[Federal Register Volume 66, Number 56 (Thursday, March 22, 2001)]
[Notices]
[Pages 16074-16077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-7106]


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

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24894: File No. 812-12192]


First Variable Life Insurance Company, et al.; Notice of 
Application

March 16, 2001.
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, as amended (the ``1940 Act'' or 
``Act'') granting exemptions from the provisions of Sections 2(a)(32) 
and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to permit the 
recapture of purchase payment credits applied to purchase payments made 
under certain deferred variable annuity contracts.

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

    Applicants: First Variable Life Insurance Company, First Variable 
Annuity Fund E, and First Variable Capital Services, Inc. (``FVCS'') 
(collectively, ``Applicants'').
    Summary of Application: Applicants seek an order under Section 6(c) 
of the Act to the extent necessary to permit, under specified 
circumstances, the recapture of purchase payment credits applied to 
purchase payments made under (i) deferred variable annuity contracts 
that First Variable Life Insurance Company (``First Variable'') will 
issue through First Variable Annuity Fund E (``Annuity Fund E'') (the 
``Contracts''), and (ii) contracts that First Variable may issue in the 
future through Annuity Fund E or any other separate account established 
by First Variable in the future to support certain deferred variable 
annuity contracts issued by First Variable (``Future Accounts''), that 
are substantially similar in all material respects to the Contracts 
(the ``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 with, First Variable, whether existing or 
created in the future, that serves as a distributor or principal 
underwriter for the Contracts or Future Contracts offered through 
Annuity Fund E or any Future Account (``First Variable Broker-
Dealer(s)'').
    Filing Date: The application was filed on July 26, 2000, and 
amended and restated on March 9, 2001.
    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 Applicant with a copy of the request, in person or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on April 9, 
2001, and should be accompanied by proof of service on the Applicants, 
in the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, Jeffrey K. Hoelzel, 
First Variable Life Insurance Company, 2122 York Road, Oak Brook, IL 
60523.

FOR FURTHER INFORMATION CONTACT: Keith A. O'Connell, Senior Counsel, or 
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division 
of

[[Page 16075]]

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, 450 Fifth St., NW., Washington, DC 
20549-0102 (tel. (202) 942-8090).

