[Federal Register Volume 67, Number 160 (Monday, August 19, 2002)]
[Notices]
[Pages 53815-53818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20974]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25697; File No. 812-12765]


Preferred Life Insurance Company of New York, et al; Notice of 
Application

August 12, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order under Section 6(c) of the 
Investment Company Act of 1940 (the ``Act'') granting exemptions from 
the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 
22c-1 thereunder to permit the recapture of a bonus credit made under 
certain deferred variable annuity contracts.

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APPLICANTS: Preferred Life Insurance Company of New York (``Preferred 
Life'' or the ``Company''), Preferred Life Variable Account C 
(``Account''), and USAllianz Investor Services, LLC (``USAZ'') 
(collectively, ``Applicants'').

SUMMARY OF APPLICATION: Applicants seek an order of the Commission 
exempting them with respect to the support of the variable annuity 
contracts issued by the Account described herein (``Contracts''), or 
and also variable annuity contracts issued in the future (``Future 
Contracts'') that are similar in all material respects to the Contracts 
and are issued by the Account (``Future Account Contracts''), or by any 
other separate account of the Company and its successors in interest 
(``Future Accounts''), and certain National Association of Securities 
Dealers, Inc. (``NASD'') member broker-dealers which may, in the 
future, act as principal underwriter of such Contracts or Future 
Contracts from the provisions of Sections 2(a)(32), 22(c), and 
27(i)(2)(A) of the Act and Rule 22c-1 thereunder, pursuant to Section 
6(c) of the Act, to

[[Page 53816]]

the extent necessary to permit the recapture of a bonus credit where 
the owner exercises his or her free look option.

FILING DATE: The application was filed on January 22, 2002 and amended 
on August 6, 2002.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving the Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on September 5, 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 may request notification of a hearing 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 Stewart D. 
Gregg, Esq., Allianz Life Insurance Company of North America, 5701 
Golden Hills Drive, Minneapolis, MN 55416.

FOR FURTHER INFORMATION CONTACT: Harry Eisenstein, Senior Counsel, at 
(202) 942-0552, or Zandra Y. Bailes, Branch Chief, at (202) 942-0670, 
Office of Insurance Products, Division of Investment Management.

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

Applicants' Representations

    1. Preferred Life is a stock life insurance company that is 
principally engaged in the sale of life insurance and annuity products, 
and is licensed in six states, including the State of New York. 
Preferred Life is a wholly-owned subsidiary of Allianz Life Insurance 
Company of North America (``Allianz Life''), a Minnesota stock life 
insurance company which both issues life insurance and annuity products 
and acts as a holding company for various financial services companies. 
All of the stock of Allianz Life is indirectly owned by Allianz 
Versicherungs-AG Holding, a German holding company.
    2. The Account is comprised of subaccounts established to receive 
and invest net purchase payments under variable annuity contracts 
issued by the Company and the Account (the ``Subaccounts''). The 
income, gains and losses, realized or unrealized, from the assets 
allocated to each Subaccount will be credited to or charged against 
those assets without regard to the income, gains or losses of the 
Company or the other Subaccounts. Applicants represent that the Account 
meets the definition of a ``separate account'' in Rule 0-1(e) under the 
Act.
    3. The Board of Directors of Preferred Life established the Account 
on February 26, 1988. The Account is registered under the Act as a unit 
investment trust (File No. 811-05716). The assets of the Account 
support flexible premium variable annuity contracts issued by the 
Company and the Account, and interests in the Account offered through 
such contracts have been registered under the Securities Act of 1933 
(``1933 Act'') on Form N-4 (File No. 333-19699). In addition, a Form N-
4 registration statement has been filed to register the interests in 
the Account offered through the Contracts (File No. 333-75718).
    4. USAZ, an affiliate of the Company, is the principal underwriter 
and the distributor of the variable annuity contracts issued by the 
Company and the Account. USAZ is registered with the Commission as a 
broker-dealer under the Securities Exchange Act of 1934, as amended, 
(the ``1934 Act''), and is a member of the NASD. USAZ may enter into 
written sales agreements with various broker-dealers to aid in the 
distribution of the Contracts for the Account.
    5. Each Subaccount will invest exclusively in a designated series 
of shares, representing an interest in a particular portfolio of one or 
more designated management investment companies of the series type 
(``Funds''). Applicants reserve the right to designate the shares of 
another portfolio of the Funds or of other management investment 
companies of the series type (``Other Funds'') as the exclusive 
investment vehicle for each new Subaccount that may be created in the 
future. Subject to Commission approval under Section 26(c) of the Act, 
Applicants also reserve the right to substitute the shares of another 
portfolio of the Funds or of Other Funds for the portfolio previously 
designated as the exclusive investment vehicle for each Subaccount.
    6. The Contracts are flexible premium variable annuity contracts 
issued by the Company through its separate account. The Contracts 
provide for accumulation of values on a variable basis, fixed basis, or 
both during the accumulation period, and may provide settlement or 
annuity payment options on a variable basis, fixed basis, or both. The 
Contracts may be purchased on a non-qualified tax basis. The Contracts 
may also be purchased and used in connection with plans qualifying for 
favorable Federal income tax treatment.
    7. The owner determines in the application or transmittal form for 
a Contract how the net premium payments will be allocated among the 
Subaccounts and the Fixed Account. The value of a contract (``Contract 
Value'') will vary with the investment performance of the Subaccounts 
selected, and the owner bears the entire risk for amounts allocated to 
a Subaccount.
    8. An owner may return his or her Contract for a refund during the 
free look period. An owner will generally have 10 days to return his or 
her Contract. Preferred Life will generally return the Contract value 
(minus any bonus credit) to the owner (the ``free look right'') in the 
event of the exercise of the free look right.
    9. An owner may surrender the Contract or make a partial withdrawal 
from the Contract value during the Accumulation Period. If an owner 
surrenders a Contract or takes a partial withdrawal, the Company may 
deduct a withdrawal charge. An owner generally may be permitted to 
withdraw certain limited amounts free of withdrawal charge.
    10. For each premium payment an owner makes, the Company may add a 
bonus credit equal to six percent of the premium payment (less prior 
partial withdrawals) to the owner's Contract value. The Company does 
not assess a specific charge for the bonus credit. The Company expects 
to use a portion of the mortality and expense risk charge, and/or the 
surrender charge to pay for the bonus credit.
    11. The owner may surrender the Contract or make a partial 
withdrawal from the Contract value during the accumulation period. If 
an owner surrenders a Contract or takes partial withdrawal, the Company 
may deduct a withdrawal charge to compensate it for expenses relating 
to sales, including commissions to registered representatives and other 
promotional expenses. An owner generally may be permitted to withdraw 
certain limited amounts free of withdrawal charge. The following chart 
shows the withdrawal charges that apply to the Contracts:

[[Page 53817]]



                            Withdrawal Charge
                  [As a percentage of premium payments]
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                                                            Withdrawal
        Completed years since receipt of premium            charge (%)
------------------------------------------------------------------------
0-2....................................................              8.5
3......................................................              8
4......................................................              7
5......................................................              6
6......................................................              5
7......................................................              4
8......................................................              3
9+.....................................................              0
------------------------------------------------------------------------

    12. The Company deducts various fees and charges, which may include 
a daily mortality and expense risk fee of 1.90% of the average daily 
Contract Value, which is increased to 2.10% if the Enhanced Death 
Benefit is selected; an annual contract maintenance charge equal to 
$30, which is currently waived if the Contract Value of a contract is 
at least $100,000; premium taxes; and withdrawal charges, which start 
at 8.5% and decline to 0% for a purchase payment after nine years from 
the date of receipt of the purchase payment. Asset-based charges are 
assessed against the entire amounts held in the Account, including the 
bonus credit amount, during the time the bonus credit has not vested. 
During such period, the aggregate asset-based charges assessed against 
an owner's Contract Value will be higher than those that would be 
charged if the owner's Contract Value did not include the bonus credit.
    13. Applicants seek exemption pursuant to Section 6(c) from 
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder to the extend necessary to permit Preferred Life to issue 
Contracts that permit recapture of bonus credits when an owner 
exercises the ``free-look'' option available under the Contract.

