[Federal Register Volume 66, Number 225 (Wednesday, November 21, 2001)]
[Notices]
[Pages 58535-58538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25262; File No. 812-12216]


Security Benefit Life Insurance Company, et al.

November 14, 2001.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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SUMMARY OF APPLICATION: Applicants seek an order to permit, under 
specified circumstances, the recapture of certain credit enhancement 
applied to the Contract value under (a) two flexible premium deferred 
variable annuity contracts (the ``Contracts'') issued by Security 
Benefit Life Insurance Company (``Security Benefit'') through SBL 
Variable Annuity Account XIV (`Variable Account XIV''), and (b) future 
variable contracts offered by Security Benefit and First Security 
Benefit Life Insurance and Annuity Company of New York (``First 
Security Benefit'') through a Separate Account (defined below) or 
Future Accounts (defined below) which contracts are substantially 
similar in all material respects to the Contracts (``Future 
Contracts'').
    Applicants: Security Benefit and First Security Benefit (the ``SBL 
Insurers''); Variable Account XIV; any other separate account of the 
SBL Insurers supporting variable annuity contracts (together with 
Variable Account XIV ``Separate Accounts''); any other separate 
accounts that will be established in the future by the SBL Insurers to 
support variable contracts (``Future Accounts''), and Security 
Distributors, Inc. (``SDI'').
    Filing Dates: The application was filed on August 9, 2000 and 
amended and restated on October 25, 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 SEC's 
Secretary and serving Applicants with a copy of the request, personally 
or by mail. Hearing requests must be received by the SEC by 5:30 p.m., 
on December 10, 2001, and should be accompanied by proof of service on 
the Applicant in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of the date of a hearing by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, c/o Amy J. Lee, Esq., Associated General Counsel, 
Security Benefit Life Insurance Company, 700 Harrison Street, Topeka, 
Kansas 66636-0001.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or 
Keith E. Carpenter, 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 may be obtained for a fee at the 
SEC's Public Reference Branch at 450 Fifth Street, NW., Washington, DC 
20549-0102 [tel. (202) 942-8090].

Applicants' Representations

    1. Security Benefit is a Life insurance company organized under the 
laws of the State of Kansas. Security Benefit offers life insurance 
policies and annuity contracts, as well as financial and retirement 
services. It is authorized to conduct life insurance and annuity 
business in the District of Columbia and all states except New York. 
Together with its subsidiaries, Security Benefit has total funds under 
management of approximately $10.3 billion.
    2. First Security Benefit is a stock life insurance company 
organized under the laws of the State of New York. First Security 
Benefit offers variable contracts in New York and is admitted to do 
business in that state. It is an indirect wholly owned subsidiary of 
Security Benefit.
    3. Security Benefit established Variable Account XIV on June 26, 
2000 pursuant to Kansas law. Variable Account XIV is registered with 
the Commission as a unit investment trust and is currently divided into 
60 subaccounts (``Subaccounts''). Each Subaccounts invests exclusively 
in shares of a corresponding open-end management investment company 
(``Series''). Certain of the Series are managed by Security Management 
Company, LLC, a wholly owned subsidiary of Security Benefit. Variable 
Account XIV funds the variable benefits available under the Contracts. 
Security Benefit has filed registration statements on Form N-4 under 
the 1940 Act and the Securities Act of 1933, as amended (the ``1933 
Act'') to register interests in Variable Account XIV under the 
Contracts. The Contracts are the Initial Contract (File No. 333-41180) 
and a New Contract (File No. 333-52114) (each a ``Contract'' and 
together, the ``Contracts'').
    4. SDI, a wholly owned subsidiary of Security Benefit, serves as 
the principal underwriter for the variable contracts issued by Security 
Benefit, including the Contracts. SDI is registered as a broker/dealer 
with the Commission under the Securities Exchange Act of 1934, as 
amended, and is a wholly owned subsidiary of Security Benefit Group, 
Inc.,, a financial services holding company wholly owned by Security 
Benefit.
    5. Security Benefit does not deduct a sales load from purchase 
payments. If a Contract holder withdraws Contract value, Security 
Benefit may deduct a contingent deferred sales charge (``withdrawal 
charge''). The withdrawal charge depends on how long a purchase payment 
has been held under a Contract. The withdrawal charge on a payment 
withdrawal during the first and second year is subject to a 7% 
withdrawal charge. The charge is 6% for payments withdrawn in the third 
year, 5% in year four, 4% in year five, 3% in year six and 2% in year 
seven. There is not withdrawal charge for payments that have been held 
under a Contract for seven complete years.
    6. The withdrawal charge will be waived on withdrawals to the 
extent that total withdrawals in any 12-month period, measured from the 
Contract date, do not exceed the free withdrawal

