[Federal Register Volume 67, Number 72 (Monday, April 15, 2002)]
[Notices]
[Pages 18257-18261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9056]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25515; File No. 812-12582]


Sage Life Assurance of America, Inc., et al.; Notice of 
Application

April 9, 2002.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order under 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) and 27(i)(2)(A) and 
Rule 22c-1 thereunder to permit the recapture of Investment Credits 
applied to purchase payments made under certain deferred variable 
annuity contracts and certificates.

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SUMMARY OF APPLICATION: Applicants seek an order under section 6(c) of 
the Act to the extent necessary to permit, under specified 
circumstances, the recapture of Investment Credits applied to purchase 
payments made under deferred variable annuity contracts and 
certificates (the ``Contracts'') that Sage Life will issue through 
Variable Account A, as well as other contracts that Sage Life may issue 
in the future through Future Accounts that are substantially similar in 
all material respects to the Contracts (the ``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, Sage Life, whether existing or created in the future, that serves 
as a distributor or principal underwriter for the Contracts or Future 
Contracts offered through

[[Page 18258]]

Variable Account A or any Future Account (``Sage Life Broker-
Dealer(s)'').
    Applicants: Sage Life Assurance of America, Inc. (``Sage Life''), 
The Sage Variable Annuity Account A (``Variable Account A'' or 
``Variable Account''), and Sage Distributors, Inc. (``SDI'') 
(collectively, ``applicants'').
    Filing Date: The application was filed on July 24, 2001, and 
Amendment No. 1 to the application was filed on March 25, 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 Commission's 
Secretary and serving Applicant with a copy of the request, in person 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on April 30, 2002, 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 Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, c/o James F. 
Bronsdon, Sage Life Assurance of America, Inc., 300 Atlantic Street, 
Suite 302, Stamford, CT 06901.

