[Federal Register Volume 67, Number 199 (Tuesday, October 15, 2002)]
[Notices]
[Pages 63708-63713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26154]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25766; File No. 812-12742]


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

October 8, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to section 11(a) of 
the Investment Company Act of 1940 (the ``Act'') approving the terms of 
an offer of exchange.

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APPLICANTS: Minnesota Life Insurance Company (``Minnesota Life''), 
Minnesota Life Variable Life Account (the ``Variable Life Account''), 
and Securian Financial Services, Inc. (``Securian Financial,'' 
collectively with Minnesota Life and the Variable Life Account, the 
``Applicants'').

SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section 
11(a) of the Act approving the terms of a proposed offer of exchange of 
new variable adjustable life insurance policies issued by Minnesota 
Life and made available through the Variable Life Account (the ``New 
Policies'') for certain outstanding variable adjustable life insurance 
policies issued by Minnesota Life and made available through the 
Variable Life Account (``VAL ``87'' or ``VAL ``95,'' collectively, the 
``Old Policies;'' collectively with the New Policies, the 
``Policies'').

FILING DATE: The Application was filed on December 31, 2001.

HEARING OR NOTIFICATION OF HEARING: An order granting the Application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving Applicants with a copy of the request, in person or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on November 1, 2002, and should be accompanied by proof of service 
on the Applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Anna Marie 
Ettel, Esq., Minnesota Life, 400 Robert Street North, St. Paul, MN 
55101-2098; copies to W. Randolph Thompson, Esq., Of Counsel, Jones & 
Blouch L.L.P., 1025 Thomas Jefferson Street, NW., Suite 410E, 
Washington, DC 20007.

FOR FURTHER INFORMATION CONTACT: Martha Atkins, Senior Counsel, or 
Lorna J. MacLeod, 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 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 ((202) 942-8090).

Applicants' Representations

    1. Minnesota Life is a life insurance company organized under the 
laws of Minnesota. Minnesota Life was formerly known as The Minnesota 
Mutual Life Insurance Company, a mutual life insurance company 
organized in 1880 under the laws of Minnesota. Effective October 1, 
1998, The Minnesota Mutual Life Insurance Company reorganized by 
forming a mutual insurance holding company named ``Minnesota Mutual 
Companies, Inc.'' The Minnesota Mutual Life Insurance Company continued 
its corporate existence following conversion to a Minnesota stock life 
insurance company. All of the shares of the voting stock of Minnesota 
Life are owned by a second tier intermediate stock holding company 
named ``Securian Financial Group, Inc.,'' which is a wholly-owned 
subsidiary of a first tier intermediate stock holding company named 
``Securian Holding Company,'' which in turn is a wholly-owned 
subsidiary of the ultimate parent, Minnesota Mutual Companies, Inc.
    2. The Variable Life Account was established on October 21, 1985, 
by the Minnesota Life Board of Trustees in accordance with certain 
provisions of Minnesota insurance law. Minnesota Life is the legal 
owner of the assets in the Variable Life Account. The obligations to 
Policy owners and beneficiaries arising under the Policies are general 
corporate obligations of Minnesota Life and thus Minnesota Life's 
general assets back the Policies. The Minnesota law under which the 
Variable Life Account was established provides that the assets of the 
Variable Life Account shall not be chargeable with liabilities arising 
out of any other business which Minnesota Life may conduct, but shall 
be held and applied exclusively to the benefit of the holders of those 
variable life insurance policies for which the separate account was 
established. The investment performance of the Variable Life Account is 
entirely independent of both the investment performance of Minnesota 
Life's General Account and of any other separate account which 
Minnesota Life may have established or may later establish. The 
Variable Life Account is organized and registered under the Act as a 
unit investment trust (File No. 811-4585) and is a ``separate account'' 
as defined in section 2(a)(37) of the Act.
    3. Securian Financial is registered with the Commission as a 
broker-dealer and is a member of the National Association of Securities 
Dealers, Inc. Securian Financial is the principal underwriter for the 
Policies. Securian Financial is a wholly-owned subsidiary of Advantus 
Capital Management, Inc., which in turn is a wholly-owned subsidiary of 
Minnesota Life.