[[Page 58536]]

amount. The free withdrawal amount in the first Contract year is equal 
to 10% of Purchase Payments made during the year. In any subsequent 
Contract year, the free withdrawal amount is equal to 10% of Contract 
value as of the first day of that Contract year.
    7. Security Benefit deducts a charge for mortality and expense 
risks assumed by Security Benefit under the Contracts. The mortality 
and expense risk charge is determined each month by reference to the 
amount of the Contract value as follows:

------------------------------------------------------------------------
                                                  Initial        New
                Contract value                    contract     contract
                                                 (percent)    (percent)
------------------------------------------------------------------------
Less than $25,000.............................          .85         1.10
At least $25,000 but less than $100,000.......          .70          .95
$100,000 or more..............................          .60          .85
------------------------------------------------------------------------

    8. Security Benefit deducts a monthly charge for optional riders 
that may be elected by a Contract holder. The charge may not exceed 1% 
of Contract value for the Initial Contract and 2% for the New Contract.
    9. Security Benefit also deducts a daily administration charge 
under the Contracts. The charge is equal to .15% annually for assets 
allocated to the Subaccounts under the Initial Contract. The daily 
charge under the New Contract differs by Subaccounts and ranges from an 
annual rate of .25% to .60%. In addition, a $30 administration charge 
is deducted under both Contracts on the Contract anniversary. Security 
Benefit also assesses a premium tax charge to reimburse itself or 
premium taxes that it incurs in connection with a Contract.
    10. An optional Extra Credit Rider (the ``Rider'') under the 
Contract makes available a credit enhancement (``Credit Enhancement''), 
which is an amount added to Contract value by Security Benefit. A 
Contract holder must purchase the Rider at issue. If purchased, a 
Credit Enhancement of 3%, 4% or 5% or purchase payments, as elected in 
the application, will be added to Contract value for each purchase 
payment made in the first Contract year. Any Credit Enhancement will be 
allocated among the Subaccounts in the same proportion as the purchase 
payment is allocated.
    11. Security Benefit deducts a charge for the Rider for a period of 
seven years from a Contract's date of issue. After the end of seven 
years from a Contract's date of issue, Security Benefit will no longer 
assess a charge for the Rider and the Credit Enhancements will be fully 
vested. The charge for this Rider, which is equal to a percentage, on 
an annual basis, of Contract value, varies based upon the interest rate 
selected by the Contract holder as set forth below:

------------------------------------------------------------------------
                                                                Rider
                  Interest rate  (percent)                      charge
                                                              (percent)
------------------------------------------------------------------------
3..........................................................          .45
4..........................................................          .60
5..........................................................          .75
------------------------------------------------------------------------