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

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

Applicants' Representations

    1. Sage Life is a stock life insurance company organized under the 
laws of Delaware. Variable Account A was established on December 3, 
1997. Sage Life serves as depositor of Variable Account A. Sage Life 
may in the future establish one or more Future Accounts for which it 
will serve as depositor.
    2. Variable Account A is a segregated asset account of Sage Life. 
The Variable Account is registered with the Commission as a unit 
investment trust investment company under the Act. Variable Account A 
filed a Form N-8A Notification of Registration under the 1940 Act on 
December 24, 1997. The Variable Account will fund the variable benefits 
available under the Contracts funded through it. Units of interest in 
Variable Account A under the Contracts they fund will be registered 
under the Securities Act of 1933 (the ``1933 Act''). In that regard, 
Variable Account A filed a Form N-4 Registration Statement on June 12, 
2001 under the 1933 Act relating to the Contracts. Sage Life may in the 
future issue Future Contracts through Variable Account A or through 
Future Accounts. That portion of the assets of Variable Account A that 
is equal to the reserves and other Contract liabilities with respect to 
Variable Account A is not chargeable with liabilities arising out of 
any other business of Sage Life. Any income, gains or losses, realized 
or unrealized, from assets allocated to Variable Account A is, in 
accordance with Variable Account A's Contracts, credited to or charged 
against Variable Account A, without regard to other income, gains or 
losses of Sage Life.
    3. SDI is a wholly-owned subsidiary of Sage Insurance Group Inc. 
and an affiliate of Sage Life, and will be the principal underwriter of 
Variable Account A and distributor of the Contracts funded through 
Variable Account A (the ``Variable Account A Contracts''). SDI is 
registered with the Commission as a broker-dealer under the Securities 
Exchange Act of 1934 (the ``1934 Act'') and is a member of the NASD. 
The Variable Account A Contracts will be offered through unaffiliated 
broker-dealers who have entered into agreements with SDI. SDI, or any 
successor entity, may act as principal underwriter for any Future 
Accounts and distributor for any Future Contracts issued by Sage Life 
in the future. A successor entity also may act as principal underwriter 
for Variable Account A.
    4. The Contracts are a part of Sage Life's line of annuity 
products. The Contracts are group and individual deferred variable and 
fixed annuity contracts and certificates. The Contracts may be issued 
under an individual retirement annuity or as a non-qualified contract. 
The Contracts are designed to provide for the accumulation of assets 
and for income through investment during an accumulation phase. 
Purchase payments may be made at any time during the accumulation 
phase. The minimum initial purchase payment is $5,000 for non-qualified 
contracts and $2,000 for qualified contracts. Additional premiums of at 
least $250 can be made.
    5. The Contracts permit purchase payments to be allocated to 
guarantee periods of the Fixed Account of Sage Life (``Fixed Sub-
Accounts'').
    6. Variable Account A is divided into various available sub-
accounts, each of which will be available under the Variable Account A 
Contracts. The sub-accounts are referred to as ``Variable Sub-
Accounts.'' Each Variable Sub-Account will invest in a portfolio of 
certain underlying mutual funds (``Funds''). The Variable Sub-Accounts 
and the Fixed Sub-Accounts will comprise the initial Investment Options 
under the Contracts. The Funds are open-end management investment 
companies registered under the 1940 Act, whose shares are registered 
under the 1933 Act.
    7. Sage Life, at a later date, may determine to create additional 
Variable Sub-Accounts of Variable Account A to invest in any additional 
portfolios or other investments as may now or in the future be 
available. Similarly, Variable Sub-Account(s) of Variable Account A may 
be combined or eliminated from time to time.
    8. The Contracts provide for transfer privileges among Sub-
Accounts, dollar cost averaging, rebalancing, and other features. The 
following charges are assessed under the Contracts:
    (i) Annual asset-based charges of 1.60% for Contract years 1-7 and 
1.40% for Contract years 8 and thereafter;
    (ii) A surrender charge which starts at 8.5% in the first year, and 
declines to 0% in the 8th Contract year with a 10% Free Withdrawal 
Amount. The Surrender Charge (as a percentage of purchase payments 
withdrawn or surrendered) is as follows:

------------------------------------------------------------------------
                                                              Applicable
                                                              surrender
                  Applicable contract year                      charge
                                                              percentage
                                                              (percent)
------------------------------------------------------------------------
1..........................................................          8.5
2..........................................................          8.5
3..........................................................          5.5
4..........................................................            5
5..........................................................            4
6..........................................................            3
7..........................................................            1
8 and thereafter...........................................            0
------------------------------------------------------------------------

With regard to the free withdrawal, a Contract owner may withdraw a 
portion of the account value without incurring a surrender charge equal 
to the greater of: (a) 10% of total purchase payments less all prior 
withdrawals (including any associated surrender charge and market value 
adjustment incurred) in that Contract year, or (b) cumulative earnings 
(i.e., the excess of the account value on the date of withdrawal over

[[Page 18259]]

