[Federal Register Volume 65, Number 202 (Wednesday, October 18, 2000)]
[Notices]
[Pages 62403-62407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26744]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24685; File No. 812-12138]


The Penn Mutual Life Insurance Company, et al., Notice of 
Application

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

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

-----------------------------------------------------------------------

SUMMARY OF APPLICATION:  Applicants seek an order to permit the 
recapture of certain credit enhancements (i) made by

[[Page 62404]]

The Penn Mutual Life Insurance Company (``Penn Mutual'') under certain 
individual deferred variable annuity contracts (``Contracts'') that 
Penn Mutual will issue and fund through Penn Mutual Variable Annuity 
Account III (``Variable Account III''); and (ii) made under contracts 
that are substantially similar in all material respects to the 
Contracts that Penn Mutual or The Penn Insurance and Annuity Company 
(``Penn Insurance'') may issue and fund in the future (``Future 
Contracts'') through Variable Account III or other current or future 
separate accounts established by Penn Mutual or Penn Insurance. 
Applicants also request that the order extend to any other National 
Association of Securities Dealers, Inc. member broker-dealer 
controlling, controlled by, or under common control with Penn Mutual 
that may serve as a principal underwriter of the Contracts or Future 
Contracts funded through Variable Account III or other separate 
accounts maintained by Penn Mutual or Penn Insurance.

APPLICANTS: The Penn Mutual Life Insurance Company, Penn Mutual 
Variable Annuity Account III, The Penn Insurance and Annuity Company, 
and Hornor, Townsend & Kent, Inc. (``HTK'') (collectively 
``Applicants'').

FILING DATE: The application was filed with the Commission on June 23, 
2000, and amended on September 21, 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 Commission's Secretary 
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 November 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 who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609. Applicants, c/o C. Ronald 
Rubley, Esq., Morgan, Lewis & Bockius LLP, 1701 Market Street, 
Philadelphia, PA 19103.

FOR FURTHER INFORMATION CONTACT: Paul G. Cellupica, Senior Special 
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 may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0102 (tel. (202) 942-8090)).

Applicants' Representations

    1. Penn Mutual is a mutual life insurance company organized under 
the laws of the Commonwealth of Pennsylvania in 1847. It provides life 
insurance, annuity and investment products. The principal offices of 
Penn Mutual are located at 600 Dresher Road, Horsham, Pennsylvania 
19044. Penn Mutual is authorized to conduct life insurance and annuity 
business in all states of the United States and in the District of 
Columbia.
    2. Variable Account III is a separate account of Penn Mutual, and 
serves as a funding entity for variable annuity contracts issued by 
Penn Mutual. Investments held in Variable Account III are segregated 
from all other assets of Penn Mutual for the purpose of funding 
variable annuity contracts. Variable Account III was established under 
the laws of Pennsylvania in 1982 and is registered with the Commission 
under the 1940 Act as a unit investment trust (File No. 811-03457).
    3. Penn Mutual has filed a registration statement on Form N-4 under 
the 1940 Act and the Securities Act of 1933, as amended, to register 
interests in Variable Account III created pursuant to the Contracts 
File No. 333-39804).
    4. Penn Insurance is a stock life insurance company organized under 
the laws of the State of Delaware, and is a wholly-owned subsidiary of 
Penn Mutual. The principal offices of Penn Insurance are located at 600 
Dresher Road, Horsham, Pennsylvania 19044. Penn Insurance is authorized 
to conduct life insurance and annuity business in most states of the 
United States and in the District of Columbia.
    5. Hornor, Townsend & Kent, Inc. is a wholly-owned subsidiary of 
Penn Mutual and serves as principal underwriter of the Contracts and 
other variable annuity contracts issued by Penn Mutual and Penn 
Insurance. HTK is registered with the Commission as a broker-dealer 
under the Securities Exchange Act of 1934, and is a member of the 
National Association of Securities Dealers, Inc.
    6. The Contracts provide, among other features, for the 
accumulation of assets and the payment of an annuity over time, on both 
a variable basis and a fixed basis. The Contracts provide for payment 
of a death benefit to a beneficiary if the owner of the contract or the 
annuitant named in the contract dies during the accumulation phase of 
the contract. The Contracts are designed to give the owner flexibility 
in planning for retirement and in meeting other financial goals. 
Benefits of the Contracts include the manner in which investment 
earnings are taxed, the availability of multiple investment options, 
and the provision for annuity and death benefit guarantees. The 
Contracts provide various annuity benefits and payout options, as well 
as transfer privileges among investment options.
    7. Penn Mutual imposes charges against the value of the Contracts 
allocated to subaccounts of Variable Account III. For Contracts with a 
Variable Account Value of $100,000 or less, an annual administration 
charge is made that is the lesser of $40 or 2% of the Variable Account 
Value. Accumulation units are used to pay this charge. A daily 
administration charge is made against the net asset value of the 
subaccounts that will not exceed an effective annual rate of 0.15%. A 
daily mortality and expense risk charge is made against the net asset 
value of the subaccounts that will not exceed an effective annual rate 
of 1.25%. The mortality and expense risk charge compensates Penn Mutual 
for the mortality-related guarantees it makes under the Contracts 
(i.e., the death benefit guarantee and the guarantee that the annuity 
factors will never be decreased if mortality experience is 
substantially different than that assumed in the Contracts), and for 
the risk that administration charges will be insufficient to cover 
administration expenses over the life of the Contracts issued by Penn 
Mutual. The mortality and expense risk charge is applied during both 
the accumulation phase and the annuity phase of the Contracts.
    8. If a Contract Owner dies during the accumulation phase of the 
Contract, Penn Mutual will pay the designated beneficiary the value of 
the Contract. If the annuitant named in the Contract dies during the 
accumulation phase, Penn Mutual will pay the designated beneficiary the 
sum of the Contract's variable account death benefit and fixed account 
death benefit. The variable account death benefit is the greater of: 
(i) the value of the Contract invested in subaccounts of Variable 
Account III; or (ii) the amount of purchase payments made by the 
purchaser which were allocated to subaccounts and the amount of 
transfers made to subaccounts, less the amount of all withdrawals and 
transfers from the subaccounts. The Contract Owner may elect to 
purchase a guaranteed

