[Federal Register Volume 66, Number 209 (Monday, October 29, 2001)]
[Notices]
[Pages 54551-54554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27077]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25222; File No. 812-12606]


Hartford Life Insurance Company, et al., Notice of Application

October 23, 2001.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of an 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 a longevity reward rider (the ``LRR'') to owners of 
certain variable annuity contracts (the ``Contracts'').

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Summary of Application: Hartford Life Insurance Company (``Hartford 
Life''), Hartford Life and Annuity Insurance Company (``Hartford Life 
and Annuity,'' together with Hartford Life, ``Hartford''), Hartford 
Life Insurance Company Separate Account Three (``HL Account Three''), 
Hartford Life and Annuity Insurance Company Separate Account Three 
(``HLA Account Three,'' together with the HL Account Three, the 
``Separate Accounts''), and Hartford Securities Distribution Company, 
Inc. (``HSD'') seek an order approving the terms of a proposed offer of 
a rider for certain existing variable annuity contract (the 
``Contracts'') issued by Hartford Life and Hartford Life and Annuity 
that reduces or waives certain charges and imposes a new Contingent 
Deferred Sales Charge (``CDSC'') on premium payments made before or 
after the rider's issue date (the ``Rider Date'').

Applicants: Hartford Life, Hartford Life and Annuity, HL Account Three, 
HLA Account Three, and HSD (collectively, ``Applicants'').

Filing Date: This application was filed on August 21, 2001.

Hearing or Notification 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 
November 14, 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 
who wish to be notified of a hearing may request notification by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC, 20549-0609. Applicants, Michael Stobart, 
Esq., Hartford Life Insurance Company, Inc., 200 Hopmeadow Street, 
Simsbury, CT 06089.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Lorna 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 complete Application is available for a fee from the SEC's Public 
Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 
(telephone (202) 942-8090).

Applicants' Representations

    1. Hartford Life is a stock life insurance company originally 
incorporated under the laws of Massachusetts on June 5, 1902, and 
subsequently re-domiciled to Connecticut. Hartford life is engaged in 
the business of writing individual and group life insurance and annuity 
contracts in the District of Columbia and all states. Hartford Life is 
a subsidiary of Hartford Fire Insurance Company. Hartford Life is 
ultimately controlled by The Hartford Financial Services Group, Inc., a 
Delaware corporation whose stock is traded on the New York Stock 
Exchange. For purposes of the Act, Hartford Life is the depositor and 
sponsor of the HL Account Three, as those terms have been interpreted 
by the Commission with respect to variable life insurance and variable 
annuity separate accounts.
    2. Hartford Life and Annuity is a stock life insurance company 
originally incorporated under the laws of Wisconsin on January 9, 1956, 
and subsequently redomiciled to Connecticut. Hartford Life and Annuity 
is engaged in the business of writing individual and group life 
insurance and annuity contracts in Puerto Rico, the District of 
Columbia and all states but New York. Hartford Life and Annuity is a 
subsidiary of Hartford Fire Insurance Company. Hartford Life and 
Annuity is ultimately controlled by The Hartford Financial Services 
Group, Inc., a Delaware corporation whose stock is traded on the New 
York Stock Exchange. For purposes of the Act, Hartford Life and Annuity 
is the depositor and sponsor of the HLA Account Three, as those terms 
have been interpreted by the Commission with respect to variable life 
insurance and variable annuity separate accounts.
    3. Hartford Life established the HL Account Three on June 22, 1994, 
and Hartford Life and Annuity established the HLA Account Three on June 
22, 1994, as segregated investment accounts under Connecticut law. 
Under Connecticut law, the assets of the HL Account Three attributable 
to the Contracts, through which interests in HL Account Three are 
issued, are owned by Hartford Life, but are held separately from all 
other assets of Hartford Life for the benefit of the owners of, and the 
persons entitled to payment under, Contracts. Similarly, the assets of 
the HLA Account Three attributable to the Contracts, through which 
interests in the HLA Account Three are issued, are owned by Hartford 
Life and Annuity, but are held separately from all other assets of 
Hartford Life and Annuity for the benefit of the owners of, and the 
persons entitled to payment under, those Contracts. Consequently, such 
assets in each Separate Account are not chargeable with liabilities 
arising out of any other business that Hartford Life and Hartford Life 
and Annuity may conduct. Income, gains and losses, realized and 
unrealized, from the assets of each of these Separate Accounts are 
credited to or charged against that Separate Account without regard to 
the income, gains or loses arising out of any other business that 
Hartford Life and Hartford Life and Annuity may conduct. Each Separate 
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.
    4. The assets of the HL Account Three support variable annuity 
Contracts, and interests in the HL Account Three offered through such 
Contracts have been registered under the Securities Act of 1933 (the 
``1933 Act'') on Form N-4. The assets of the HLA Account Three support 
variable annuity Contracts, and interests in the HLA Account Three 
offered through such Contracts have been registered under the 1933 Act 
on Form N-4.
    5. HSD is registered with the Commission as a broker-dealer under 
the Securities Exchange Act of 1934 and is a member of the National 
Association of Securities Dealers, Inc. HSD is the principal 
underwriter for the Contracts and for other Hartford variable insurance 
products. HSD is an affiliate

