[Federal Register Volume 67, Number 62 (Monday, April 1, 2002)]
[Notices]
[Pages 15430-15434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7778]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25500; File No. 812-12630]


Northbrook Life Insurance Company, et al.; Notice of Application

March 26, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an amended order pursuant to section 
11(a) of the Investment Company Act of 1940, as amended (the ``Act'') 
approving the proposed offer of a new Longevity Reward Rider (``new 
LRR''), as set forth below.

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    Applicants: Northbrook Life Insurance Company (``Northbrook''), 
Northbrook Variable Annuity Account II (``Account II''), Allstate Life 
Insurance Company of New York (``Allstate New York''), Allstate Life of 
New York Variable Annuity Account II (``ALNY Account II'') and Morgan 
Stanley DW Inc. (formerly known as Dean Witter Reynolds Inc.) (``Morgan 
Stanley'') (collectively, the ``Applicants'').
    Summary of Application: Applicants seek an order to amend an 
Existing Order (described below) approving the offer by the Applicants 
of the new LRR upon the terms and subject to the conditions described 
herein and in the Prior Application (described below).
    Filing Date: The application was filed on September 4, 2001, 
amended on January 23, 2002, and amended and restated on March 19, 
2002.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Secretary of 
the Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on April 22, 2002, 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.

[[Page 15431]]


ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, Charles Smith, Esq., 
Assistant Counsel, Allstate Life Insurance Company, 3100 Sanders Road, 
Northbrook, Illinois 60062; with a copy to Richard T. Choi, Esq., Foley 
& Lardner, 3000 K Street, NW, Suite 500, Washington, DC 20007.

