[Federal Register Volume 66, Number 220 (Wednesday, November 14, 2001)]
[Notices]
[Pages 57137-57140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28485]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25256; File No. 812-12526]


Kemper Investors Life Insurance Company, et al.

November 7, 2001.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``1940 Act'') granting exemptions 
from the provisions of sections 2(a)(32) and 27(i)(2)(A) of the 1940 
Act and Rule 22c-11 thereunder.

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    Applicants: Kemper Investors Life Insurance Company (``KILICO''), 
Zurich Kemper Life Insurance Company of New York (``ZKLICONY''), KILICO 
Variable Annuity Separate Account (the ``Separate Account''), and 
Investors Brokerage Services, Inc. (``IBS'') (collectively 
``Applicants''). KILICO and ZKLICONY are also referred to in this 
Application as the ``Insurance Company Applicants.''
    Summary of Application: Applicants seek an order under section 6(c) 
of the 1940 Act to the extent necessary to permit the recapture, under 
specified circumstances, of certain credits applied to purchase payment 
made under the deferred variable annuity contract described herein that 
KILICO will issue through the Separate Account (the ``Contract(s)''), 
as well as other contracts that the Insurance Company Applicants may 
issue in the future through the Separate Account or future separate 
accounts of the Insurance Company Applicants (``Other Accounts'') that 
are substantially similar in all material respects to the Contract 
(``Future Contracts''). Applicants also request that the order being 
sought extend to any other National Association of Securities Dealers, 
Inc. (``NASD'') member broker-dealer controlling or controlled by, or 
under common control with, KILICO, whether existing or created in the 
future, that serves as distributor or principal underwriter for the 
Contract or Future Contracts (``Affiliated Broker-Dealers'') and any 
successors in interest to Applicants.
    Filing Date: The Application was filed on May 21, 2001, and amended 
and restated on October 11, 2001, and amended on November 2, 2001.
    Hearing or Notification of Hearing: An order granting the 
Application will be issued unless the SEC orders a hearing. Interested 
persons may request a hearing by writing to the SEC's Secretary and 
serving Applicants with a copy of the request, in person or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on December 
3, 2001, and should be accompanied by proof of service on the 
Applicants, in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Kemper 
Investors Life Insurance Company, 1600 McConnor Parkway, Schaumburg, 
Illinois 60196, Attn: Debra P. Rezabek, Esq.; Zurick Kemper Life 
Insurance Company of New York, 515 Madison Avenue, Suite 2302, New 
York, NY 10022, Attn: Debra P. Rezabek, Esq.; copies to Christopher S. 
Petito, Esq., Jorden Burt LLP, 1025 Thomas Jefferson Street, NW., Suite 
400 East, Washington, DC 20007-0805.

FOR FURTHER INFORMATION CONTACT: Alison Toledo, Senior Counsel, or 
Lorna MacLeod, Branch Chief, Division of Investment Management, Office 
of Insurance Products, at 202-942-0670.

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

Applicants' Representations

    KILICO was organized under the laws of the State of Illinois in 
1947 as a stock life insurance company. KILICO offers annuity and life 
insurance products and is admitted to do business in the District of 
Columbia and all states except New York. KILICO is a wholly-owned 
subsidiary of Kemper Corporation, a non-operating holding company. 
Kemper Corporation is a wholly-owned Subsidiary of Zurich Group Holding 
(``ZGH''), a Swiss holding company, formerly known as Zurich Financial 
Services. ZGH is wholly-owned by Zurich Financial Services (``ZFS''), a 
new Swiss holding company. ZFS was formerly Zurich Allied AG, which was 
merged with Allied Zurich p.l.c. in October 2000.
    2. ZKLICONY is a stock life insurance company organized under the 
laws of the State of New York in 1999. ZKLICONY offers a broad line of 
individual life insurance and annuity products. ZKLICONY is a wholly-
owned subsidiary of KILICO, which in turn is a wholly-owned subsidiary 
of the Kemper Corporation. ZKLICONY may in

