[Federal Register Volume 67, Number 78 (Tuesday, April 23, 2002)]
[Proposed Rules]
[Pages 19886-19893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9456]



[[Page 19885]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 239 and 274



Disclosure of Costs and Expenses by Insurance Company Separate Accounts 
Registered as Unit Investment Trusts That Offer Variable Annuity 
Contracts; Proposed Rule

  Federal Register / Vol. 67, No. 78 / Tuesday, April 23, 2002 / 
Proposed Rules  

[[Page 19886]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239 and 274

[Release Nos. 33-8087; IC-25521; File No. S7-07-02]
RIN 3235-AI39


Disclosure of Costs and Expenses by Insurance Company Separate 
Accounts Registered as Unit Investment Trusts That Offer Variable 
Annuity Contracts

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing revisions 
to the registration form for insurance company separate accounts that 
are registered as unit investment trusts and that offer variable 
annuity contracts. The proposed amendments would revise the format of 
the fee table to require disclosure of the range of expenses for all of 
the mutual funds offered through the separate account, rather than 
disclosure of the expenses of each fund. These and other proposed 
technical amendments to the fee table will conform the treatment of 
fund expenses in the registration form for variable annuities to that 
in the registration form for variable life insurance policies that we 
are adopting in a companion release today, and the registration form 
used by mutual funds.

DATES: Comments must be received on or before June 14, 2002.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-07-02; this file number 
should be included on the subject line if E-mail is used. All comments 
received will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, NW, Washington, 
DC 20549-0102. Electronically submitted comment letters also will be 
posted on the Commission's Internet site (http://www.sec.gov).\1\
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    \1\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Mark Cowan, Senior Counsel, Katy 
Mobedshahi, Attorney, or Paul G. Cellupica, Assistant Director, (202) 
942-0721, Office of Disclosure and Insurance Product Regulation, 
Division of Investment Management, Securities and Exchange Commission, 
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450 Fifth Street, NW, Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is proposing for comment amendments to Form N-4 [17 
CFR 239.17b; 17 CFR 274.11c], the form used by separate accounts 
organized as unit investment trusts and offering variable annuity 
contracts to register under the Investment Company Act of 1940 [15 
U.S.C. 80a-1 et seq.] (``Investment Company Act'') and to offer their 
securities under the Securities Act of 1933 [15 U.S.C. 77a et seq.] 
(``Securities Act'').

I. Discussion

A. Disclosure of Range of Portfolio Company Expenses

    Form N-4 is the registration form used by insurance company 
separate accounts organized as unit investment trusts that offer 
variable annuity contracts to register under the Investment Company Act 
and to register their securities under the Securities Act. Form N-4 
requires that a prospectus for a variable annuity contract include a 
fee table, similar to the fee table required by Form N-1A for mutual 
funds.\2\ The fee table of Form N-4 requires disclosure of the costs 
and expenses that a variable annuity contractowner will bear, directly 
or indirectly. This includes the annual operating expenses for each 
mutual fund in which a contractowner may invest (``Portfolio 
Company'').\3\
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    \2\ Item 3(a) of Form N-4.
    \3\ Variable annuity separate accounts registered as unit 
investment trusts are divided into sub-accounts, each of which 
invests in a different Portfolio Company. Each contractowner selects 
the sub-accounts, and thus the Portfolio Companies, in which his or 
her account value is invested.
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    Our proposed amendments would conform the treatment of Portfolio 
Company expenses in Form N-4 to that in newly adopted Form N-6. The 
Commission has today adopted Form N-6 for insurance company separate 
accounts that are registered as unit investment trusts and that offer 
variable life insurance policies, to be used by these separate accounts 
to register under the Investment Company Act and to offer their 
securities under the Securities Act.\4\ Unlike the fee table in Form N-
4, which requires disclosure of the expenses for each Portfolio 
Company, the fee table of Form N-6 requires disclosure of the range of 
expenses for all of the Portfolio Companies.\5\ Because variable life 
fees and charges are complex, and because variable life policies 
frequently offer numerous Portfolio Companies as investment options, we 
concluded that investors could be overwhelmed by information if the 
fees and charges for each Portfolio Company were required to be 
separately stated in the Form N-6 fee table.\6\
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    \4\ Investment Company Act Release No. IC-25522 (April 12, 2002) 
(``Form N-6 Adopting Release'').
    \5\ Form N-6 Adopting Release, supra note 4, at Section II.A.2., 
``Risk/Benefit Summary: Fee Table (Item 3); Portfolio Company Fees 
and Charges.''
    \6\ Id.y
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    In proposing Form N-6, we noted that we expected to reconsider the 
disclosure of Portfolio Company fees and charges in variable annuity 
prospectuses.\7\ We now believe that the approach adopted in Form N-6 
to disclosing the fees and expenses of Portfolio Companies available 
through a variable life insurance policy may be appropriate in the 
variable annuity context as well. Therefore, we are proposing to amend 
the fee table of Form N-4 to require disclosure of the range of 
expenses for all of the Portfolio Companies offered through the 
separate account, rather than separate disclosure of the expenses of 
each Portfolio Company.\8\
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    \7\ Investment Company Act Release No. 23066 (March 13, 1998) 
[63 FR 13988, 13993 n. 48 (March 23, 1998)] (Form N-6 Proposing 
Release).
    \8\ Proposed Item 3(a).
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    We believe that use of a range of Portfolio Company expenses is 
warranted in order to simplify fee tables for variable annuity 
contracts, which have grown longer and more complex. As with variable 
life insurance policies, the number of investment options available 
through a typical variable annuity contract has expanded considerably 
in recent years.\9\ Variable annuity fee tables have also become more 
complicated in recent years because insurers have increasingly offered 
variable annuity contracts with a variety of so-called ``unbundled'' 
optional features, each of which has a separate charge.\10\
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    \9\ Rick Carey, 9-Month Variable Annuity Sales Off 20% From Last 
Year, National Underwriter Life & Health/Financial Services Edition, 
Dec. 3, 2001, at 14 (estimating that average number of funds 
available in a variable annuity contract increased from five in 1988 
to 33 in 2001).
    \10\ Timothy C. Pfeifer, Growing Rider Use Furthers Flexibility 
But Also Complexity, National Underwriter Life & Health/Financial 
Services Edition, Sept. 3, 2001, at 22 (describing growth in 
optional riders on both variable annuities and variable life 
insurance).
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    In addition, our proposed change will conform the treatment of 
Portfolio Company expenses in the fee table of the variable annuity 
prospectus to that in the fee table of the variable life

