[Federal Register Volume 65, Number 241 (Thursday, December 14, 2000)]
[Notices]
[Pages 78224-78227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31896]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24787: File No. 812-11940]


The Travelers Insurance Company, et al.

December 8, 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 (``1940 Act'' or ``Act'') granting 
exemptions from 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 added 
to purchase payments of certain variable annuity contracts.

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    Applicants: The Travelers Insurance Company (``The Travelers''), 
The Travelers Life and Annuity Company (``Travelers Life,'' together 
with The Travelers, ``Insurers''), the Travelers Fund BD III for 
Variable Annuities (``Fund BD III''), The Travelers Fund BD IV for 
Variable Annuities (``Fund BD IV'') (Fund BD III, together with Fund BD 
IV, the ``Separate Accounts'' or ``Accounts'') and Travelers 
Distribution LLC (``Travelers Distribution'').
    Summary of Application: Applicants seek an order section 6(c) of 
the Act to the extent necessary to permit the recapture of credits 
added to purchase payments of certain variable annuity contracts (the 
``Contracts''). Applicants also request that the order being sought 
extend to (i) any other contracts that may be issued in the future by 
the Insurers that are substantially similar in all material respects to 
the Contracts (``Future Contracts'') but are issued through the 
Accounts or through separate accounts of the Insurers to be established 
in the future (``Future Accounts''), and (ii) any other National 
Association of Securities Dealers, Inc. (``NASD''), member broker-
dealers controlling or controlled by, or under common control with the 
Insurers, whether existing or created in the future, that acts as a 
distributor of and/or principal underwriter for the Contracts or Future 
Contracts offered through the Insurer's Accounts or Future Accounts 
(``Future Underwriters'').
    Filing Date: The application was filed on January 19, 2000, and was 
amended and restated on November 1, 2000. Applicants represent that 
they will file an amended and restated application during the notice 
period to conform to the representations set forth herein.
    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 January 2, 2001, 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, NW., Washington, DC 20549-0609. Applicants, Kathleen A. McGah, 
Esq., The Travelers Insurance Company, One Tower Square, Hartford, CT 
06183.

FOR FURTHER INFORMATION CONTACT: Keith A. O'Connell, Senior Counsel, or 
Lorna J. 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 is available for a fee from the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicant's Representations

    1. The Travelers, a Connecticut stock insurance company, is 
licensed to conduct life insurance business in all of the states of the 
United States, the District of Columbia, Puerto Rico, Guam, the British 
and U.S. Virgin Islands, and the Bahamas. The Travelers is an indirect 
wholly owned subsidiary of Citigroup Inc. Citigroup Inc. consists of 
businesses that include a broad range of financial services, including 
asset management, banking and consumer finance, credit and charge 
cards, insurance investments, investment banking, and trading.
    2. Travelers Life, a Connecticut stock insurance company, is 
licensed to conduct life insurance because in a majority of states of 
the United States. Travelers Life is a wholly owned subsidiary of The 
Travelers.
    3. Fund BD III and Fund BD IV were established under the laws of 
Connecticut as separate investment accounts by The Travelers and 
Travelers Life, respectively. Assets allocated to each Separate Account 
support the benefits payable under group and individual annuity 
contracts offered by the Insurers. Each Separate Account is

[[Page 78225]]