[[Page 57138]]

the future issue Future Contracts through Other Accounts.
    3. KILICO established the Separate Account on May 29, 1981, 
pursuant to Illinois law. It is a separate investment account 
(segregated asset account) of KILICO used to fund the Contract and 
other variable annuity contracts issued by KILICO. The Separate Account 
and its component ``Subaccounts'' are registered with the Commission as 
a single unit investment trust under the 1940 Act. The Separate Account 
will fund the variable benefits available under the Contract. The 
offering of the Contract will be registered under the Securities Act of 
1933 (the ``1933 Act'').
    4. IBS is the principal underwriter of the Contracts. IBS is 
registered with the Commission as a broker-dealer under the Securities 
Exchange Act of 1934 and is a member of the NASD. The Contracts are 
sold by licensed insurance agents (where the Contracts may be lawfully 
sold) who are registered representatives of broker-dealers which are 
registered under the Securities Exchange Act of 1934 and are members of 
the NASD. IBS is a wholly-owned subsidiary of KILICO, which enters into 
selling group agreements with affiliated and unaffiliated broker-
dealers.
    5. The minimum initial purchase payment is $10,000. The minimum 
subsequent purchase payment for non-qualified Contracts is generally 
$500, however, if the owner authorizes automatic periodic payments the 
minimum subsequent payment is $100. The minimum subsequent purchase 
payment for qualified Contracts is $50. KILICO's prior approval is 
required for cumulative purchase payments of over $1,000,000.
    6. If elected by an owner, KILICO will credit an extra amount to 
the Contract equal to 2% of each purchase payment made in the first 
Contract year and 2% of the owner's non-loaned Contract value on every 
fifth Contract anniversary (the ``Value Credit(s)''). KILICO will 
allocate each Value Credit pro rata among the investment options 
according to the owner's allocation instructions. KILICO will fund 
Value Credits from its general account assets. In order for the owner 
to elect to receive a Value Credit, the Contract must be issued prior 
to the owner's 81st birthday. If an owner elects to receive the Value 
Credit, KILICO will assess a Value Credit Rider Charge of .40% during 
each of the first fifteen Contract years. In addition, withdrawal 
charges will be higher and will apply longer than they would if an 
owner does not elect the Value Credit.
    7. The Value Credit is not part of the amount an owner will receive 
if he or she exercises the Contract's free look provision. In addition, 
Value Credits applied within one year prior to a total withdrawal 
(surrender of the Contract) made after the tenth Contract year are 
deducted from the amount payable to the owner. With limited exceptions, 
if an owner makes a partial withdrawal within one year following 
receipt of a Value Credit after the tenth Contract year, except as part 
of the Contract's systematic withdrawal program, KILICO will reduce the 
Value Credit in the same proportion as the partial withdrawal bears to 
the Contract value and deduct it from the remaining value of the 
Contract. Regardless of whether or not the Value Credit is vested, all 
gains or losses attributable to that Value Credit are part of the 
owner's Contract value and are immediately vested.
    8. The free look period is the period during which an owner may 
return a Contract after it has been delivered and receive a refund. The 
length of the free look period will vary according to state law but 
will be at least ten days. Depending on the laws of the state in which 
the Contract is issued, the amount of the refund will be equal to (i) 
The value of the Contract, (ii) the purchase payment(s), or (iii) the 
greater of the previous two values. The Value Credit, if any, will not 
be part of the amount an owner will receive if the free look provision 
is exercised. Unless the law requires that the full amount of the 
purchase payment(s) be refunded, the owner bears the investment risk 
from the time of purchase until he or she returns the Contract, and the 
refund amount may be more or less than the purchase payment(s) the 
owner made.
    9. A Contract owner may make withdrawals from his or her Contract 
at any time before annuitization. The minimum withdrawal amount is $500 
or the amount remaining in the applicable investment option, if less 
than $500. If an owner elects the Value Credit, any withdrawal made 
within one year of receiving a Value Credit after the tenth Contract 
year will result in a recapture by KILICO of all or part of that Value 
Credit (but no recapture will be made of any prior Value Credits).
    10. In the care of a surrender of the Contract during or after the 
tenth Contract year, KILICO will recapture the entire amount of the 
Value Credit made within one year of the surrender. No recapture of 
Value Credits would occur other than during the free look period or in 
Contract years 11, 16, 21 and every fifth Contract year thereafter.
    11. In the case of a partial withdrawal, KILICO will reduce the 
Value Credit by the same proportion that the amount of the partial 
withdrawal bears to the Contract value immediately prior to the partial 
withdrawal. KILICO will deduct the amount of the Value Credit 
recaptured upon partial withdrawal from the remaining Contract value.
    12. Neither death benefit payments, nor any partial withdrawal or 
surrender arising under the following circumstances will result in the 
recapture of a Value Credit in whole or in part:
     After the owner has been confined in a skilled health care 
facility for at least 45 consecutive days and is confined at the time 
of the withdrawal request.
     Within 45 days following the owner's discharge from a 
skilled health care facility after a confinement of at least 45 days.
     If the owner becomes disabled after the Contract is issued 
and before age 65.
    13. Withdrawals may be subject to a withdrawal charge depending on 
the contribution year in which the withdrawal is made and whether the 
owner has elected the Value Credit. The following table shows the 
amount and duration of the withdrawal charge:

------------------------------------------------------------------------
                                                Withdrawal
                                                charge  If   Withdrawal
                                                 no value    charge  If
              Contribution year                   credit    value credit
                                                 elected    elected  (in
                                                   (in        percent)
                                                 percent)
------------------------------------------------------------------------
Less than one................................            7           8.5
One but less than two........................            6           8.5
Two but less than three......................            5           8.5
Three but less than four.....................            5           8.5
Four but less than five......................            4           7.5
Five but less than six.......................            3           6.5
Six but less than seven......................            2           5.5
Seven but less than eight....................            0           3.5
Eight but less than nine.....................            0           1.5
9+...........................................            0           0
------------------------------------------------------------------------

    14. In calculating the withdrawal charge, KILICO treats withdrawals 
as coming from earnings (if any) first, and then from the oldest 
purchase payments first (i.e., first-in, first-out). KILICO will charge 
all amounts withdrawn and any applicable withdrawal charge against 
purchase payments in the chronological order in which KILICO received 
them beginning with the initial purchase payment. Each Contract Year, 
an owner may make a partial or total withdrawal from the Contract 
without incurring a withdrawal charge up to the greatest of:
     Purchase payments that are no longer subject to withdrawal 
charges,

[[Page 57139]]

minus withdrawals attributable to those purchase payments;
     Contract value, minus any purchase payments paid within 
the prior seven years (nine years for Contracts with the Value Credit 
rider), plus any withdrawals from purchase payments subject to 
withdrawal charges, including any withdrawal charge); or
     10% of purchase payments that are subject to withdrawal 
charges, minus any purchase payments subject to a withdrawal charge 
previously withdrawn, including any withdrawal charges.
    Any amount withdrawn that is not subject to a withdrawal charge 
will be considered a ``partial free withdrawal.''
    15. Owners of the Contracts may allocate their purchase payments 
among 43 investment options--41 Subaccounts of the Separate Account, 
the fixed investment option, or the market value adjustment option. 
Each Subaccount will invest in shares of a corresponding portfolio of 
Scudder Variable Series I, Scudder Variable Series II, The Alger 
American Fund, Dreyfus Investment Portfolios, Dreyfus Socially 
Responsible Growth Fund, Inc., Credit Suisse Warburg Pincus Trust, and 
INVESCO Variable Investment Funds, Inc.
    16. KILICO may in the future decide to create additional 
Subaccounts to invest in any additional underlying funds as may now or 
in the future be available. KILICO also may decide to combine or 
eliminate Subaccounts or transfer assets to and from Subaccounts. 
Similarly, the Insurance Company Applicants may offer different 
underlying investment options thorough the Other Accounts and add to, 
combine or eliminate the Subaccounts investing in those investment 
options from time to time.
    17. The Contract provides for various death benefits, annuity 
benefits and annuity payout options, as well as transfer privileges 
among Subaccounts, dollar cost averaging, and other features. The 
Contract contains the following charges (in addition to the withdrawal 
charges and the Value Credit Rider charge described above): (i) A $30 
annual records maintenance charge; (ii) a mortality and expense risk 
charge of 1.30%; (iii) an administrative expense charge of 0.15%; (iv) 
a transfer fee of $10 for each transfer after the first 12 transfers 
made during a contract year (which currently is intended to be waived); 
(v) a maximum charge of 0.45% for a guaranteed retirement income 
benefit (if elected); (vi) a charge of either 0.25% (attained ages 0-
80) or 0.85% (attained ages 81 and higher) for an earning enhanced 