[[Page 19887]]

insurance prospectus. We note that one of the commenters on Form N-6 
urged that the Commission adopt a uniform approach to disclosure of 
Portfolio Company expenses in Form N-4 and Form N-6. We agree with this 
commenter's argument that requirements to report Portfolio Company 
expenses differently in variable annuity and variable life insurance 
registration statements would complicate the process of preparing 
registration statements without improving the quality of 
disclosure.\11\
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    \11\ Letter from Nationwide Life Insurance Company to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission (``SEC'') 
(June 29, 1998) (available in File No. S7-9-98). See also Letter 
from W. Thomas Conner, Vice President, Regulatory Affairs, National 
Association for Variable Annuities, to Paul F. Roye, Director, and 
Susan Nash, Senior Assistant Director, Division of Investment 
Management, SEC (Oct. 6, 1999) (available in File No. S7-07-02) 
(recommending that Commission adopt range of Portfolio Company 
expenses approach in Form N-4).
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    We emphasize that investors in variable annuity contracts will 
continue to have access to information about the fees and expenses of 
each Portfolio Company. Prior to adoption of Form N-6, a mutual fund 
that offers its shares exclusively to insurance company separate 
accounts as investment options for variable life insurance policies and 
variable annuity contracts was permitted to omit the fee table from its 
prospectus.\12\ However, in connection with the adoption of Form N-6, 
we have also amended Form N-1A, the form used by mutual funds to 
register under the Investment Company Act and to offer their securities 
under the Securities Act, to eliminate this exclusion from the fee 
table requirement for mutual funds that offer their shares exclusively 
to separate accounts. Because this exclusion has been eliminated, 
investors in variable annuity contracts will now have access to 
information about the fees and expenses of each Portfolio Company in 
the prospectus for the Portfolio Company.\13\ Our proposed amendments 
to the fee table of Form N-4 would require a statement referring 
investors to the Portfolio Company prospectuses for more detail 
concerning Portfolio Company fees and expenses.
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    \12\ See Item 3 of Form N-1A; Investment Company Act Release No. 
16766 (Jan. 23, 1989) [54 FR 4772 (Jan. 31, 1989)] (adopting Form N-
4 fee table and eliminating the fee table requirement in Form N-1A 
for Portfolio Companies offering shares exclusively to insurance 
company separate accounts); Investment Company Act Release No. 16482 
(July 15, 1988) [53 FR 27872, 27874 (July 25, 1988)] (proposing Form 
N-4 fee table and elimination of Form N-1A fee table requirement for 
Portfolio Companies offering shares exclusively to insurance company 
separate accounts).
    \13\ Investors in variable annuity contracts receive the 
prospectuses for both the separate account unit investment trust and 
the Portfolio Companies they have selected.
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    We are also proposing to permit registrants to continue to include 
disclosure of the fees and expenses for each Portfolio Company in the 
fee table of Form N-4, in addition to the range of expenses for the 
Portfolio Companies. This approach parallels the fee table of Form N-6 
and would provide registrants with the flexibility to include this 
detailed information when they determine that it would be helpful, and 
not overwhelming, to investors.\14\
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    \14\ Proposed Instruction 23 to Item 3(a); Instruction 4(h) to 
Item 3 of Form N-6.
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    Like current Forms N-4 and N-1A, and newly adopted Form N-6, the 
proposed amendments would require line item disclosure of subcategories 
of Portfolio Company expenses, including management fees, distribution 
(12b-1) fees, and other expenses, as well as total annual Portfolio 
Company operating expenses. We request comment on whether this 
breakdown is appropriate or whether there should be more or fewer line 
items. We also request comment on other alternatives to the disclosure 
of Portfolio Company expenses in the fee table of Form N-4.

B. Other Fee Table Changes To Conform to Forms N-1A and N-6

    We are proposing other amendments to conform the format and 
instructions for the fee table of Form N-4 more closely to its 
counterparts in Forms N-1A and N-6. These changes are discussed below.
    Expense Reimbursement and Fee Waiver Arrangements. We are proposing 
to require that Portfolio Company operating expenses be disclosed 
before expense reimbursement and fee waiver arrangements. Expenses 
after reimbursement or waiver could be disclosed in a footnote.\15\
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    \15\ Proposed Instructions 21(a) & 22 to Item 3(a). See 
Instructions 3(d)(i) and 3(e) to Item 3 of Form N-1A; Instructions 
4(f)(i) and 4(g) to Item 3 of Form N-6. Under Form N-1A, the staff 
has permitted mutual funds with fees that are subject to a 
contractual limitation that requires reimbursement or waiver of 
expenses to add two lines to the fee table: one line showing the 
amount of the reimbursement or waiver, and a second line showing the 
fund's net expenses after subtracting the reimbursement or waiver 
from the total fund operating expenses. See Letter from Barry D. 
Miller, Associate Director, Division of Investment Management, SEC, 
to Craig S. Tyle, General Counsel, Investment Company Institute 
(Oct. 2, 1998). We intend that the staff construe the proposed 
amendments to the fee table requirements of Form N-4, if adopted, 
consistent with the approach taken under Form N-1A, to permit the 
addition of one line to the fee table showing the range of net 
Portfolio Company operating expenses after taking account of 
contractual limitations that require reimbursement or waiver of 
expenses. This additional line would be placed immediately under the 
``Total Annual [Portfolio Company] Operating Expenses'' line of the 
fee table and would have to use appropriate descriptive captions. A 
footnote to the fee table would be required to describe the 
contractual arrangement.
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    Expense Example. Currently, Form N-4 requires the fee table to 
provide an example of the cumulative amount of separate account and 
Portfolio Company fees and expenses incurred over one, three, five, and 
ten year periods, based on a hypothetical investment of $1,000 and an 
annual 5% return.\16\ Expense information in the example must be shown 
for each Portfolio Company offered through the contract.\17\ Because 
the proposed amendments to the Form N-4 fee table will require 
disclosure of the range of Portfolio Company expenses, rather than the 
expenses for each Portfolio Company offered through the contract, we 
are proposing to amend the expense example and the accompanying 
instructions, so that only an expense example based on the maximum 
expenses charged by any of the Portfolio Companies would be 
required.\18\ An additional example, based on the minimum expenses 
charged by any of the Portfolio Companies, could also be provided.\19\ 
In lieu of providing examples based on the maximum and minimum expenses 
charged by the Portfolio Companies offered through the contract, a 
registrant would be permitted to include expense examples for each of 
the Portfolio Companies, as Form N-4 currently requires.\20\
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    \16\ Item 3(a) and Instruction 21 to Item 3(a) of Form N-4.
    \17\ Instruction 5 to Item 3(a) of Form N-4.
    \18\ Proposed Instruction 24(b) to Item 3(a). Under Form N-1A, 
the staff has permitted mutual funds with fees that are subject to a 
contractual limitation that requires reimbursement or waiver of 
expenses to take account of the reimbursement or waiver in 
calculating the example required by the fee table of Item 3, but 
only for the duration of the contractual limitation. Funds may not 
assume that the reimbursement or waiver will continue for periods 
subsequent to the contractual limitation period in calculating 
expenses shown in the example. Cf. Letter from Barry D. Miller, 
Associate Director, Division of Investment Management, SEC, to Craig 
S. Tyle, General Counsel, Investment Company Institute (Oct. 2, 
1998) (permitting funds with fees that are subject to a contractual 
limitation that requires reimbursement or waiver to add two lines to 
the fee table showing the amount of the reimbursement or waiver and 
total net expenses). We intend that the staff construe the proposed 
amendments to the expense example requirements of Form N-4, if 
adopted, consistent with the approach it has taken with the expense 
example of the fee table of Form N-1A, to permit expense examples to 
take into account contractual limitations on Portfolio Company 
operating expenses that require reimbursement or waiver of expenses, 
but only for the period of the contractual limitation.
    \19\ Proposed Instruction 24(b) to Item 3(a).
    \20\ Id.
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    The proposed amendments would also modify the format of the expense 
example to conform to the format of the