    12. The Contracts permit Contract holders to cancel their Contracts 
and to receive a refund during the Free-Look Period. The Free-Look 
Period generally is a 10-day period beginning on the day a Contract 
holder receives his or her Contract. If a Contract holder returns a 
Contract during the Free-Look Period, the Contract will be canceled and 
treated as void from the Contract date.
    13. In most instances, a Contract holder who returns a Contract 
during the Free-Look Period is entitled to a refund of his or her 
Contract value plus any charges deducted from such Contract value, as 
of the end of the business day on which the Contract is received for 
cancellation. A Contract holder will also receive a refund of any 
amounts that may have been deducted to pay for state premium taxes and/
or other taxes. As is disclosed in the Contract prospectus, the value 
of any Credit Enhancement added to the Contract value will be deducted 
if the Contract holder returns the Contract during the Free-Look 
Period.
    14. In the event of a full or partial withdrawal under a Contract 
with a Rider in force, Security Benefit will recapture all or part of 
any Credit Enhancement that has not yet vested. An amount equal to \1/
7\ of the Credit Enhancement will vest as of each anniversary of the 
Contract's date of issue and the Credit Enhancement will be fully 
vested at the end of seven years from that date. The amount to be 
forfeited in the event of a withdrawal is equal to a percentage of the 
Credit Enhancement that has not yet vested. The percentage is 
determined for each withdrawal as of the date of the withdrawal by 
dividing the amount of the withdrawal, including any withdrawal 
charges, by the Contract value immediately prior to the withdrawal.
    15. The Contracts provide for a death benefit upon the death of the 
Contract holder prior to the annuity start date. The death benefit 
proceeds will be the death benefit reduced by any outstanding loan 
balance including loan interest, any pro rata account administration 
charge and any uncollected premium tax. If a Contract holder dies 
before the annuity start date, the amount of the death benefit 
generally will be the greater of: (a) The sum of all Purchase Payments 
(not including Credit Enhancement if an Extra Credit Rider was in 
effect), less any reductions caused by previous withdrawals, including 
withdrawal charges (``Purchase Payment Death Benefit''); or (b) the 
Contract value on the date due proof of death and instructions 
regarding payment are received by Security Benefit (less the amount of 
any Credit Enhancement applied during the 12 months prior to the date 
of the Contract holder's death if an Extra Credit Rider was in effect) 
(``Contract Value Death Benefit''). If a Contract holder dies prior to 
the annuity start date and due proof of death and instructions 
regarding payment are not received by Security Benefit at its home 
office within six months of the date of the Contract holder's death, 
the death benefit will be the Contract Value Death Benefit. If a 
Contract holder has purchased one of the following riders, the death 
benefit will be as determined under the terms of the applicable rider: 
(a) Annual Stepped Up Death Benefit; (b) Guaranteed Growth Death 
Benefit; (c) Combined Annual Stepped Up and Guaranteed Growth Death 
Benefit; and (d) Combined Guaranteed Growth Death Benefit and 
Guaranteed Minimum Income Benefit. Each of those riders also excludes 
Credit Enhancements from any Purchase Payment Death Benefit and reduces 
the amount of any other death benefit by an amount equal to any Credit 
Enhancements applied during the 12 months prior to the date of the 
Contract holder's death.
    16. Applicants seek exemptions 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 necessary to permit the SBL Insurers with 
respect to the Contracts to: (a) deduct from any full or partial 
withdrawal a proportionate amount of any Credit Enhancement that has 
not yet vested; and (b) deduct from any death benefit, except the 
Purchase Payment Death Benefit, the amount of any Credit Enhancement 
applied during the 12 months prior to the date of the Contract holder's 
death. The requested exemptions would also apply to any Future Contract 
funded by the Separate Accounts or Future Accounts that recapture 
Credit Enhancements provided that any such Future Contract is 
substantially similar in all material respects to the Contracts.

[[Page 58537]]