death benefit (if elected); and (vii) any applicable state premium tax. 
All of such fees and charges are described in greater detail in the 
Form N-4 Registration Statement for the Contract and the Separate 
Account.
    18. Applicants seek exemption pursuant to section 6(c) form 
sections 2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22-1 
thereunder to the extent deemed necessary to permit the Insurance 
Company Applicants to recapture part or all of the Value Credits, as 
described above in the following instances: (i) When an owner exercises 
the Contract's free look provision; and (ii) when an owner makes a 
partial withdrawal or a surrender in Contract year ten or subsequent 
Contract years within one year of receiving a Value Credit. Applicants 
also request that the order being sought extend to any Affiliated 
Broker-Dealer that serves as a distributor or principal underwriter for 
the Contract or Future Contracts funded by the Separate Account or 
Other Accounts, and to any successors in interest to Applicants. 
Undertake that Future Contracts will be substantially similar in all 
material respects to the Contracts.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions from the provisions of the 1940 Act 
and the rules promulgated thereunder if and to the extent that such 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act. Applicants 
request that the Commission pursuant to section 6(c) of the 1940 Act 
grant the exemptions requested below with respect to the Contracts and 
any Future Contract funded by the Separate Account or Other Accounts 
that are issued by the Insurance Company Applicants and underwritten or 
distributed by IBS or Affiliated Broker-Dealers. Applicants undertake 
that Future Contracts funded by the Separate Account or any Other 
Account, in the future, will be substantially similar in all material 
respects to the Contracts. Applicants believe that the requested 
exemption are appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the 1940 Act.
     Subsection (i) of section 27 of the 1940 Act provides that section 
27 does not apply to any registered separate account funding variable 
insurance contracts, or to the sponsoring insurance company and 
principal underwriter of such account, except as provided in paragraph 
(2) of the subsection. Paragraph (2) provides that it shall be unlawful 
for such a separate account or sponsoring insurance company to sell a 
contract funded by the registered separate account unless such contract 
is a redeemable security. Section 2(a)(32) 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.
    3. Applicants submit that the recapture of the Value Credit in the 
circumstances set forth in this Application would not deprive an owner 
of his or her proportionate share of the issuer's current net assets. 
An owner's interest in the Value Credit allocated to his or her annuity 
account during or after year ten is not vested until one year after 
that Value Credit is so allocated. Unless and until any Value Credit 
amount is vested, the issuing Insurance Company Applicant retains the 
right and interest in the Value Credit, although not in the earnings 
attributable to that amount. Thus, Applicants urges that when the 
issuing Insurance Company Applicant recaptures any Value Credit, it is 
merely retrieving its own assets, and the owner has not been deprived 
of a proportionate share of the applicable Account's assets because his 
or her interest in the Value Credit amount has not vested.
    4. In addition, Applicants state that permitting an owner to retain 
a Value Credit under a Contract upon the exercise of the free look 
provision would not only be unfair, but would also encourage 
individuals to purchase a Contract with no intention of keeping it, and 
return it for a quick profit. Furthermore, Applicants state that the 
recapture of Value Credits within one year after its receipt during or 
after Applicants year ten is designed to provide the Insurance Company 
Applicants with a measure of protection against a Contract owner 
surrendering or making a partial withdrawal shortly after a Value 
credit is made thereby leaving the Insurance Company Applicants from 
its general account assets within a year prior to the withdrawal, and 
any gain on that Value Credit would remain a part of the owner's 
Contract value.
    5. Applicants represent that it is not administratively feasible to 
track the Value Credit in the Separate Account or Other Account once it 
has been declared. Accordingly, the asset-based

[[Page 57140]]

