[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30244-30251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14076]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-24995; File No. 812-12226]
Sun Life Assurance Company of Canada (U.S.), et al.
May 30, 2001.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order pursuant to section 11(a) of
the Investment Company Act of 1940 (the ``Act'') approving the terms of
an offer of exchange and for an order pursuant to section 6(c) of the
Act granting exemptions from sections 2(a)(32), 22(c) and 27(i)(2)(A)
of the Act and Rule 22c-1 thereunder to permit the recapture of certain
bonus credits.
-----------------------------------------------------------------------
Applicants: Sun Life Assurance Company of Canada (U.S.)(``Sun
Life''), Sun Life Assurance Company of Canada (U.S.) Variable Account F
(``Variable Account''), and Clarendon Insurance Agency, Inc.
(``Clarendon'').
Summary of Application: Applicants seek an order approving the
terms of a proposed offer of exchange of MFS Regatta Choice, a new
variable annuity contract issued by Sun Life and made available through
the Variable Account (the ``New Contract''), for MFS Regatta Gold, an
outstanding annuity contract issued by Sun Life and made available
through the Variable Account (the ``Old Contract,'' collectively with
the New Contract, the ``Contracts''). Applicants also seek an order to
permit the recapture, from any New Contract returned to Sun Life during
the free look period, of a 2% bonus payment credited on amounts
transferred to the New Contract under the proposed offer of exchange.
Filing Date: The application was filed on August 16, 2000, and
Amendment No. 1 was filed on May 30, 2001.
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 must be received by the
Commission by 5:30 p.m. on June 25, 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 requester'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: Sun Life Assurance
Company of Canada (U.S.), One Copley Place, Boston, Massachusetts
02116.
FOR FURTHER INFORMATION CONTACT: Kenneth C. Fang, Attorney, or Keith E.
Carpenter, Branch Chief, at (202) 942-0670, Office of Insurance
Products, Division of Investment Management.
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 (tel. (202) 942-8090).
Applicants' Representations
Applicants
1. Sun Life is a stock life insurance company incorporated under
the laws of Delaware on January 12, 1970. Sun Life does business in 49
states of the United States, the District of Columbia and Puerto Rico.
Sun Life is an indirect wholly-owned subsidiary of Sun Life Assurance
Company of Canada (``Sun Life (Canada)''). Sun Life (Canada) completed
its demutualization on March 22, 2000. As a result of the
demutualization, a new holding company, Sun Life Financial Services of
Canada Inc. (``Sun Life Financial''), is now the ultimate parent of Sun
Life (Canada) and Sun Life. Sun Life Financial, a corporation organized
in Canada, is a reporting company under the Securities Exchange Act of
1934 with common shares listed on the
[[Page 30245]]
Toronto, New York, London and Manila stock exchanges.
The Variable Account is the separate account in which Sun Life sets
aside and invests assets attributable to the Contracts. The Variable
Account is organized and registered under the Act as a unit investment
trust (File No. 811-05846).
3. Clarendon is registered with the Commission as a broker-dealer
and is a member of the National Association of Securities Dealers, Inc.
Clarendon is the principal underwriter for the Contracts and acts as
general distributor of certain other of Sun Life's variable insurance
products. Clarendon is a wholly-owned subsidiary of Sun Life.
Reasons for Exchange Offer
4. Applicants assert that, during recent years, the variable
annuity marketplace has become increasingly competitive. Many of the
purchasers of variable annuity contracts in the 1980s and early 1990s
are at, or close to, the expiration of their deferred sales charge
period, and the contract values of many contracts are no longer subject
to a deferred sales charge. Holders of such contracts have become
``prime targets'' for competitors' variable annuity sales efforts. In
response to these forces, the market has seen the continuous
introduction of innovative products with attractive features to catch
the eye of existing and prospective variable annuity purchasers. Sun
Life has experienced the effects of its competitors' offers, which
often include ``bonus offers,'' through the loss of a substantial
portion of its Old Contract business.
5. Applicants state that Sun Life's competitors are permitted to
make attractive offers to Sun Life's Old Contract owners because, among
other reasons, offers of exchange to contract owners of unaffiliated
insurance companies are not prohibited by Section 11 of the Act (nor
subject to the requirements of Rule 11a-2 thereunder) by virtue of a
Commission staff no-action position granted to Alexander Hamilton Funds
(pub. avail. July 20, 1994). Applicants state that the Alexander
Hamilton letter stands for the proposition that, except for limited
exceptions, exchange offers between unaffiliated investment companies
are not prohibited under Section 11. Consistent with Section 11(a),
therefore, a fund may impose a contingent deferred sales charge on
shares purchased by investors with proceeds of shares exchanged from an
unaffiliated fund.
6. Applicants assert that, but for the affiliated nature of the
exchange, Sun Life would be able to offer a bonus program to its
existing Old Contract owners that is similar to its competitors'
programs. However, unlike its competitors who may make bonus offers to
Old Contract owners, Sun Life is constrained from making a similar
offer without first obtaining Commission approval of the terms of the
exchange.