Applicant's Representatives

    1. First Variable is a stock life insurance company organized under 
the laws of the state of Arkansas in 1968. ILona Financial Group, Inc. 
(``ILona'') owns all of First Variable's outstanding stock, and Irish 
Life & Permanent plc., in turn, owns all of ILona. First Variable 
serves as depositor for Annuity Fund E. First Variable may in the 
future establish one or more Future Accounts for which it will serve as 
depositor.
    2. Annuity Fund E is a segregated asset account of First Variable. 
Annuity Fund E is registered with the Commission as a unit investment 
trust investment company under the Act. Annuity Fund E will fund the 
variable benefits available under the Contracts funded through it. 
Units of interest in Annuity Fund E under the Contracts they fund will 
be registered under the Securities Act of 1933 (the ``1933 Act''). 
First Variable may in the future issue Future Contracts through Annuity 
Fund E or through Future Accounts. Applicants represent that Future 
Contracts funded by Annuity Fund E or any Future Accounts will be 
substantially similar in all material respects to the Contracts. That 
portion of the assets of Annuity Fund E that is equal to the reserves 
and other Contract liabilities with respect to Annuity Fund E is not 
chargeable with liabilities arising out of any other business of First 
Variable. Any income, gains or loses, realized or unrealized, from 
assets allocated to Annuity Fund E is, in accordance with Annuity Fund 
E's Contracts, credited to or charged against Annuity Fund E, without 
regard to other income, gains or losses of First Variable.
    3. FVCS is a wholly-owned subsidiary of First Variable and will be 
the principal underwriter of Annuity Fund E and distributor of the 
Contracts funded through Annuity Fund E (the ``Annuity Fund E 
Contracts''). FVCS is registered with the Commission as a broker-dealer 
under the Securities Exchange Act of 1934 (the ``1934 Act'') and is a 
member of the NASD. The Annuity Fund E Contracts will be offered 
through unaffiliated broker-dealers who have entered into agreements 
with FVCS. All of such unaffiliated broker-dealers will be registered 
broker-dealers under the 1934 Act and NASD members. FVCS, or any 
successor entity, may act as principal underwriter for any Future 
Accounts and distributor for any Future Contracts issued by First 
Variable in the future.
    4. The Contract is a part of First Variable's line of annuity 
products. The Contract is an individual deferred variable annuity 
contract. The Contract may be issued under a qualified plan, specially 
sponsored program or an individual retirement annuity or as a non-
qualified contract. The Contract is designed to provide for the 
accumulation of assets and for income through the investment. Purchase 
payments may be made at any time during the accumulation phase. The 
minimum initial purchase payment is $10,000 for non-qualified contracts 
and $5,000 for qualified plan contracts. Additional purchase payments 
of at least $200 can be made.
    5. The Contract permits purchase payments to be allocated to a 
fixed account of First Variable (``Fixed Account''). The Fixed Account 
is not registered with the Commission.
    6. Annuity Fund E currently is divided into 24 sub-accounts, each 
of which will be available under the Annuity Fund E Contracts. The sub-
accounts are referred to as ``Investment Options.'' Each Investment 
Option will invest in shares of a corresponding portfolio of the 
following underlying investment companies (``Funds''): AIM Variable 
Insurance Funds, Inc.; American Century Variable Portfolios, Inc.; 
Deutsche Asset Management VIT Funds; Federated Insurance Series; 
Templeton Variable Products Series Fund; Lord Abbett Series Fund, Inc.; 
MFS Variable Insurance Trust; Seligman Portfolios, Inc.; Variable 
Insurance Products Funds I, II and III; and Variable Investors Series 
Trust. The Funds are registered under the Act as open-end management 
investment companies and the shares are registered under the 1933 Act.
    7. The Contract also provides for transfer privileges among 
Investment Options, dollar cost averaging, rebalancing and other 
features. The following charge are assessed under the Contract: (i) 
annual asset-based charges as follows: 1.25% for mortality and expense 
risks, plus .15% for administration expenses, (ii) optional additional 
benefit charges, during the accumulation period and while the rider is 
in effect, which equal .15% of Contract value for the Best Anniversary 
Value Death Benefit; .20% of Contract value for Extra Protector Death 
Benefit Rider; and .25% of Contract value for the Guaranteed Minimum 
Income Payment Rider; (iii) a withdrawal charge (assessed against each 
purchase payment withdrawn) which starts at 8.5% in the first year, and 
declines thereafter to 0% after 9 years \1\ with a 15% free withdrawal 
option; (iv) a $30 per year contract maintenance charge during the 
accumulation period; and (v) a transfer fee of $10 for each transfer in 
excess of 12 in a Contract year. The Funds also incur management fees 
and operating expenses which vary depending upon which Portfolios are 
selected.

------------------------------------------------------------------------
                                                                Charge
  The withdrawal charge is: years since premium payment \1\    (percent)
------------------------------------------------------------------------
1 or less...................................................         8.5
2...........................................................         8.5
3...........................................................         8.5
4...........................................................         7.5
5...........................................................         6.5
6...........................................................         5.5
7...........................................................         4.5
8...........................................................           3
9...........................................................           2
10 or more..................................................           0
------------------------------------------------------------------------

    8. Each time a Contract Owner makes a purchase payment, First 
Variable will add an additional amount to the Contract (``Purchase 
Payment Credit''). The Purchase Payment Credit will equal: 4% of each 
purchase payment if the sum of all withdrawals is less than $250,000 on 
the day First Variable receives the purchase payment, 4.5% of each 
payment if the sum of all purchase payments reduced by the sum of all 
withdrawals is equal to or greater than $250,000 but less than 
$2,000,000, and 5% of each purchase payment if the sum of all purchase 
payments reduced by the sum of all purchase payments reduced by the sum 
of all withdrawals is equal to or greater than $2,000,000. First 
Variable will fund the Purchase Payment Credit from its general account 
assets. First Variable will allocate the Purchase Payment Credit to the 
Investment Options in the same proportion as the purchase payment.
    9. First Variable will recapture any Purchase Payment Credit 
applied to a Contract: (i) if the owner returns the Contract within the 
Free-Look period; (ii) for any purchase payment made within one year 
prior to the death of the Owner, or Annuitant if the Contract is owned 
by a non-natural person, however, the Owner will never receive less 
than the purchase payments; (iii) for any purchase payment made within 
one year prior to a partial or full withdrawal or surrender; and (iv) 
for any purchase payment made within three years prior to the annuity 
date. The Purchase Payment Credit will be recaptured on a pro-rata 
basis for partial