[[Page 62405]]

minimum rising floor death benefit as a rider to the Contract.
    9. Full or partial withdrawals may be made at any time during the 
accumulation phase of the Contract. The amount available for withdrawal 
is based on the value of the Contract next determined after Penn Mutual 
receives the request for withdrawal.
    10. No sales load is deducted from purchase payments before 
allocating them to subaccounts of Variable Account III. A sales charge 
may, however, be deducted from withdrawals under certain circumstances. 
If the Contract Owner makes a withdrawal and a purchase payment was 
made in any of the eight contract years prior to the date of the 
withdrawal, a sales charge may be deducted, subject to certain 
exceptions noted below. Amounts withdrawn are attributed in sequence to 
prior purchase payments starting with the first purchase payment. The 
table below shows the contingent deferred sales charge that may be 
deducted from withdrawals. The charge is made only against amounts 
equal to purchase payments made by the Contract Owner and is not made 
against any gains attributable to such purchase payments or against 
amounts attributable to any purchase payment credits made to the 
Contracts by Penn Mutual.

------------------------------------------------------------------------
                                                            Contingent
                                                          deferred sales
    Number of contract years since purchase payments       charge (% of
                                                             purchase
                                                             payment)
------------------------------------------------------------------------
0-3.....................................................               8
4.......................................................               7
5.......................................................               6
6.......................................................               5
7.......................................................               3
8.......................................................               3
9 and later.............................................               0
------------------------------------------------------------------------

The Contract Owner may make certain withdrawals at any time without any 
sales charge being imposed. At the end of the first contract year and 
once in each contract year thereafter, the Contract Owner may withdraw 
up to 15% of total purchase payments (as of the date of the withdrawal 
request) without incurring a sales charge. The Contract Owner may elect 
to receive this free withdrawal in a lump sum or on a systematic basis 
as provided in the Contracts. Withdrawals of up to $500,000 may also be 
made for medical reasons and for disability reasons without incurring a 
sales charge, as provided in the Contracts and described in the 
Prospectus. A withdrawal that is not subject to a deferred sales charge 
is referred to as a ``Free Withdrawal.''
    11. The Contracts contain a ``free-look'' provision as required 
under state law. Under the free-look provision, the purchaser may 
return the Contract within a certain number of days after purchase and 
receive the value of the Contract on the date it was returned plus any 
premium taxes deducted from the purchase payment or, in some states, 
the purchase payment that was made to Penn Mutual. The free-look period 
generally is ten days, but may be for a longer period under the laws of 
some states and under different factual circumstances.
    12. The Contracts have a credit enhancement feature. Each time a 
purchaser makes a purchase payment under the Contract, Penn Mutual will 
credit an additional amount to the Contract from its general account 
assets (``Purchase Payment Enhancement''). Purchase Payment 
Enhancements will be allocated to subaccounts of the Variable Account 
III and to the fixed accounts in the same proportion as purchase 
payments are allocated under the Contract. Penn Mutual will determine 
the amount of the Purchase Payment Enhancement by multiplying the 
purchase payment by the applicable payment percentage set forth in the 
table below.

