[Federal Register Volume 66, Number 228 (Tuesday, November 27, 2001)]
[Notices]
[Pages 59270-59273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29457]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25274; File No. 812-12638]


Integrity Life Insurance Company, et al.

November 20, 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 ``Act'') granting exemptions 
from the provisions of sections 2(a)(32) and 37(i)(2)(A) of the Act and 
Rule 22c-1 thereunder.

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    Applicants: Integrity Life Insurance Company (``Integrity''), 
National Integrity Life Insurance Company (``National Integrity,'' 
together with Integrity, the ``Companies''), Separate Account I of 
Integrity Life Insurance Company, Separate Account I of National 
Integrity Life Insurance Company (together with Separate Account I of 
Integrity Life Insurance Company, the ``Account''), and Touchstone 
Securities, Inc. (``Touchstone'').
SUMMARY OF APPLICATION: Applicants seek an order of exemption pursuant 
to Section 6(c) of the Act to the extent necessary to permit the 
recapture, under specified circumstances, of credits applied to 
contributions made under certain flexible premium variable annuity 
contracts that the Companies will issue through the Accounts (the 
``Contracts''), as well as other contracts that the Companies may issue 
in the future through their existing or future separate accounts 
(``Other Accounts'') that are substantially similar to the Contracts in 
all material respects (``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 or affiliated with, Touchstone, 
whether existing or created in the future, that serves as distributor 
or principal underwriter for the Contracts or Future Contracts 
(``Affiliated Broker-Dealers'').
    Filing Date: The application was filed on September 20, 2001, and 
amended and restated on November 14, 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, personally or by mail. 
Hearing requests must be received by the SEC by 5:30 p.m. on December 
17, 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 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 
SEC's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o G. Stephen 
Wastek, Esq., Assistant General Counsel & Assistant Secretary, 
Integrity Life Insurance Company, 515 West Market Street, Louisville, 
Kentucky 40202.

FOR FURTHER INFORMATION CONTACT: Alison Toledo, Senior Counsel, or 
Lorna J. 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

    1. Integrity is a stock life insurance company organized under the 
laws of Ohio. It is authorized to sell life insurance and annuities in 
47 states and the District of Columbia. Integrity is a subsidiary of 
Western and Southern Life Insurance Company (``Western and Southern''), 
a mutual life insurance company organized under the laws of Ohio.
    2. National Integrity is a stock life insurance company organized 
under the laws of New York. It is authorized to sell life insurance and 
annuities in four

[[Page 59271]]