[[Page 19888]]

example in Form N-1A, by prescribing that a narrative explanation 
precede the example.\21\ The proposed amendments also would increase 
the initial hypothetical investment in the example from $1,000 to 
$10,000, the amount currently used in the expense example in Form N-
1A.\22\ The increase reflects the fact that the typical amount invested 
in a variable annuity far exceeds $1,000,\23\ while still providing a 
round figure that will facilitate an investor's computation of his or 
her own estimated expenses based on the investor's actual investment.
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    \21\ Proposed Item 3(a). See Item 3 of Form N-1A.
    \22\ Proposed Item 3(a). See Item 3 of Form N-1A.
    \23\ See R. James Doyle, VARDS, and Timothy Pfeifer, Milliman 
USA, Inc., Variable Annuity Feature and Benefit Utilization Study 7-
8 (Feb. 2002) (average initial premium for a variable annuity 
contract is $61,411).
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    We request comment on alternative formats for the expense example 
in Form N-4.
    Fee Table Narrative. Currently, Form N-4 requires a brief narrative 
immediately following the fee table, explaining the purpose of the fee 
table and cross-referencing the Portfolio Company prospectuses.\24\ We 
propose to require narrative explanations to precede each section of 
the fee table, in order to better help investors understand the 
information about fees and charges shown in that section. These would 
be similar to the narrative explanations required by the Form N-6 fee 
table.\25\ A registrant would be able to modify a narrative explanation 
if the explanation contains comparable information to that shown.\26\ 
We request comment on whether the proposed narrative explanations will 
be useful to investors in understanding the types of fees and charges 
disclosed in the fee table.
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    \24\ General Instruction 1 to Item 3(a) of Form N-4.
    \25\ Proposed Item 3(a) and Proposed General Instruction 1 to 
Item 3(a). See Item 3 and Instruction 1(b) to Item 3 of Form N-6.
    \26\ Proposed General Instruction 1 to Item 3(a). See 
Instruction 1(b) to Item 3 of Form N-6.
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    Fee Table Captions. The proposed amendments would add a caption to 
the Portfolio Company expenses section of the fee table for 
``Distribution [and/or Service] (12b-1) Fees,'' which includes any 
distribution and other expenses a fund pays under a rule 12b-1 plan. 
This addition would reflect the increasing use of such plans in recent 
years by funds that serve as investment options for variable annuity 
contracts.\27\ In addition, we propose to delete the current 
instruction that permits the use of subcategories under the caption for 
``Other Expenses'' in the Portfolio Company expenses section of the fee 
table.\28\ We believe that these subcategories would have extremely 
limited relevance in the context of a table showing the range of 
expenses for all Portfolio Companies because different Portfolio 
Companies would likely have different subcategories of ``Other 
Expenses.''
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    \27\ See Letter from Heidi Stam, Associate Director, Division of 
Investment Management, SEC, to Gary Hughes, Chief Counsel, 
Securities and Banking, American Council of Life Insurance, Paul 
Schott Stevens, General Counsel, Investment Company Institute, and 
Mark J. Mackey, President & Chief Executive Officer, National 
Association for Variable Annuities (May 30, 1996) (describing issues 
raised by use of 12b-1 plans by funds underlying variable insurance 
products).
    \28\ Instruction 17(b) to Item 3(a) of Form N-4.
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    We also propose to amend the instructions to clarify that a 
registrant may modify or add captions in the fee table if the captions 
shown do not provide an accurate description of its fees and expenses, 
which parallels a similar instruction in the Form N-6 fee table.\29\ 
This instruction recognizes that, following the enactment of the 
National Securities Markets Improvement Act of 1996, insurers have 
increased flexibility to structure variable annuity charges, subject to 
a requirement that those charges be reasonable in the aggregate.\30\ We 
request comment on whether the captions of the fee table of Form N-4 
are appropriate and whether additional captions or sub-captions should 
be required.
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    \29\ Proposed General Instruction 3 to Item 3(a). See 
Instruction 1(c) to Item 3 of Form N-6.
    \30\ 15 U.S.C. 80a-26; 15 U.S.C. 80a-27; National Securities 
Markets Improvement Act of 1996, Pub. L. No. 104-290 (1996), Section 
205; S. Rep. No. 293, 104th Cong., 2d Sess. 22 (1996); H. Rep. No. 
622, 104th Cong., 2d Sess. 45-46 (1996).
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    Requirement to Disclose All Fees and Charges. Currently, the fee 
table of Form N-4 requires that registrants disclose all transaction 
fees, whether or not a specific caption is provided for a charge in the 
fee table.\31\ We are proposing to add an instruction, similar to an 
instruction in Form N-6, requiring registrants also to disclose all 
recurring fees and charges.\32\ We believe that complete disclosure of 
all fees and charges that a contractowner may pay is appropriate. We 
are not aware of any mechanism to distinguish between charges for 
optional features that ought to be included in the fee table because 
they are expected to be selected by most or a majority of investors, or 
by ``typical'' investors, and charges for optional features that are 
expected to be less popular and hence arguably could be omitted from 
the fee table. We note that in recent years insurers have increasingly 
offered variable annuities with a variety of so-called ``unbundled'' 
optional features, each of which has a specific charge.\33\ This trend 
toward unbundling of features and charges would make the task of 
separating out those optional features that will be selected by a 
``typical'' investor much more difficult. We request comment on whether 
there should be any limitations on the charges required to be disclosed 
in the fee table.
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    \31\ Instruction 12 to Item 3(a) of Form N-4.
    \32\ Proposed Instruction 15 to Item 3(a). See Instruction 3(e) 
to Item 3 of Form N-6.
    \33\ Timothy C. Pfeifer, Growing Rider Use Furthers Flexibility 
But Also Complexity, supra note 10 (describing growth in optional 
riders).
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    Requirement to Disclose Maximum Charges. The proposed amendments to 
the fee table would add an instruction requiring disclosure of the 
maximum guaranteed charge for each item unless a specific instruction 
directs otherwise.\34\ In addition, registrants would be permitted, but 
not required, to disclose current charges in the fee table so long as 
the current charge disclosure is no more prominent than, and does not 
obscure or impede understanding of, the required maximum guaranteed 
charge disclosure. Registrants would also be able to include in a 
footnote to the table a tabular, narrative, or other presentation 
providing further detail regarding variations in a charge. This 
instruction parallels a similar instruction in Form N-6.\35\ We request 
comment on this approach.
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    \34\ Proposed General Instruction 5 to Item 3(a).
    \35\ See Instruction 1(f) to Item 3 of Form N-6.
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II. General Request for Comments