[[Page 16076]]

withdrawals, including partial withdrawals under the free withdrawal 
option.
    10. Applicants seek exemption pursuant to Section 6(c) from 
Sections 2(a)(32), and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder 
to the extent necessary to permit First Variable to recapture, with 
respect to the Contracts and Future Contracts, an amount equal to any 
Purchase Payment Credit in the following instances; (1) when the 
Contract Owner exercises the right to return the Contract under the 
Free-Look provision of the Contract (the Contract value refunded will 
be reduced by any Purchase Payment Credit applied); (ii) if a death 
benefit if payable (any Purchase Payment Credit based on any purchase 
payment received within 12 months prior to the date of death of the 
Contract Owner or annuitant (when the owner is a non-natural person) 
will be returned to First Variable, however, the Owner will never 
receive less than the purchase payments; (iii) for withdrawals or 
surrenders, including partial withdrawals (any Purchase Payment Credit 
resulting from purchase payments paid within 12 months prior to receipt 
of the request for the withdrawal or surrender will be deducted from 
the Contract value prior to determining the amount available for 
withdrawal or surrender); and (iv) for any purchase payment made within 
3 years prior to the annuity date.

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 summarized 
above with respect to the Contracts and any Future Contracts funded by 
Annuity Fund E or Future Accounts, that are issued by First Variable 
and underwritten or distributed by FVCS or First Variable Broker-
Dealers. Applicants assert 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. The asset-based charges applicable to Annuity Fund E will be 
assessed against the entire amounts held in the Annuity Fund E, 
including the Purchase Payment Credit amount during the Free-Look 
period and the 12-month period following a purchase payment preceding 
certain events (i.e., payment of a death benefit and withdrawals or 
surrenders) and the 3 year period following a purchase payment when an 
owner annuitizes the Contract. As a result, during such periods, the 
aggregate asset-based charges assessed against an Owner's Contract 
value will be higher than those that would be charged if the Owner's 
Contract value did not include the Purchase Payment Credit.
    3. Subsection (i) of Section 27 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 any 
registered separate account funding variable insurance contracts or a 
sponsoring insurance company of such account to sell a contract funded 
by the registered separate account unless, among other things, such 
contract is a redeemable security. Section 2(a)(32) 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.
    4. Applicants assert that the Purchase Payment Credit recapture 
provisions of the Contract would not deprive an Owner of his or her 
proportionate share of the issuer's current net assets. Applicants 
state that an Owner's interest in the amount of the Purchase Payment 
Credit allocated to his or her Contract value upon receipt of a 
purchase payment is not vested until the applicable Free-Look period 
has expired without return of the Contract. Similarly, Applicants state 
that an Owner's interest in the amount of any Purchase Payment Credit 
allocated upon receipt of purchase payments made during the 12-month 
period before a death benefit is payable, or a withdrawal or surrender 
is made or for purchase payments made during the 3-year period prior to 
annuitizaiton also is not vested. Until or unless the amount of any 
Purchase Payment Credit is vested, Applicants assert that First 
Variable retains the right and interest in the Purchase Payment Credit 
amount, although not in the earnings attributable to that amount. Thus, 
Applicants argue that when First Variable recaptures any Purchase 
Payment Credits it is simply retrieving its own assets, and because an 
Owner's interest in the Purchase Payment Credit is not vested, the 
Owner has not been deprived of a proportionate share of Annuity Fund 
E's assets, i.e., a share of the applicable Annuity Fund E's assets 
proportionate to the owner's Contract value (including the Purchase 
Payment Credit).
    5. In addition, with respect to Purchase Payment Credit recapture 
upon the exercise of the free-look privilege, Applicants state that it 
would be patently unfair to allow an Owner exercising that privilege to 
retain a Purchase Payment Credit amount under a Contract that has been 
returned for a refund after a period of only a few days. Applicants 
state that if First Variable could not recapture the Purchase Payment 
Credit, individuals could purchase a Contract with no intention of 
retaining it, and simply return it for a quick profit.
    6. Furthermore, Applicants state that the recapture of Purchase 
Payment Credit relating to purchase payments made within twelve months 
of the payment of a death benefit, or a withdrawal or surrender or 
within 3 years of annuitization is designed to provide First Variable 
with a measure of protection. Applicants state that the risk is that, 
rather than spreading purchase payments over a number of years, an 
Owner will make very large purchase payments shortly before certain 
events, thereby leaving First Variable less time to recover the cost of 
the Purchase Payment Credits applied, to its financial detriment. 
Again, the amounts recaptured equal the Purchase Payment Credits 
provided by First Variable from its own general account assets, and any 
gain would remain as part of the Contract's value.
    7. Applicants assert that the Purchase Payment Credit will be 
attractive to and in the interest of investors because it will permit 
Contract Owners to put between 104% and 105% of their purchase payments 
to work for them in the selected Investment Options. Also, any earning 
attributable to the Purchase Payment Credit will be retained by 
Contract Owners and the principal amount of the Purchase Payment Credit 
will be retained if the contingencies set forth in the Application are 
satisfied.
    8. Applicants assert that the provisions for recapture of any 
applicable Purchase Payment Credit under the Contracts do not, and any 
such Future Contract provisions will not, violate Section 2(a)(32) and 
27(i)(2)(A) of the Act. Nevertheless, to avoid any uncertainties, 
Applicants request an exemption from those