purchase payments received, less prior withdrawals taken subject to 
surrender charges). Any amount in (a) not used in a Contract year may 
be carried forward to the next Contract year subject to a maximum of 
30% of the total purchase payments over 100% of all prior withdrawals 
(including any associated surrender charge and market value adjustment 
incurred in that Contract year). Because the Free Withdrawal Amount is 
not considered a liquidation of purchase payments, if an Owner 
surrenders the Contract during the same Contract year in which the 
Owner has taken advantage of the full Free Withdrawal Amount, the Owner 
will pay the same surrender charges as if the Owner did not take 
advantage of the full Free Withdrawal Amount;
    (iii) a $40 annual administration charge in Contract years 1-7 for 
Contracts having Account Value of less than $50,000 on the charge 
deduction date ($0 thereafter);
    (iv) a maximum transfer charge of $25 for each transfer in excess 
of 12 in a Contract year (which is currently waived);
    (v) if optional benefit riders are selected, the following charges 
are assessed (as a percentage of Account Value): 0.20% for the 
Guaranteed Minimum Income Benefit; 0.35% for the Enhanced Guaranteed 
Minimum Income Benefit; 0.05% for the Accidental Death Benefit; 0.25% 
for the Earnings Enhancement Death Benefit; 0.05% for the Enhanced 
Guaranteed Minimum Death Benefit; and 0.55% for the Guaranteed Minimum 
Account Value Benefit. Sage Life currently assesses a charge for the 
Earnings Enhancement Life Insurance benefit outside of the Contract 
which is equal, on an annual basis, to 0.25% of Account Value. The 
Funds also impose management and administrative fees which vary 
depending upon which Portfolio(s) are selected.
    When withdrawals are made from the Contract, the amounts withdrawn, 
for the purpose of determining surrender charges, will be taken in the 
following order: first earnings, then the Free Withdrawal Amount, then 
purchase payments subject to the surrender charge.
    9. Sage Life will add an Investment Credit to the Account Value for 
cumulative purchase payments made during Contract year one. The maximum 
Investment Credits are:

------------------------------------------------------------------------
                                                              Investment
                                                                credit
                                                              percentage
    Cumulative purchase payments during contract year 1         (as a
                                                              percentage
                                                             of purchase
                                                              payments)
------------------------------------------------------------------------
Less than $50,000..........................................          3.0
More than $49,999.99 but less than $500,000................          4.0
More than $499,999.99......................................          5.0
------------------------------------------------------------------------

    The crediting of the Investment Credit for any purchase payments 
made during Contract Year one will be made at the same time purchase 
payments are allocated to the Fixed and Variable Sub-Accounts.
    If additional purchase payments are made during Contract year one 
that increase the cumulative purchase payments to a higher breakpoint, 
Sage Life will credit an additional Investment Credit to the Account 
Value. For each previous purchase payment made during Contract year 
one, Sage Life calculates this amount by subtracting (b) from (a), and 
then multiplying by (c), where: (a) Is the Investment Credit percentage 
based upon cumulative purchase payments to date, but not beyond 
Contract year one; (b) is the sum of the Investment Credit percentages 
previously credited to a purchase payment made during Contract year 
one; and (c) is the corresponding purchase payment made during Contract 
year one.
    Each Investment Credit will be allocated to the same Sub-Accounts 
and in the same proportion as the purchase payment just made. The 
Investment Credit is not considered to be a purchase payment. 
Investment Credits will be paid from Sage Life's general account 
assets. Surrender charges will not be assessed on the Investment 
Credit. Investment Credits are also not considered to be an investment 
in the Contract (basis) for tax purposes.
    10. Sage Life will recapture some or all of the Investment Credits, 
but not the earnings relating to the Investment Credits, in the 
following circumstances:
    (i) Sage Life will recapture any Investment Credits credited to the 
Account Value if the Contract owner cancels the Contract during the 
Free-Look Period.
    (ii) Sage Life will recapture any Investment Credits credited to 
the Account Value in the 24 months before the income date.
    (iii) If the Contract owner withdraws all or a portion of a 
purchase payment (for which an Investment Credit was added to the 
Contract) before the seventh Contract anniversary and it is subject to 
a surrender charge, Sage Life will recapture a proportionate amount of 
the Investment Credit related to that purchase payment. (Proportionate 
means the amount of the withdrawal subject to a surrender charge as a 
percentage of the amount of the unliquidated purchase payment.) For 
example, assume an initial purchase payment of $100,000. An Investment 
Credit is added and, therefore, the account value equals $104,000. 
Assume that sometime during the fourth Contract year, the return (net 
of charges) is 50%, for an account value of $156,000. Assume that the 
Contract owner withdraws $100,000. (No other withdrawals were made, and 
assume that a market value adjustment does not apply.) The $100,000 
withdrawal would be determined as follows: $56,000 is earnings, and 
will be subject neither to the surrender charge nor to recapture; 
$44,000 is considered to be a liquidation of a portion of the purchase 
payment. In year four, the surrender charge percentage is 5%, which, 
applied to the $44,000, results in a charge of $2,200. In addition, 
$1,760 of the Investment Credit is recaptured ($4,000 x $44,000/
100,000). Therefore, the amount of the withdrawal paid is $100,000 as 
requested. The account value will be reduced by the amount of the 
withdrawal paid ($100,000), by the surrender charge ($2,200) and by the 
recapture of a proportionate amount of the Investment Credit ($1,760) 
for a total reduction in account value of $103,960.
    (iv) If a Contract owner withdraws all or a portion of a purchase 
payment for which Sage Life credited an Investment Credit before the 
seventh Contract anniversary and an otherwise applicable surrender 
charge is waived pursuant to the Waiver of Surrender Charge Rider, Sage 
Life will recapture the Investment Credit related to the purchase 
payment. The Waiver of Surrender Charge Rider provides that Sage Life 
will not deduct a surrender charge if, at the time it receives a 
request for a withdrawal or a surrender, it has also received due proof 
that the Contract Owner (or the annuitant, if the Owner is not an 
individual) has a ``Qualifying Terminal Illness'' or meets the rider's 
prerequisites concerning confinement to a ``Qualifying Hospital or 
Nursing Care Facility.''
    11. 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 necessary to permit Sage Life to recapture Investment 
Credits applied to the Contract and Future Contracts as described 
above.