states and the District of Columbia. National Integrity is a direct 
subsidiary of Integrity and an indirect subsidiary of Western and 
Southern.
    3. Separate Account I of Integrity Life Insurance Company was 
established in 1986 as a separate account under Ohio law for the 
purpose of funding variable annuity contracts issued by Integrity. It 
is a segregated asset account of Integrity and is registered with the 
Commission as a unit investment trust under the Act.
    4. Separate Account I of National Integrity Life Insurance Company 
was established in 1986 as a separate account under New York law for 
the purpose of funding variable annuity contracts issued by National 
Integrity. It is a segregated assets account of National Integrity and 
is registered with the Commission as a unit investment trust under the 
Act.
    5. The Accounts will fund the variable benefits available under the 
Contracts. Each Company's offering of the Contract is registered under 
the Securities Act of 1933. That portion of the assets of the Accounts 
that is equal to the reserves and other Contract liabilities with 
respect to the Account is not charageble with liabilities arising out 
of any other business of the Companies. Any income, gains or losses, 
realized or unrealized, from assets allocated to the Account are, in 
accordance with the Contracts, credited to or charged against the 
Accounts, without regard to other income, gains or losses of the 
Companies.
    6. Touchstone is the principal underwriter of the Contracts. 
Touchstone 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 registered representatives of broker-dealer that 
have entered into distribution agreements with Touchstone. Touchstone 
is a wholly owned subsidiary of Western and Southern.
    7. This application requests relief for two variable annuity 
Contracts both contained in a single registration statement previously 
filed on Form N-4 pursuant to the Securities Act of 1933. The Contracts 
are the IQ Smart Annuity (``IQ'') and the Grandmaster Annuity 
(``Grandmaster'').
    8. The minimum initial contribution for both Contracts is $1,000 
($3,000 in Pennsylvania and South Carolina). An owner may make 
additional contributions of at least $100 at any time (except for the 
IQ New York Contract which is a single premium Contract). The Companies 
may limit total contributions to $1,000,000 if the owner is under age 
76 and to $250,000 if the owner is over age 76.
    9. The Added value Option is an optional credit to the Contracts of 
between 1% and 5% of the total first year contributions (the 
``Credit''). If an owner selects the Added Value Option at the time of 
application, the Companies will credit an extra amount of the Contract 
each time the owner makes a contribution within the first twelve months 
after the Contract is issued. The owner may select a Credit from 1% to 
5%. The Companies will allocate Credits pro rata among the investment 
options in the same ratio as the contribution. The Companies will fund 
Credits from their general account assets.
    10. The annual charge for the Added Value Option is .15% for each 
percentage of Credit an owner selects. The charge is assessed against 
the Accounts and the fixed accounts. For example, if the owner selects 
the 3% Credit, the annual charge is .45%. The charge is subject to a 
minimum and maximum dollar amount. The minimum amount is .145% 
multiplied by first year total contributions. The maximum amount is 
.182% multiplied by first year total contributions. The prospectuses 
for the Contracts contain a chart of percentages the Companies will use 
in calculating the range of dollar amounts. The Companies assess the 
charge quarterly on the assets in the investment options to which the 
owner's contributions are allocated. The Companies will discontinue 
deducting the charge seven years from the date the Contract is issued.
    11. The Credit is not part of the amount an owner will receive if 
he or she exercises the free look provision. In addition, all or part 
of the Credit will be recaptured if the owner makes a withdrawal during 
the first seven Contract years. Regardless of whether or not the Credit 
is vested, all gains or losses attributable to such Credit are part of 
the owner's Contract value and are immediately vested.
    12. The free look period is the 10-day period (or longer if 
required by state law) during which an owner may return a Contract 
after it has been delivered and receive a full refund of the Contract 
value, less any Credits applied. Unless the law requires that the full 
amount of the contribution be refunded, less any withdrawals, 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 
contribution the owner made. The Credit is not part of the amount an 
owner will be paid if the free look provision is exercised.
    13. An owner may make withdrawals from the Contract at any time 
before annuitization. The minimum withdrawal amount is $300. Assuming 
the owner has selected the Added Value Option, any withdrawal during 
the first seven Contract years will be subject to the recapture of all 
or part of any Credit applied to the Contract, and if applicable, 
contingent withdrawal charges. The IQ Contract contains no contingent 
withdrawal charges. The Grandmaster Contract does not contain 
contingent withdrawal charges. The amount that will be recaptured 
depends on the Contract year in which the withdrawal is made. The chart 
below shows what portion of the Added Value Option as credited will be 
recaptured in connection with a partial or a complete withdrawal.

                       Amount of Credit Recaptured
------------------------------------------------------------------------
                                                              Integrity
                                                                 and
                                                               national
                       Contract year                          integrity
                                                                 (In
                                                               percent)
------------------------------------------------------------------------
1..........................................................          100
2..........................................................          100
3..........................................................           85
4..........................................................           70
5..........................................................           55
6..........................................................           40
7..........................................................           25
8+.........................................................            0
------------------------------------------------------------------------

    The contingent withdrawal charge is a percentage of contribution 
withdrawal by the owner. The contingent withdrawal charge for the 
Grandmaster Contract for each Company is as follows:

------------------------------------------------------------------------
                                                 Integrity     National
   Number of years from date of contribution    charge  (In   integrity
                                                  percent)    charge (%)
------------------------------------------------------------------------
1.............................................            8            7
2.............................................            7            6
3.............................................            6            5
4.............................................            5            4
5+............................................            0            0
------------------------------------------------------------------------

    For purposes of calculating the contingent withdrawal charge, the 
Companies treat withdrawals as coming from the oldest contribution 
first (i.e., first-in, first-out). In the case of partial withdrawals, 
the Companies deduct the contingent withdrawal charge, if any, from the 
value remaining in the Contract, not from the withdrawal amount 
requested by the owner.
    14. For the IQ product, owners of the Contracts may allocate their 
contributions among sixty-four investment options--fifty-seven variable 
investment options and seven fixed investment options. Each subaccount 
of the Accounts is a variable investment