    The Commission requests comment on the proposed changes to Form N-
4, including suggested changes to related provisions of rules and forms 
that the Commission is not proposing to amend. Are there additional 
changes that we should make to conform the Form N-4 fee table to the 
fee tables in Forms N-1A and N-6?
    Our proposed amendments are intended to conform the fee tables of 
Forms N-4 and N-6. If we adopt changes to our Form N-4 proposals in 
response to comments, we intend to adopt conforming changes to Form N-
6. We therefore request that commenters on our proposed amendments to 
the fee table of Form N-4 address how their comments would apply to the 
fee table of Form N-6, and whether a different approach to any aspect 
of fee and expense disclosure is warranted in Form N-6 because of the 
differences between variable life insurance and variable annuities. We 
also request that commenters address the costs and benefits of any 
conforming change that

[[Page 19889]]

they recommend we make to the fee table of Form N-6.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 [5 U.S.C. 801 et seq.], the Commission also is requesting 
information regarding the potential effect of the proposed amendments 
to Form N-4 on the U.S. economy on an annual basis. Commenters are 
requested to provide empirical data to support their views.

III. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules on affected persons and entities.
    Form N-4 is the registration form used by insurance company 
separate accounts organized as unit investment trusts that offer 
variable annuity contracts to register under the Investment Company Act 
and to register their securities under the Securities Act.\36\ Form N-4 
requires that a prospectus for a variable annuity contract include a 
fee table showing the costs and expenses that a variable annuity 
contractowner will bear, directly or indirectly, including the annual 
operating expenses for each mutual fund in which a contractowner may 
invest (``Portfolio Company''). The proposed amendments would amend the 
fee table in the prospectus of Form N-4 to require registrants to 
disclose the range of fees and expenses for all of the Portfolio 
Companies offered, rather than separately disclosing the fees and 
expenses of each Portfolio Company. Registrants would still be 
permitted to include additional disclosure of the fees and expenses of 
each Portfolio Company offered through a sub-account of the registrant. 
Use of a range of Portfolio Company expenses is warranted in order to 
streamline and improve fee tables for variable annuity contracts, which 
have grown increasingly longer and more complex in recent years as the 
number of investment options available through a typical variable 
annuity contract has expanded. Under the proposed amendments, in order 
to treat Portfolio Company expense disclosure consistent with Form N-1A 
and Form N-6, registrants would be also required to show total 
Portfolio Company annual expenses without the effect of any fee waiver 
or expense reimbursement arrangements, although expenses after 
reimbursement or waiver could be disclosed in a footnote to the fee 
table.
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    \36\ Under a variable annuity contract, purchase payments are 
invested in an insurer's separate account created under state law 
and legally segregated from the assets of the insurer's general 
account. The separate account offers the contract owner a number of 
investment options, which generally consist of mutual funds.
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    The proposed amendments would also make other technical changes 
conforming the format and the instructions for the fee table of Form N-
4 more closely to the fee tables in Forms N-6 and N-1A. These 
amendments include the following:
     Revising the expense example in the fee table, to require 
only an example based on the maximum expenses charged by any Portfolio 
Company, for purposes of consistency with disclosure of the range of 
Portfolio Company expenses in the fee table.
     Making other modifications to the format of the example, 
for purposes of consistency with the format of the expense example in 
Form N-1A.
     Prescribing narrative explanation to precede each section 
of the fee table, in order to help investors understand the information 
about fees and charges presented in that section and thereby improve 
transparency of fee disclosure.
     Requiring a caption in the fee table for 12b-1 
distribution expenses, and adding an instruction permitting registrants 
to modify or add captions in the fee table, as appropriate. These 
changes would update the fee table of Form N-4 to reflect the increased 
use of 12b-1 plans by funds that serve as investment options for 
variable annuity contracts and the increased flexibility provided to 
insurers by the National Securities Markets Improvement Act of 1996 in 
structuring variable annuity charges, and would conform the fee table 
of Form N-4 more closely to the fee table of Form N-6.
     Adding an instruction requiring disclosure of all 
recurring fees and charges other than annual Portfolio Company 
operating expenses, in order to improve transparency of fee disclosure, 
and to make Form N-4 consistent with Form N-6.
     Adding an instruction requiring disclosure of maximum 
guaranteed charges for each item, but also permitting disclosure of 
current charges, in order to improve transparency of fee disclosure, 
and to make Form N-4 consistent with Form N-6.

A. Benefits

    We believe that the proposed amendments to Form N-4 will benefit 
investors by making the variable annuity prospectus easier for 
investors to understand. As noted above, disclosure of a range of 
Portfolio Company expenses should make fee tables for variable annuity 
contracts, which have grown increasingly longer and more complex in 
recent years, easier to understand. Investors will continue to have 
access to information about the fees and expenses of each Portfolio 
Company in the prospectus for the Portfolio Company. The proposed 
amendments would also modify the expense example of the Form N-4 fee 
table, consistent with the use of the range of Portfolio Company 
expenses in the fee table.
    The proposed amendments would make other technical changes to the 
format and instructions of the fee table of Form N-4, in order to 
improve transparency of the fees and charges that contractowners will 
pay, to make the Form N-4 fee table more consistent with its 
counterpart in Form N-6, and to reflect changes in the types of fees 
and charges assessed by variable annuity contracts since the fee table 
of Form N-4 was adopted. We believe these changes may improve 
disclosure of variable annuity fees and expenses to investors. It is 
difficult to quantify the effects of this improved disclosure, though 
we note that the changes we are proposing are limited in nature.
    The proposed amendments may also result in slightly reduced 
printing and mailing costs to registrants. Disclosure of the range of 
Portfolio Company expenses rather than the expenses of each Portfolio 
Company may shorten the typical variable annuity prospectus, because 
disclosure of these expenses sometimes comprises a full page, or more, 
of a variable annuity prospectus. \37\ We do not expect that any of the 
other changes in the proposed amendments would lengthen the variable 
annuity prospectus, as these changes would largely affect the format in 
which fee and expense information is to be presented, rather than the 
quantity of information presented. Based on a print run of 20,000 
copies for a typical variable annuity prospectus, and printing and 
mailing costs of $0.05 per page, the reduction in printing and mailing 
costs attributable to the proposed amendments may equal $1,000 for a 
typical variable annuity contract. \38\ Based on an estimate of 520 
variable annuity contracts currently being actively marketed, 
therefore, these