[[Page 18260]]

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 the Act. Applicants request that the Commission, 
pursuant to section 6(c) of the Act, grant the exemptions summarized 
above with respect to the Contracts and any Future Contracts funded by 
Variable Account A or Future Accounts, that are issued by Sage Life and 
underwritten or distributed by SDI or Sage Life Broker-Dealers. 
Applicants state that Future Contracts funded by Variable Account A or 
any Future Accounts will be substantially similar in all material 
respects to the Contracts. 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 it is not administratively feasible to 
track the Investment Credit amount in the Variable Account after the 
Investment Credit is applied. Accordingly, the asset-based charges 
applicable to the Variable Account will be assessed against the entire 
amounts held in the Variable Account, including the Investment Credit. 
As a result, 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 Investment Credit.
    3. Subsection (i) of Section 27 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 any 
registered separate account funding variable insurance contracts or a 
sponsoring insurance company of such account to sell a contract funded 
by the registered separate account unless, among other things, 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 proportionate share of the 
issuer's current net assets, or the cash equivalent thereof.
    4. Applicants submit that the Investment Credit recapture 
provisions of the Contract would not deprive an Owner of his or her 
proportionate share of the issuer's current net assets. Applicants 
state that an Owner's interest in the amount of the Investment Credit 
allocated to his or her Account Value upon receipt of first year 
purchase payments is not fully vested until the applicable free-look 
period has expired without return of the Contract. Similarly, 
Applicants state that an Owner's interest in the amount of any 
Investment Credit is not completely vested for seven complete years 
following the Contract date (date the Contract was issued) with respect 
to withdrawals and 24 months with respect to annuitization. Until or 
unless the amount of any Investment Credit is vested, Applicants submit 
that Sage Life retains the right and interest in the Investment Credit 
amount, although not in the earnings attributable to that amount. Thus, 
Applicants argue that when Sage Life recaptures any Investment Credit 
it is simply retrieving its own assets, and because an Owner's interest 
in the Investment Credit is not vested, the Owner has not been deprived 
of a proportionate share of the Variable Account's assets, i.e., a 
share of the applicable Variable Account's assets proportionate to the 
Owner's Account Value.
    5. In addition, with respect to Investment Credit recapture upon 
the exercise of the free-look privilege, Applicants state that it would 
be patently unfair to allow an owner exercising that privilege to 
retain a Investment Credit amount under a Contract that has been 
returned for a refund after a period of only a few days. Applicants 
state that if Sage Life could not recapture the Investment Credit, 
individuals could purchase a Contract with no intention of retaining 
it, and simply return it for a quick profit.
    6. Furthermore, Applicants state that the recapture of Investment 
Credits upon certain withdrawals or the receipt of income payments is 
designed to provide Sage Life with a measure of protection. Again, the 
amounts recaptured were provided by Sage Life from its own general 
account assets as an Investment Credit, and any gain would remain as 
part of the Account Value.
    7. Applicants represent that the Investment Credit will be 
attractive to and in the interest of investors because it will permit 
Owners to put between 103% to 105% of their first year purchase 
payments to work for them in the selected Sub-Accounts. Also, any 
earnings attributable to the Investment Credit will be retained by the 
Owner, and the principal amount of the Investment Credit will be 
retained if the contingencies set forth in the application are 
satisfied.
    8. Applicants state that Sage Life's right to recapture Investment 
Credits applied within seven Contract years of certain withdrawals or 
the receipt of income payments within 24 months of the credit being 
applied protects it against the risk that Owners will contribute large 
amounts as they approach certain events to obtain the Investment 
Credit, while avoiding Contract charges over the long term. With 
respect to refunds paid upon the return of Contracts within the ``Free-
Look'' period, the amount payable by Sage Life must be reduced by the 
allocated Investment Credit. Otherwise, Applicants state that 
purchasers could apply for Contracts for the sole purpose of exercising 
the Free-Look provision and making a quick profit.
    9. Applicants submit that the provisions for recapture of any 
applicable Investment Credit under the Contracts do not, and any such 
Future Contract provisions will not, violate sections 2(a)(32) and 
27(i)(2)(A) of the Act. Nevertheless, to avoid any uncertainties, 
Applicants request an exemption from those Sections, to the extent 
deemed necessary, to permit the recapture of any Investment Credit 
under the circumstances described herein with respect to the Contracts 
and any Future Contracts, without the loss of the relief from Section 
27 provided by Section 27(i).
    10. 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, whether or not members of any 
securities association, to the same extent, covering the same subject 
matter, and for the accomplishment of the same ends as are prescribed 
in Section 22(a) in respect of the rules which may be made by a 
registered securities association governing its members. Rule 22c-1 
thereunder 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

