[Federal Register Volume 66, Number 62 (Friday, March 30, 2001)]
[Notices]
[Pages 17454-17457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-7892]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24915; File No. 812-12364]


Golden American Life Insurance Company, et al.

March 26, 2001.
AGENCY: Securities and Exchange Commission (the ``Commission'').

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

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    Applicants: Golden American Life Insurance Company (``Golden 
American''), Separate Account B of Golden American (the ``Account'') 
and Directed Services, Inc. (``DSI'') (together, the ``Applicants'').
    Summary of the Application: Applicants seek an order of the 
Commission, pursuant to Section 6(c) of the Act to the extent necessary 
to permit the recapture of certain credits applied to premium payments 
made in consideration of deferred variable annuity contracts which 
Golden American currently issues (the ``Contracts'') and substantially 
similar variable annuity contracts that Golden American may issue in 
the future (``Future Contracts'') as well as any other separate 
accounts of Golden American and its successors in interest (``Future 
Accounts'') that support in the future variable annuity contracts that 
are similar in all material respects to the Contracts and principal 
underwriters of such contracts (``Future Underwriters'').
    Filing Date: The application was filed on December 13, 2000, and 
amended and restated on March 23, 2001.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a

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hearing. Interested persons may request a hearing by writing to the 
Secretary of the Commission and serving the 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 April 16, 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 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. Applicant, c/o Linda Senker, 
Esq., Golden American Life Insurance Company, 1475 Dunwoody Drive, West 
Chester, Pennsylvania 19380. Copies to Stephen E. Roth, Esq., 
Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW., 
Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Zandra Y. Bailes, Senior Counsel, or 
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the Application. 
The Application is available for a fee from the Commission's Public 
Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 
(tel. (202) 942-8090).

Applicant's Representations

    1. Golden American is a stock life insurance company originally 
incorporated under laws of Minnesota and later redomiciled in Delaware. 
Golden American is engaged in the business of writing annuities, both 
individual and group, in all states (except New York) and the District 
of Columbia. Golden American is a subsidiary of Equitable of Iowa 
Companies, Inc. (``Equitable of Iowa''). Golden American is ultimately 
controlled by ING Group N.V., a global financial services holding 
company.
    2. Golden American established the Account as a segregated 
investment account under Delaware law. The assets of the Account 
support one or more varieties of variable annuity contracts, including 
the Contracts. The assets of the Account attributable to the Contracts 
and any other variable annuity contracts through which interests in the 
Account are issued are owned by Golden American but are held separately 
from all other assets of Golden American, for the benefit of the owners 
of, and the persons entitled to payment under, Contracts issued through 
the Account. Consequently, such assets are not chargeable with 
liabilities arising out of any other business that Golden American may 
conduct. Income, gains and losses, realized or unrealized, from each 
subaccount of the Account, are credited to or charged against that 
subaccount without regard to any other income, gains or losses of 
Golden American. The Account is a ``separate account'' as defined by 
Rule 0-1(e) under the Act, and is registered with the Commission as a 
unit investment trust. Interests in the Account offered through the 
Contracts have been registered under the Securities Act of 1933 on Form 
N-4.
    3. DSI is a wholly-owned subsidiary of Equitable of Iowa. It serves 
as the principal underwriter of Golden American separate accounts 
registered as unit investment trusts under the Act, including the 
Account, and is the distributor of the variable life insurance 
contracts and variable annuity contracts issued through such separate 
accounts, including the Contracts. DSI is registered as a broker-dealer 
under the Securities Exchange Act of 1934 and is a member of the 
National Association of Securities Dealers, Inc. (the ``NASD'').
    4. The Contracts make available a number of subaccounts of the 
Account to which owners may allocate net premium payments and 
associated bonus credits (described below) and to which owners may 
transfer contract value. The Contracts also offer fixed-interest 
allocation options under which Golden American credits guaranteed rates 
of interest for various period (including interest crediting mechanisms 
which entail the imposition of ``market value'' adjustments under 
certain circumstances). The Contracts offer a variety of fixed and 
variable annuity payment options to owners. In the event of an owner's 
(or, in certain circumstances, an annuitant's) death prior to the 
annuity commencement date, beneficiaries may elect to receive death 
benefits in the form of one of the annuity payment options instead of a 
lump sum.
    5. The Contracts generally may only be purchased with a minimum 
initial premium of $10,000 or more ($1,500 to certain employee benefit 
plans). Golden American may deduct a premium tax charge from premium 
payments in certain states, but otherwise deducts a charge for premium 
taxes upon surrender or annuitization of the Contract or upon the 
payment of a death benefit, depending upon the jurisdiction. The 
Contracts provide for an annual administrative charge of $40 that 
Golden American deducts on each Contract Anniversary and upon a full 
surrender of a Contract, a daily administrative charge deducted from 
the assets of the Account at an annual rate of 0.15% of the Account's 
average daily net assets and a daily mortality and expense risk charge 
deducted from the assets of the Account at annual rates ranging from 
1.30% to 1.75% of the Account's average daily net assets. Three 
optional death benefit riders are available with the Contract: (1) The 
Annual Ratchet enhanced death benefit, (2) the 7% Solution enhance 
death benefit and (3) the Max 7 enhanced death benefit. If purchased, 
the charge for the optional death benefit riders in included in the 
mortality and expense risk charge. The Contracts also provide for a 
charge of $25 for each transfer of contract value in excess of 12 per 
contract year. Lastly, the Contracts have a surrender charge in the 
form of a contingent deferred sales charge (``CDSC''), which is equal 
to the percentage of each premium payment surrendered or withdrawn, and 
declines from 8% during the first four years of the premium payment to 
0% after 9 full years since the premium payment. No CDSC applies to 
contract value representing an annual free withdrawal amount or to 
contract value in excess of aggregate premium payments (less prior 
withdrawals of premium payments).
    6. If an owner dies before the annuity commencement date, the 
Contracts provide, under most circumstances, for a death benefit 
payable to a beneficiary. If the owner is not a natural person, then 
the death benefit is payable upon the death of an annuitant.
    7. Golden American offers a bonus credit provision under the 
Contracts, pursuant to which it credits an owner's contract value with 
an additional amount when a net premium payment is applied. Under the 
bonus credit provisions, Golden American credits contract value with an 
amount that is a percentage is currently 5% for issue ages under age 70 
and 4% for issue age 70 and over. In the future Golden American may 
credit contract value with amounts that are a greater percentage of 
each premium payment. If above 4%, Golden American also may reduce that 
percentage upon 30 days advance written notice, but will never reduce 
it below 4%. Applicants acknowledge that the exemptive order requested 
herein will not provide an exemption for a bonus credit recapture in 
excess of 5%.
    8. Under the bonus credit provision, Golden American recaptures or 
retains