registered with the Commission as a unit investment trust, and meets 
the definition of a ``separate account'' in section 2(a)(37) of the 
1940 Act.
    4. Travelers Distribution is registered as a broker-dealer under 
the Securities Exchange Act of 1934 (``1934 Act'') and is a member of 
the NASD. Travelers Distribution serves as the principal underwriter 
for the Contracts, and is affiliated with the Insurers.
    5. The Contracts are flexible premium variable annuity contracts 
that may be purchased by individuals or groups in connection with 
certain retirement plans on a tax-qualified or a non-tax-qualified 
basis. Each Contract permits an owner to allocate funds to one or more 
variable funding options and/or to the fixed account. Each Contract 
provides an owner special features such as purchase payment credits, 
systematic withdrawals, dollar-cost averaging, and automatic 
rebalancing as well as a choice of a standard death benefit or an 
enhanced death benefit.
    6. During the first Contract year, for each purchase payment made, 
the relevant Insurer will add a credit to the owner's Contract value. 
This credit will be funded from the Insurer's general account assets. 
The credit will equal a percentage of each purchase payment made and 
will depend upon the greater age of the owner or annuitant at issue. If 
the greater age is 69 or under, the credit will be 5%. If the greater 
age is 70 or over, the credit will be 4%.
    7. Each Insurer will apply the credit to the investment options 
selected by the owner in the same ratio as the applicable purchase 
payment. However, the Insurer will deduct the credit from the contract 
value if: (i) The owner returns the Contract during the right to return 
period; (ii) the owner (or the annuitant, with no contingent annuitant 
surviving) dies within 12 months after the credit is applied; or (iii) 
the owner surrenders or annuitizes the Contract within 12 months after 
the credit is applied. The amount of credit deducted from any 
surrender, any contract value applied to an annuity option, or death 
benefit made by the Insurer will not include the amount attributable to 
the credit's investment pains or losses. An Insurer will not recapture 
purchase payment credits from any partial withdrawal.
    8. Each owner may elect a standard death benefit or an enhanced 
death benefit. Under the standard death benefit, an Insurer will pay 
the beneficiary an amount equal to the greater of (1) and (2) below, 
each reduced by the any applicable premium tax and withdrawals (and 
charges) not previously deducted where: (1) is the contract value, less 
any purchase payment credits applied within 12 months of the death; or 
(2) is the total purchase payments made under the Contract.
    9. Under the enhanced death benefit, an Insurer will pay the 
beneficiary an amount equal to the greatest of (1), (2), and (3) below, 
each reduced by any applicable premium tax and withdrawals (and 
charges) not previously deducted where: (1) is the contract value, less 
any purchase payment credits applied within 12 months of the death; (2) 
is the total purchase payments made under the Contract; or (3) is the 
``step-up'' value that reflects the highest anniversary calculation of 
cash value (before the annuitant's 80th birthday or death) after 
adjustment for purchase payments and withdrawals.
    10. An owner may make a withdrawal at any time before the maturity 
date. However, each Insurer will apply a withdrawal charge if purchase 
payments and associated credits are withdrawn before they have been in 
a contract for ten years. The withdrawal charge is assessed as a 
percentage of each purchase payment and associated credit as follows: 
0-4, 5, 6, 7, 8, 9, 10 years since purchase payment made will be 
assessed a withdrawal charge of 8%, 7%, 6%, 5%, 3%, 1%, and 0%, 
respectively.
    11. For purposes of the withdrawal charge calculation, the Insurers 
will take the withdrawal first from: (a) any purchase payments and 
associated credits to which no withdrawal charge applies; then from (b) 
any remaining free withdrawal allowance (after being reduced by (a)); 
then from (c) any purchase payment and associated credits to which a 
withdrawal charge applies (on a first-in, first-out basis); and then 
from (d) any Contract earnings.
    12. Purchase payment credits, however, are not considered in the 
calculation of the withdrawal charge if the withdrawal is taken within 
12 months after the credit is applied--therefore, purchase payment 
credits are never subject to withdrawal charges during that 12-month 
period. Unless the owner requests otherwise, each Insurer will deduct 
the withdrawal charge from the amount withdrawn.
    13. The Insurers will not deduct a withdrawal charge if purchase 
payments are distributed: due to the death of the owner or the 
annuitant (with no contingent annuity surviving); under the Travelers 
Minimum distribution Program (under which an owner may instruct an 
Insurer to make minimum distributions that may be required by the IRS 
upon reaching age 70\1/2\); or under the Nursing Home Confinement 
provision (this provision is only available if the owner elects the 
enhanced death benefit).
    14. Beginning in the second Contract year, an owner may withdraw up 
to 10% of contract value annually without a withdrawal charge. The free 
withdrawal amount is calculated as of the end of the previous Contract 
year.
    15. Certain other charges are made in connection with the 
Contracts. Among these charges are an annual $40 administrative charge 
(waived if contract value is $100,000 or more), asset-based mortality 
and expense risk and administrative expense charges, and fund fees and 
expenses.
    16. The mortality and expense risk and administrative expense 
charges are deducted daily. On an annual basis, the mortality and 
expense risk and administrative expense charges combined, total 1.40% 
of the average daily net assets of the Separate Account (if the owner 
selects the standard death benefit) or total 1.60% of the average daily 
net assets of the Separate Account (if the owner selects the enhanced 
death benefit).