[[Page 18261]]

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.
    11. Arguably, Sage Life's recapture of the Investment Credit might 
be viewed as resulting in the redemption of redeemable securities for a 
price other than one based on the current net asset value of Variable 
Account A. Applicants contend, however, that recapture of the 
Investment Credit is not violative of Rule 22c-1. Applicants argue that 
the recapture does not involve either of the evils that Rule 22c-1 was 
intended to eliminate or reduce, 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 their redemption 
or repurchase at a price above it, and (ii) other unfair results 
including speculative trading practices. To effect a recapture of a 
Investment Credit, Sage Life will redeem interests in an Owner's 
account value at a price determined on the basis of current net asset 
value of Variable Account A. The amount recaptured will equal the 
amount of the Investment Credit that Sage Life paid out if its general 
account assets. Although Owners will be entitled to retain any 
investment gain attributable to the Investment Credit, the amount of 
such gain will be determined on the basis of the current net asset 
value of Variable Account A. Thus, no dilution will occur upon the 
recapture of the Investment 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 Investment 
Credit. However, to avoid any uncertainty 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 
Investment Credit under the Contracts and Future Contracts.

Conclusion

    Applicants submit that their request for an order is appropriate 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 argue 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 their Application described herein. 
Applicants submit that having them file additional applications would 
impair their ability effectively to take advantage of business 
opportunities as they arise. Further, Applicants state that if they 
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 request meets the standards set out in section 6(c) of 
the 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 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. 02-9056 Filed 4-12-02; 8:45 am]
BILLING CODE 8010-01-P