7. Applicants state that, in response to this competitive
situation, Sun Life has developed an attractive offer (``Exchange
Offer'') that would give eligible owners of the Old Contract the
opportunity to exchange their contracts for a New Contract. On the day
the exchange is effected (the ``Exchange Date''), eligible owners would
also receive a 2% bonus based on the total accumulation value
(``Account Value'') of each Old Contract surrendered in exchange for a
New Contract (``2% Bonus''). Withdrawals made after the free look
period under the New Contract has expired would be governed by the
terms of the New Contract, including application of the withdrawal
charge (referred to in this application as the ``contingent deferred
sales charge'' or ``CDSC''). If a Contract owner exercises his or her
right to cancel the New Contract during the free look period, the 2%
Bonus will be returned to Sun Life and the Old Contract will be
reinstated with an Account Value that reflects the investment
experience while the New Contract was held. Applicants state that the
terms of the Exchange Offer, which will be communicated to eligible
Contract owners in a notification of the Exchange Offer (the ``Offering
Letter''), are designed to respond to the business practicalities of
Sun Life's competitive situation and to assure that persisting Contract
owners who accept the Exchange Offer receive an immediate and enduring
economic benefit.
The New Contract
8. The MFS Regatta Choice Contract is offered pursuant to a
registration statement under the Securities Act of 1933 (the ``1933
Act'') filed on February 22, 2000, and last amended on April 23, 2001
(File No. 333-30844). Applicants state that the MFS Regatta Choice
Contract was designed to enhance the MFS Regatta Gold Contract, adding
four new optional enhanced death benefit features incorporated in 10
optional riders and other enhancements. The MFS Regatta Choice Contract
is offered as individual and group flexible payment variable annuity
contracts for use in connection with retirement and deferred
compensation plans. It permits Account Value to be accumulated on a
variable, fixed, or combination of variable and fixed basis. It
requires a minimum initial purchase payment of $10,000.
9. Account Values of the New contract currently may be allocated to
sub-accounts of the Variable Account that each invest in one of 29
different investment company portfolios (``Underlying Funds'')--29
mutual funds sponsored by MFS/Sun Life Series Trust.
10. Values may also be accumulated on a guaranteed basis by
allocation to Sun Life's general account (the ``Fixed Account'').
Contract owners may select one or more ``Guarantee Periods'' from those
available guaranteed interest rates for the duration of the particular
Guarantee Period(s) selected by the Contract owner. Sun Life guarantees
that it will credit interest at a minimum rate of 3% per year,
compounded annually, to amounts allocated to the Fixed Account. Sun
Life may credit interest at a rate in excess of the minimum rate;
however, it is not obligated to do so. The Guarantee Periods are
offered pursuant to a registration statement under the 1933 Act filed
on June 12, 2000 (File No. 333-39034).
11. All cash withdrawals of any guarantee amount from the Fixed
Account, except those effective within 30 days prior to the expiration
date of the Applicable guarantee Period or the withdrawal of interest
credited during the current Contract year, are subject to a market
value adjustment (``MVA''). The MVA reflects the relationship between
the current rate for the guarantee amount being withdrawn and the
guaranteed interest rate applicable to the amount being withdrawn. It
also reflects the time remaining in the applicable Guarantee Period.
Generally, if the guaranteed interest rate is lower than the applicable
current rate, then application of the MVA will result in a lower
payment upon withdrawal. Conversely, if the guaranteed interest rate is
higher than the applicable current rate, the application of the MVA
will result in a higher payment upon withdrawal.
12. Account Value may be transferred among the sub-accounts of the
Variable Account without charge, although Sun Life reserves the right
to limit the number of transfers to 12 in a Contract year and to charge
up to $15 per transfer. Transfers to and from the Fixed Account are
permitted, subject to certain restrictions described in the prospectus
for the New Contract.
13. Contract owners may enroll in an optional Dollar Cost Averaging
program (the ``DCA Program'') by allocating a minimum of $1,000 of
their purchase payment into the DCA Program and pre-
[[Page 30246]]
authorizing transfers to any of the sub-accounts at regular time
intervals.
14. Contract owners may also enroll in one of three asset
allocation models, each of which represents a combination of sub-
accounts with a different level of risk. Contract owners who elect an
asset allocation model will have their investment options automatically
reallocated on a quarterly basis, or as determined by the terms of the
asset allocation program. The former MFS asset allocation model, which
was available under the Old Contract but discontinued in May 1998, will
be made available under New Contracts to owners of Old Contracts who
are currently participating in that model.
15. Contract owners with an Account Value of $10,000 or more may
participate in the Systematic Withdrawal Program. Under the Systematic
Withdrawal Program, a Contract owner may elect to receive automatic
withdrawals from his or her Account Value, the amount and frequency of
which is determined by the Contract owner. An MVA may apply to
withdrawals under the Systematic Withdrawal Program.
16. Contract owners may enroll in the Portfolio Rebalancing
Program, whereby funds are transferred among the sub-accounts in order
to maintain the percentage allocation the Contract owner has selected.
The transfers may occur on a quarterly, semi-annual or annual basis.
17. Contract owners may enroll in the Secured Future Program, under
which purchase payments are divided between the Fixed Account and the
sub-accounts. For the Fixed Account portion, a portion of the purchase
payment is allocated to a Guarantee Period of the Contract owner's
choosing, so that at the end of the Guarantee Period, the Fixed Account
allocation (including interest) will equal the entire amount of the
original purchase payment. The remainder of the original purchase
payment will be invested in the sub-accounts of the Contract owner's
choosing. At the end of the Guarantee Period, the Contract owner will
be guaranteed the amount of the original purchase payment, in addition
to the investment performance of the subaccounts.