[[Page 16077]]

Sections, to the extent deemed necessary, to permit the recapture of 
any Purchase Payment Credit under the circumstances described herein 
with respect to the Contracts and any Future Contracts, without the 
loss of the 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 underwiters of, and dealers in, the redeemable securities 
of any registered investment company, whether or not members of any 
securities association, to the same extent, covering the same subject 
matter, and for the accomplishment of the same ends as are prescribed 
in Section 22(a) in respect of the rules which may be made by a 
registered securities association governing its members. 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.
    10. Arguably, First Variable's recapture of the Purchase Payment 
Credit might be viewed as resulting in the redemption of redeemable 
securities for a price other than one based on the current net asset 
value of Annuity Fund E. Applicants contend, however, that recapture of 
the Purchase Payment Credit is not violative of Rule 22c-1. Applicants 
argue that the recapture does not involve either of the evils 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 their 
redemption or repurchase at a price above it, and (ii) other unfair 
results including speculative trading practices. See Adoption of Rule 
22c-1 under the 1940 Act, Investment Company Release No. 5519 (Oct. 16, 
1968). To effect a recapture of a Purchase Payment Credit, First 
Variable will redeem interests in an Owner's Contract value at a price 
determined on the basis of current net asset value of Annuity Fund E. 
The amount recaptured will equal the amount of the Purchase Payment 
Credit that First Variable paid out of its general account assets. 
Applicants state that, although Owners will be entitled to retain any 
investment gain attributable to the Purchase Payment Credit, the amount 
of such gain will be determined on the basis of the current net asset 
value of Annuity Fund E. Thus, Applicants state that no dilution will 
occur upon the recapture of the Purchase Payment Credit. Applicants 
also 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 Credit. However, to avoid any 
uncertainty as to full compliance with the Act, Applicants request an 
exemption from the provisions of Rule 22c-1 to the extent deemed 
necessary to permit them to recapture the Purchase Payment Credit under 
the Contracts and Future Contracts.

Conclusion

    Applicants assert that their request for an order 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 argue 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 their Application described herein. 
Applicants assert that having them file additional applications would 
impair their ability effectively to take advantage of business 
opportunities as they arise. Further, Applicants state that if they 
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 assert, based on the grounds summarized above, that 
their exemptive request meets the standards set out in Section 6(c) of 
the Act, namely, that the exemptions requested 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, and that, therefore, the Commission should grant 
the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-7106 Filed 3-21-01; 8:45 am]
BILLING CODE 8010-01-M