The New Policies

    4. The New Policies are offered pursuant to a registration 
statement under the Securities Act of 1933 (the ``1933 Act'') filed on 
February 8, 2000 (File No. 333-96383).
    5. The New Policies are variable adjustable life insurance policies 
that permit the Policy owner to determine the amount of life insurance 
protection he or she requires and the amount of money the Policy owner 
can afford to pay. Based on the Policy owner's selection of the 
premium, face amount and death benefit option, Minnesota Life will 
calculate the guaranteed plan of insurance. Subject to certain 
minimums, maximums, and Minnesota Life's underwriting standards, a 
Policy owner may choose any level of premium or death benefit he or she 
wishes. This flexibility results in a broad range of plans of 
insurance.
    6. The New Policies have a level premium for a specified number of 
years, for the life of the insured, or until the Policy becomes paid 
up.
    7. Policy values of the Old and New Policies may be invested in the 
Variable

[[Page 63709]]

Life Account or in the general account option. The Variable Life 
Account currently has 25 sub-accounts to which a Policy owner may 
allocate premiums (the ``Sub-Accounts''). Each Sub-Account invests in 
shares of a corresponding portfolio of the underlying mutual funds 
(``Underlying Funds''). Following is a list of the Underlying Funds: 
Advantus Series Fund, Inc.: Growth Portfolio, Bond Portfolio, Money 
Market Portfolio, Asset Allocation Portfolio, Mortgage Securities 
Portfolio, Index 500 Portfolio, Capital Appreciation Portfolio, 
International Stock Portfolio, Small Company Growth Portfolio, Value 
Stock Portfolio, Small Company Value Portfolio, Global Bond Portfolio, 
Index 400 Mid-Cap Portfolio, Macro-Cap Value Portfolio, Micro-Cap 
Growth Portfolio, Real Estate Securities Portfolio; Franklin Templeton 
Variable Insurance Products Trust: Templeton Developing Markets 
Securities Fund--Class 2 Shares, Templeton Asset Strategy Fund--Class 2 
Shares, Franklin Small Cap Fund--Class 2 Shares; Fidelity Variable 
Insurance Products Funds: Mid Cap Portfolio--Service Class Shares, 
Contrafund[reg] Portfolio--Service Class 2 Shares, Equity-Income 
Portfolio--Service Class 2 Shares; and Janus Aspen Series: Capital 
Appreciation Portfolio--Service Shares, International Growth 
Portfolio--Service Shares. Amounts invested in the Sub-Accounts are 
subject to the management fees paid and other expenses incurred by the 
Underlying Funds.
    8. Policy values may also be accumulated on a guaranteed basis by 
allocation to Minnesota Life's general account (the ``Guaranteed 
Principal Account''). Guaranteed Principal Account interest is 
guaranteed to be credited at a rate of at least 4% on an annual basis.
    9. Actual cash value may be transferred between the Guaranteed 
Principal Account and the Variable Life Account or among the Sub-
Accounts of the Variable Life Account. A Policy owner may request a 
transfer at any time while the Policy remains in force, or the Policy 
owner may arrange in advance for systematic transfers. A transfer is 
subject to a transaction charge, not to exceed $10, for each transfer 
of actual cash value among the Sub-Accounts and the Guaranteed 
Principal Account. Currently, there is a charge only for non-systematic 
transfers in excess of four per year.
    10. Policy values under the New Policies may be accessed by means 
of partial surrenders, policy loans or total surrender. Interest 
payable on policy loans will not be more than that permitted in the 
state in which the Policy is delivered; interest credited on loan 
accounts established in connection with outstanding loans will be at a 
rate which is not less than the policy loan interest rate minus 1% per 
year. If the Policy has been in force for ten years or more, the loan 
is credited at a rate equal to the policy loan rate minus 0.5% per 
year.
    11. The New Policies offer a choice of two death benefit options: a 
level death benefit equal to the New Policy's face amount (the ``Cash 
Option'') or a death benefit equal to the face amount plus policy value 
(the ``Protection Option''). In either case, the death benefit may be 
greater if necessary for a New Policy to continue to comply with the 
tax law definition of life insurance.
    12. The minimum face amount of a New Policy is $25,000 if the 
insured is greater than age 15, and $10,000 if the insured is age 0 to 
15.
    13. From base premiums, Minnesota Life deducts a Sales Charge, an 
Additional Face Amount Charge, and a Premium Charge. Premium Charges 
vary depending on whether the premium is a scheduled premium or a non-
repeating premium.
    (a) The Sales Charge consists of a deduction from each premium of 