Legal Analysis

    1. Section 6(c) authorizes the Commission, by order upon 
application, to conditionally or unconditionally grant an exemption 
from any provision, rule or regulation of the Act to the extent that 
the 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. Because the 
provisions described below may be inconsistent with a recapture of a 
bonus credit, Applicant requests exemptions for the Contracts described 
herein, and for Future Contracts that are substantially similar in all 
material respects to the Contracts described herein, from Sections 
2(a)(32), 22(c) and 27(i)(2)(A) of the Act, and Rule 22c-1 thereunder, 
pursuant to Section 6(c), to the extent necessary to recapture the 
bonus credit applied to a premium payment in the instance described 
above. Applicants seek exemptions therefrom in order to avoid any 
questions concerning the Contracts' compliance with the Act and rules 
thereunder. Applicants assert that the recapture of the bonus credit is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and purposes fairly intended by the contract 
and provisions of the Act.
    2. Section 27(i) provides that Section 27 does not apply to any 
registered separate account funding variable insurance contracts, nor 
to the sponsoring insurance company and principal underwriter of such 
account, except as provided for in Section 27(i)(2)(A). Section 
27(i)(2)(A) of the Act, in pertinent part, makes it unlawful for any 
registered separate account funding variable insurance contracts, or 
for the sponsoring insurance company of such account, to sell any such 
contract unless such contract is a redeemable security. Section 
2(a)(32) of the Act defines ``redeemable security'' as any security 
under the terms of which the holder, upon its presentation to the 
issuer, is entitled to receive approximately his proportionate share of 
the issuer's current net assets, or the cash equivalent thereof.
    3. To the extent that the bonus credit recapture might be seen as a 
discount from the net asset value, or might be viewed as resulting in 
the payment to an owner of less than the proportionate share of the 
issuer's net assets, the bonus credit recapture would trigger the need 
for relief absent some exemption from the Act. Rule 6c-8 provides, in 
relevant part, that a registered separate account and any depositor of 
such account, shall be exempt from Section 2(a)(32), 22(c), 27(c)(1), 
27(c)(2), and 27(d) of the Act and Rule 22c-1 thereunder to the extent 
necessary to permit them to impose a deferred sales load on any 
variable annuity contract participating in such account. However, the 
bonus credit recapture is not a sales load, but a recapture of a bonus 
credit the Company previously applied to an owner's premium payments.
    4. Applicants submit that the recapture of a bonus credit does not 
violate Section 2(a)(32) of the Act. Applicants submit that the bonus 
recapture provisions in the Contracts do not deprive the owner of his 
or her proportionate share of the issuer's current net assets. An 
owner's right to the bonus credit will vest after the free look period. 
Until that time, the Company retains the right and interest in the 
dollar amount of any unvested bonus credit amount. Applicants argue 
that when the Company recaptures a bonus credit that is not vested, 
such owner would not be deprived of a proportionate share of the 
Account's assets (the issuer's current net assets) in violation of 
Section 2(a)(32). Therefore, according to Applicants, such recapture 
does not reduce the amount of each Account's current net assets an 
owner would otherwise be entitled to receive. To avoid uncertainty as 
to full compliance with the Act, Applicants request an exemption from 
the provisions of Sections 2(a)(32) and 27(i)(2)(A) to the extent 
deemed necessary to permit them to recapture the bonus credit under the 
Contracts and Future Contracts.
    5. Section 22(c) of the Act states that the Commission may make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company to accomplish the same ends as 
contemplated by Section 22(a). Rule 22c-1, promulgated under Section 
22(c) of the Act, in pertinent part, prohibits a registered investment 
company issuing a redeemable security (and a person designated in such 
issuer's prospectus as authorized to consummate transactions in such 
security, and a principal underwriter of, or dealer in, any such 
security) from selling, redeeming, or repurchasing any such security 
except at a price based on the current net asset value of such 
security.
    6. The Company's addition of the bonus credit might arguably be 
viewed as resulting in an owner purchasing a redeemable security for a 
price below the current net asset value. Further, by recapturing the 
bonus credit, the Company might arguably be redeeming a redeemable 
security for a price other than one based on the current net asset 
value of the Account. Applicants contend that these are not correct 
interpretations or applications of these statutory and regulatory 
provisions. Applicants contend that the bonus credit does not violate 
Section 22(c) and Rule 22c-1. In support of this contention, Applicants 
note that an owner's interest in his or her Contract value or in an 
Account would always be offered at a price next determined on the basis 
of net asset value and that the granting of a bonus credit does not 
reflect a reduction of that price. Instead, the Company will purchase 
with its own general account assets an interest in an Account equal to 
the bonus credit. Because the bonus credit will be paid out of Company 
assets, not Account

[[Page 53818]]