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

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

Applicant's Representations

    1. Northbrook is a wholly-owned subsidiary of Allstate Life 
Insurance Company (''Allstate Life''). Allstate Life is an indirect 
subsidiary of The Allstate Corporation, a publicly-traded insurance 
holding company. Northbrook is Account II's depositor within the 
meaning of the Act.
    2. Morgan Stanley is a wholly-owned subsidiary of Morgan Stanley 
Dean Witter & Co., a publicly-traded financial services company. Morgan 
Stanley is the principal underwriter of Account II. Morgan Stanley is 
registered as a broker-dealer under the Securities Exchange Act of 1934 
(File No. 8-14172).
    3. Account II is registered under the Act as a unit investment 
trust (File No. 811-6116). Account II funds the Morgan Stanley Dean 
Witter Variable Annuity II Contracts (the ``VA II Contracts'') that 
Northbrook and Morgan Stanley have offered and sold for a number of 
years.
    4. The VA II Contracts, which are registered under the Securities 
Act of 1933 (File No. 033-35412), are deferred annuity contracts under 
which Contract owners may make one or more purchase payments over a 
period of time (called the ``accumulation phase''). During the 
accumulation phase, the Contract owner's purchase payments, after 
deduction of certain charges, earn (at the owner's election) a 
``variable'' return based on the investment performance of one or more 
of Account II's subaccounts and/or a fixed rate of return that 
Northbrook declares from time to time.
    5. At the end of the accumulation phase, the Contract owner elects 
whether to receive a ``lump sum'' payment of the VA II Contract's 
accumulated value, or to receive that value under one of several 
payment options. Payment options are available on a variable and/or 
fixed basis. The VA II Contracts incorporate many other features, 
including ``death benefit'' options, partial withdrawal rights, full 
surrender rights, transfer privileges and other optional rider 
benefits.
    6. The VA II Contracts currently impose a withdrawal charge of up 
to 6% of any amount by which purchase payments withdrawn in any year 
exceed 15% of the cumulative purchase payments that had been made as of 
the beginning of that year (the ``annual free withdrawal amount''). The 
withdrawal charge associated with each purchase payment declines 1% 
each year until it is 0% beginning in the seventh year after the 
payment was made. Unused portions of the annual free withdrawal amount 
do not carry over to future years.
    7. The VA II Contracts also impose an annual Contract maintenance 
charge of $ 30, a $ 25 charge applicable to certain transfers in excess 
of twelve during a one-year period (which is currently being waived), a 
daily administrative charge at an annual rate of 0.10% of the 
Contract's value in Account II, a mortality and expense risk charge at 
an annual rate of 1.25% of the Contract's value in Account II (or 
higher if certain optional rider benefits are selected), and a charge 
corresponding to any applicable state premium taxes.
    8. Allstate New York is a stock life insurance company organized in 
New York in 1967. Like Northbrook, Allstate New York is a wholly-owned 
subsidiary of Allstate Life.
    9. ALNY Account II funds the Allstate New York Variable Annuity II 
Contracts (``ALNY Contracts''). The ALNY Contracts are substantially 
similar to the VA II Contracts (together with the ALNY Contracts, the 
``Contracts'') covered by the Existing Order, and have the same 
withdrawal charge schedule, base mortality and expense charge, contract 
maintenance charge, and administrative expense charge. However, due to 
limitations imposed by the New York Insurance Department, the ALNY 
Contracts do not offer the following income and death benefit riders 
that are offered by the VA II Contracts: Death Benefit Combination 
Option, Income Benefit Combination Option 2, Income and Death Benefit 
Combination Option 2 and Enhanced Earnings Death Benefit Option. Other 
than the optional riders, there are no material differences between the 
ALNY Contracts and the VA II Contracts.
    10. By order dated June 8, 2000 (the ``Existing Order''),\1\ the 
Commission approved, pursuant to Section 11 of the Act, the offer by 
Northbrook, Account II, and Morgan Stanley of a Longevity Reward Rider 
to owners of certain variable products as described in the application 
for the Existing Order (``Prior Application'').\2\ Applicants are 
seeking to amend the Existing Order to approve the offer by Applicants 
of the new LRR. The new LLR is identical to the LRR currently offered 
through the VA II Contracts (``existing LRR''), with the modifications 
described below. Both the ALNY Contracts and the VA II Contracts are 
distributed exclusively by Morgan Stanley.
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    \1\ Northbrook Life Insurance Company, Investment Company Act 
Release No. 24493 (June 8, 2000) (File No. 812-12092).
    \2\ Northbrook Life Insurance Company, Investment Company Act 
Release No. 24456 (May 16, 2000) (File No. 812-12092).
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    11. The existing LRR provides the following benefits: (a) An option 
whereby a deceased owner's surviving spouse may continue the Contract 
using the then-current death benefit value as the new Contract value, 
if higher, rather than the current Contract value; (b) a reduced 
mortality and expense risk charge (i.e., at an annual rate that is .07% 
less than the rate that otherwise would apply); (c) a permanent waiver 
of the $30 annual Contract maintenance charge if the Contract's value 
exceeds $40,000 at any time; and (d) a reduction in the withdrawal 
charge that will apply to the withdrawal of any purchase payments that 
are made after the existing LRR is added to the Contract.
    12. Contract owners who elect the existing LRR have a new three-
year withdrawal charge schedule that applies to withdrawals made after 
the rider's issue date (the ``Rider Date''). The new schedule applies 
to any amount of such a subsequent withdrawal of purchase payments that 
exceeds the 15% annual free withdrawal amount, regardless of whether 
such withdrawn purchase payments were made before or after the Rider 
Date.
    13. The withdrawal charge under the new withdrawal charge schedule 
begins at 3% and declines by 1% per year over three years to 0% by the 
end of the third year. For purchase payments made prior to the Rider 
Date, the three-year period runs from the Rider Date. For any purchase 
payment made subsequent to the Rider Date, the three-year period runs 
from the date of that payment.
    14. The same exceptions to imposing the existing LRR withdrawal 
charge apply as apply to the Contract's basic withdrawal charge. 
Specifically, no existing LRR withdrawal charge is