[[Page 54552]]

of Hartford Life and Hartford Life and Annuity.
    6. The Contracts are flexible premium deferred variable annuity 
contracts. The annuity Contract provide for the accumulation of values 
on variable basis, fixed basis, or both, during the accumulation 
period, and provide settlement or annuity payment options on a variable 
basis, fixed basis, or both.
    7. At the end of the accumulation period, the Contract owner elects 
whether to receive a ``lumb sum'' payment of the Contract's accumulated 
value, or to receive that value under one of several other payment 
options that Hartford offers. While some of these payment options 
provide payments for a period that includes the life of an 
``annuitant,'' others do not.
    8. The Contracts incorporate many other features, including several 
``death benefit'' options, partial and full surrender rights, transfer 
privileges, and other optional rider benefits.
    9. In addition to any charges associated with the underlying mutual 
funds, the charges under the Contracts are as follows:
     A Contingent Deferred Sales Charge (``CDSC'') may be 
assessed against each premium payment withdrawn or surrendered from a 
contract. The length of time from receipt of the premium payment to the 
time of withdrawal or surrender determines the amount of the CDSC. 
During the first seven Contract years, withdrawals or surrenders are 
deemed to be withdrawn first from premiums paid, in the order in which 
such premiums were received, and then from earnings. After the seventh 
Contract year, all withdrawals or surrenders are deemed to be withdrawn 
first from earnings, then from premium payments in the order in which 
such premiums were received. The CDSC is applied to premiums withdrawn 
in the percentage shown in the following table:

------------------------------------------------------------------------
                                                              Surrender
       Length of time (in years) from premium payment           charge
                                                              (percent)
------------------------------------------------------------------------
1..........................................................            6
2..........................................................            6
3..........................................................            5
4..........................................................            5
5..........................................................            4
6..........................................................            3
7..........................................................            2
8 or more..................................................            0
------------------------------------------------------------------------