18. Account Value under the New Contract may be accessed at any
time prior to the annuity commencement date by means of partial
surrenders or full surrender. The annual withdrawal amount, which is
not subject to the CDSC, is referred to herein as the ``free withdrawal
amount.'' During the first Contract year, the New Contract permits a
free withdrawal amount of up to 15% of purchase payments made during
that Contract year. After the first Contract anniversary, the free
withdrawal amount is equal to the amount of all purchase payments made
before the last seven years that have not been withdrawn, plus the
greater of: (a) All earnings minus any previous withdrawals taken
during the life of the Contract, or (b) 15% of the amount of all
purchase payments made during the last seven years, including the
current Contract year, minus any free withdrawals taken during the
current Account year. Any unused ``free withdrawal amount'' is not
cumulative if it was based upon 15% of all purchase payments made
during the last seven Contract years, but is cumulative if it was based
on all earnings minus previous withdrawals.
19. The New Contract provides for a basic death benefit and 10
optional death benefit riders, each of which provides an enhanced death
benefit. An optional death benefit election must be made, if at all,
before the date Sun Life accepted the Contract owner's first purchase
payment (the ``Contract Date'') and the Contract owner's 80th birthday
and may not be changed after the New Contract is issued. Contract
owners pay an additional charge during the accumulation phase for each
optional death benefit rider elected. The ``Maximum Anniversary Account
Value (``MAV'') Rider'' enhances the death benefit by providing the
greater of (a) any of the basic death benefits, or (b) the highest
Account Value on any Account anniversary before the Contract owner's
81st birthday, adjusted for subsequent purchase payments, partial
withdrawals and charges between that Account anniversary and the death
benefit date. The ``5% Premium Roll-Up (``5% Roll-Up'') Rider''
enhances the death benefit by providing the greater of (a) any of the
basic death benefits, or (b) total purchase payments plus interest
accruals, adjusted for partial withdrawals. The ``Earnings Enhancement
(``EEB'') Rider'' enhances the death benefit in one of two ways
depending on the Contract owner's age on the Contract Date. If the
Contract owner was 69 or younger on the Contract Date, the enhanced
death benefit is (a) the greatest of any of the basic death benefit
amounts, plus (b) 40% of the difference between Account Value and net
purchase payments, capped at 40% of net purchase payments made prior to
death, calculated as of the death benefit date. If the Contract owner
was between 70 and 79 on the Contract Date, the enhanced death benefit
is (a) the greatest of any of the basic death benefit amounts, plus (b)
25% of the difference between Account Value and net purchase payments,
capped at 25% of net purchase payments made prior to death, calculated
as of the death benefit date. Net purchase payments under the EEB Rider
will be adjusted for all partial withdrawals. The ``Earnings
Enhancement Plus (``EEB Plus'') Rider'' enhances the death benefit in
one of two ways depending on the Contract owner's age on the Contract
Date. If the Contract owner was 69 or younger on the Contract Date, the
enhanced death benefit is (a) the greatest of any of the basic death
benefit amounts, plus (b) 40% of the difference between Account Value
and net purchase payments, up to a cap of 100% of net purchase payments
made prior to death, calculated as of the death benefit date. After the
7th Contract year, the cap is 100% of the difference between net
purchase payments and any purchase payments made within the 12 months
prior to death. If the Contract owner was between 70 and 79 on the
Contract Date, the enhanced death benefit is (a) the greatest of any of
the basic death benefit amounts, plus (b) 25% of the difference between
Account Value and net purchase payments, up to a cap of 40% of net
purchase payments made prior to death, calculated as of the death
benefit date. After the 7th Contract year, the cap is 40% of the
difference between net purchase payments and any purchase payments made
within the 12 months prior to death. The MAV Rider, the 5% Roll-Up
Rider and the EEB Rider may be combined. The EEB Plus, EEB Plus MAV and
EEB Plus 5% Roll-Up Riders are designed to be ``comprehensive'' riders
and may not be combined with each other or with any of the other death
benefit riders. The New Contract prospectus describes how the death
benefit will be calculated if a Contract owner elects more than one
optional death benefit rider.
20. The New Contract contains four annuity payment options. Annuity
options are available on a fixed or variable basis, or a combination
thereof.
21. The New Contract assesses a CDSC against partial or full
surrenders in excess of the free withdrawal amount. The length of time
from receipt of a purchase payment to the time of surrender determines
the percentage of the CDSC. During the first seven years from each
purchase payment, a CDSC will be assessed against the surrender of
purchase payments that is a percentage of the amount surrendered (not
to exceed the aggregate amount of the purchase payments made). The CDSC
[[Page 30247]]
ranges from 7% in year 1 to 0% in year 7 and after.
22. In certain states, the New Contract provides for a waiver of
the CDSC if the Contract owner is confined to an eligible nursing home
and has been there for at least the preceding 180 days, or shorter
period in some states, and at least one year has passed since the
Contract Date. Additionally, Sun Life does not impose the CDSC on
amounts applied to provide an annuity, amounts Sun Life pays as a death
benefit, except under the cash surrender method, or amounts transferred
among the sub-accounts, between the sub-accounts and the Fixed Account,
or within the Fixed Account.
23. During the life of the New Contract, Sun Life deducts a
mortality and expense risk charge from the value of the assets of the
Variable Account at an effective annual rate of 1.00% (if initial
purchase payment was less than $1 million) and 0.85% (if initial
purchase payment was $1 million or more). If a Contract owner
annuitizes his New Contract prior to the eighth Contract year, Sun Life
will deduct an additional 0.25% during the income phase.