[[Page 19890]]

printing and postage savings could total $520,000 annually. \39\
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    \37\ The proposed amendments would require a registrant to 
include a statement referring investors to Portfolio Company 
prospectuses for more detail concerning Portfolio Company fees and 
expenses. This required statement would not impose any additional 
disclosure burden on registrants, because the instructions to Form 
N-4 currently require a similar cross-reference to the Portfolio 
Company prospectuses. See General Instruction 1 to Item 3(a) of Form 
N-4.
    \38\ These estimates are based on information provided to the 
staff by an insurance company that issues variable annuities of the 
typical print runs of its prospectuses, and its printing and mailing 
costs.
    \39\ The estimate of 520 variable annuity contracts is based on 
the number of contracts tracked by Morningstar, Inc. Morningstar, 
Principia Pro Plus, Variable Annuities/Life (Jan. 2002).
---------------------------------------------------------------------------

    In addition, conforming the disclosure requirements for Portfolio 
Company expenses in variable annuity prospectuses to those in variable 
life prospectuses may simplify the process of preparing registration 
statements for some registrants, because frequently insurance companies 
that issue variable annuities also issue variable life insurance.\40\ 
We believe that these cost savings will be relatively small, however.
---------------------------------------------------------------------------

    \40\ We estimate, based on an analysis of data from the EDGAR 
filing system for 2000 and 2001, that approximately two-thirds of 
insurers issuing variable annuities also issue variable life 
insurance policies.
---------------------------------------------------------------------------

B. Costs

    Although the proposed amendments to the fee table of Form N-4 are 
limited and many of them are technical in nature, they differ from the 
current requirements of the fee table of Form N-4, which have been in 
place since 1989. Therefore, variable annuity issuers may incur a one-
time cost for training in order for their personnel, particularly 
lawyers and others who are responsible for supervising the preparation 
of filings on Form N-4, to review and analyze the disclosure 
requirements of the amendments to Form N-4. Because the proposed 
amendments would make mostly minor changes to the current format of the 
Form N-4 fee table, and would not require the disclosure of information 
that the current fee table does not require, we estimate that this cost 
will be fairly small. We lack data necessary to make a more precise 
estimate of the cost resulting from the amendments, but we estimate 
that this cost will be approximately $500 for each insurance company 
that sponsors separate accounts that are registered on Form N-4 and 
issue variable annuity contracts that are actively being sold. Further, 
we estimate that there are 94 such insurance companies. \41\ We 
therefore estimate the one-time cost attributable to the proposed 
amendments to Form N-4 to be $47,000. We request comment on both the 
cost estimate of $500 for each insurance company affected, and the 
total cost estimate of $47,000.
---------------------------------------------------------------------------

    \41\ The estimate of the number of insurance companies issuing 
variable annuities is based on the staff's analysis of data from the 
EDGAR filing system for 2000 and 2001.
---------------------------------------------------------------------------

    We do not expect that the amendments to Form N-4 will result in any 
net effect on the aggregate hour burden for completing and filing Form 
N-4. We expect that in preparing their fee tables for Form N-4, 
registrants will still need to calculate each line item of expenses for 
each Portfolio Company offered through the contract, in order to 
determine the minimum and maximum expenses of the Portfolio Companies. 
We also expect that the other proposed amendments modifying the format 
and instructions of the Form N-4 fee table to conform more closely to 
the fee tables of Form N-6 and Form N-1A will have no net effect on the 
burden hours for completing and filing Form N-4, because they will not 
require disclosure of any additional information by issuers.
    The Commission requests comment on the costs and benefits of the 
proposed amendments to Form N-4, including any benefits to investors 
resulting from improved disclosure, and estimates of the one-time cost 
burden to apply the requirements of the proposed amendments to their 
existing variable annuity prospectuses. Commenters should provide 
analysis and empirical data to support their views on the costs and 
benefits associated with this proposal.

IV. Effects on Efficiency, Competition, and Capital Formation

    Section 2(c) of the Investment Company Act, section 2(b) of the 
Securities Act, and section 3(f) of the Securities Exchange Act of 1934 
require the Commission, when engaging in rulemaking that requires it to 
consider or determine whether an action is consistent with the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.\42\
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 77b(b), 78c(f), and 80a-2(c).
---------------------------------------------------------------------------

    The proposed amendments to Form N-4 are expected to have minimal 
effects on efficiency and competition among issuers of variable annuity 
insurance policies. If adopted, the proposed amendments would revise 
the fee table in the prospectus of Form N-4 to require registrants to 
disclose the range of expenses for all the Portfolio Companies offered 
through the separate account, rather than disclosing separately the 
fees and expenses of each Portfolio Company. In addition, the proposed 
amendments would make certain other technical changes to conform the 
format and instructions to the fee table of Form N-4 more closely to 
its counterparts in Form N-6 and Form N-1A. The proposed amendments 
would allow fee table disclosure of Portfolio Company expenses to be 
shorter, and would generally make fee table disclosure clearer and more 
understandable to investors. However, we would not expect the proposed 
amendments to have any significant effect on competition and efficiency 
because they would not change the quantity of information about fees 
and expenses that investors in variable annuity contracts receive. 
Similarly, it is unclear whether the proposed amendments to Form N-4 
will affect capital formation. We request comment on whether the 
proposed amendments, if adopted, would promote efficiency, competition, 
and capital formation.