     Each Contract year, an amount equal to a specific 
percentage of total premium payments paid as of the date of the 
withdrawal (``Annual Withdrawal Amount'') may be withdrawn without 
being subject to any otherwise applicable CDSC. The Annual Withdrawal 
Amount under a Contract is currently 10%.
     An annual contract maintenance charge of $30 is assessed 
on each Contract anniversary date or, when applicable, the date on 
which the Contract is fully surrendered. This fee will be waived if the 
Contract's account value exceeds $50,000 on the Contract's anniversary 
date.
     An administrative charge is assessed on a daily basis at 
an annualized rate of 0.15% of the Contract's account value invested in 
the Separate Accounts.
     A mortality and expense risk charge is assessed on a daily 
basis at an annualized rate of 1.25% of the Contract's account value 
invested in the Separate Accounts.
     An optional Death Benefit Rider is available for an 
additional charge assessed on a daily basis at an annualized rate of 
0.15% of the Contract's account value invested in the Separate 
Accounts.
     A charge corresponding to any applicable state premium 
taxes.
    10. Hartford now proposes to offer a Longevity Reward Rider (the 
``LRR'') to owners of certain existing Contracts. The additional 
benefits under the LRR include:
     A reduced mortality and expense risk charge assessed on a 
daily basis at an annualized rate of 1.15% of a Contract's account 
value invested in the Separate Accounts; and
     A new CDC schedule with a lower maximum percentage (5%) 
and of shorter duration (5 years), applies to the withdrawal or 
surrender of any premium payments made after the LRR is added to the 
Contract.
    11. After the LRR is added to a Contract (``Rider Date''), a new 
five-year CDSC schedule (``New Schedule'') applies to all withdrawals 
or surrenders made after the Rider Date and supplants the original CDSC 
schedules for the Contacts. Under the New Schedule, withdrawals or 
surrenders made during the first five years from the Rider Date are 
taken first from premiums paid, in the order such premiums were 
received, and then from earnings. After the fifth year from the Rider 
Date, all withdrawals or surrenders are taken first from earnings, then 
from premium payments, in the order such payments were received.
    12. The New Schedule applies to all premium payments withdrawn or 
surrendered, whether made before or after the Rider Date, as shown in 
the following table. For premium payments made after the Rider Date, 
the five-year period runs from the date of that premium payments. For 
premium payments made before the Rider Date, the five-year period runs 
from the Rider Date.

------------------------------------------------------------------------
                                                              Surrender
       Length of time (in years) from premium payment           charge
                                                              (percent)
------------------------------------------------------------------------
1..........................................................            5
2..........................................................            4
3..........................................................            3
4..........................................................            2
5..........................................................            1
6..........................................................            0
------------------------------------------------------------------------

    13. The same exceptions that apply to the Contract's basic CDSC 
will also apply to the New Schedule. Specifically, no CDSC will be 
imposed: (a) At the time an Annuity Payment Option commences; (b) upon 
the death of a Contract owner or annuitant; (c) upon amounts withdrawn 
to satisfy any applicable minimum distribution requirements under the 
Internal Revenue Code; or (d) for amounts withdrawn which are within 
the limits of the Annual Withdrawal Amount. The Annual Withdrawal 
Amount is currently 10%.
    14. If withdrawn or surrendered after the Rider Date, premium 
payments made before the Rider Date are subject to a CDSC for an 
additional five years, even if they were no longer subject to a CDSC 
under the Contracts. For example, if the LRR were purchased in the 
eighth Contract year, the initial premium would no longer be subject to 
a CDSC under the Contract. However, upon purchase of the LRR, the 
initial premium becomes subject to a CDSC for five years after the 
Rider Date. Moreover, until withdrawals or surrenders are taken first 
from ``earnings'' and then from premiums (i.e., five years after the 
Rider Date) more of the amount withdrawn or surrendered may be subject 
to a CDSC that would be the case under Contracts without the LRR 
because the surrender is deemed to be withdrawn first from premiums and 
then from earnings.
    15. Except for the New Schedule, the LRR will not result in any 
increase in or imposition of any charge. Except for the potential 
application of the New Schedule to premium made before the Rider Date 
to which no CDSC would apply under the Contracts absent the LRR, every 
aspect of a Contract will be at least as favorable after the LRR is 
added as it was before.
    16. Further, adding the LRR to a Contract will have no adverse tax 
consequences to Contract owners.
    17. The LRR will only be available to Contract owners who: (a) Have 
maintained their Contracts for at least seven years, and either (b) 
have not