24. During the accumulation phase, Sun Life deducts an account fee
on each Contract anniversary. During Contract years one through five,
the account fee is $35. After Contract year five, Sun Life may change
the account fee each year, but it will never exceed $50. Sun Life
deducts the account fee pro rata from each sub-account and each
Guarantee Period based on the allocation of Account Value on a Contract
owner's Contract anniversary. Sun Life will not charge the account fee
if a Contract owner's Account Value has been allocated only to the
Fixed Account during the applicable Contract year or if Account Value
is $75,000 or more on a Contract anniversary. During the income phase,
Sun Life deducts an annual account fee of $35 in equal amounts from
each variable annuity payment made during the year. No fee is deducted
from fixed annuity payments.
25. Sun Life deducts from the assets of the Variable Account an
administrative expense charge at an annual effective rate equal to
0.15% during both the accumulation phase and the income phase.
26. Charges for the optional death benefit riders under the New
Contract will vary based on the particular death benefit rider elected.
The charge (as a percentage of daily Account Value) for various death
benefit riders are as follows: 0.15% for the MAV, 5% Roll-Up and EEB
Riders; 0.25% for the EEB Plus Rider and the combination EEB and MAV,
EEB and 5% Roll-Up, and MAV and 5% Roll-Up Riders; and 0.40% for the
combination EEB and MAV and 5% Roll-Up, EEB Plus MAV, and EEB Plus 5%
Roll-Up Riders.
27. Charges are deducted from purchase payments under the New
Contract for premium tax, if applicable, imposed by a state or other
governmental entity. Certain states impose a premium tax, currently
ranging up to 3.5%. Sun Life pays premium taxes at the time imposed
under applicable state law and recovers premium taxes upon full
surrender, when a death benefit is paid or at annuitization.
The Old Contract
28. The MFS Regatta Gold Contract is offered pursuant to a
registration statement under the 1933 Act (File No. 33-41628). The Old
Contract is offered as a flexible payment group and individual tax-
deferred variable annuity contract. It permits Account Value to be
accumulated on a variable, fixed or combination variable and fixed
basis. The minimum initial purchase payment is $5,000 ($10,000 in
California, Texas and Maryland since October 1999).
29. Account Values of the New Contract currently may be allocated
to the same 29 sub-accounts of the Variable Account available under the
New Contract, each of which invests in an Underlying Fund of the MFS/
Sun Life Series Trust.
30. Contract owners may participate in the DCA Program, Asset
Allocation Program, Systematic Withdrawal Program, Interest Out
Program, Portfolio Rebalancing Program and Secured Future Program.
Under the Interest Out Program, the Contract owner may opt to be paid
or reinvest the interest credited to all Guarantee Periods that the
Contract owner has chosen. The withdrawals under both the Systematic
Withdrawal Program and the Interest Out Program are subject to
surrender charges.
31. Account Values may also be allocated to the one or more Fixed
Account Guarantee Periods made available from time to time. Sun Life
may change the guaranteed interest rates it offers from time to time,
but no guaranteed interest rate will ever be less than 3% per year (4%
per year for Contracts issued before November 1993), compounded
annually. Early withdrawals from an allocation to a Guarantee Period,
including cash withdrawals, transfers, and commencement of an annuity,
may be subject to an MVA, which could increase or decrease Account
Value. Guarantee Periods under the Old Contract are offered pursuant to
a registration statement under the 1933 Act filed on April 26, 1999
(File No. 333-77041) and will be carried forward upon exchange to the
New Contract.
32. Account Value of an Old Contract may be accessed by means of
partial surrenders or full surrender. The CDSC is not applied to the
annual free withdrawal amount equal to 10% of purchase payments made
during the last seven Contract years, including the current Contract
year, plus all purchase payments made before the last seven Contract
years that have not been previously withdrawn. For Old Contracts issued
after November 1994, the annual withdrawal allowance may be carried
forward and available for use in future years on a cumulative basis.
33. The Old Contract offers a basic death benefit determined as of
the death benefit date. The Old Contract offers a choice of five
annuity options. Each annuity option is available on a variable or
fixed basis or combination thereof.
34. For maintenance of the Old Contract, an account fee equal to
the lesser of $30 or 2% of the value of the Old Contract is deducted
from the Account Value of each Old Contract annually for the first five
years of a Contract. After the fifth year, Sun Life may change this fee
annually, but it will never exceed the lesser of $50 or 2% of Account
Value.
35. A mortality and expense risk charge at an annual rate of 1.25%
of daily sub-account value and an administrative expense charge at an
annual rate of 0.15% of daily sub-account value are deducted from
Account Value.
36. Currently, no fee is imposed on the twelve transfers allowed
per Contract year; however, Sun Life reserves the right to impose a
transfer fee of up to $15 per transfer. In addition, an MVA may be
calculated on amounts transferred from or within the Fixed Account.
37. Charges for premium taxes, if any, imposed by a state or other
governmental entity are deducted from purchase payments under the Old
Contract. Certain states impose a premium tax, currently ranging up to
3.5%. Sun Life pays premium taxes at the time imposed under applicable
state law and recovers the premium taxes upon full surrender, death or
annuitization.
38. Applicants represent that the features and benefits of the New
Contract will be no less favorable than under the Old Contract, except
for differences in the annuitization options, free withdrawal amount
and the Fixed Account Interest Out Program. Applicants also represent
that the fees
[[Page 30248]]
and charges of the New Contract will be no higher than those of the Old
Contract, with the exception of the annual account fee and the CDSC.