V. Paperwork Reduction Act

    Form N-4 contains ``collection of information'' requirements within 
the meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3501 et 
seq.], and the Commission has submitted the proposed collections of 
information to the Office of Management and Budget for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the 
collection of information is ``Form N-4 under the Investment Company 
Act of 1940 and Securities Act of 1933, Registration Statement of 
Separate Accounts Organized as Unit Investment Trusts.'' The 
information collection requirements imposed by Form N-4 are mandatory. 
Responses to the collection of information will not be kept 
confidential. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
    Form N-4 (OMB Control No. 3235-0318) was adopted pursuant to 
section 8(a) of the Investment Company Act [15 U.S.C. 80a-8] and 
section 5 of the Securities Act [15 U.S.C. 77e]. The purpose of Form N-
4 is to meet the registration and disclosure requirements of the 
Securities Act and Investment Company Act and to enable separate 
accounts organized as unit investment trusts that offer variable 
annuity contracts to provide investors with information necessary to 
evaluate an investment in a variable annuity contract.
    The Commission is proposing to amend Form N-4 to conform the 
disclosure of Portfolio Company expenses in the fee table to the format 
used in Form N-6, the registration form for insurance company separate 
accounts registered as unit investment trusts that offer variable life 
insurance policies. Under the proposed amendments, registrants on Form 
N-4 would be required to disclose only the range of the expenses for 
all of the Portfolio Companies in which the separate account invests. 
Variable

[[Page 19891]]

annuity investors would continue to have access to complete information 
about the Portfolio Company fees and expenses because disclosure of the 
fees and expenses for each Portfolio Company would be located in its 
prospectus under the requirements of Form N-1A. In addition, 
registrants on Form N-4 would be required to disclose Portfolio Company 
expenses in the fee table prior to expense reimbursements and fee 
waiver arrangements, consistent with the approach adopted by the 
Commission in Form N-1A and Form N-6. Registrants would be permitted to 
disclose expenses after reimbursement or waiver in a footnote to the 
fee table. The proposed amendments would also make other technical 
changes in order to conform the format and instructions for the fee 
table of Form N-4 to its counterparts in Form N-1A and Form N-6.
    The Commission estimates that there are 615 separate accounts 
offering variable annuity contracts that are registered with the 
Commission on Form N-4. \43\ We estimate that Form N-4 requires 
approximately 219.8 hours for each post-effective amendment and 298 
hours for each initial registration statement, with total aggregate 
burden hours of 284,379.20. \44\
---------------------------------------------------------------------------

    \43\ See Proposed Collection; Comment Request (Extension of Form 
N-4) (Jan. 4, 2000) [65 FR 1934 (Jan. 12, 2000)]. The estimate of 
the number of separate accounts was based on the staff's analysis of 
filings it received on Form N-4 over a representative period.
    \44\ See id. The burden hours to complete an initial 
registration statement and a post-effective amendment on Form N-4 
were based on a survey by the staff of nine issuers of variable 
annuity contracts.
---------------------------------------------------------------------------

    We do not expect that the amendments to Form N-4 will result in any 
net effect on the aggregate hour burden for completing and filing Form 
N-4. We expect that in preparing their fee tables for Form N-4, 
registrants will still need to calculate each line item of expenses for 
each Portfolio Company offered through the contract, in order to 
determine the minimum and maximum expenses of the Portfolio Companies. 
We also expect that the other proposed amendments modifying the format 
of the Form N-4 fee table to conform more closely to the fee tables of 
Form N-6 and Form N-1A will have no net effect on the burden hours for 
completing and filing Form N-4, because they will not require any 
additional information to be disclosed.
    We request your comments on the accuracy of our estimate. Pursuant 
to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) 
Evaluate whether the proposed collection of information is necessary 
for the proper performance of the functions of the agency, including 
whether the information will have practical utility; (ii) evaluate the 
accuracy of the Commission's estimate of burden of the proposed 
collection of information; (iii) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (iv) evaluate whether there are ways to minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Room 3208, 
New Executive Office Building, Washington, DC 20503, and should send a 
copy to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609, with 
reference to File No. S7-07-02. Request for materials submitted to OMB 
by the Commission with regard to this collection of information should 
be in writing, refer to File No. S7-07-02, and be submitted to the 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549, Attention: Records Management, Office of Filings and 
Information Services. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days after publication of 
this release.

VI. Regulatory Flexibility Act Certification

    Pursuant to Section 605(b) of the Regulatory Flexibility Act [5 
U.S.C. 605(b)], the Chairman of the Commission has certified that the 
proposed amendments to Form N-4 would not, if adopted, have a 
significant economic impact on a substantial number of small entities. 
Few, if any, small entities are affected by Form N-4. The Chairman's 
certification, including the reasons therefor, is attached to this 
release as Appendix A. The Commission encourages written comment on the 
certification. Commenters are asked to describe the nature of any 
impact on small entities and provide empirical data to support the 
extent of the impact.

VII. Statutory Authority

    The amendments to Form N-4 are being proposed pursuant to sections 
5, 7, 8, 10, and 19(a) of the Securities Act [15 U.S.C. 77e, 77g, 77h, 
77j, and 77s(a)] and sections 8, 24, 30, and 38 of the Investment 
Company Act [15 U.S.C. 80a-8, 80a-24, 80a-29, and 80a-37].

List of Subjects

17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend Chapter II, Title 17 of the Code of Federal Regulations as 
follows.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    1. The general authority citation for Part 239 is revised to read 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

    2. The authority citation for Part 274 is revised to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise 
noted.

    Note: The text of Form N-4 does not and these amendments will 
not appear in the Code of Federal Regulations.

    3. Form N-4 (referenced in Secs. 239.17b and 274.11c), Item 
3(a), is amended by:
    a. Revising Item 3(a);
    b. Revising Instructions: General Instructions 1, 3, and 5;
    c. Removing the heading ``Portfolio Company Annual Expenses'' 
preceding Instruction 15;
    d. Removing Instructions 16 through 21;
    e. Redesignating Instruction 15 as Instruction 16;
    f. Adding new Instruction 15;
    g. Adding the heading ``Annual [Portfolio Company] Operating 
Expenses'' to precede newly redesignated Instruction 16; and
    h. Adding new Instructions 17 through 25, to read as follows:

Form N-4

* * * * *

[[Page 19892]]

Item 3. Synopsis

    (a) Include the following information, in plain English under 
rule 421(d) under the Securities Act [17 CFR 430.421(d)]:
    The following tables describe the fees and expenses that you 
will pay when buying, owning, and surrendering the contract. The 
first table describes the fees and expenses that you will pay at the 
time that you buy the contract, surrender the contract, or transfer 
cash value between investment options. State premium taxes may also 
be deducted.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Contractowner Transaction Expenses:
  Sales Load Imposed on Purchases (as a     ________%
   percentage of purchase payments).
  Deferred Sales Load (as a percentage of   ________%
   purchase payments or amount
   surrendered, as applicable).
  Surrender Fees (as a percentage of        ________%
   amount surrendered, if applicable).
  Exchange Fee............................  ________%
------------------------------------------------------------------------

    The next table describes the fees and expenses that you will pay 
periodically during the time that you own the contract, not 
including [portfolio company] fees and expenses.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
[Annual] Contract Fee......................................  ...........
Separate Account Annual Expenses (as a percentage of
 average account value)
  Mortality and Expense Risk Fees..........................    ________%
  Account Fees and Expenses................................    ________%
  Total Separate Account Annual Expenses...................    ________%
------------------------------------------------------------------------

    The next table describes the [portfolio company] fees and 
expenses that you will pay periodically during the time that you own 
the contract. The table shows the minimum and maximum fees and 
expenses charged by any of the [portfolio companies]. More detail 
concerning each [portfolio company's] fees and expenses is contained 
in the prospectus for each [portfolio company].

