[Federal Register Volume 65, Number 218 (Thursday, November 9, 2000)]
[Notices]
[Pages 67421-67424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28750]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-24725; File No. 812-12136]
Principal Life Insurance Company, et al., Notice of Application
November 2, 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 (the ``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 credits applied to purchase payments made under certain
variable annuity contracts.
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Summary of Application: Applicants Principal Life Insurance Company
(``Principal Life''), Principal Life Insurance Company Separate Account
B (the ``Account''), and Princor Financial Services Corporation
(``Princor'') seek an order to permit, under specified circumstances,
the recovery of certain credits previously applied to purchase payments
made under: (i) Certain deferred variable annuity contracts that
Principal Life issues through the Account (the contracts, including
certain data pages and endorsements, are collectively referred to
herein as the ``Contracts''), and (ii) contracts that Principal Life
may issue in the future through the Account, any of its other separate
accounts, or any separate accounts that it may establish in the
future(``Future Accounts'') which contracts are substantially similar
in all material respects to the Contracts (``Future Contracts'').
Applicants also request that the order extend to any other National
Association of Securities Dealers, Inc. (``NASD'') member broker-dealer
controlling, controlled by, or under common control with Principal
Life, 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 Account or any Future Accounts
(collectively ``Affiliated Broker-Dealers'').
Applicants: Principal Life, the Account, Princor, and any of
Principal Life's Future Accounts established to
[[Page 67422]]
support Future Contracts issued by Principal Life (collectively,
``Applicants'').
Filing Date: The Application was filed on June 22, 2000 and amended
on October 30, 2000.
Hearing or Notification of Hearing: An order granting the
Application will be issued unless the SEC orders a hearing. Interested
persons may request a hearing by writing to the SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 on November 27,
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
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, NW, Washington, DC 20549.
Applicants, c/o J. Sumner Jones, Jones & Blouch, L.L.P., 1025 Thomas
Jefferson Street, NW., Washington, DC 20007-0805.
FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel,
or Keith Carpenter, Branch Chief, Office of Insurance Products,
Division of Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: 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
(telephone (202) 942-8090).
Applicants' Representations
1. Principal Life is a stock life insurance company organized under
the laws of Iowa in 1879 as Bankers Life Association. It changed its
name to Bankers Life Company in 1911, to Principal Mutual Life
Insurance Company in 1986, and then to Principal Life Insurance Company
in 1998. The name change to Principal Life Insurance Company was made
in connection with the reorganization into a mutual holding company
structure in 1998. Principal Life's principal business is offering life
insurance and annuity contracts in 50 states and the District of
Columbia. Principal Mutual Holding company is the holding company of
Principal Life, its affiliates and subsidiaries, collectively known as
Principal Financial Group.
2. The Account was established in 1970 by Principal Life as a
separate account under Iowa law and is registered with the Commission
as a unit investment trust under the Act. The Account funds the
benefits available under the Contracts and other variable annuity
contracts issued by Principal Life. The offering of the Contracts by
Principal Life is registered under the Securities Act of 1933. That
portion of the assets of the Account that is equal to the reserves and
other contract liabilities with respect to the Account is not
chargeable with liabilities arising out of any other business of
Principal Life. Any income, gains or losses, realized or unrealized,
from assets allocated to the Account are, in accordance with the
various contracts, credited to or charged against the Account without
regard to other income, gains or losses of Principal Life.
3. Princor is an Iowa corporation controlled by Principal Financial
Services, Inc. and is the principal underwriter of the Contracts.
Princor is registered as a broker-dealer under the Securities Exchange
Act of 1934 and is a member of the NASD. Sales of the Contracts are
made by registered representatives of broker-dealers authorized by
Princor to sell the Contracts. Such registered representatives are also
licensed insurance agents or brokers of Principal Life.
4. The Contracts are flexible purchase payment individual deferred
combination fixed and variable annuity contracts. The Contracts may be
issued under a qualified contract or as a non-qualified contract.
5. The minimum initial purchase payment for a Contract is $2,500
for non-qualified retirement programs and $1,000 for a qualified
Contract. The minimum subsequent purchase payment is $100. Principal
Life may limit total Contract purchase payments to $2,000,000.
6. At the time of issuance, a Contract owner may elect to purchase
the Purchase Payment Credit Rider. If the Rider is elected, Principal
Life will add a 5% payment enhancement or credit to the owner's
Contract (the ``Credit'') upon receipt of a purchase payment from the
Contract owner during the first contract year. After the first contract
year, additional purchase payments will not receive a Credit. Principal
Life will fund Credits from its general account assets and will
allocate Credits among investment options (excluding certain fixed
benefit options used for dollar cost averaging (the DCA Plus accounts))
in the same proportion as the applicable purchase payment.