charges applicable to the Separate Account or Other Account will be 
assessed against the entire amount held in the Separate Account or 
Other Account, including the Value Credit, during the free look period 
and the recapture periods. As a result, during such periods, the 
aggregate asset-based charges assessed against an owner's Contract 
value will be higher than if no Value Credit had been added. The 
Insurance Company Applicants nonetheless represent that the Contract's 
fees and charges, in the aggregate, are, or will be, reasonable within 
the meaning of section 26(e) of the 1940 Act.
    6. Applicants represent that the Value Credit will be attractive to 
and in the interest of investors because it will permit owners to put 
102% of their purchase payments in the first Contract year to work for 
them in the selected Subaccounts and to receive an additional 2% credit 
on all Contract value (even earnings) on every fifth contract 
anniversary thereafter. In addition, the owner will retain any earnings 
attributable to the Value Credits recaptured, as well as the principal 
of the Value credit once vested.
    7. Applicants submit that the provisions for recapture of any Value 
Credit under the Contracts do not, and any Future Contract provisions 
will not, violate sections 2(a)(32) and 27(i)(2)(A) of the 1940 Act. 
Sections 26(e) and 27(i) were added to the 1940 ACt to implement the 
purposes of the National Securities Markets Improvement Act of 1996 and 
Congressional intent. The application of Value Credits under the 
Contracts should not raise any questions about the Insurance Company 
Applicants' compliance with the provisions of section 27(i). However, 
to avoid any uncertainty as to full compliance with the 1940 Act, 
Applicants request an exemption from sections 2(a)(32) and 27(i)(2)(A), 
to the extent deemed necessary, to permit the recapture of any Value 
Credit under the circumstances described in the Application with 
respect to Contracts and Future Contracts, without the loss of relief 
from section 27 provided by section 27(i).
    8. Rule 22c-1 under the 1940 Act prohibits a registered investment 
company issuing any redeemable security, a person designated in such 
issuer's prospectus as authorized to consummate transactions in any 
such security, and a principal underwriter of, or dealer in, such 
security, from selling, redeeming, or repurchasing any such security 
except at a price based on the current net asset value of such security 
which is next computed after receipt of a tender of such security for 
redemption or of an order to purchase or sell such security.
    9. It is possible that someone might view the Insurance Company 
Applicants' recapture of the Value Credit 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 Value Credit does not violate Rule 
22c-1. The recapture of all or part of the Value Credit does not 
involve either of the evils that Rule 22c-1 was intended to eliminate 
or reduce as far as reasonably practicable, namely: (i) The dilution of 
the value of outstanding redeemable securities of registered investment 
companies through their sale at a price below net asset value or 
repurchase at a price above it, and (ii) other unfair results, 
including speculative trading practices. To effect a recapture of a 
Value Credit, the issuing Insurance Company Applicant will redeem 
interests in a Contract at a price determined on the basis of the 
current accumulation unit value(s) of the Subaccount(s) to which the 
owner's Contract value is allocated. The amount recaptured will equal 
the amount of the Value Credit that the issuing Insurance Company 
Applicant paid out of its general account assets. Although the owner 
will retain any investment gain attributable to the Value Credit or 
bear any loss attributable to that Value Credit, the amount of that 
gain or loss will be determined on the basis of the current 
accumulation unit values of the applicable Subaccounts. Thus, no 
dilution will occur upon the recapture of the Value Credit. Applicants 
also submit that the second harm that Rule 22c-1 was designed to 
address, namely speculative trading practices calculated to take 
advantage of backward pricing, will not occur as a result of the 
recapture of the Value Credit. Because neither of the harms that Rule 
22c-1 was meant to address is found in the recapture of the Value 
Credit, Rule 22c-1 should not apply to any Value Credit. However, to 
avoid any uncertainty as to full compliance with the 1940 Act, 
Applicants request an exemption from the provisions Rule 22c-1 to the 
extent deemed necessary to permit them to recapture the Value Credit 
under the Contracts and Future Contracts.

Conclusion

    Applicants submit that their request for an order that applies to 
the Separate Account and any Other Accounts established by the 
Insurance Company Applicants, in connection with the recapture of Value 
Credits applied under the Contract and Future Contracts, is appropriate 
in the public interest. Such an order would promote competitiveness in 
the variable annuity market by eliminating the need to file redundant 
exemptive applications, thereby reducing administrative expenses and 
maximizing the efficient use of Applicants' resources. Investors would 
not receive any benefit or additional protection by requiring 
Applicants to repeatedly seek exemptive relief that would present no 
issue under the 1940 Act that has not already been addressed in this 
Application. Having Applicants file additional applications would 
impair Applicants' ability to take advantage of business opportunities 
as they arise. Further, if Applicants were required repeatedly to seek 
exemptive relief with respect to the same issues addressee in this 
Application, investors would not receive any benefit or additional 
protection thereby.
    Applicants submit, for the reasons summarized above, that their 
exemptive request meets the standards set out in section 6(c) of the 
1940 Act, namely, that the exemptions requested are necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 1940 Act, and that, therefore, the Commission should 
grant the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28485 Filed 11-13-01; 8:45 am]
BILLING CODE 8010-01-M