Applicants' Legal Analysis

    1. 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 separate account, except as provided 
in paragraph (2) of that 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 ``(A) such contract is a redeemable security.''
    2. Section 2(a)(32) of the 1940 Act defines ``redeemable security'' 
as any security, other than short-term paper, under the terms of which 
the holder, upon presentation to the issuer, is entitled to receive 
approximately his or her proportionate shares of the issuer's current 
net assets, or the cash equivalent thereof.
    3. Applicants state that the amount paid in the event of a full or 
partial withdrawal excludes a proportionate amount of any Credit 
Enhancement conditionally applied to the Contract in the seven years 
prior to the date of the full or partial withdrawal. The amount of any 
death benefit that is based upon Contract value does not include the 
amount of any Credit Enhancement conditionally applied to the Contract 
in the 12 months prior to the date of the Contract holder's death. In 
each instance, the Contract holder arguably is not receiving his or her 
proportionate share of applicable Separate Account's then-current net 
assets. Applicants submit, however, that the recapture of the amount of 
any Credit Enhancement conditionally applied to the Contract during the 
seven-year period beginning on the date of issue of the Contract or the 
12-month period prior to the date of the Contract holder's death would 
not deprive a Contract holder of his or her proportionate share of the 
issuer's current net assets. Until or unless the Credit Enhancement is 
vested, Security Benefit retains a right and interest in the Credit 
Enhancement. The prospectus clearly discloses that, for purposes of 
withdrawals, a Credit Enhancement will vest only at the end of the 
seven-year period beginning on the Contract's date of issue. The 
prospects also clearly discloses that, for purposes of the death 
benefit, a Credit Enhancement will vest only if it has been added to 
the Contract value of a Contract holder as of a date more than 12 
months prior to the date of the Contract holder's death.
    4. Applicants submit that annuity contracts, unlike life insurance 
contracts, are not intended to insure against the risk of the premature 
death of the insured. Instead, annuity contracts are intended to 
provide an income stream to the Contract holder or a named beneficiary, 
for the life of the annuitant or for a period of years. The risk to an 
insurer under an annuity contract typically is that the annuitant lives 
longer than the insurer's prediction.
    5. According to the Applicants, if Credit Enhancements are applied 
unconditionally to the death benefit under an annuity contract before a 
minimum period of time has elapsed from the time that a Credit 
Enhancement has been credited, the insurer runs the risk of adverse 
selection. The insurer runs the risk that, for example, a terminally 
ill Contract holder will make a large purchase payment in order to 
leverage the amount of money he or she is able to transfer to the 
beneficiary. Applicants that requiring a year to elapse before a Credit 
Enhancement may be included in a death benefit is an appropriate means 
to ensure that the Contracts are not used as a risk-free vehicle for 
persons to leverage the amount of money they wish to transfer to a 
beneficiary.
    6. Section 22(c) of the 1940 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 a redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in 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.
    7. Applicants state that Security Benefit's recapture of the Credit 
Enhancement with respect to the Contracts in instances in which: (a) A 
withdrawal is made and fewer than seven years have elapsed since the 
issue date of the Contract, or (b) a death benefit is paid, other than 
the Purchase Payment Death Benefit, and fewer than 12 months have 
elapsed between the time that the Credit Enhancement has been applied 
to the Contract, and the death of the Contract holder, 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 
applicable Subaccount of a Separate Account. In other words, because 
any such Credit Enhancement paid by Security Benefit is immediately 
added, on a conditional basis, to the Contract value of certain 
Contract holders, and further because these amounts are allocated to 
certain Subaccounts for the benefit of the participating Contract 
holder, the net asset value of each Subaccount arguably is affected by 
these credits.
    8. Applicants content, however, that the recapture of the Credit 
Enhancement under the circumstances described in the application should 
not be deemed to be a violation of section 22(c) and rule 22c-1. To the 
extent that the recapture practices described in the application are 
considered to be technical violations of these provisions, Applicants 
request relief from Section 22(c) and rule 22c-1 in order to recapture 
Credit Enhancements as discussed above for the Contracts and Future 
Contracts to the extent that an SBL Insurer has provided Credit 
Enhancements to a Control holder within: (a) Seven years of a full or 
partial withdrawal; or (b) 12 months of the Contract holder's death 
before the Annuity Start Date where the death benefit is not a Purchase 
Payment Death Benefit.
    9. Applicants assert that the recapture of the Credit Enhancement 
does not involve either of the practices 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 their redemption or repurchase at a price above it, and 
(b) other unfair results, including speculative trading practices.
    10. Applicants submit that the proposed recapture of the Credit 
Enhancement poses no threat of dilution. To effect a recapture of a 
Credit Enhancement, Security Benefit redeems (and the other SBL Insurer 
will redeem) interests in the Subaccounts at a price determined on the 
basis of the current accumulation unit value of each of the Subaccounts 
of the Separate Account in which the Contract holder's Contract value 
is allocated. The amount recaptured in the event of a full or partial 
withdrawal or death benefit, will be equal to the amount of the Credit 
Enhancement paid out of the General Account assets of Security Benefit. 
That amount will be redeemed at the current accumulation unit value of 
the applicable Subaccount(s) as of the date

[[Page 58538]]

of receipt of the death claim, or withdrawal request, in proper order. 
Thus, no dilution will occur upon the recapture of a Credit 
Enhancement.
    11. Applicants also submit that the second practice 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 Credit Enhancement.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested exemptions are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-29023 Filed 11-20-01; 8:45 am]
BILLING CODE 8010-01-M