7. Principal Life will recover any Credit applied if the Contract
owner returns the Contract for a refund during the 10-day ``free look''
period. The free look period is the 10-day period (or a longer period
in states where required) during which a Contract owner may return a
Contract after it has been delivered. Upon such return, the Contract
owner generally will receive a full refund of the Contract value, less
any Credit, and no withdrawal charge will apply to the refund. The
Contract owner will retain any earnings attributable to the Credit
allocated to his or her account value or, if there has been a decline
in the value of accumulation units for an investment to which a Credit
has been allocated, will bear the loss from such decline. The refund
amount may thus be more or less than the Contract owner's purchase
payment. Where applicable state law requires that the full amount of
the purchase payment be refunded, the Contract owner will receive that
amount, and Principal Life will retain any earnings, or bear any loss,
attributable to the Credit as well as to the purchase payment. The
recovery of Credits from the sub-accounts will be effected by canceling
accumulation units equal in value to the full amounts to be recovered,
the number of such units to be calculated at the accumulation unit
value next determined. Amounts recovered will be withdrawn from each
investment option in the same proportion that the value of the
investment account of each investment option bears to the Contract
value.
8. Contract owners may allocate their purchase payments among a
fixed account, two different DCA Plus fixed options (which will not be
available to Contract owners who elect the Purchase Payment (Credit
Rider), and a number of sub-accounts of the Account. Each sub-account
invests in shares of a corresponding portfolio of certain underlying
investment companies (``Underlying Funds''). Principal Life may,
subject to compliance with applicable law, add other sub-accounts,
eliminate or combine existing sub-accounts or transfer assets in one
sub-account to another sub-account established by Principal Life or an
affiliated company.
9. The Contracts provide for the following charges: (i) A
withdrawal or contingent deferred sales charge (``CDSC'') as a
percentage of amounts withdrawn attributable to purchase payments that
have been in the Contract less than seven complete years, with the
applicable percentage charge declining from a maximum of 6% in years
zero, one and two to 0.0% in year seven and thereafter; (ii) an annual
contract fee
[[Page 67423]]
that is the lesser of $30 or 2% of the accumulated value (which may be
waived under certain circumstances); (iii) a daily mortality and
expense risks charge in an amount equal on an annual basis to 1.25% of
the value of each variable investment account, deducted from each sub-
account; and (iv) any applicable state or local premium taxes up to
3.5%, depending on the Contract owner's state of residence or the state
in which the Contract was sold. In addition, the Underlying Funds also
impose a management and administrative fee which varies depending upon
which Funds are selected.
10. If the Purchase Payment Credit Rider is elected, the Contracts
will provide for the following charges: (i) A withdrawal or contingent
deferred sales charge (``CDSC'') as a percentage of amounts withdrawn
attributable to purchase payments that have been in the Contract less
than nine complete years, with the applicable percentage charge
declining from a maximum of 8% in years zero, one, two and three to
0.0% in year nine and thereafter; (ii) an annual contract fee that is
the lesser of $30 or 2% of the accumulated value (which may be waived
under certain circumstances); (iii) a daily mortality and expense risks
charge in an amount equal on an annual basis to 1.25% of the value of
each variable investment account, deducted from each sub-account; (vi)
a Purchase Payment Credit Rider charge payable for the first 8 contract
years, in an amount equal on an annual basis to .60% of the value of
each variable investment account, deducted from each sub-account; and
(v) any applicable state or local premium taxes up to 3.5%, depending
on the Contract owner's state of residence or the state in which the
Contract was sold. In addition, the Underlying Funds also impose a
management and administrative fee which varies depending upon which
Funds are selected.
11. Because of the higher charges applicable to a Contract with the
Purchase Payment Credit Rider, the prospectus description of the Rider
will include a statement to the effect that expenses of a Contract with
the Rider may be higher than expenses of a Contract without the Rider
and the amount of the Credits may be more than offset by the fees and
charges associated with the Credits. The prospectus will also state
that there may be circumstances in which a Contract owner may be worse
off for having the Rider because of the higher charges.
Applicants' 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 exemptions requested
below with respect to the Contracts, and any Future Contracts funded by
the Account or Future Accounts, that are issued by Principal Life and
underwritten or distributed by Princor or Affiliated Broker-Dealers.
Applicants undertake that Future Contracts 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 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 extend deemed necessary to permit Principal Life to recover any
Credit previously applied to purchase payments under certain Contracts
or Future Contracts if a Contract owner returns the Contracts or Future
Contracts for a refund during the free look period.
3. Applicants represent that it is not administratively feasible to
track asset-based charges against Credits in the Account after the
Credits have been applied. Accordingly, the asset-based charges
applicable to the Account will be assessed against the entire amounts
held in the Account, including Credits, during the free look period. As
a result, during such period, the aggregate asset-based charges
assessed against a Contract owner's annuity account value will be
higher than they would have been if the owner's annuity account value
did not include any Credits.
4. 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) defines a ``redeemable
security'' as any security, other than short-term paper, under the
terms of which the holder, upon representation to the issuer, is
entitled to receive approximately his or her proportionate share of the
issuer's current net asserts, or the cash equivalent thereof.