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the credited amount in the event that the owner exercises his or her 
cancellation right during the ``free look'' period. Also, in computing 
death benefits, Golden American may ``recapture'' bonus credits applied 
within twelve months prior to the date as of which the death benefit is 
computed. Finally, in the event of a surrender or withdrawal of 
contract value where the surrender charge is waived due to the owner's 
receipt of qualified extended medical care or date of such diagnosis of 
a qualifying terminal illness (as defined in the contract), Golden 
American will ``recapture'' all bonus credits applied during the twelve 
months prior to the receipt of such care or date of such diagnosis (a 
``waiver event'').
    9. Applicants request that the Commission issue an order pursuant 
to section 6(c) of the Act, exempting them as well as Future Accounts 
and Future Underwriters from the provisions of sections 2(a)(32) and 
27(i)(2)(A) of the act and Rule 22c-1 thereunder, to the extent 
necessary to permit the recapture of certain credits applied to premium 
payments made in consideration of the Contracts.

Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security, or transaction or any class of persons, securities, 
or transactions from any provision or provisions of the Act and/or any 
rule promulgated thereunder if, and to the extent that, such exemption 
is necessary or appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act.
    2. Subsection (i) of section 27 provides that section 27 does not 
apply to any registered separate account supporting variable annuity 
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 ``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.
    3. Applicants submit 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. Applicants submit that the recapture of bonus credits would not, 
at any time, deprive an owner of his or her proportionate share of the 
current net assets of the Account because, until the appropriate 
recapture period expires, Golden American retains the right to and 
interest in each owner's contract value representing the dollar amount 
of any unvested bonus credits. Therefore, Applicants argue that if 
Golden American recaptures any bonus credit or part of a bonus credit 
in the circumstances described above, it would merely be retrieving its 
own assets. Applicants state that Golden American would grant bonus 
credits out of its general account assets and the amount of the credits 
(although not the earnings on such amounts) remain Golden American's 
until such amounts vest with the owner. Thus, Applicants argue that to 
the extent that Golden American may grant and recapture bonus credits 
in connection with variable contract value, it would not, at either 
time, deprive any owner of his or her then proportionate share of an 
Account's assets.
    4. Applicants state that the bonus credit recapture provisions are 
necessary for Golden American to offer the bonus credits. Applicants 
argue that it would be unfair to Golden American to permit owners to 
keep their bonus credits upon their exercise of the Contracts ``free 
look'' provision. Because no CDSC applies to the exercise of the ``free 
look'' provision. Applicants state that the owner could obtain a quick 
profit in the amount of the bonus credit at Golden American's expense 
by exercising that right. Likewise, Applicants argue that because no 
additional CDSC applies upon the death or an owner (or annuitant), and 
no CDSC applies upon a waiver event, such a death or waiver event 
shortly after the award of bonus credits would afford an owner or a 
beneficiary a similar profit at Golden American's expense.
    5. Applicants represent that it is not administratively feasible to 
track the unvested value of bonus credits in the Account, and Golden 
American deducts the daily mortality and expense risk charge and the 
daily administrative charge from the entire net asset value of the 
Account. As a result, the daily mortality and expense risk charge and 
the daily administrative charge paid by any owner is greater than that 
which he or she would pay without the bonus credit.
    6. Applicants assert that the dynamics of Golden American's bonus 
credit provisions would not violate sections 2(a)(32) or 27(i)(2)(A) of 
the Act. Nonetheless, in order to avoid any uncertainty as to full 
compliance with the Act, Applicants seek exemptions from these two 
sections.
    7. 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. Rule 22c-1 thereunder imposes 
requirements with respect to both the amount payable on redemption of a 
redeemable security and the time such amount is calculated. 
Specifically, Rule 22c-1, in pertinent part, 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 of 
redemption, or of an order to purchase or sell such security.
    8. Golden American's recapture of any bonus credit could be viewed 
as the redemption of a contractowner's interest in the Account at a 
price above net asset value. Applicants content, however, that the 
bonus credits do not violate Rule 22c-1 under the Act. Applicants argue 
that bonus credit provisions do not give rise to either of the evils 
that Rule 22c-1 was designed to address. The Rule was intended to 
eliminate or reduce, as far as was reasonably practicable, 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 at a price above net asset value, or other 
unfair results, including speculative trading practices.
    9. Applicants argue that the evils prompting the adoption of Rule 
22c-1 were primarily the result of backward pricing, 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. 
Backward pricing permitted certain investors to take advantage of 
increases or decreases in net asset value that were not yet reflected 
in the price, thereby diluting the values, of outstanding shares.
    10. Applicants argue that the proposed bonus credit provisions pose 
no such threat of dilution. Applicants