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 1940 Act. 
Because the provisions described below may be inconsistent with certain 
aspects of the recapture of the purchase payment credits, Applicants 
seek exemptions from Sections 2(a)(32), 22(c), 27(i)(2)(A) and Rule 
22c-1 thereunder, to the extent necessary, pursuant to Section 6(c) to 
recapture the credits from those owners who surrender during the right 
to return period, or who surrender, annuitize or die before the 
expiration of the relevant 12-month time period. For the reasons 
discussed below, Applicants submit that the recapture of the purchase 
payment credits is in the public interest and consistent with the 
protection of investors and purposes fairly intended by the 1940 Act.
    2. Applicants note that because the credit is added to contract 
value, the asset-based mortality and expense charge and administrative 
charge are higher than they would have been had the Insurer not added 
the credit to the owner's Contract value. Applicants submit that it is 
not administratively

[[Page 78226]]

feasible to track the credit amount in the Separate Account once the 
credit is applied. Nevertheless, each Insurer represents that the fees 
and charges, in the aggregate, are reasonable within the meaning of 
Section 26(e).
    3. Section 27(i)(2)(A) of the 1940 Act, 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 a ``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 the recapture of the purchase payment credits 
could be seen as a discount from net asset value or could result in the 
return of less than the proportionate share of the issuer's net assets, 
the recapture of the credits would trigger the need for relief absent 
some exemption from the 1940 Act.
    4. The purchase payment credits are part of the overall pricing 
structure for each Contract. When the Contracts were designed, the 
pricing actuaries established the credits at a set level assuming the 
Insurer could recover its costs associated with the credits if the 
owner remained in the Contract for a certain period of time. Applicants 
submit that should the owner surrender, annuitize, or die before that 
period, the Insurer must recover the credits to help offset its costs. 
Therefore, Applicants seek relief from Section 2(a)(32).
    5. Applicants assert that the owner's interest in the credit amount 
does not vest until the expiration of both the right to return period 
and the 12-month period following the credits' application to the 
owner's account. Until such time, the Insurer retains the right to and 
interest in the credit amount, although not the earnings attributable 
to the credit. Therefore, Applicants argue that when an Insurer 
recaptures the purchase payment credit, the Insurer is simply taking 
back what rightfully belongs to the Insurer--its own assets. 
Accordingly, Applicants argue that the credit recapture is a legitimate 
``charge'' for a benefit under the Contracts, and does not reduce the 
amount of Fund BD III's or Fund BD IV's current net assets that an 
owner otherwise would be entitled to receive.
    6. Moreover, Applicants represent that the recapture of the 
purchase payment credits is consistent with the long-term nature of the 
Contracts. The recapture acts as an ``anti-selection'' device by 
discouraging an owner to invest in the Contract simply to make a quick 
profit. In other words, the recapture prevents an owner from making a 
very large contribution one day and then surrendering the contract the 
next day (and thereby depriving the Insurer of opportunity to recover 
the cost of the credits applied). As stated above, the credits are 
contributed by the Insurer from its own general account assets, and any 
gain attributable to the credits would remain as part of the owner's 
contract value.
    7. Consistent with Section 2(a)(32), therefore, Applicants argue 
that the Contracts will be ``redeemable securities.'' The Contracts 
provide for withdrawals and surrenders of contract value. The 
prospectuses for the Contracts disclose the contingent nature of the 
credit recapture. Accordingly, Applicants argue that there will be no 
restriction on, or impediment to, withdrawals or surrenders that should 
cause the Contracts to be considered other than redeemable securities 
within the meaning of the 1940 Act and rules thereunder, and that an 
owner upon taking a withdrawal from a Contract or surrendering or 
annuitizing a Contract will receive his ``proportionate share'' of the 
relevant Separate Account: i.e., the amount of the purchase payment 
reduced by the amount of all charges and increased or decreased by the 
amount of investment performance credited to the Contract.
    8. Rule 22c-1, promulgated under Section 22(c) of the 1940 Act, 
imposes requirements with respect to both the amount payable on 
redemption and the time as of which such amount is calculated. 
Specifically, Rule 22c-1, in pertinent part, prohibits a registered 
investment company issuing a redeemable security and its principal 
underwriter 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. To the 
extent that the credit recapture can be viewed as causing a Contract to 
be redeemed at a price that is computed at less than current net asset 
value, Applicants request relief from Section 22(c) and Rule 22c-1.
    9. Applicants argue that the purchase payment credit recapture will 
comply with the requirements of Rule 22c-1. Regarding the amount 
payable, Applicants argue that the recapture of the credits upon 
surrender, annuitization, or death of an owner during the right to 
return period and the 12-month period following the credits' 
application to the owner's Contract value, does not alter the owner's 
current net asset value. Furthermore, regarding the timing requirement 
of Rule 22c-1, Applicants, consistent with their current procedures, 
represent that they will determine the net cash surrender value under a 
Contract in accordance with Rule 22c-1 on a basis next computed after 
receipt of an owner's request for surrender or annuitization or a 
beneficiary's death report date. Accordingly, Applicants assert that 
they will comply with both the amount payable and timing requirements 
of Rule 22c-1.
    10. In addition, Applicants argue that the credit recapture is 
consistent with the policy behind Rule 22c-1. Applicants state that the 
Commission's purpose in adopting Rule 22c-1 was to minimize (i) 
dilution of the interests of the other security holders, and (ii) 
speculative trading practices that are unfair to such holders. 
Applicants represent that the purchase payment credit recapture would 
in no way have the dilutive effect that Rule 22c-1 is designed to 
prohibit, because a surrendering or annuitizing owner, or a 
beneficiary, would ``receive'' no more than an amount equal to the 
Contract value determined pursuant to the formula and at a time set out 
in the Contract. Furthermore, Applicants argue that variable annuities, 
by their nature, do not lend themselves to the kind of speculative 
short-term trading that Rule 22c-1 was aimed against, and, even if they 
could be so used, the credit recapture would discourage, rather than 
encourage, any such trading.
    11. In addition to the considerations discussed above, Applicants 
assert that despite the fact that the purchase credits are subject to 
recapture upon surrender, annuitization, or payment of the death 
benefit before the expiration of the relevant 12 month time period, the 
credits are advantageous to owners. Even though the credits do not vest 
until 12 months after they are applied, owners receive the benefits 
from the credits. Upon application, owners will be able to invest the 
credits (thus having more to invest than they otherwise would have 
had), and will be able to receive any positive investment experience 
from those credits.
    12. Applicants assert that the Contracts' charge structure provides 
equitable treatment to all owners. Applicants state that the charge 
structure was established for the purchase payment credits so that the 
Insurer may recover its costs over the life of the Contract. If an 
owner could surrender or annuitize a Contract, or if a beneficiary 
could receive the death benefit proceeds before the 12 month