------------------------------------------------------------------------
                                                             Purchase
   Total purchase payments less total withdrawals made        payment
                   under the contract                       enhancement
                                                            percentage
------------------------------------------------------------------------
Less than $100,000......................................               3
$100,000 to $500,000....................................               4
$500,000 to $2,000,000..................................               5
------------------------------------------------------------------------

In addition, if the initial purchase payment made under the Contract is 
$2,000,000 or more, Penn Mutual will credit a Purchase Payment 
Enhancement to the Contract in an amount equal to 6% of the initial 
purchase payment. If more than one purchase payment is made during the 
first year of the Contract, the Contract may receive an additional 
Purchase Payment Enhancement at the time of each additional purchase 
payment, based upon a Purchase Payment Enhancement percentage rate 
applicable to all purchase payments made during the year. Such 
additional Purchase Payment Enhancement will be determined as follows: 
When an additional purchase payment is made, Penn Mutual will determine 
the difference between: (i) The sum of all prior purchase payments made 
during the year times the purchase payment percentage applied to the 
current purchase payment; and (ii) the total Purchase Payment 
Enhancement previously credited to the Contract during the year. The 
difference, if any, will be credited to the Contract as an additional 
Purchase Payment Enhancement.
    13. The Contract provides that if it is returned to Penn Mutual 
pursuant to the free-look provision, the Contract Owner will not 
receive a Purchase Payment Enhancement and will not receive any 
investment gain or be charged any expense that would have been 
attributable to such Purchase Payment Enhancement.
    14. The Contract also provides that if the Contract Owner makes a 
withdrawal from the Contract within twelve months of the crediting of a 
Purchase Payment Enhancement, and if the withdrawal is subject to a 
deferred sales charge under the terms of the Contract, the Purchase 
Payment Enhancement will be recaptured by Penn Mutual and will not be 
paid to the Contract Owner.
    15. 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 deemed necessary to permit Penn Mutual to 
issue the Contracts and to permit Penn Mutual and Penn Insurance to 
issue Future Contracts that provide for the recapture of certain 
Purchase Payment Enhancements when the Contract Owner makes a 
withdrawal from the Contract that is subject to a deferred sales charge 
within one year of the date a purchase payment and the related Purchase 
Payment Enhancement were credited to the Contract.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class 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.
    2. Applicants request that the Commission, pursuant to Section 6(c) 
of the Act, grant the exemptions requested below with respect to the 
Contracts and any Future 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.
    3. Subsection (i) of Selection 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

[[Page 62406]]