Terms of the Exchange Offer
39. Applicants propose to offer eligible owners of Old Contracts
the opportunity to exchange their Old Contract for a New Contract by
means of the Exchange Offer. Eligible MFS Regatta Gold Contract owners
will be permitted to exchange their entire MFS Regatta Gold Contract
for an MFS Regatta Choice Contract. To be eligible for the Exchange
offer, Contract owners must (a) Have completed seven or more Contract
years under their Old Contract, (b) not have made total purchase
payments during the most recent five Contract years that are greater
than 25% of the purchase payments made prior to the most recent seven
Contract years, and (c) meet eligibility requirements of MFS Regatta
Choice.
40. Sun Life, from its general account, will provide a 2% Bonus to
each owner of an Old Contract who accepts the offer, which is based on
the Account Value of each Old Contract surrendered in exchange for a
New Contract. The Exchange Offer will provide that, upon acceptance of
the offer, a New Contract will be issued with an Account Value equal to
2% greater than the Account Value of the Old Contract surrendered in
the exchange. The Account Value of an Old contract (``Exchange
Value''), together with the 2% Bonus and any additional purchase
payments submitted with an Internal Exchange Application Form for the
New Contact, will be applied to the New Contract as of the Exchange
Date. No CDSC will be deducted upon the surrender of an Old Contract if
received in connection with the Exchange Offer.
41. If a Contract owner exercises his or her right to cancel the
New Contract during the free look period, the 2% Bonus will be returned
to Sun Life and the Old Contract (including amounts allocated to
Guarantee Periods) will be reinstated with an Account Value that
reflects the investment experience while the New Contract was held.
After expiration of the New Contract's free look period, withdrawals
will be governed by the terms of the New Contract for purposes of
calculating any CDSC. If a Contract owner surrenders his New Contract
prior to the completion of the CDSC period, Sun Life will apply the
applicable CDSC according to the New Contract's seven-year schedule.
The Exchange Date will be the issue date of the New Contract for
purposes of determining Contract years and anniversaries after the
Exchange Date.
42. Sun Life will send the Offering Letter to eligible Contract
owners and their brokers that will explain the terms of the Exchange
Offer and instruct eligible owners of Old Contracts to contact their
brokers for assistance with completing the offer. Contract owners will
be provided with a prospectus for the New Contract, the Offering Letter
that compares the applicable Contracts and an Internal Exchange
Application Form.
43. The Offering Letter will advise owners of an Old Contract that
the Exchange Offer is specifically designed for those Contract owners
who intend to continue to hold their Contracts as long-term investment
vehicles. The Offering Letter will state that the offer is not intended
for all Contract owners, and that it is especially not appropriate for
any Contract owner who anticipates surrendering all or a significant
part (i.e., more than the ``free withdrawal amount'' on an annual
basis) of his or her Contract before seven years. The Offering Letter
will also state that Contract owners with amounts allocated to Old
Contract Guarantee Periods will experience no change in Guarantee
Period upon acceptance of the Exchange Offer. The Offering Letter will
encourage Contract owners to carefully evaluate their personal
financial situation when deciding whether to accept or reject the
Exchange Offer. In addition, the Offering Letter will explain how an
owner of an Old Contract contemplating an exchange may avoid the
applicable CDSC on the New Contract if no more than the annual ``free
withdrawal amount'' is surrendered and any subsequent deposits are held
until expiration of the CDSC period. In this regard, the Offering
Letter will state in concise, plain English that if the New Contract is
surrendered during the initial CDSC period, (a) the 2% Bonus may be
more than offset by the CDSC, and (b) a Contract owner may be worse off
then if he or she had rejected the Exchange Offer.
44. The Internal Exchange Application Form, which will accompany
the Offering Letter, will include an owner acknowledgment section with
check-off boxes setting forth specific questions designed, among other
things, to determine a Contract owner's suitability for the Exchange
Offer. In particular, the form will seek affirmative confirmation that
an owner does not anticipate a need to withdraw more than 15% per year
(plus earnings) from the New Contract during the CDSC period. Other
questions on the form seek owner acknowledgment that the Exchange Offer
is suitable only for a Contract owner if he or she expects to hold the
New Contract as a long-term investment and the Contract owner may be
better off rejecting the Exchange Offer if he or she plans to surrender
the New Contract during the CDSC period. All boxes on the form must be
checked off with affirmative responses before Sun Life will process the
exchange. After making a suitability determination, broker-dealers will
be required to forward completed forms to Sun Life for processing. In
the event Sun Life receives an incomplete form (i.e., a form with one
or more acknowledgment boxes not checked off), Sun Life will not
process the exchange, treating the transaction as ``not in good
order.'' Sun Life intends to contact any broker-dealer who submits a
form not in good order, however, in no event will Sun Life process
exchange transactions based on incomplete forms.
45. The Account Value of an Old Contract (``Exchange Value'')
together with the 2% Bonus and any additional purchase payments
submitted with an Internal Exchange Application Form for the New
Contract will be applied to the New Contract as of the Exchange Date.
