[Federal Register Volume 65, Number 241 (Thursday, December 14, 2000)]
[Notices]
[Pages 78221-78224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31897]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24788; File No. 812-12256]


Integrity Life Insurance Company, et al.

December 8, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (``1940 Act'') 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.

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    Applicants: Integrity Life Insurance Company (``Integrity''), 
National Integrity Life Insurance Company (``National Integrity,'' 
together with Integrity, the ``Companies''), Separate Account I of 
Integrity Life Insurance Company, Separate Account I of National 
Integrity Life Insurance Company (together with Separate Account I of 
Integrity Life Insurance Company, the ``Accounts''), and Touchstone 
Securities, Inc. (``Touchstone'').
    Summary of Application: Applicants seek an order of exemption 
pursuant to Section 6(c) of the 1940 Act to the extent necessary to 
permit the recapture, under specified circumstances, of credits applied 
to contributions made under certain flexible premium variable annuity 
contracts that the Companies will issue through the Accounts (the 
``Contracts''), as well as other contracts that the Companies may issue 
in the future through their existing or future separate accounts 
(``Other Accounts'') that are substantially similar to the Contracts in 
all material respects (``Future Contracts''). Applicants also request 
that the order being sought extend to any other National Association of 
Securities Dealers, Inc. (``NASD'') member broker-dealer controlling or 
controlled by, or under common control or affiliated with, Touchstone, 
whether existing or created in the future, that serves as distributor 
or principal underwriter for the Contracts or Future Contracts 
(``Affiliated Broker-Dealers'').
    Filing Date: The application was filed on September 15, 2000, and 
amended and restated on December 4, 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 must 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 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, NW., Washington, DC 20549-0609. Applicants, c/o G. Stephen 
Wastek, Esq., Assistant General Counsel, Integrity Life Insurance 
Company, 515 West Market Street, Louisville, Kentucky 40202.

FOR FURTHER INFORMATION CONTACT: Ronald A. Holinsky, 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 
SEC's Public Reference Branch at (202) 942-8090.

Applicants' Representations

    1. Integrity is a stock life insurance company organized under the 
laws of the State of Ohio. It is authorized to sell life insurance and 
annuities in 47 states and the District of Columbia. Integrity is a 
subsidiary of Western and Southern Life Insurance Company (``Western 
and Southern''), a mutual life insurance company organized under the 
laws of the State of Ohio.
    2. National Integrity is a stock life insurance company organized 
under the laws of New York. It is authorized to sell life insurance and 
annuities in four states and the District of Columbia. National 
Integrity is a direct subsidiary of Integrity and an indirect 
subsidiary of Western and Southern.
    3. Separate Account I of Integrity Life Insurance Company was 
established in 1986 as a separate account under Ohio law for the 
purpose of funding variable annuity contracts issued by Integrity. It 
is a segregated asset account of Integrity and is registered with the 
Commission as a unit investment trust under the Act (File No. 811-
04844).
    4. Separate Account I of National Integrity Life Insurance Company 
was established in 1986 as a separate account under New York law for 
the purpose of funding variable annuity contracts issued by National 
Integrity. It is a segregated asset account of National Integrity and 
is registered with the Commission as a unit investment trust under the 
Act (File No. 811-04846).
    5. The Accounts will fund the variable benefits available under the 
Contracts. Each Company's offering of the Contracts is registered under 
the Securities Act of 1933. That portion of the assets of the Accounts 
that is equal to the reserves and other Contract liabilities with 
respect to the Accounts is not chargeable with liabilities arising out 
of any other business of the Companies. Any income, gains or losses, 
realized or unrealized, from assets allocated to the Accounts are, in 
accordance with the Contracts, credited to or charged against the 
Accounts, without regard to other income, gains or losses of the 
Companies.
    6. Touchstone is the principal underwriter of the Contracts. 
Touchstone is registered with the Commission as a broker-dealer under 
the Securities Exchange Act of 1934 and is a member of the NASD. The 
Contracts are sold by registered representatives of broker-dealers that 
have entered into distribution agreements with Touchstone. Touchstone 
is a wholly owned subsidiary of Western and Southern.
    7. The minimum initial contribution is $1,000. An owner may make 
additional contributions of at least $100 at any time. The Companies 
may limit total contributions to $1,000,000 if the owner is under age 
76 and to $250,000 if the owner is over age 76.
    8. The Added Value Option is an optional credit to the Contracts of 
between 1% and 5% of the total first year contributions (the 
``Credit''). If an owner selects the Added Value Option at the time of 
application, the Companies will credit an extra amount to a Contract 
each time the owner makes a contribution within the first twelve months 
after the contract is issued. The owner may select a Credit form 1% to 
5%. The Companies will allocate Credits pro rata among the investment 
options in the same ratio as the contribution. The Companies will fund 
Credits from their general account assets.
    9. The annual charge for the Added Value Option is .15% for each 
percentage of Credit an owner selects. The charge is assessed against 
the Accounts and the fixed accounts. For example, if the owner selects 
the 3% Credit, the annual charge is .45%. The charge is subject to a 
minimum and maximum dollar amount. The minimum, amount is .145% 
multiplied