[[Page 59272]]

option that will invest in shares of a corresponding portfolio of 
Fidelity's Variable Insurance Product Funds, Janus Aspen Series, The 
Legends Fund, MFS Variable Insurance Trust, Putnam Variable Trust 
Funds, Touchstone Variable Series Trust or Van Kampen Life Portfolios. 
For the Grandmaster product, owners of the Contracts may allocate their 
contributions among forty-seven investment options--forty variable 
investment options and seven fixed investment options. Each subaccount 
of the Accounts is a variable investment option that will invest in 
shares of a corresponding portfolio of Fidelity's Variable Insurance 
Product Funds, Janus Aspen Series, MFS Variable Insurance Trust or 
Putnam Variable Trust Funds.
    15. The Companies, at a later date, may decide to create additional 
subaccounts to invest in any additional funding media as may now or in 
the future be available. The Companies, from time to time, also may 
combine or eliminate subaccounts or transfer assets to and from 
subaccounts.
    16. The Contract provides for a death benefit, various death 
benefit options, annuity benefits and annuity payout options, as well 
as transfer privileges, dollar cost averaging, and other features. The 
IQ Contract has the following charges: (i) An annual administrative 
charge of $30 for contracts with account values of $50,000 or less; 
(ii) a mortality and expense risk charge of 1.30%; (iii) an 
administrative expense charge of .15%; (iv) a transfer fee of $20 after 
twelve transfers made during a Contract year; (v) any applicable charge 
for the Added Value Option; (vi) any applicable death benefit option 
fee; and (vii) any applicable state premium tax. The Grandmaster 
Contract has the following charges: (i) a deferred sales charge as a 
percentage of contribution withdrawn as described above; (ii) an annual 
administrative charge of $30 for contracts with account values of 
$50,000 or less; (iii) a mortality and expense risk charge of 1.20%; 
(iv) an administrative expense charge of .15%; (v) a transfer fee of 
$20 after twelve transfer made during a Contract year; (vi) any 
applicable charge for the Added Value Option; (vii) any applicable 
death benefit option fee; and (viii) any applicable state premium tax. 
In addition, assets invested in the subaccounts of either product are 
charged with the annual operating expenses of the underlying 
portfolios.
    17. Applicants seek exemption pursuant to section 6(c) from 
sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder 
to the extent deemed necessary to permit the Companies to recapture 
part or all of a Credit in the following instances: (i) when an owner 
exercises the Contract's free look provision; and (ii) when an owner 
makes a withdrawal in excess of the annual 10% free withdrawal amount 
within the first seven Contract years.

Applicants' Legal Analysis

    1. 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 Act. Applicants request that the Commission pursuant 
to section 6(c) of the Act grant the exemptions requested below with 
respect to the Contracts and any Future Contracts issued by the 
Companies, funded by the Accounts or Other Accounts, and underwritten 
or distributed by Touchstone or Affiliated Broker-Dealers. Applicants 
undertake that Future Contracts will be substantially similar to the 
Contracts in all material respects. Applicants believe that the 
requested exemptions are appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    2. Applicants represent that is not administratively feasible to 
track a Credit in the Accounts after the Credit is applied. 
Accordingly, the asset-based charges applicable to the Accounts will be 
assessed against the entire amount held in the Accounts, including the 
Credit, during the free look period and the recapture period. As a 
result, during such periods, the aggregate asset-based charges assessed 
against an owner's account value will be higher than those that would 
be charged if the owner's account value did not include the Credit. The 
account value includes all assets in the Accounts and the fixed 
accounts, including any Credit.
    3. 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 by the registered separate account unless such contract is a 
redeemable security. Section 2(a)(32) defines ``redeemable security'' 
as any security, other than short-term paper, under the terms of which 
the holder, upon presentation to the issuer, is entitled to receive 
approximately his or her proportionate share of the issuer's current 
net assets, or the cash equivalent thereof.
    4. Applicants submit that the recapture of a Credit in the 
circumstances set forth in the application would not deprive an owner 
of his her proportionate share of the issuer's current net assets. An 
owner's interest in a Credit allocated to his or her Contract value 
upon receipt of a contribution make during the first twelve months 
after issuance is not fully vested until the eighth Contract year. 
Unless and until the full amount of a Credit is vested, the Companies 
retain at least partial right and interest in the Credit, although not 
in the earnings attributable to that amount. Thus, Applicants argue 
that when the Companies recapture a Credit, in part or in full, they 
are merely retrieving their own assets and the owner has not been 
deprived of a proportionate share of the applicable Accounts' assets 
because his or her interest in the Credit has not vested.
    5. In addition, Applicants state that permitting an owner to retain 
a 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 
Credits applied to contributions made within the first twelve months 
after issuance is designed to provide the Companies with a measure of 
protection against anti-selection. The risk here is that, rather than 
spreading contributions over a number of years, an owner might make 
very large contributions during the first Contract year, thereby 
leaving the Companies little time to recover the cost of the Credits. 
As noted earlier, the amounts recaptured equal the Credits provided by 
the Companies from their general account assets and any gain would 
remain a part of the owner's Contract value.
    6. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put 
between 101% and 105% of each of their contributions to work for them 
in the selected investment options. In addition, the owner will retain 
any earnings attributable to the Credit, as well as the principle 
amount of the Credit once vested.