No CDSC will be deducted upon the surrender of an Old Contract if
received in connection with the Exchange Offer. If a Contract owner
surrenders his New Contract after the free look period but prior to the
completion of the CDSC period, Sun Life will apply the CDSC based on
the number of Contract years payment has been in a New Contract: 7% for
Contract years 0-1, 7% for Contract years 1-2, 6% for Contract years 2-
3, 6% for Contract years 3-4, 5% for Contract years 4-5, 4% for
Contract years 5-6, 3% for Contract years 6-7, and 0% for Contract
years 7 or more. If a Contract owner exercises his or her right to
cancel the New Contract during the free look period, the 2% Bonus will
be returned to Sun Life and the Old Contract (including amounts
allocated to Guarantee Periods) will be reinstated with an Account
Value that reflects the investment experience while the New Contract
was held. The Exchange Date will be the issue date of the New Contract
for purposes of determining Contract years and anniversaries after the
Exchange Date.
46. To accept the Exchange Offer, an owner of an Old Contract must
complete an Internal Exchange Application Form. Account Values will be
allocated to the same Vairable Account investment options and the same
Guarantee Periods under the New Contract on the Exchange Date. Account
Values may
[[Page 30249]]
subsequently be reallocated under the new Contract (including to new
Guarantee Periods of the Fixed Account) pursuant to Contract owner
instructions. Payments submitted with the Internal Exchange Application
Form will be assumed to be payments under the New Contract as of the
date of issue of the New Contract. Applicants state that no adverse tax
consequences will be incurred by those Contract owners who accept the
Exchange Offer. As to non-qualified Contracts, the exchanges will
constitute tax-free exchanges pursuant to Section 1035 of the Internal
Revenue Code. Any exchange with respect to IRA Contracts will be a
direct transfer and not taxable distributions to Contract owners.
47. Applicants state that the Exchange Offer is meant to encourage
existing Contract owners to remain with Sun Life rather than surrender
their Contracts in exchange for a competitor's product offering a
similar bonus. If the New Contract CDSC is not permitted on the
Exchange Value, Applicants believe that some Contract owners might
exchange their New Contract intending to take advantage of the 2% Bonus
and then surrender the New Contract intending to take advantage of the
2% Bonus and then surrender the New Contract without a CDSC. Without
the CDSC, Sun Life would have no assurance that a Contract owner who
accepted the Exchange Offer would persist for long enough for the 2%
Bonus and payments to registered representatives to be recouped through
standard fees from the ongoing operation of the New Contract.
Applicants state that registered representatives will be paid
commissions for soliciting exchanges that are less than they normally
are paid for soliciting sales of the New Contract. Applicants state
that compensating registered representatives for these exchanges is
necessary in order to provide sufficient incentive for them to compete
with competitors' registered representatives.
Applicants' Conditions
Applicants agree to the following conditions:
1. The Offering Letter will contain concise, plain English
statements that (a) The Exchange Offer is suitable only for Contract
owners who expect to hold their Contracts as long-term investments and
(b) if the New Contract is surrendered during the initial CDSC period,
the 2% Bonus may be more than offset by the CDSC and a Contract owner
may be worse off than if he or she had rejected the Exchange Offer.
2. The Offering Letter will disclose in concise, plain English each
aspect of the New Contract that will be less favorable than the Old
Contract.
3. Sun Life will send the Offering Letter directly to eligible
contract owners. A Contract owner choosing to exchange will then
complete and sign an Internal Exchange Application Form, which will
prominently restate in concise, plain English the statements required
in Condition No. 1, and return it to Sun Life. If the Internal Exchange
Application Form is more than two pages long, Sun Life will use a
separate document to obtain Contract owner acknowledgment of the
statements required in Condition No. 1.
4. Sun Life will maintain the following separately identifiable
records in an easily accessible place for the time periods specified
below in this Condition No. 4, for review by the Commission upon
request: (a) Records showing the level of exchange activity and how it
relates to the total number of Contract owners eligible to exchange
(quarterly as a percentage of the number eligible); (b) copies of any
form of Offering Letter and other written materials or scripts for
presentations by representatives regarding the Exchange Offer that Sun
Life prepares or approves, including the dates that such materials were
used; (c) records containing information about each exchange
transaction that occurs, including the name of the Contract owner; Old
and New Contract numbers; the amount of the CDSC waived on surrender of
the Old Contract; Guarantee Periods carried forward; optional death
benefits selected; Bonus paid; the name and C.R.D. number of the
registered representative soliciting the exchange, firm affiliation,
branch office address, telephone number, and name of the registered
representative's broker-dealer; commission paid; the Internal Exchange
Application Form (and separate document, if any, used to obtain the
Contract owner's acknowledgment of the statements required in Condition
No. 1) showing the name, date of birth, address and telephone number of
the Contract owner, and the date the Internal Exchange Application Form
(or separate document) was signed; amount of Account Value exchanged;
and persistency information relating to the New Contract including the
date of any subsequent surrender and the amount of CDSC paid on
surrender; and (d) logs showing a record of any Contract owner
complaint about the exchange; state insurance department inquiries
about the exchange; or litigation, arbitration or other proceedings
regarding any exchange. The logs will include the date of complaint or
commencement of proceeding; name and address of the person making the
complaint or commencing the proceeding; nature of the complaint or
proceeding; and persons named or involved in the complaint or
proceeding. Applicants will retain records specified in (a) and (d) for
six years after the date the records are created, records specified in
(b) for a period of six years after the date of last issue, and records
specified in (c) for a period of two years after the date that the
initial CDSC period of the New Contract ends.