up to 44% and applies only to base premiums scheduled to be paid in the 
12-month period following the policy date, or any policy adjustment 
involving an increase in base premium or any policy adjustment 
occurring during a period when a Sales Charge is being assessed. It 
will also apply only to that portion of an annual base premium 
necessary for an original issue whole life plan of insurance under the 
Cash Option. In other words, the amount of any base premium in excess 
of this amount will not be subject to the Sales Charge. The Sales 
Charge is designed to compensate Minnesota Life for distribution 
expenses incurred with respect to the Policies. Only adjustments that 
involve an increase in base premium will result in an additional Sales 
Charge being assessed on that increase in premium.
    (b) The Additional Face Amount Charge is an amount not to exceed $5 
per $1,000 of face amount of insurance. This amount may vary by the age 
of the insured and the premium level for a given amount of insurance. 
This charge is made ratably from premiums scheduled to be paid during 
the first policy year and during the 12 months following certain policy 
adjustments. The Additional Face Amount Charge is designed to 
compensate Minnesota Life for the administrative costs associated with 
issuance or adjustment of the Policies, including the cost of 
processing applications, conducting medical exams, classifying risks, 
determining insurability and risk class, and establishing policy 
records.
    (c) The Premium Charge of 6% is deducted from each base premium, 
approximately 2.5% of which is attributable to state and local premium 
tax obligations of Minnesota Life in connection with receipt of 
premiums under the New Policies. This charge is designed to cover the 
expenses related to premiums, including but not limited to 
administration, sales load, and taxes.
    14. Non-repeating premiums are currently subject to a Premium 
Charge of 3%. Minnesota Life does not assess a Sales Charge or an 
Additional Face Amount Charge against non-repeating premiums.
    15. In addition to deductions from premiums and non-repeating 
premiums, Minnesota Life assesses from actual cash value of a Policy, a 
Monthly Policy Charge, a Cost of Insurance Charge, and certain 
transaction charges.
    (a) The Monthly Policy Charge is $8 plus $0.02 per $1,000 of face 
amount. The maximum Monthly Policy Charge will never exceed $10 plus 
$0.03 per $1,000 of face amount. The Monthly Policy Charge is designed 
to cover certain administrative expenses, including those attributable 
to a Policy owner's records created and maintained by Minnesota Life.
    (b) The Cost of Insurance Charge compensates Minnesota Life for 
providing the death benefit under a Policy and is calculated based on 
rates that cannot exceed the maximum charges for mortality derived from 
the 1980 Commissioners Standard Ordinary Mortality Tables.
    (c) Transaction charges consist of up to a $25 charge for each 
policy adjustment, which compensates Minnesota Life for expenses 
associated with processing transactions. If the only policy adjustment 
is a partial surrender, the transaction charge will be the lesser of 
$25 or 2% of the amount surrendered. Minnesota Life also reserves the 
right to make a charge, not to exceed $25, for each transfer of actual 
cash value among the Guaranteed Principal Account and the Sub-Accounts 
of the Variable Life Account. Currently, there is a $10 charge only for 
non-systematic transfers in excess of four per year.
    16. From the assets held in the Variable Life Account, Minnesota 
Life assesses a Mortality and Expense Risk charge, deducted on each 
valuation date at an annual rate of 0.50% of the average daily net 
assets of the Variable Life Account. Although Minnesota Life reserves 
the right to charge or make provision for any taxes payable by

[[Page 63710]]

Minnesota Life with respect to the Variable Life Account or the 
Policies by a charge or adjustment to such assets, no such charge or 
provision is made at the present time. The Mortality and Expense Risk 
Charge compensates Minnesota Life for assuming the risks that cost of 
insurance charges will be insufficient to cover actual mortality 
experience and that the other charges will not cover Minnesota Life's 
expenses in connection with the Policy.
    17. Additional Benefits are offered by Minnesota Life as riders to 
the New Policies, subject to underwriting approval. These Additional 
Benefits may require the payment of additional premium. The Additional 
Benefits include a Waiver of Premium Agreement, an Inflation Agreement, 
a Business Continuation Agreement, a Family Term Rider, an Exchange of 
Insureds Agreement, and an Accelerated Benefits Agreement.