assets, Applicants assert that no dilution will occur as a result of 
the credit.
    7. Applicants contend that the recapture of the bonus credit does 
not involve either of the problems that the Commission intended to 
eliminate or reduce with Rule 22c-1. The Commission's stated purpose in 
adopting Rule 22c-1 was to avoid or minimize (1) dilution of the 
interests of other security holders and (2) speculative trading 
practices that are unfair to such holders. Applicants claim that the 
proposed recapture of the bonus credit does not pose such threat of 
dilution and that the bonus credit recapture will not alter an owner's 
net asset value. The Company will determine an owner's net cash 
surrender value under the Contract in accordance with Rule 22c-1 on a 
basis next computed after receipt of an owner's request for surrender 
(likewise, the calculation of death benefits and annuity payment 
amounts will be in full compliance with the forward pricing requirement 
of Rule 22c-1). The amount recaptured will equal the amount of the 
bonus credit that the Company paid out of its general account 
assets.\1\ Although an owner will retain any investment gain 
attributable to the bonus credit, the Company will determine the amount 
of such gain on the basis of the current net asset value of the 
Subaccount. Thus, Applicants argue, no dilution will occur upon the 
recapture of the bonus credit. In addition, Applicants assert that the 
credit recapture does not create the opportunity for speculative 
trading.
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    \1\ As noted above, asset-based charges applicable to the 
Account will be assessed against the entire amounts held in the 
Account, including the bonus credit amount. Applicants state that 
this is because it is not administratively feasible to track the 
bonus credit in the Account after the Company applies the credit.
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    8. Applicants contend that Rule 22c-1 and Section 22(c) should have 
no application to the bonus credit, as neither of the harms that Rule 
22c-1 was designed to address are found in the recapture of the bonus 
credit. However, to avoid uncertainty as to full compliance with the 
Act, Applicants request an exemption from the provisions of Section 
22(c) and Rule 22c-1 to the extent deemed necessary to permit them to 
recapture the bonus credit under the Contracts and Future Contracts.
    9. Applicants submit that the Commission should grant the 
exemptions requested in this Application, even if the bonus credit 
described herein conflicts with Sections 2(a)(32), 22(c), or 
27(i)(2)(A) of the Act or Rule 22c-1 thereunder. According to 
Applicants, the bonus credit provision is generally very favorable to 
the owners. While there may be a downside in a declining market where 
an owner would incur losses attributable to the credit, any earnings on 
the bonus credit in an appreciating market would vest immediately with 
an owner. Applicants assert that the bonus credit recapture provisions 
do not diminish the overall value of the bonus credit.
    10. Applicants state that the Company's recapture of the bonus 
credit is designed to prevent anti-selection against the Company. The 
risk of anti-selection would be that an owner could make significant 
premium payments into the Contract solely in order to receive a quick 
profit from the credit. The Company generally protects itself from this 
kind of anti-selection, and recovers its costs in situations where an 
owner withdraws his or her money early in the life of a Contract, by 
imposing a withdrawal charge of up to 8.5%. However, where an owner 
withdraws his money pursuant to a ``free-look'' provision, the Company 
generally does not apply this charge. Applicants state that the Company 
seeks to recapture the bonus credit (which is less than the withdrawal 
charge under the Contract) only in the circumstance where it does not 
apply the withdrawal charge.
    11. The Applicants also contend that it would be inherently unfair 
to allow an owner exercising the free-look privilege in the Contract to 
retain the bonus credit when returning the Contract for a refund after 
a period of only a few days (usually 10 or less). If the Company could 
not recapture the bonus credit, individuals might purchase a Contract 
with no intention of retaining it, and simply return it for a quick 
profit. By recapturing the bonus credit, the Company will prevent such 
individuals from doing so.
    12. The Applicants submit that the bonus credit involves none of 
the abuses to which provisions of the Act and the rules thereunder are 
directed. The owner will always retain the investment experience 
attributable to the bonus credit, and will retain the principal amount 
in all cases except under the one circumstance described herein. 
Further, the Company should be able to recapture such bonus credit to 
protect itself from investors wishing to use the Contract as a vehicle 
for a quick profit at the Company's expense, and to enable the Company 
to limit potential losses associated with such bonus credit.
    13. Applicants request exemptions from Sections 2(a)(32), 22(c), 
and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent 
necessary to permit the Applicant to recapture the bonus credit applied 
to a premium payment under the Contracts and Future Contracts in the 
circumstance described above.
    14. Applicants also seek class relief with respect to Future 
Underwriters, Future Accounts and Future Contracts. Applicants assert 
that additional requests for exemptive relief would present no issues 
under the Act not already addressed herein. Applicants state that if 
the Applicant were to repeatedly seek exemptive relief on behalf of 
Future Underwriters, Future Accounts and/or Future Contracts with 
respect to the same issues addressed herein, investors would not 
receive additional protection or benefit, and investors and the 
Applicants could be disadvantaged by increased costs from preparing 
such additional requests for relief. Applicants argue that the 
requested class relief is appropriate in the public interest because 
the relief will promote competitiveness in the variable annuity market 
by eliminating the need for the Company or its affiliates to file 
redundant exemptive applications, thereby reducing administrative 
expenses and maximizing efficient use of resources. Elimination of the 
delay and the expense of repeatedly seeking exemptive relief would, 
Applicants opine, enhance each Applicant's ability to effectively take 
advantage of business opportunities as such opportunities arise.
    For the reasons set forth above, Applicants believe that the 
exemptions requested are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act, and 
consistent with and supported by Commission precedent.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20974 Filed 8-16-02; 8:45 am]
BILLING CODE 8010-01-P