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contend that an owner's interest in his or her contract value or in the 
Account would always be offered under the Contracts at a price 
determined on the basis of net asset value. Applicants assert that 
recaptures of bonus credits result in a redemption of Golden American's 
interest in an owner's contract value or in the Account at a price 
determined on the basis of the Account's current net asset value and 
not at an inflated price. Moreover, the amount recaptured will always 
equal the amount that Golden American paid from its general account for 
the credits. Similarly, although owners are entitled to retain any 
investment gains attributable to the bonus credits, the amount of such 
gains would always be computed at a price determined on the basis of 
net asset value.
    11. Applicants contend that Rule 22c-1 should have no application 
to the bonus credit because neither of the harms that it was intended 
to address arise in connection with the proposed bonus credit 
provisions. nonetheless, in order to avoid any uncertainty as to full 
compliance with the Act, Applicants seek an exemption from Rule 22c-1.
    12. Applicants also submit that even if the proposed bonus credit 
provisions would conflict with sections 2(a)(32) or 27(i)(2)(A) of the 
Act or Rule 22c-1 thereunder, the Commission should grant the 
exemptions that they request because the bonus credit provisions are 
generally favorable and beneficial for owners. The recapture provisions 
of the Contracts temper this benefit somewhat, but owners, unless they 
(or, in certain circumstances, annuitants) die, retain the ability to 
avoid the recapture. Although there is a downside in declining markets 
to bonus credits if the owner (or annuitant) dies or if the owner 
exercises his to her cancellation right during the ``free look'' period 
or if the owner surrenders the Contract or withdraws Contract value 
where the surrender charge is waived due to a ``waiver event'', the 
bonus credit provisions (including their dynamic elements) are fully 
disclosed in the prospectuses for the Contracts. Applicants argue that 
the recapture provisions do not, on balance, diminish the overall value 
of the bonus credit provisions.
    13. Applicants state that the Commission's authority under section 
6(c) of the Act to grant exemptions from various provisions of the Act 
and rules thereunder is broad enough to permit orders of exemption 
thereunder that cover classes of unidentified persons. Applicants 
request an order of the Commission that would exempt them, Golden 
American's successors in interest, Future Accounts and Future 
Underwriters from the provisions of sections 2(a)(32) and 27(i)(2)(A) 
of the Act and Rule 22c-1 thereunder. Applicants submit that the 
exemption of these classes of persons is 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 
because all of the potential members of the class could obtain the 
foregoing exemptions for themselves on the same basis as the 
Applicants, but only at a cost to each of them that is not justified by 
any public policy purpose. As discussed, the requested exemptions would 
only extend to persons that in all material respects are the same as 
the Applicants. The Commission has previously granted exemptions to 
classes of similarly situated persons in various contexts and in a wide 
variety of circumstances, including class exemptions for recapturing 
bonus credits under variable annuity contracts.
    14. Applicants represent that Future Contracts will be 
substantially similar in all material respects to the Contracts and 
that each factual statement and representation about the bonus credit 
provisions of the Contracts will be equally true of Future Contracts. 
Applicants also represent that each material representation made by 
them about the Account and DSI will be equally true of Future Accounts 
and Future Underwriters, to the extent that such representations relate 
to the issues discussed in the application. In particular, each Future 
Underwriter will be registered as a broker-dealer under the Securities 
Exchange Act of 1934 and be a NASD member.

Conclusion

    Applicants represent that the requested exemptions are necessary 
and appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-7892 Filed 3-29-01; 8:45 am]
BILLING CODE 8010-01-M