[[Page 15432]]

imposed at the time a payment option commences, upon the death of a 
Contract owner or annuitant, upon amounts withdrawn to satisfy any 
applicable minimum distribution requirements under the Internal Revenue 
Code, or upon amounts withdrawn that are within the 15% annual free 
withdrawal amount. These are the same exceptions as would apply to the 
Contracts without the existing LRR.
    15. Contract owners are not permitted to elect for the existing LRR 
to apply to part of a contract and not to the rest. Any election of the 
existing LRR must apply to the whole contract.
    16. The new LRR is identical to the existing LRR, except that the 
new LRR will be available to an expanded class of eligible Contract 
owners. The existing LRR is available only to Contract owners whose 
entire Contract value is no longer subject to a withdrawal charge. By 
contrast, the new LRR would be available to any Contract owner if on 
the date of application for the new LRR (``Application Date''):

     the Contract owner's initial purchase payment is no 
longer subject to a withdrawal charge; and
     the Contract owner's additional purchase payments, if 
any, would be subject to total withdrawal charges (assuming a 
current surrender of the Contract) equal to an amount not greater 
than 0.25% of the current Contract value.
    The following example illustrates the operation of the new 
eligibility criteria: In 1990, an individual purchases a Contract 
with an initial purchase payment of $150,000. On January 1, 1997, 
the Contract owner makes an additional purchase payment of $20,000. 
In 2001, the Contract owner applies to add the new LRR. At that 
time, the Contract value is $200,000, and the additional purchase 
payment is subject to the Year 4 surrender charge of 2%:
    (A) Contract value = $200,000
    (B) Hypothetical withdrawal charge (assuming full surrender) = 
$20,000 x .02 = $400
    (C) Eligibility Calculation ( .25%) = (B) / (A) = 400 / 200,000 
= 0.20%
    Because the withdrawal charge upon surrender on the Application 
Date is less than .25% of the Contract value, the Contract owner is 
eligible to add the LRR.

    17. The principal purpose of the new LRR is the same as that of the 
existing LRR, namely, to reward eligible Contract owners for their 
persistency. However, the broader eligibility criteria for the new LRR 
is intended to meet the demands of Contract owners for such additional 
flexibility. Specifically, many Contract owners have expressed the 
desire that additional purchase payments, especially where small 
compared to the initial purchase payment, should not defeat eligibility 
for the LRR. In addition, the new LRR, like the existing LRR, will 
better allow Northbrook and Allstate New York to maintain the Contracts 
on a competitive footing with other newer variable annuity contracts in 
the marketplace that offer the same or similar benefits.