[[Page 78222]]

by the first year total contributions. The maximum amount is .182% 
multiplied by first year total contributions. The prospectuses for the 
Contracts contain a chart of percentages the Companies will use in 
calculating the range of dollar amounts. The Companies assess the 
charge quarterly on the assets in the investment options to which an 
owner's contributions are allocated. The Companies will discontinue 
deducting the charge seven years from the date a Contract is issued.
    10. The Credit is not part of the amount an owner will receive if 
he or she exercises the free look provision. In addition, all or part 
of the Credit will be recaptured if the owner makes a withdrawal in 
excess of the annual 10% free withdrawal amount during the first seven 
contract years. The 10% free withdrawal provision allows an owner to 
withdraw up to 10% annually of the account value without any contingent 
withdrawal charge or a market value adjustment being assessed. 
Regardless of whether or not the Credit is vested, all gains or losses 
attributable to such Credit are part of the owner's contract value and 
are immediately vested.
    11. The free look period is the 10-day period (or longer if 
required by state law) during which an owner may return a Contract 
after it has been delivered and receive a full refund of the Contract 
value, less any Credits applied. Unless the law requires that the full 
amount of the contribution be refunded, less any withdrawals, the owner 
bears the investment risk from the time of purchase until he or she 
returns a Contract and the refund amount may be more or less than the 
contribution the owner made. The Credit is not part of the amount an 
owner will be paid if the free look provision is exercised.
    12. An owner may make withdrawals from a Contract at any time 
before annuitization. The minimum withdrawal amount is $300. Assuming 
the owner has selected the Added Value Option, any withdrawal in excess 
of the annual 10% free withdrawal amount during the first seven 
contract years will be subject to the recapture of all or part of any 
Credit applied to the Contract and will also be subject to contingent 
withdrawal charges. Only amounts withdrawn in excess of the 10% free 
withdrawal amount are subject to recapture or contingent withdrawal 
charges. The amount that will be recaptured depends on the contract 
year in which the withdrawal is made. The chart below shows what 
portion of the Added Value Option as credited will be recaptured in 
connection with a partial withdrawal in excess of the free withdrawal 
amount or a complete withdrawal.

                       Amount of Credit Recaptured
------------------------------------------------------------------------
                                                               National
                                                   Integrity   integrity
                  Contract year                       (in         (in
                                                   percent)    percent)
------------------------------------------------------------------------
1...............................................         100         100
2...............................................          85         100
3...............................................          65          85
4...............................................          55          70
5...............................................          40          55
6...............................................          25          40
7...............................................          10          25
8+..............................................           0           0
------------------------------------------------------------------------

    The contingent withdrawal charge is a percentage of contributions 
withdrawn by the owner. The contingent withdrawal charge for each 
Company is as follows:

------------------------------------------------------------------------
                                                               National
                                                   Integrity   integrity
    Number of years from date of contribution       charge      charge
                                                      (in         (in
                                                   percent)    percent)
------------------------------------------------------------------------
1...............................................           8           7
2...............................................         7.5           6
3...............................................           7           5
4...............................................           6           4
5...............................................           5           3
6...............................................           4           2
7...............................................           3           1
8+..............................................           0           0
------------------------------------------------------------------------