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
   Annual [Portfolio Company] Operating Expenses (expenses that are deducted from [portfolio company] assets)
Management Fees......................................                                             ____% - ____%
Distribution [and/or Service] (12b-1) Fees...........                                             ____% - ____%
Other Expenses.......................................                                             ____% - ____%
Total Annual [Portfolio Company] Operating Expenses..                                             ____% - ____%
----------------------------------------------------------------------------------------------------------------

Example

    This Example is intended to help you compare the cost of 
investing in the contract with the cost of investing in other 
variable annuity contracts.
    The Example assumes that you invest $10,000 in the contract for 
the time periods indicated. The Example also assumes that your 
investment has a 5% return each year and assumes the maximum fees 
and expenses of any of the [portfolio companies]. Although your 
actual costs may be higher or lower, based on these assumptions, 
your costs would be:

------------------------------------------------------------------------
 
-------------------------------------
  (1) If you surrender your contract at the end of the applicable time
                                period:
1 year             3 years            5 years           10 years
$__                $__                $__               $__
 
     (2) If you annuitize at the end of the applicable time period:
1 year             3 years            5 years           10 years
$__                $__                $__               $__
 
                (3) If you do not surrender your contract:
1 year             3 years            5 years           10 years
$__                $__                $__               $__
------------------------------------------------------------------------

Instructions:

General Instructions

    1. Include the narrative explanations in the order indicated. A 
Registrant may modify a narrative explanation if the explanation 
contains comparable information to that shown.
* * * * *
    3. A Registrant may omit captions if the Registrant does not 
charge the fees or expenses covered by the captions. A Registrant 
may modify or add captions if the captions shown do not provide an 
accurate description of the Registrant's fees and expenses.
* * * * *
    5. In the Contractowner Transaction Expenses, [Annual] Contract 
Fee, and Separate Account Annual Expenses tables, the Registrant 
must disclose the maximum guaranteed charge, unless a specific 
instruction directs otherwise. The Registrant may disclose the 
current charge, in addition to the maximum charge, if the disclosure 
of the current charge is no more prominent than, and does not 
obscure or impede understanding of, the disclosure of the maximum 
charge. In addition, the Registrant may include in a footnote to the 
table a tabular, narrative, or other presentation providing further 
detail regarding variations in the charge. For example, if deferred 
sales charges decline over time, the Registrant may include in a 
footnote a presentation regarding the scheduled reductions in the 
deferred sales charges.
* * * * *
    15. If the Registrant (or any other party pursuant to an 
agreement with the Registrant) imposes any other recurring charge 
other than annual portfolio company operating expenses, add another 
caption describing it and list the (maximum) amount or basis on 
which the charge is deducted.

Annual [Portfolio Company] Operating Expenses

* * * * *
    17. If a Registrant has multiple sub-accounts, it should 
disclose the minimum and maximum expenses of any portfolio companies 
for each line item. For example, if a Registrant has five sub-
accounts with management fees of 0.50%, 0.70%, 1.00%, 1.10%, and 
1.25%, respectively, it should disclose that management fees range 
from 0.50% to 1.25%. The minimum and maximum amounts disclosed for 
``Total Annual [Portfolio Company] Operating Expenses'' should be 
the minimum and maximum ``Total Annual [Portfolio Company] Operating 
Expenses'' for any portfolio company, and not the sum of the minimum 
and maximum amounts disclosed for the individual line items. For 
example, assume a Registrant has three sub-accounts. Sub-account 1 
has management fees of 0.50%, 12b-1 fees of 0.25%, other expenses of 
0.30%, and total expenses of 1.05%; sub-account 2 has management 
fees of 0.90%, 12b-1 fees of 0.00%, other expenses of 0.25%, and 
total expenses of 1.15%; and sub-account 3 has management fees of 
1.00%, 12b-1 fees of 0.00%, other expenses of 0.25%, and total 
expenses of 1.25%. The minimum and maximum amounts to be disclosed 
in the table are: management fees--0.50%-1.00%; 12b-1 fees--0.00%-
0.25%; other expenses: 0.25%-0.30%; total annual [portfolio company] 
operating expenses--1.05%-1.25%. The total annual [portfolio 
company] operating expenses are the expenses of sub-accounts 1 and 
3, respectively, not the sum of the minimum and maximum amounts 
disclosed for the individual line items, which would be 0.75%-1.55%.
    18. ``Management Fees'' include investment advisory fees 
(including any fees based on a portfolio company's performance), any 
other management fees payable to a portfolio company's investment 
adviser or its affiliates, and administrative fees payable to a 
portfolio company's investment adviser or its affiliates that are 
not included as ``Other Expenses.''
    19. ``Distribution [and/or Service] (12b-1) Fees'' include all 
distribution or other expenses incurred during the most recent 
fiscal year under a plan adopted pursuant to rule 12b-1 [17 CFR 
270.12b-1].
    20. (a) ``Other Expenses'' include all expenses not otherwise 
disclosed in the table that are deducted from a portfolio company's 
assets. The amount of expenses deducted from a portfolio company's 
assets are the amounts shown as expenses in the portfolio company's 
statement of operations (including increases resulting from 
complying with paragraph 2(g) of rule 6-07 of Regulation S-X [17 CFR 
210.6-07]).
    (b) ``Other Expenses'' do not include extraordinary expenses as 
determined under generally accepted accounting principles (see 
Accounting Principles Board Opinion No. 30). If extraordinary 
expenses were incurred by any portfolio company that would, if