[[Page 78227]]

period after credit application without the recapture of the credits, 
the Insurer may not be able to fully recover its costs. If the Insurer 
did not recapture the credits and instead raised other charges under 
the Contract, the Insurer could be charging persisting owners enrolled 
in the product more than may otherwise be necessary to recover the 
costs attributable to such owners.
    13. Applicants seek the relief requested herein not only with 
respect to themselves and the Contracts described above, but also with 
respect to Future Contracts issued by themselves through Future 
Accounts and underwritten by Future Underwriters. Applicants represent 
that the terms of the relief requested with respect to any Future 
Contract, Future Account, and Future Underwriter are consistent with 
standards set forth in section 6(c) of the 1940 Act.
    14. Applicants state that, without the requested class relief, 
exemptive relief for any Future Contract, Future Account, and Future 
Underwriter would have to be requested and obtained separately. 
Applicants assert that these additional requests for exemptive relief 
would present no issues under the 1940 Act not already addressed in 
this application. Applicants state that if the Applicants were to 
repeatedly seek exemptive relief with respect to the same issues, 
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 Applicants to file redundant 
exemptive applications, thereby reducing administrative expenses and 
maximizing efficient use of resources. Elimination of the delay and the 
expense of repeatedly seeking exemptive relief would, Applicants argue, 
enhance each Applicant's ability to effectively take advantage of 
business opportunities as such opportunities arise. Applicants assert, 
for all the reasons stated herein, that their request for class 
exemptions is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the Contract and provisions of the 1940 Act, and that an 
order of the Commission including such class relief, should, therefore, 
be granted.

Conclusion

    For the reasons stated above, Applicants assert that the requested 
exemptions, in accordance with the standards of section 6(c), 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 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31896 Filed 12-13-00; 8:45 am]
BILLING CODE 8010-01-M