Applicants' Legal Analysis
Section 11
1. Section 11(a) of the Act makes it unlawful for any registered
open-end company, or any principal underwriter for such a company, to
make or cause to be made an offer to the holder of a security of such
company, or of any other open-end investment company, to exchange his
security for a security in the same or another such company on any
basis other than the relative net asset values of the respective
securities, unless the terms of the offer have first been submitted to
and approved by the Commission or are in accordance with Commission
rules adopted under section 11.
2. Section 11(c) of the Act, in pertinent part, requires, in
effect, that any offer of exchange of the securities of a registered
unit investment trust for the securities of any other investment
company be approved by the Commission or satisfy applicable rules
adopted under section 11, regardless of the basis of the exchange.
3. The purpose of section 11 of the Act is to prevent
``switching,'' the practice of inducing security holders of one
investment company to exchange their securities for those of a
different investment company, ``solely for the purpose of exacting
additional selling charges.'' That type of practice was found by
Congress to be widespread in the 1930s prior to adoption of the Act.
4. Section 11(c) of the Act requires Commission approval (by order
or by rule) of any exchange, regardless of its basis, involving
securities issued by a unit investment trust, because investors in unit
investment trusts were found by Congress to be particularly vulnerable
to switching operations.
5. Applicants assert that the potential for harm to investors
perceived in switching was its use to extract additional sales charges
from those investors.
[[Page 30250]]
6. Applicants assert that the terms of the proposed Exchange Offer
do not present the abuses against which section 11 was intended to
protect. The Exchange Offer was designed to allow Sun Life to compete
on a level playing field with its competitors who are making bonus
offers to its Contract owners. No addition sales load or other fee will
be imposed at the time of exercise of the Exchange Offer.
7. Rule 11a-2, by its express terms, provides Commission approval
of certain types of offers of exchange of one variable annuity contract
for another. Applicants assert that other than the relative net asset
value requirement (which is not satisfied solely because Contract
owners accepting the offer will be a given a 2% Bonus) the only part of
Rule 11a-2 that would not be satisfied by the proposed Exchange Offer
is the requirement that payments under the exchanged contract (the Old
Contract) be treated as if they had been made under the acquired
contract (the New Contract) on the dates actually made. This provision
of Rule 11a-2 is often referred to as a ``tacking'' requirement because
it has the effect of ``tacking together'' the CFSC expiration periods
of the exchanged and acquired contracts.
8. Applicants assert that the absence of tacking does not mean that
an exchange offer cannot be very attractive and beneficial to
investors. Applicants state that the proposed Exchange Offer would
assure an immediate and enduring economic benefit to investors. The 2%
Bonus would be applied immediately and the fact that asset-based
charges would be decreased by the exchange (except for those who select
two or three additional optional death benefit riders) would assure
that the benefit would endure. An owner of an Old Contract who intends
to continue to hold the Contract as a long-term retirement planning
vehicle will be significantly advantaged by the Exchange Offer because
this 2% Bonus will automatically be added to his or her Account Value
upon receipt of an enhanced New Contract. No sales charge will ever be
paid on the amounts rolled over in the exchange unless the New Contract
is surrendered before expiration of the New Contract's CDSC period.
9. Applicants assert that tacking should be viewed as a useful way
to avoid the need to scrutinize the terms of an offer of exchange to
make sure that there is not abuse. Tacking is not a requirement of
Section 11. Rather, it is a creation of a rule designed to approve the
terms of offers of exchange ``sight unseen.'' Tacking focuses on the
closest thing to multiple deduction of sales loads that is possible in
a CDSC context--multiple exposure to sales loads upon surrender or
redemption. If tacking and other safeguards of Rule 11a-2 are present,
there is no need for the Commission or its staff to evaluate the terms
of the offer. The absence of tacking in this fully scrutinized Section
11 application will have no impact on offers made pursuant to the rule
on a ``sight unseen'' basis.
10. Applicants assert that the terms of the Exchange Offer are
better than those of its competitors. No tacking is required when Sun
Life's competitors offer than variable annuity contracts to owners of
Old Contracts or when Sun Life makes such an offer to competitor's
contract owners. In those exchanges, unlike the ones proposed here, the
exchanging Contract owners actually must pay any remaining CDSC on the
exchanged Contract at the time of the exchange.
11. To the extent there are differences in the Contracts, those
differences relate to enhanced contractual features and charges that
are fully described in prospectuses for the New Contracts. Furthermore,
the Offering Letter will contain concise, plain English statements that
(a) the Exchange Offer is suitable only for Contract owners who expect
to hold their Contracts as long-term investments and (b) if the New
Contract is surrendered during the initial CDSC period, the 2% Bonus
may be more than offset by the CDSC and a Contract owner may be worse
off than if or she had rejected the Exchange Offer. Applicants assert
that Contract owners should have the opportunity to decide, on the
basis of full and fair disclosure, whether the enhancements of the New
Contracts and the 2% Bonus justify accepting the offer.
Sections 2(a)(32), 22(c), 27(i)(2)(A) and Rule 22c-1
12. 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 seek exemption pursuant to
section 6(c) from sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act
and Rule 22c-1 thereunder to the extent deemed necessary to permit Sun
Life to issue New Contracts that provide for a 2% Bonus upon exchange
and to recapture the 2% Bonus when a Contract owner returns a New
Contract to Sun Life for a refund during the free look period.
13. Applicants assert that with respect to refunds paid upon the
return of the New Contract within the free look period, the amount
payable by Sun Life must be reduced by the 2% Bonus amount. Otherwise,
purchasers could apply for the New Contract for the sole purpose of
exercising the free look provision and making a quick profit.