[[Page 19893]]

included, materially affect the minimum or maximum amounts shown in 
the table, disclose in a footnote to the table what the minimum and 
maximum ``Other Expenses'' would have been had the extraordinary 
expenses been included.
    21. (a) Base the percentages of ``Annual [Portfolio Company] 
Operating Expenses'' on amounts incurred during the most recent 
fiscal year, but include in expenses amounts that would have been 
incurred absent expense reimbursement or fee waiver arrangements. If 
a portfolio company has a fiscal year different from that of the 
Registrant, base the expenses on those incurred during either the 
period that corresponds to the fiscal year of the Registrant, or the 
most recently completed fiscal year of the portfolio company. If the 
Registrant or a portfolio company has changed its fiscal year and, 
as a result, the most recent fiscal year is less than three months, 
use the fiscal year prior to the most recent fiscal year as the 
basis for determining ``Annual [Portfolio Company] Operating 
Expenses.''
    (b) If there have been any changes in ``Annual [Portfolio 
Company] Operating Expenses'' that would materially affect the 
information disclosed in the table:
    (i) Restate the expense information using the current fees as if 
they had been in effect during the previous fiscal year; and
    (ii) In a footnote to the table, disclose that the expense 
information in the table has been restated to reflect current fees.
    (c) A change in ``Annual [Portfolio Company] Operating 
Expenses'' means either an increase or a decrease in expenses that 
occurred during the most recent fiscal year or that is expected to 
occur during the current fiscal year. A change in ``Annual 
[Portfolio Company] Operating Expenses'' does not include a decrease 
in operating expenses as a percentage of assets due to economies of 
scale or breakpoints in a fee arrangement resulting from an increase 
in a portfolio company's assets.
    22. A Registrant may reflect minimum and maximum actual 
[portfolio company] operating expenses that include expense 
reimbursement or fee waiver arrangements in a footnote to the table. 
If the Registrant provides this disclosure, also disclose the period 
for which the expense reimbursement or fee waiver arrangement is 
expected to continue, or whether it can be terminated at any time at 
the option of a portfolio company.
    23. A Registrant may include additional tables showing annual 
operating expenses separately for each portfolio company immediately 
following the required table of ``Annual [Portfolio Company] 
Operating Expenses.'' The additional tables should be prepared in 
the format, and in accordance with the Instructions, prescribed in 
Item 3 of Form N-1A [17 CFR 239.15A; 17 CFR 274.11A] for disclosing 
``Annual Fund Operating Expenses.''

Example

    24. For purposes of the Example in the table:
    (a) Assume that the percentage amounts listed under ``Separate 
Account Annual Expenses'' remain the same in each year of the 1-, 3-
, 5-, and 10-year periods, except that an adjustment may be made to 
reflect reduced annual expenses resulting from completion of the 
amortization of initial organization expenses;
    (b) Assume deduction of the maximum percentage amount of 
expenses shown under ``Total Annual [Portfolio Company] Operating 
Expenses,'' and that this amount remains the same in each year of 
the 1-, 3-, 5-, and 10-year periods, except that an adjustment may 
be made to reflect reduced annual expenses resulting from completion 
of the amortization of initial organization expenses. An additional 
example that assumes deduction of the minimum percentage amount of 
expenses shown under ``Total Annual [Portfolio Company] Operating 
Expenses'' may also be provided, immediately following the required 
expense example based on maximum portfolio company expenses. In lieu 
of providing the required example based on maximum portfolio company 
expenses, a Registrant may include separate expense examples based 
on the expenses of each portfolio company;
    (c) Assume the maximum sales load that may be deducted from 
purchase payments is deducted;
    (d) For any breakpoint in any fee, assume that the amount of the 
Registrant's (and the portfolio company's) assets remains constant 
as of the level at the end of the most recently completed fiscal 
year;
    (e) Assume no exchanges or other transactions;
    (f) Reflect any [annual] contract fee by dividing the total 
amount of [annual] contract fees collected during the year that are 
attributable to the contract offered by the prospectus by the total 
average net assets of all the sub-accounts in the separate account 
that are attributable to the contract offered by the prospectus. Add 
the resulting percentage to ``Separate Account Annual Expenses,'' 
and assume that it remains the same in each year of the 1-, 3-, 5-, 
and 10-year periods;
    (g) Reflect any contingent deferred sales load by assuming a 
complete surrender on the last day of the year;
    (h) Provide the information required in the third section of the 
Example only if a sales load or other fee is charged upon a complete 
surrender; and
    (i) Include in the Example the information provided by the 
caption ``If you annuitize at the end of the applicable time 
period'' only if the Registrant charges fees upon annuitization that 
are different from those charged upon surrender.
    25. New Registrants. For purposes of this Item, a ``New 
Registrant'' is a Registrant (or sub-account of the Registrant) that 
does not include in Form N-4 financial statements reporting 
operating results or that includes financial statements for the 
Registrant's (or sub-account's) initial fiscal year reporting 
operating results for a period of 6 months or less. The following 
Instructions apply to New Registrants:
    (a) Base the percentages in ``Annual [Portfolio Company] 
Operating Expenses'' on payments that will be made, but include in 
expenses amounts that will be incurred without reduction for expense 
reimbursement or fee waiver arrangements, estimating amounts of 
``Other Expenses.'' Disclose in a footnote to the table that ``Other 
Expenses'' are based on estimated amounts for the current fiscal 
year.
    (b) A New Registrant may reflect in a footnote to the table 
expense reimbursement or fee waiver arrangements that are expected 
to reduce any minimum or maximum [portfolio company] operating 
expense or the estimate of minimum or maximum ``Other Expenses'' 
(regardless of whether the arrangement has been guaranteed). If the 
New Registrant provides this disclosure, also disclose the period 
for which the expense reimbursement or fee waiver arrangement is 
expected to continue, or whether it can be terminated at any time at 
the option of a portfolio company.
    (c) Complete only the 1- and 3-year period portions of the 
Example, and estimate any [annual] contract fees collected.

* * * * *

    Dated: April 12, 2002.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

Appendix A

[Note: Appendix A to the preamble will not appear in the Code of 
Federal Regulations.]

Regulatory Flexibility Act Certification

    I, Harvey L. Pitt, Chairman of the Securities and Exchange 
Commission, on information and belief, hereby certify, pursuant to 5 
U.S.C. 605(b), that the proposed amendments to Form N-4, if adopted, 
would not have a significant economic impact on a substantial number 
of small entities.
    The proposed amendments to Form N-4, a registration form for 
insurance company separate accounts that offer variable annuity 
contracts, would amend the fee table presentation in the prospectus 
of Form N-4 to require disclosure of the range of annual expenses 
for all portfolio companies in which the separate account invests, 
rather than separate disclosure of the expenses of each portfolio 
company.
    Few, if any, registered insurance company separate accounts have 
net assets of less than $50,000,000, when separate account assets 
are aggregated with the assets of the sponsoring insurance company. 
As a result, few, if any, small entities within the definitions 
provided in Rule 0-10 under the Investment Company Act of 1940 and 
rule 157 under the Securities Act of 1933 would be affected by the 
proposed amendments to Form N-4, if adopted. Accordingly, the 
proposed amendments would not have a significant economic impact on 
a substantial number of small entities.

    Dated: April 11, 2002.

Harvey L. Pitt,
Chairman.
[FR Doc. 02-9456 Filed 4-22-02; 8:45 am]
BILLING CODE 8010-01-U