The Old Policies

    18. The Old Policies are offered pursuant to registration 
statements under the Securities Act of 1933 (File Nos. 333-03233 and 
333-64395).
    19. The Old Policies are variable adjustable life insurance 
policies that permit the Policy owner to select any two of the three 
components of a Policy--face amount, premium and plan of insurance--and 
Minnesota Life will then calculate the third. Subject to certain 
minimums, maximums and Minnesota Life's underwriting standards, a 
Policy owner may choose any level of premium or face amount that he or 
she wishes.
    20. The Old Policies have a level premium for a specified number of 
years, for the life of the insured, or until the Policy becomes paid 
up. If, however, the Policy owner selects a premium amount which is 
less than the premium required for a whole life plan of insurance (or, 
in other words, if the Policy owner selects a ``protection plan'' of 
insurance, described below), premiums will be payable for the life of 
the insured or to age 100, but the guaranteed face amount of insurance 
provided by the Policy will not be level during the life of the 
insured.
    21. Whole life insurance plans provide life insurance in an amount 
at least equal to the initial face amount at the death of the insured 
whenever that occurs. Premiums may be payable for a specified number of 
years or for the life of the insured. Whole life insurance plans assume 
an eventual tabular cash value accumulation, at or before the insured's 
age 100, equal to the net single premium required for that face amount 
of insurance.
    22. ''Protection plans'' of insurance provide life insurance in an 
amount at least equal to the initial face amount for a specified 
period. After the initial protection period, there is insurance 
coverage in a reduced amount on the life of the insured. ``Protection 
plans'' of insurance assume the exhaustion of the tabular cash value at 
the end of the initial protection period, except for the cash value 
associated with the reduced amount of insurance coverage at the end of 
the initial protection period.
    23. The highest premium amount permitted at the time of issue, or 
the maximum plan of insurance, for a specific face amount is one which 
will provide a fully paid-up Policy after the payment of ten annual 
premium payments. Whole life plans become paid up upon the payment of a 
designated number of annual premiums or at a designated age of the 
insured. If the Policy owner selects a premium amount which is less 
than the premium required for a whole life plan of insurance, premiums 
will be payable for the life of the insured or to age 100, but the 
guaranteed face amount of insurance provided by the Policy will not be 
level during the life of the insured. The initial face amount will be 
in effect until the Policy's tabular cash value, i.e., the cash value 
which is assumed in designing the Policy and which would be guaranteed 
in a conventional fixed-benefit is exhausted. At that time a lower 
amount of insurance will become effective. This reduced face amount is 
calculated on the basis of the continued payment of the scheduled 
premiums and a whole life plan of insurance. The result is that the 
Policy, on issue, will have an initial guaranteed death benefit 
extending to a stated date; after that date, a lower death benefit is 
guaranteed for the life of the insured.
    24. Policy values of the Old Policies may be invested in the 
Variable Life Account or in the general account option. The Variable 
Life Account currently has the same 25 Sub-Accounts as the New Policies 
have, to which a Policy owner may allocate premiums. Amounts invested 
in the Sub-Accounts are subject to the management fees paid and other 
expenses incurred by the Underlying Funds.
    25. Policy values may also be accumulated on a guaranteed basis by 
allocation to the Guaranteed Principal Account. Guaranteed Principal 
Account interest is guaranteed to be credited at a rate of at least 4% 
on an annual basis.
    26. Actual cash value may be transferred between the Guaranteed 
Principal Account and the Variable Life Account or among the Sub-
Accounts of the Variable Life Account. A Policy owner may request a 
transfer at any time while the Policy remains in force, or the Policy 
owner may arrange in advance for systematic transfers, subject to a 
maximum of 20 accounts. A transfer is subject to a transaction charge, 
not to exceed $10, for each transfer of actual cash value among the 
Sub-Accounts and the Guaranteed Principal Account. Currently, there is 
a charge only for non-systematic transfers in excess of four per year.
    27. Policy values under the Old Policies may be accessed by means 
of partial surrenders, policy loans or total surrender. Interest 
payable on policy loans will not be more than that permitted in the 
state in which the Policy is delivered; interest credited on loan 
accounts established in connection with outstanding loans will be at a 
rate which is not less than the policy loan interest rate minus 2% per 
year. If certain conditions are met, the loan is credited at a rate 
equal to the policy loan rate minus 0.75% per year.
    28. The Old Policies offer a choice of two death benefit options: 
the Cash Option or the Protection Option. Under the Cash Option, the 
death benefit will be the current face amount at the time of the 
insured's death. The death benefit will not vary unless the policy 
value exceeds the net single premium for the then-current face amount. 
At that time, the death benefit will be the greater of the face amount 
of the Policy or the amount of insurance which could be purchased at 
the date of the insured's death by using the policy value as a net 
single premium. Under the Protection Option for VAL '87, the death 
benefit is the current face amount or, if the policy value is greater 
than the tabular cash value at the date of the insured's death, the 
current face amount plus an additional amount of insurance which could 
be purchased by using that difference between values as a net single 
premium. Under the Protection Option for VAL '95 and Amended VAL '95, 
before the policy anniversary nearest the insured's age 70, the amount 
of the death benefit is the policy value plus the larger of: (a) the 
then current face amount; and (b) the amount of insurance which could 
be purchased using the policy value as a net single premium. At the 
policy anniversary nearest the insured's age 70, Minnesota Life will 
automatically adjust the face amount of the policy to equal the death 
benefit immediately preceding the adjustment. The Protection Option of 
VAL '95 is only available until the policy anniversary nearest the 
insured's age 70, at which time Minnesota Life converts the death 
benefit option to the cash option.