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, requires, in 
effect, that any offer of exchange of the securities of a registered 
unit investment trust for the securities of any other investment 
company be approved by the Commission regardless of the basis of the 
exchange.
    3. Standing alone, Section 11(a) by its terms applies only to 
exchanges of securities issued by ``open-end'' investment companies, 
which, under section 5(a)(1) of the Act, includes only management-type 
investment companies. ALNY Account II and Account II are unit 
investment trust-type (rather than a management-type) investment 
companies under section 4(2) of the Act. It would appear, therefore, 
that Section 11 could require Commission approval for Applicants' offer 
of the new LRR only if that offer falls within the ambit of Section 
11(c).
    4. Applicants do not concede that their offer of the new LRR to 
existing Contract owners necessarily constitutes an offer of securities 
of a registered unit investment trust in exchange for securities of any 
other investment company within the purview of Section 11(c). Nor do 
Applicants concede that, for purposes of Section 11, a Contract with 
the new LRR is a different security than a Contract without the new 
LRR. Nevertheless, Applicants request an exemption pursuant to Section 
11(a) of the Act to the extent deemed necessary to permit the offer of 
the new LRR as described herein.
    5. Applicants have considered whether they could rely on Rule 11a-2 
under the Act. Applicants believe and represent that the only provision 
in Rule 11a-2 that could prevent such reliance would be the so-called 
``tacking'' requirement in Rule 11a-2(d)(1). Applicants state that 
since the new LRR withdrawal charge continues for only three years, and 
since the new LRR is only available to a Contract owner if on the 
Application Date (a) the Contract owner's initial purchase payment was 
made at least six years prior to the date the new LRR is added to the 
Contract (``Rider Date''); and (b) the Contract owner's additional 
purchase payments, if any, would be subject to total withdrawal charges 
(assuming a current surrender of the Contract) equal to an amount not 
greater than 0.25% of the current Contract value, the tacking 
requirement effectively would prohibit the imposition of some or all of 
the new LRR's withdrawal charge with respect to purchase payments made 
prior to the Rider Date. For that reason, Applicants have concluded 
that Rule 11a-2 is unavailable to them.
    6. 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. 
Applicants assert that the new LRR would not involve ``switching.'' 
Applicants maintain, to the contrary, that the purpose of the new LRR 
is to enable Contract owners to enhance their Contracts through the 
rider without having to buy a new variable annuity contract. Applicants 
represent that because the new LRR provides clear benefits, as 
described above, the new LRR's sole purpose is not to exact additional 
selling charges (or any other type of charge).
    7. Applicants state that the new LRR would not result in any 
duplicative charges. Applicants represent that the limited withdrawal 
charge provided under the new LRR is reasonable in relation to the 
benefits that the rider provides and the costs that Applicants will 
incur in providing those benefits. Those costs will include costs of 
developing and administering the new LRR, the direct dollar costs of 
the charges that will be waived or reduced and the benefits that will 
be paid under the new LRR, and the costs of distributing the new LRR to 
Contract owners and educating them about it.
    8. Applicants represent that any possible withdrawal charge under 
the new LRR is modest in amount. For Contract owners with additional 
purchase payments subject to withdrawal charges, the new LRR waives all 
outstanding withdrawal charges applicable under the Contract's existing 
withdrawal schedule and applies instead the withdrawal charge under the 
new withdrawal schedule,

[[Page 15433]]

which may result in a lower withdrawal charge. Applicants state that, 
if the Contract owner makes no withdrawals during the three years after 
the Rider Date, there is no possibility that any withdrawal charge will 
ever be deducted that exceeds what would have been deducted absent the 
new LRR. Applicants also state that even if purchase payments are 
withdrawn during that three-year period, the new LRR withdrawal charge 
will apply only if more than the 15% annual free withdrawal amount is 
withdrawn in any year.
    9. The new LRR will be offered only to Contract owners who already 
have demonstrated an inclination to maintain their Contracts for 
substantial periods of time. Applicants believe that the income taxes 
that are generally payable when earnings are withdrawn from a Contract, 
as well as the tax penalties that may apply if those withdrawals are 
made prior to the owner's reaching age 59 1/2, serve as additional 
motivations that cause most owners to hold their Contracts for a 
substantial number of years (and often until retirement).
    10. Applicants state that any withdrawal charge will be waived for 
withdrawals of any amounts necessary to meet any federal tax law 
minimum distribution requirements applicable to a Contract.
    11. Under all these circumstances, Applicants believe that, as a 
practical matter, few owners that add the new LRR to their Contracts 
will ever actually pay any additional withdrawal charges as a result; 
and to the extent that the new LRR succeeds in its purpose of 
maintaining the Contracts on a competitive footing in the marketplace, 
withdrawals should be even further reduced.
    12. Applicants state that except for the withdrawal charge as 
described above, the new LRR will not result in any increase in or 
imposition of any charge. Accordingly, Applicants assert that except 
for the potential imposition of the new LRR withdrawal charge on 
certain withdrawals that occur within three years after the Rider Date, 
every aspect of a Contract will be at least as favorable after the new 
LRR is added as it was before. Applicants maintain that adding the new 
LRR to a Contract will have no adverse tax consequences to a Contract's 
owner.
    13. In light of these considerations, Applicants do not believe 
there is any public policy or purpose under Section 11 (or otherwise) 
that would preclude offering the new LRR on the terms and subject to 
the conditions stated herein.

