
reduction of that price. Applicants state that the Companies will 
purchase with their own general account assets an interest in an 
Account equal to the bonus credit. Applicants assert that because the 
bonus credit will be paid out of the Company assets, not Account 
assets, no dilution will occur as a result of the credit.
    10. Applicants argue that the recapture of the bonus credit does 
not involve either of the evils that the Commission intended to 
eliminate or reduce with Rule 22c-1. The Commission's stated purpose in 
adopting Rule 22c-1 was to avoid or minimize: (i) dilution of the 
interests of other security holders; and (ii) speculative trading 
practices that are unfair to such holders. Applicants assert that the 
proposed recapture of the bonus credit does not pose such threat of 
dilution. The bonus credit recapture will not alter an owner's net 
asset value. Each Company will determine an owner's net cash surrender 
value under a Policy in accordance with Rule 22c-1 on a basis next 
computed after receipt of an owner's request for surrender (likewise, 
the calculation of death benefits and annuity payment amounts will be 
in full compliance with the forward pricing requirement of Rule 22c-1). 
The amount recaptured will equal the amount of the bonus credit that a 
Company paid out of its general account assets. Although an owner will 
retain any investment gain attributable to the bonus credit, a Company 
will determine the amount of such gain on the basis of the current net 
asset value of a sub-account. Applicants further assert that the credit 
recapture does not create the opportunity for speculative trading 
calculated to take advantage of backward pricing.
    11. Applicants assert that Rule 22c-1 and Section 22(c) should have 
no application to the bonus credit, as neither of the harms that Rule 
22c-1 was designed to address are found in the recapture of the bonus 
credit. However, to avoid uncertainty as to full compliance with the 
1940 Act, the 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 bonus credit under the Policies and Future 
Policies.
    12. Applicants argue that a Company should be able to recapture 
such bonus credit to protect itself from investors wishing to use the 
Policy as a vehicle for a quick profit at a Company's expense, and to 
enable a Company to limit potential losses associated with such bonus 
credit.
    13. Applicants request exemptions from Sections 2(a)(32), 22(c), 
and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder, to the 
extent necessary to permit the Applicants to recapture the bonus credit 
applied to a premium payment in the circumstances described above. 
Applicants assert that additional requests for exemptive relief would 
present no issues under the 1940 Act not already addressed herein. 
Applicants state that if the Applicants were to repeatedly seek 
exemptive relief with respect to the same issues addressed herein, 
investors would not receive additional protection or benefit, and 
investors and the Applicants could be disadvantaged by increased costs 
from preparing such additional requests for relief. Applicants argue 
that the requested class relief is appropriate in the public interest 
because the relief will promote competitiveness in the variable annuity 
market by eliminating the need for the Companies or their affiliates to 
file redundant exemptive applications, thereby reducing administrative 
expenses and maximizing efficient use of resources.

Conclusion

    For the reasons set forth above, Applicants believe that the 
exemptions requested are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act, 
and consistent with and supported by Commission precedent.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-24127 Filed 9-19-00; 8:45 am]
BILLING CODE 8010-01-M