[[Page 63711]]

    29. With the Amended VAL '95 Protection Option, after the policy 
anniversary nearest the insured's age 70, the amount of the death 
benefit is equal to the current face amount or, if the policy value is 
greater than the tabular cash value at the date of the insured's death, 
the current face amount plus an additional amount of insurance which 
could be purchased by using that difference between values as a net 
single premium.
    30. The minimum face amount of an Old Policy is $50,000.
    31. From base premiums, Minnesota Life deducts a Sales Load, an 
Underwriting Charge, a Premium Tax Charge and a Face Amount Guarantee 
Charge. The base premium excludes any charge deducted from the premium 
to provide for any additional benefits provided by rider and, in the 
case of VAL '95, any charge deducted for sub-standard risks.
    (a) The Sales Load consists of a deduction from each premium of 7% 
and it may also include a first year sales load deduction not to exceed 
23%. The first year sales load applies only to base premiums, scheduled 
to be paid in the 12-month period following the policy date, or any 
policy adjustment involving an increase in base premium or any policy 
adjustment occurring during a period when a first year sales load is 
being assessed. The Sales Load will also apply only to that portion of 
an annual base premium necessary for an original issue whole life plan 
of insurance. The Sales Load is designed to compensate Minnesota Life 
for distribution expenses incurred with respect to the Policies.
    (b) The Underwriting Charge currently is an amount not to exceed $5 
per $1,000 of face amount of insurance. This amount may vary by the age 
of the insured and the premium level for a given amount of insurance. 
This charge is made ratably from premiums scheduled to be paid during 
the first policy year and during the twelve months following certain 
policy adjustments. The Underwriting Charge is designed to compensate 
Minnesota Life for the administrative costs associated with issuance or 
adjustment of the Policies, including the cost of processing 
applications, conducting medical exams, classifying risks, determining 
insurability and risk class and establishing policy records.
    (c) The Premium Tax Charge of 2.5% is deducted from each base 
premium. This charge is designed to cover the aggregate premium taxes 
Minnesota Life pays to state and local governments for this class of 
policies.
    (d) The Face Amount Guarantee Charge of 1.5% is deducted from each 
base premium. This charge is designed to compensate Minnesota Life for 
its guarantee that the death benefit will always be at least equal to 
the current face amount in effect at the time of death regardless of 
the investment performance of the sub-accounts in which net premiums 
have been invested.
    32. Non-repeating premiums are currently subject to the 2.5% 
Premium Tax Charge, but not to a Sales Load Charge. Minnesota Life does 
not assess a Face Amount Guarantee Charge or an Underwriting Charge 
against non-repeating premiums.
    33. In addition to deductions from premiums and non-repeating 
premiums, Minnesota Life assesses from the actual cash value of a 
Policy, an Administration Charge, the Cost of Insurance Charge and 
certain transaction charges (and in the case of a VAL `87 Policy, any 
charge for sub-standard risks).
    (a) The Administration Charge is designed to cover certain of 
Minnesota Life's administrative expenses, including those attributable 
to the records maintained for the Policies. The Administration Charge 
is $60 for each policy year.
    (b) The Cost of Insurance Charge compensates Minnesota Life for 
providing the death benefit under a Policy. The charge is calculated by 
multiplying the net amount at risk under the Policy by a rate that 
varies with the insured's age, sex, risk class, the level of scheduled 
premiums for a given amount of insurance, duration of the Policy, and 
the tobacco use of the insured. The rate is guaranteed not to exceed 
the maximum charges for mortality derived from the 1980 Commissioners 
Standard Ordinary Mortality Tables.
    (c) Transaction charges are for expenses associated with processing 
transactions. There is a charge of up to $25 for each policy 
adjustment. If the only policy adjustment is a partial surrender, the 
transaction charge will be the lesser of $25 or 2% of the amount 
surrendered. Minnesota Life also reserves the right to make a charge, 
not to exceed $25, for each transfer of actual cash value among the 
Guaranteed Principal Account and the sub-accounts of the Variable Life 
Account. Currently there is a $10 charge only for non-systematic 
transfers in excess of four per year.
    34. From the assets held in the Variable Life Account, Minnesota 
Life assesses a Mortality and Expense Risk charge, deducted on each 
valuation date at an annual rate of 0.50% of the average daily net 
assets of the Variable Life Account. Although Minnesota Life reserves 
the right to charge or make provision for any taxes payable by 
Minnesota Life with respect to the Variable Life Account or the 
Policies by a charge or adjustment to such assets, no such charge or 
provision is made at the present time. The Mortality and Expense Risk 
Charge compensates Minnesota Life for assuming the risks that cost of 
insurance charges will be insufficient to cover actual mortality 
experience and that the other charges will not cover Minnesota Life's 
expenses in connection with the Policy.
    35. Additional Benefits are offered by Minnesota Life as riders to 
the Old Policies, subject to underwriting approval. These Additional 
Benefits may require the payment of additional premium. The Additional 
Benefits include a Waiver of Premium Agreement, a Policy Enhancement 
Agreement and Cost of Living Agreement, a Face Amount Increase 
Agreement, a Survivorship Life Agreement, a Family Term Rider, an 
Exchange of Insurance Agreement, an Accelerated Benefits Agreement, and 
a Short Term Agreement.