[[Page 59273]]

    7. Applicants further submit that the recapture of any Credit only 
applies in relation to the risk of anti-selection against the 
Companies. Anti-selection can generally be described as a risk that 
owners obtain an undue advantage based on elements of fairness to the 
Companies and the actuarial and other factors taken into account in 
designing the Contracts and Future Contracts. The Companies provide the 
Credit from their general account assets on a guaranteed basis. Thus, 
they undertake a financial obligation that contemplates the retention 
of the Contracts and Future Contracts by their owners over an extended 
period, consistent with the long-term nature of retirement planning. 
The Companies generally expect to recover their costs, including 
Credits, over an anticipated duration while a Contract or Future 
Contract is in force. The right to recapture Credits applied to 
contributions made within the first twelve months after issuance 
protects the Companies against the risk that an owner will purchase a 
Contract or Future Contract or make larger or additional contributions 
with the knowledge that the contingency that triggers payment of a 
benefit is likely or about to occur. With respect to refunds paid upon 
the return of a Contract or Future Contract during the free look 
period, the amount payable by the Companies must be reduced by the 
amount of the Credit. Otherwise, investors could purchase a Contract or 
Future Contract for the sole purpose of exercising the free look 
provision and making a quick profit.
    8. Applicants submit that the provisions for recapture of Credits 
under the Contracts and Future Contracts do not violate sections 
2(a)(32) and 27(i)(2)(A) of the Act. Sections 26(e) and 27(i) were 
added to the Act to implement the purposes of the National Securities 
Markets Improvement Act of 1996 and Congressional intent. The 
application of a Credit to contributions made under the Contracts 
should not raise any questions as to the Companies' compliance with the 
provisions of section 27(i). However, to avoid any uncertainly 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 any Credit under the circumstances summarized 
herein without the loss of relief from section 27 provided by section 
27(i).
    9. Rule 22c-1 under the 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 
next computed after receipt of a tender of such security for redemption 
or of an order to purchase or sell such security.
    10. The Companies' recapture of a Credit might arguably be viewed 
as resulting in the redemption of redeemable securities for a price 
other than one based on the current accumulation unit value of the 
Accounts. Applicants contend, however, that the recapture of the Credit 
does not violate Rule 22c-1. To effect a recapture of a Credit, the 
Companies 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 Credit paid out of the 
Companies' general account assets. Although the owner will be entitled 
to retain any investment gain attributable to the Credit, the amount of 
that gain 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 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 Credit. Because 
neither of the harms that Rule 22c-1 was meant to address is found in 
the recapture of the Credit, Rule 22c-1 should not apply to any Credit. 
However, to avoid any uncertainly as to full compliance with the Act, 
Applicants request an exemption from the provisions of Rule 22c-1 to 
the extent deemed necessary to permit them to recapture the Credit 
under the Contracts and Future Contracts.

Conclusion

    Applicants submit that their request for an order that applies to 
the Accounts and any other Accounts established by the Companies, in 
connection with the issuance of the Contracts and Future Contracts, is 
appropriate and in the public interest. Applicants state that 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. Applicants undertake that Future Contracts 
funded by the Accounts or by Other Accounts will be substantially 
similar to the Contracts in all material respects. Applicants state 
that investors would not receive any benefit or additional protection 
by requiring Applicants to repeatedly seek exemptive relief that would 
present no issue under the Act that has not already been addressed in 
the application. Applicants submit that having Applicants file 
additional applications would impair Applicants' ability to take 
advantage of business opportunities as they arise. Further, Applicants 
state that if Applicants were required repeatedly to seek exemptive 
relief with respect to the same issues addressed in the application 
described herein, investors would not receive any benefit or additional 
protection thereby.
    Applicants submit, based on the grounds summarized above, that 
their exemptive requests meet the standards set out in section 6(c) of 
the Act and that the Commission should, therefore, grant the requested 
order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-29457 Filed 11-26-01; 8:45 am]
BILLING CODE 8010-01-M