5. Applicants submit that the recovery of Credits in the
circumstances set forth in the Application does not deprive a Contract
owner of his or her proportionate share of the issuer's current net
assets. A Contract owner's interest in the Credit allocated to his or
her annuity account value is not vested until the applicable free look
period has expired without return of the Contract. Until the right to
recovery has expired and any Credit has vested, Principal Life retains
the right and interest therein. Thus, when Principal Life recovers any
Credit, it is merely retrieving its own assets. The Contract owner is
not deprived of a proportionate share of the Account's assets because
the Contract owner's interest in such Credit has not vested. Moreover,
Principal Life does not recover any earnings attributable to Credits
allocated to a Contract owner's account value prior to exercise of the
free look return.
6. Applicants further submit that permitting a Contract owner to
retain a Credit upon the exercise of the free look return provisions
would be unfair and would deny Principal Life a reasonable measure of
protection against anti-selection. The anti-selection risk here is
that, rather than spreading purchase payments over a number of years, a
Contract owner might seek to manipulate Contracts provisions in a
manner that leaves Principal Life little time to recover the cost of
the Credits. For example, permitting a Contract owner to retain a
Credit upon the exercise of the free look return would encourage the
purchase of Contracts for a quick profit upon return rather than with
the intention of making a long-term investment. As stated above, the
amounts recovered will equal the Credits provided by Principal Life
from general account assets, and any gains attributable to such Credits
will remain a part of the Contract owner's Contract value. For the
foregoing reasons, Applicants submit that the provisions for recovery
of Credits under the Contracts do not violate Section 2(a)(32) and
27(i)(2)(A) of the Act.
7. Applicants believe, moreover, that the exemptive relief
requested is consistent with and serves the stated
[[Page 67424]]
purpose of the National Securities Markets Improvement Act of 1996
(``NSMIA'') in amending the Act to ``provide more effective and less
burdensome regulation.'' Sections 26(e) and 27(i) were added to the Act
to implement the purposes of NSMIA and Congressional intent. The
application of Credits to purchase payments under the Contracts should
not raise any questions as to Principal Life's compliance with the
provisions of Section 27(i). However, to avoid any uncertainty as to
full compliance with the Act, Applicants request an exemption from
Sections 2(a)(32) and 27(i)(2)(A), to the extent deemed necessary, to
permit the recovery of Credits under the circumstances described in the
Application with respect to Contracts and Future Contracts, without the
loss of relief from Section 27 provided by Section 27(i).
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 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. Principal Life's recovery of Credits as described in the
Application might arguably be viewed as involving the redemption of
redeemable securities for a price other than one based on the current
net asset value of the Account.
9. Applicants believe that the recovery of the Credits does not
violate Section 22c-1 and Rule 22c-1. Such recovery does not involve
either of the harms that Rule 22c-1 was intended to eliminate or
reduce, 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 repurchase at a price above it, and (ii)
other unfair results, including speculative trading practices. These
harms resulted from 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. Such 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 fund shares.
10. Applicants submit that the recovery of Credits as described in
the Application does not pose such a threat of dilution. In effecting
recoveries, Principal Life will redeem interests in a Contract owner's
Contract at a price determined on the basis of the current net asset
value of the sub-account(s) to which the owner's Contract value is
allocated. The amounts recovered will equal the Credits that Principal
Life has paid out of general account assets. Except where state law
requires that the full amount of the purchase payment be refunded, the
Contract owners will be entitled to retain any investment gains
attributable to the Credits, and the amounts of such gains will be
determined on the basis of the current net asset values of the
applicable sub-accounts. Under these circumstances, in Applicants'
view, the recovery of the Credits does not involve dilution. Applicants
further submit 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
recovery of Credits.
11. Applicants contend that, because neither of the harms that Rule
22c-1 was meant to address are found in the recovery of Credits, Rule
22c-1 and Section 22(c) should not be construed as applicable thereto.
However, to avoid any uncertainty in this regard, Applicants request an
exemption from the provisions of Section 22(c) and Rule 22c-1 to the
extent deemed necessary to permit them to recover Credits under the
Contracts and Future Contracts as described in the Application.
12. Applicants submit that their request for an order that applies
to Future Accounts and Future Contracts that are substantially similar
in all material respects to the Contracts and underwritten or
distributed by Princor 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 will
not receive any benefit or additional protection if Applicants are
required repeatedly to seek exemptive relief presenting no issue under
the Act that has not already been addressed in the Application. Having
Applicants file additional applications would impair Applicants'
ability to effectively take advantage of business opportunities as they
arise. Applicants undertake that Future Contracts funded by the Account
or by Future Accounts which seek to rely on the order issued pursuant
to this Application will be substantially similar in all material
respects to the Contracts.
Conclusion
Section 6(c) of the Act, in pertinent part, provides that the
Commission, by order upon application, may conditionally or
unconditionally exempt any persons, security or transaction, or any
class or classes of 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, for the reasons stated
in the Application, 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-28750 Filed 11-8-00; 8:45 am]
BILLING CODE 8010-01-M