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.''
    4. 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.
    5. Applicants submit that the recapture by Penn Mutual of a 
Purchase Payment Enhancement when a withdrawal is made from the 
Contract within one year of the crediting by Penn Mutual of a Purchase 
Payment Enhancement would not deprive the owner of his or her 
proportionate share of the assets of Variable Account III. The Contract 
Prospectus informs Contract Owners that any Purchase Payment 
Enhancement credited to the Contract within one year of the date of a 
full or partial withdrawal from the Contract that is subject to a 
deferred sales charge will be deducted from the value of the Contract. 
Applicants state that the Contract and the Prospectus make clear that 
any Purchase Payment Enhancement credited to the Contract in connection 
with a purchase payment made by the Contract Owners is conditioned on 
the purchase payment remaining in the Contract for a period of at least 
one year (unless the purchase payment may be withdrawn without payment 
of a deferred sales charge). Applicants assert that the Contract does 
not provide a vested right to a Purchase Payment Enhancement when the 
owner makes a withdrawal within one year of the credit unless the 
withdrawal is a Free Withdrawal. Because the Purchase Payment 
Enhancement is conditional and not vested, Applicants maintain that the 
recapture of the Purchase Payment Enhancement is simply the retrieval 
by Penn Mutual of its own assets.
    6. Applicants state that the Contracts provide for the conditional 
crediting of Purchase Payment Enhancements during a one-year period to 
provide Penn Mutual with some measure of protection against purchasers 
making purchase payments with the intent of gaining a Purchase Payment 
Enhancement and then withdrawing purchase payments within a relatively 
short period of time. They state that the Contract is designed as a 
long-term investment vehicle and that it is intended to provide the 
owner with the opportunity for long term growth of assets and with 
income and assets for retirement. Applicants state that the Contracts 
are also intended to provide Penn Mutual, the issuer, with the 
opportunity to recover over the long term the cost it incurs in issuing 
and administering the Contracts. Applicants maintain that the 
conditional crediting of Purchase Payment Enhancements during a one-
year period following a purchase payment is consistent with and a 
necessary part of the design of the Contracts. Further, the exemptions 
requested are limited in important respects. Recapture of a Purchase 
Payment Enhancement will be made only if a withdrawal is made within 
one year of the crediting of the Purchase Payment Enhancements. In 
addition, there will be no recapture if the withdrawal is not subject 
to a deferred sales charge.
    7. Applicants submit that under the terms of the Contracts, as 
described in the Prospectus, the purchaser will receive his or her 
proportional share of Variable Account III in accordance with the 
purpose and intent of Sections 27(i)(2)(A) and 2(a)(32) of the Act.
    8. 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, to accomplish the same purposes as 
contemplated by Section 22(a). Rule 22c-1 under the Act 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. Applicants submit that the recapture of the Purchase Payment 
Enhancement is not contrary to Section 22(c) and rule 22c-1.
    9. Applicants state that the recapture of the Purchase Payment 
Enhancement described in the Application does not involve either of the 
harms that Rule 22c-1 was intended to address, 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. They 
state that these harms were the result of backward pricing, or 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. Applicants contend that the proposed recapture of the 
Purchase Payment Enhancement poses no such threat of dilution. They 
state that to effect a recapture of a Purchase Payment Enhancement, 
Penn Mutual will redeem interests in subaccounts of Variable Account 
III at a price determined on the basis of the current net asset value 
of Variable Account III. The amount recaptured will equal the amount of 
the Purchase Payment Enhancement that Penn Mutual paid out of its 
general account assets. Applicants state that although an owner will be 
entitled to retain any investment gain resulting from the Purchase 
Payment Enhancement, the owner will retain the gain based on current 
net asset value. Applicants submit that no dilution will occur upon the 
recapture of the Purchase Payment Enhancement.
    10. Applicants assert that the second harm that Rule 22c-1 was 
designed to address, namely, speculative trading practices calculated 
to take advantage of backward pricing, will not occur as a result of 
the recapture of the Purchase Payment Enhancement. They state that 
there is no possibility that the recapture of such Purchase Payment 
Enhancements will lead to speculative trading in interests created 
under the Contract.
    11. Applicants submit that because neither of the harms that Rule 
22c-1 was meant to address is found in the recapture of the Purchase 
Payment Enhancement, Section 22(c) of the Act and Rule 22c-1 thereunder 
should not be applied to the recapture of Purchase Payment Enhancements 
described in the Application.
    12. Applicants represent that any Future Contracts will be 
substantially similar in all material respects to the Contracts. They 
submit that an order granting exemptive relief to Future Contracts 
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.

Conclusion

    Applicants request an order pursuant to Section 6(c) of the Act for 
exemptions from Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act 
and Rule 22c-1 thereunder to the extent deemed

[[Page 62407]]

necessary to permit Penn Mutual to issue the Contracts and to permit 
Penn Mutual and Penn Insurance to issue Future Contracts which allow 
them to recapture Purchase Payment Enhancements as described herein. 
For the reasons stated in this Application, Applicants submit that the 
requested exemptions meet the standards set out in Section 6(c), 
namely, that the exemptions 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, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-26744 Filed 10-17-00; 8:45 am]
BILLING CODE 8010-01-M