Applicants' Conditions

    1. The Offering Document will contain concise, plain English 
statements that: (a) the new LRR is suitable only for Contract owners 
who expect to hold their Contracts as long term investments; and (b) if 
a significant amount of the Contract's value is surrendered or 
withdrawn during the first three years after the Rider Date, the new 
LRR's benefits may be more than offset by that charge, and a Contract 
owner may be worse off than if he or she had rejected the new LRR.
    2. The Offering Document will disclose in concise plain English the 
only aspect in which adding the new LRR rider could disadvantage a 
Contract owner (i.e., through the possible imposition of the new LRR 
withdrawal charge).
    3. A Contract owner choosing to add the new LRR will complete and 
sign the election form, which will prominently restate in concise, 
plain English the statements required in Condition No. 1, and will 
return it to Northbrook or Allstate New York, as appropriate. If the 
election form is more than two pages long, Northbrook or Allstate New 
York, as appropriate, will use a separate document to obtain the 
Contract owner's acknowledgment 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) Northbrook or Allstate 
New York, as appropriate, will maintain records showing the level of 
new LRR purchases and how it relates to the total number of Contract 
owners eligible to acquire the new LRR (at least quarterly as a 
percentage of the number eligible); (b)(i) Northbrook or Allstate New 
York, as appropriate, will maintain copies of any form of Offering 
Document, prospectus disclosure, election form, acknowledgment form, or 
offering letter, regarding the offering of the new LRR, including the 
dates(s) used, and (ii) Morgan Stanley will maintain copies of any 
other written materials or scripts for presentations used by registered 
representatives regarding the new LRR, including the dates used; (c) 
records showing information about each new LRR purchase that occurs, 
including (i) the following information to be maintained by Northbrook 
or Allstate New York, as appropriate: the name of the Contract owner; 
the Contract number; the election form (and separate acknowledgment 
form, if any, used to obtain the Contract owner's acknowledgment of the 
statements required in Condition No. 1 above), including the date such 
election or acknowledgment form was signed; the date of birth, address 
and telephone number of the Contract owner; the issue date of the new 
LRR; the amount of the Contract's value on that date; and persistency 
information relating to the Contract (date of any subsequent 
withdrawals and withdrawal charges paid); and (ii) the following 
information to be maintained by Morgan Stanley: the name of the 
Contract owner, the Contract number, 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 
the amount of commissions paid to the registered representative that 
relates to the new LRR; and (d) each of Northbrook or Allstate New 
York, as appropriate, and Morgan Stanley will maintain logs showing any 
Contract owner complaints received by it about the new LRR, state 
insurance department inquiries to it about the new LRR, or litigation, 
arbitration or other proceedings to which it is a party regarding the 
new 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 named or involved in the complaint or 
proceeding.
    6. Applicants will retain (a) the records specified in Condition 
Nos. 4(a) and (d) above for six years from creation of the record; (b) 
the records specified in Condition No. 4(b) above for six years after 
the date of last use; and (c) the records specified in Condition No. 
4(c) for five years from the Rider Date. The records referred to in 
these conditions will be prepared and retained, for the periods 
specified herein, by Northbrook or Allstate New York, as appropriate, 
and Morgan Stanley. Nevertheless, upon request of the Commission or its 
staff, Northbrook or Allstate New York, as appropriate, and Morgan 
Stanley shall coordinate the prompt assembly of such records for review 
at a single easily accessible location.

Conclusion

    For the reasons discussed above, Applicants submit that the new LRR 
offer is necessary or appropriate in the public interest and consistent 
with the protection of investors and the purposes fairly intended by 
the policies and provisions of the Act. Applicants submit

[[Page 15434]]

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. 02-7778 Filed 3-29-02; 8:45 am]
BILLING CODE 8010-01-P