[[Page 54553]]

made any premium payments within the previous two years or (c) have a 
CDSC less than or equal to two percent of current Contract value. For 
those Contract owners electing the LRR who made premium payments prior 
to the Rider Date, that remain subject to a CDSC on the Rider Date, 
that charge will be waived and the New Schedule will apply. Contract 
owners will not be permitted to elect for the LRR to apply to part of a 
Contract and not to the rest. Any election of the LRR must apply to the 
whole Contract.
    18. After an initial notification of the offer in prospectuses for 
the Contracts or other communication to Contract owners, the LRR will 
be offered by providing eligible owners who express an interest in 
learning the details of the offer, in addition to such prospectus, a 
separate document explaining the offer (``the Offering Document'').
    19. The Offering Document will advise Contract owners that the 
offer is specifically designed for those Contract owners who intend to 
continue to hold their Contracts as long-term investment vehicles. The 
Offering Document will state that the offer is not intended for all 
Contract owners, and that it is not appropriate for any Contract owner 
who anticipates surrendering all or a significant part of his or her 
Contract within the next five years. The Offering Document will 
encourage Contract owners to carefully evaluate their personal 
financial situation when deciding whether to accept or reject the offer 
of the LRR. In addition, the Offering Document will explain that the 
New Schedule will not apply to amounts withdrawn in a Contract year 
that do not exceed the Annual Withdrawal Amount, or to premium payments 
maintained until expiration of the New Schedule. In this regard, the 
Offering Document will state in plain English that, if a significant 
amount of the Contract's value is surrendered or withdrawn during the 
five years following the Rider Date, (a) the LRR's benefits may be more 
than offset by the New Schedule; and (b) a Contract owner may be worse 
off than if he or she had rejected the offer.
    20. To accept the LRR, an owner must complete an election form. 
This election form will include the disclosure set forth in Condition 
No. 1 under ``Conditions'' below.

Applicants' Legal Analysis

    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 that 
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.
    2. Section 11(c) of the Act, in pertinent part, effectively 
requires 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, regardless of the basis of the 
exchange.
    3. Congress enacted Section 11 to prevent ``switching'' (i.e., 
``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.' '' According to the Commission, ``[I]nvestors in `fixed 
trusts,' now known as unit investment trusts, were found to be 
particularly vulnerable to switching operations. In order to earn 
another sales commission, a UIT sponsor would often pressure unit 
holders into exchanging their units for those of another of the 
sponsor's trusts.''
    4. Applicants assert that the LRR would not involve ``switching.'' 
Rather, the purpose of the LRR, as with other optional riders, is to 
enable Contract owners to enhance their Contracts without having to 
purchase a new variable annuity contract. In addition, because the LRR 
offers benefits to Contract owners, as described above, Applicants 
believe it cannot fairly be argued that the LRR's sole purpose is to 
exact additional selling charges (or any other type of charge).
    5. Further, applicants assert that election of the LRR will not 
result in any duplicative charges and that the limited CDSC provided 
under the LRR is reasonable in relation to the benefits that the rider 
provides and the costs that Applicants will incur in providing those 
benefits. Applicants represent that those costs will include costs of 
developing and administering the LRR, the direct dollar costs of the 
charges that will be waived or reduced, the benefits that will be paid 
under the LRR, and the costs of distributing the LRR to Contract owners 
and educating them about it.
    6. Applicants note that the New Schedule imposes a lower maximum 
CDSC and is shorter in duration than the schedules under the Contracts 
without the LRR. If the Contract owner makes no surrenders during the 
five years after the Rider Date, there is no possibility that a CDSC 
will be deducted that exceeds what would have been deducted absent the 
LRR. Moreover, even if premium payments are withdrawn during that five-
year period, the New Schedule will apply only if the amount withdrawn 
exceeds the Annual Withdrawal Amount.
    7. Applicants argue that the LRR will be offered only to Contract 
owners who already have demonstrated an ability to maintain their 
Contracts for substantial periods of time. The income taxes that are 
generally payable when earnings are withdrawn from a Contract, as well 
as the potential tax penalties that may apply to withdrawals made prior 
to an owner reaching age 59\1/2\, serve as additional motivations that 
encourage most owners to hold their Contracts for a substantial number 
of years. Any CDSC will be waived with respect to any amounts necessary 
to meet the minimum distribution requirements applicable to the 
Contract under federal tax law.
    8. Applicants assert that, given the conditions described above, 
few Contract owners who add the LRR to their Contracts will ever be 
assessed any additional CDSC.
    9. Applicants state that the primary benefit of the LRR is the 
.010% reduction in mortality and expense risk charge to Contract 
owners, which benefit is guaranteed and cannot be reduced or withdrawn.
    10. Further, Applicants state that additional premium payments made 
after the LRR is added to a Contract will be subject only to the 5%/5-
year New Schedule rather than the Contract's regular 6%/7-year CDSC 
schedule that would have applied to those same premium payments under 
the Contracts if the LRR had not been added to the Contract. Applicants 
assert that this is a substantial benefit to any Contract owner--
including a surviving spouse of the Contract owner who is eligible to 
continue the Contract after the Contract owner's death--who may have an 
interest in making further premium payments.
    11. In light of these considerations, Applicants assert that there 
is not any public policy or purpose under Section 11 (or otherwise) 
that would preclude offering the LRR under the terms and conditions 
stated herein.fund.