Applicants represent that it is not administratively feasible to track
the 2% Bonus amount in the Variable Account after the 2% Bonus is
applied. Accordingly, the asset-based charges applicable to the
Variable Account will be assessed against the entire amounts held in
the Variable Account, including the 2% Bonus amount, during the free
look period. As a result, during such period, the aggregate asset-based
charges assessed against a Contract owner's Account Value will be
higher than those that would be charged if the Contract owner's Account
Value did not include the 2% Bonus.
14. Subsection (i) of Section 27 of the Act provides that Section
27 does not apply to any registered separate account funding variable
insurance contracts, or to the sponsoring insurance company and
principal underwriter of such account, except as provided in paragraph
(2) of the subsection. Paragraph (2) provides that it shall be unlawful
for such a separate account or sponsoring insurance company to sell a
contract funded by the registered separate account unless such contract
is a redeemable security. Section 2(a)(32) defines ``redeemable
security'' as any security, other than short-term paper, under the
terms of the 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.
15. Applicants submit that the recapture of the 2% Bonus upon
return of a New Contract during the free look period would not deprive
the owner of his or her proportionate share of the issuer's current net
assets. Applicants assert that a Contract owner's interest in the 2%
Bonus allocated to his or her Account Value upon exchange is not vested
until the applicable free look period has expired without return of the
Contract. Until the right to recapture has expired and 2% Bonus is
vested. Applicants assert that Sun Life retains the right and interest
in the 2% Bonus, although not in the earnings attributable to that
amount. Applicants assert that when Sun Life recaptures the 2% Bonus,
it is merely retrieving its own
[[Page 30251]]
assets, and the Contract owner has not been deprived of a proportionate
share of the Variable Account's assets because his or her interest in
the Bonus amount has not vested.
16. In addition, Applicants assert that permitting a Contract owner
to retain a 2% Bonus under a New Contract upon the exercise of the
right to cancel during the free look period would not only be unfair,
but would also encourage individuals to exchange into a New Contract
with no intention of keeping it and returning it for a quick profit.
The amounts recaptured equal the 2% Bonus provided by Sun Life from its
general account assets, and any gain would remain a part of the
Contract owner's Account Value. In addition, the amount the Contract
owner receives in the circumstances where the 2% Bonus is recaptured
will always equal or exceed the surrender value of the New Contract.
17. Applicants submit that the provisions for recapture of the 2%
Bonus under the New Contract does not violate sections 2(a)(32) and
27(i)(2)(A) of the Act. However, to avoid any uncertainty as to full
compliance with the Act, Applicants request an exemption from sections
2(a)(32) and 27(i)(2)(A), to the extent deemed necessary, to permit the
recapture of the 2% Bonus under the circumstance described in the
Application with respect to the New Contract, without the loss of
relief from section 27 provided by section 27(i).
18. Section 22(c) of the Act authorizes the Commission to make
rules and regulations applicable to registered investment companies and
to principal underwriters of, and dealers in, the redeemable securities
of any registered investment company to accomplish the same purposes as
contemplated by section 22(a). Rule 22c-1 thereunder prohibits a
registered investment company issuing any redeemable security, a person
designated in such issuer's prospectus as authorized to consummate
transactions in any such security, and a principal underwriter of, or
dealer in, such security, from selling, redeeming, or repurchasing any
such security except at a price based on the current net asset value of
such security which is next computed after receipt of a tender of such
security for redemption or of an order to purchase or sell such
security.
19. Sun Life's recapture of the 2% Bonus might arguably be viewed
as resulting in the redemption of redeemable securities for a price
other than one based on the current net asset value of the Account.
Applicants contend, however, that the recapture of the Bonus does not
violate section 22(c) and Rule 22c-1. Applicants argue that the
recapture of the 2% Bonus does not involve either of the evils that
Rule 22c-1 was intended to eliminate or reduce as far as reasonably
practicable, namely: (a) The dilution of the value of outstanding
redeemable securities of registered investment companies through their
sale at a price below net asset value or repurchase at a price above
it, and (b) other unfair results, including speculative trading
practices. The proposed recapture of the 2% Bonus does not pose such a
threat of dilution. To effect a recapture of the 2% Bonus, Sun Life
will redeem interests in a Contract owner's Contract at a price
determined on the basis of the current net asset value of that
Contract. The amount recaptured will equal the amount of the 2% Bonus
that Sun Life paid out of its general account assets. Although the
Contract owner will be entitled to retain any investment gain
attributable to the 2% Bonus, the amount of that gain will be
determined on the basis of the current net asset value of the Contract.
Thus, Applicants state that no dilution will occur upon the recapture
of the 2% Bonus. 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 2% Bonus.
20. Applicants argue that Section 22(c) and Rule 22c-1 should not
apply because neither of the harms that Rule 22c-1 was meant to address
are found in the recapture of the 2% Bonus. 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 2% Bonus under
the New Contract.
Conclusion
For the reasons summarized above, Applicants submit that the
Exchange Offer is consistent with the protections provided by Section
11 of the Act and that approval of the terms of the Exchange Offer is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies and provisions of the Act. Applicants further submit that
their request for exemptions from Sections 2(a)(32), 22(c) and
27(i)(2)(A) of the Act and Rule 22c-1 thereunder meet the standards set
out in Section 6(c) of the Act. Applicants submit that the requested
order should therefore be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14076 Filed 6-4-01; 8:45 am]
BILLING CODE 8010-01-M