    For purposes of calculating the contingent withdrawal charge, the 
Companies treat withdrawals as coming from the oldest contribution 
first (i.e., first-in, first-out). In the case of partial withdrawals, 
the Companies deduct the contingent withdrawal charge, if any, from the 
value remaining in a Contract, not from the withdrawal amount requested 
by the owner.
    13. Owners of the Contracts may allocate their contributions among 
42 investment options--40 variable investment options and two fixed 
investment options. Each subaccount of the Accounts is a variable 
investment option that will invest in shares of a corresponding 
portfolio of Janus Aspen Series, Fidelity's Variable Insurance Product 
Funds, The Legends Fund, MFS Variable Insurance Trust, Putnam Variable 
Trust Funds, or Van Kampen Life Portfolios.
    14. The Companies, at a later date, may decide to create additional 
subaccounts to invest in any additional funding media as may now or in 
the future be available. The Companies, from time to time, also may 
combine or eliminate subaccounts or transfer assets to and from 
subaccounts.
    15. The Contracts provide for a death benefit, various death 
benefit options, annuity benefits and annuity payout options, as well 
as transfer privileges, dollar cost averaging, and other features. The 
Contracts have the following charges: (a) a deferred sales charge as a 
percentage of contributions withdrawn as described above; (b) an annual 
administrative charge of $30; (c) a mortality and expense risk charge 
of .85%; (d) an administrative expense charge of .15%; (e) a transfer 
fee of $20 after twelve transfers made during a Contract year; (f) any 
applicable charge for the Added Value Option; (g) any applicable death 
benefit option fee; and (h) any applicable state premium tax. In 
addition, assets invested in the subaccounts are charged with the 
annual operating expenses of the underlying portfolios.
    16. 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 deemed necessary to permit the 
Companies to recapture part or all of a Credit in the following 
instances: (a) when an owner exercises the Contract's free look 
provision; and (b) when an owner makes a withdrawal in excess of the 
annual 10% free withdrawal amount within the first seven Contract 
years.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 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 1940 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 1940 Act. Applicants 
request that the Commission pursuant to section 6(c) of the 1940 Act 
grant the exemptions requested below with respect to the Contracts and 
any Future Contracts issued by the Companies, funded by the Accounts or 
Other Accounts, and underwritten or distributed by Touchstone or 
Affiliated Broker-Dealers. Applicants undertake that Future Contracts 
will be substantially similar to the Contracts in all material 
respects. 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 1940 Act.
    2. Applicants represent that it is not administratively feasible to 
track a

[[Page 78223]]