Applicants' Conditions

    Applicants have consented to the following conditions:
    1. The Offering Document will contain concise, plain English 
statements that: (a) The LRR is suitable only for Contract owners who 
expect to hold their Contract as long term investments; and (b) if a 
significant amount of the Contract's Value is

[[Page 54554]]

surrendered or withdrawn during the first five years after the Rider 
Date, the LRRs' benefits may be more than offset by that charge, and a 
Contract owner may be worse off if he or she had rejected the LRR.
    2. The Offering Document will disclose in concise plain English the 
only aspect in which adding the LRR rider could disadvantage a Contract 
owner (i.e., through the possible imposition of the New Schedule of 
CDSC).
    3. A Contract owner choosing to add the LRR will complete and sign 
the election form, which will prominently restate in concise plain 
English the statements required in Condition No. 1, and return it to 
Hartford. If the election form is more than 2 pages long, Hartford will 
use a separate document to obtain the Contract owner's acknowledgement 
of the statements referred to in Condition No. 1 above.
    4. Applicants will maintain and make available the following 
separately identifiable records, for the time periods specified below, 
for review by the Commission upon request: (a) Records showing the 
level of LRR purchases and how it relates to the total number of 
Contract owners eligible to acquire the LRR (at least quarterly as a 
percentage of the number eligible); (b) copies of any form of Offering 
Document, prospectus disclosure, election form, acknowledgement form, 
or offering letter, regarding the offering of the LRR including the 
dates(s) used, and copies of any other written materials or scripts for 
presentations used by registered representatives regarding the LRR, 
including dates used; (c) records showing information about each LRR 
purchase that occurs, including the Contract number; the election form 
(and separate acknowledgement form, if any, used to obtain the Contract 
owner's acknowledgement of the statements required in Condition No. 1 
above); the date such election or acknowledgement form was signed; the 
date of birth; address and telephone number of the Contract owner; the 
issue date of the LRR; the amount of the Contract's value on that date; 
persistency information relating to the Contract (date of any 
subsequent CDSCs and CDSC paid); the registered representative's name, 
CRD number, firm affiliation, branch office address and telephone 
number; the name of the registered representative's broker-dealer; and 
thea mount of commission paid to the registered representative that 
relates to the LRR; and (d) logs showing any Contract owner complaints 
received by it about the LRR, state insurance department inquiries to 
it about the LRR, or litigation, arbitration or other proceedings to 
which it is a party regarding the LRR.
    5. Applicants will include the following information on the logs 
referred to in Condition No. 4(d) above: 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 names or involved in the complaint or 
proceeding.
    6. Applicants will retain (i) the records specified in Conditions 
Nos. 4(a) and 4(d) above for six years from creation of the record; 
(ii) the records specified in Condition No. 4(b) above for six years 
after the date of last use; and (iii) the records specified in 
Condition No. 4(c) for seven years from the Rider Date.

Conclusion

    For the reasons discussed above, Applicants assert (1) that the LRR 
offers substantial benefits to Contract owners, will be advantageous 
for the majority of owners to whom it will be offered, and does not 
contravene any policy or purpose of Section 11 and (2) that approval of 
Applicant's offer of the LRR as described, and subject to the 
conditions set forth, in the application 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 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. 01-27077 Filed 10-26-01; 8:45 am]
BILLING CODE 8010-01-M