Credit in the Accounts after the Credit is applied. Accordingly, the 
asset-based charges applicable to the Accounts will be assessed against 
the entire amount held in the Accounts, including the Credit, during 
the free look period and the recapture period. As a result, during such 
periods, the aggregate asset-based charges assessed against an owner's 
account value will be higher than those that would be charged if the 
owner's account value did not include the Credit. The account value 
includes all assets in the Accounts and the fixed accounts, including 
any Credit.
    3. 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, 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) of the 1940 
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 or her 
proportionate share of the issuer's current net assets, or the cash 
equivalent thereof.
    4. Applicants assert that the recapture of a Credit in the 
circumstances set forth in the application would not deprive an owner 
of his or her proportionate share of the issuer's current net assets. 
An owner's interest in a Credit allocated to his or her Contract value 
upon receipt of a contribution made during the first twelve months 
after issuance is not fully vested until the eighth contract year. 
Unless and until the full amount of a Credit is vested, the Companies 
retain at least partial right and interest in the Credit, although not 
in the earnings attributable to the amount. Thus, Applicants argue that 
when the Companies recapture a Credit, in part or in full, they are 
merely retrieving their own assets and the owner has not been deprived 
of a proportionate share of the applicable Accounts' assets because his 
or her interest in the Credit has not vested.
    5. In addition, Applicants state that permitting an owner to retain 
a Credit under a Contract upon the exercise of the free look provision 
would not only be unfair, but would also encourage individuals to 
purchase a Contract, with no intention of keeping it, and return it for 
a quick profit. Furthermore, Applicants state that the recapture of 
Credits applied to contributions made within the first twelve months 
after issuance is designed to provide the Companies with a measure of 
protection against anti-selection. The risk here is that, rather than 
spreading contributions over a number of years, an owner might make 
very large contributions during the first Contract year, thereby 
leaving the Companies little time to recover the cost of the Credits. 
As noted earlier, the amounts recaptured equal the Credits provided by 
the Companies from their general account assets and any gain would 
remain a part of the owner's contract value.
    6. Applicants assert that the Credit will be attractive to and in 
the interest of investors because it will permit owners to put between 
100% and 105% of each of their contributions to work for them in the 
selected investment options. In addition, the owner will retain any 
earnings attributable to the Credit, as well as the principal amount of 
the Credit once vested.
    7. Applicants further assert that the recapture of any Credit only 
applies in relation to the risk of anti-selection against the 
Companies. Anti-selection can generally be described as a risk that 
owners obtain an undue advantage based on elements of fairness to the 
Companies and the actuarial and other factors taken into account in 
designing the Contracts and Future Contracts. The Companies provide the 
Credit from their general account assets on a guaranteed basis. Thus, 
they undertake a financial obligation that contemplates the retention 
of the Contracts and Future Contracts by their owners over an extended 
period, consistent with the long-term nature of retirement planning. 
The Companies generally expect to recover their costs, including 
Credits, over an anticipated duration while a Contract or Future 
Contract is in force. The right to recapture Credits applied to 
contributions made within the first twelve months after issuance 
protects the Companies against the risk that an owner will purchase a 
Contract or Future Contract or make larger or additional contributions 
with the knowledge that the contingency that triggers payment of a 
benefit is likely or about to occur. With respect to refunds paid upon 
the return of a Contract or Future Contract during the free look 
period, the amount payable by the Companies must be reduced by the 
amount of the Credit. Otherwise, investors could purchase a Contract or 
Future Contract for the sole purpose of exercising the free look 
provision and making a quick profit.
    8. Applicants submit that the provisions for recapture of Credits 
under the Contracts and Future Contracts do not violate sections 
2(a)(32) and 27(i)(2)(A) of the 1940 Act. Sections 26(e) and 27(i) were 
added to the 1940 Act to implement the purposes of the National 
Securities Markets Improvement Act of 1996 and Congressional intent. 
The application of a Credit to contributions made under the Contracts 
should not raise any questions as to the Companies' compliance with the 
provisions of Section 27(i). However, to avoid any uncertainty as to 
full compliance with the 1940 Act, Applicants request an exemption from 
sections 2(a)(32) and 27(i)(2)(A), to the extent deemed necessary, to 
permit the recapture of any Credit under the circumstances summarized 
herein without the loss of relief from Section 27 provided by Section 
27(i).
    9. Section 22(c) of the 1940 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 1940 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 next computer after receipt of 
a tender of such security for redemption or of an order to purchase or 
sell such security.
    10. The Companies' recapture of a Credit might arguably be viewed 
as resulting in the redemption of redeemable securities for a price 
other than one based on the current accumulation unit value of the 
Accounts. Applicants contend, however, that the recapture of the Credit 
does not violate section 22(c) or Rule 22c-1. To effect a recapture of 
a Credit, the Companies will redeem interests in a Contract at a price 
determined on the basis of the current accumulation unit value(s) of 
the subaccount(s) to which the owner's contract value is allocated. The 
amount recaptured will equal the amount of the Credit paid out of the 
Companies' general account assets. Although the owner will be entitled 
to retain any investment gain attributable to the Credit, the amount of 
that gain will be determined on the basis of the current accumulation 
unit values of the applicable subaccounts. Thus, no

[[Page 78224]]

dilution will occur upon the recapture of the Credit. Applicants also 
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 recapture of the 
Credit. Because neither of the harms that Rule 22c-1 was meant to 
address is found in the recapture of the Credit, Rule 22c-1 and section 
22(c) should not apply to any Credit. However, to avoid any uncertainty 
as to full compliance with the Act, 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 Credit under the 
Contracts and Future Contracts.

Conclusion

    Applicants submit that their request for an order that applies to 
the Accounts and any Other Accounts established by the Companies, in 
connection with the issuance of the Contracts and Future Contracts, is 
appropriate in the public interest. Applicants state that 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. Applicants state that investors would not 
receive any benefit or additional protection by requiring Applicants to 
repeatedly seek exemptive relief that would present no issue under the 
Act that has not already been addressed in the application. Applicants 
submit that having Applicants file additional applications would impair 
Applicants' ability to take advantage of business opportunities as they 
arise. Further, Applicants state that if Applicants were required 
repeatedly to seek exemptive relief with respect to the same issues 
addressed in the application described herein, investors would not 
receive any benefit or additional protection thereby.
    Applicants submit, based on the grounds summarized above, that 
their exemptive requests meet the standards set out in section 6(c) of 
the 1940 Act and that the Commission should, therefore, grant the 
requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-31897 Filed 12-13-00; 8:45 am]
BILLING CODE 8010-01-M