The Exchange Offer

    36. The exchange offer will be made only to Policy owners who have 
held their Old Policy for at least two years from the original issue 
date of the Old Policy and at least one year from their most recent 
policy adjustment on the Old Policy.
    37. Eligible owners of Old Policies will be advised of the exchange 
offer in a notice accompanying the annual report. The notice will 
contain an overview of the offer and will instruct the Policy owner to 
contact his or her agent if the Policy owner is interested in the 
offer. Policy owners who express an interest will be provided two 
personalized illustrations and two prospectuses, accompanied by a 
letter explaining the offer and the administration fees associated with 
the offer, as well as a piece of sales literature that compares the two 
Policies.
    38. The description of the proposed exchange offer in letters to 
Old Policy owners and in the New Policy's prospectus will provide full 
disclosure of the material differences in the two Policies. Each Old 
Policy owner will be provided, at no charge, personalized hypothetical 
illustrations that compare the Old and New Policies. The New Policies 
should be less expensive than the Old Policies for most Policy owners. 
The disclosure and illustrations provided give Old Policy owners

[[Page 63712]]

sufficient information to determine which Policy is best for them.
    39. The exchange offer will provide that, upon acceptance of the 
offer, a New Policy will be issued with the same face amount as the Old 
Policy surrendered in the exchange, and with a policy value adjusted to 
reflect a $200 processing charge (see below). The Policy owner and the 
insured must be the same person(s) under the New Policy acquired as 
under the exchanged Old Policy.
    40. The risk class for a New Policy acquired by exchange will be 
the one most similar to the risk class for the exchanged Old Policy. 
New evidence of insurability will not be required as a condition of the 
exchange.
    41. No premium charges will be deducted upon the acquisition of a 
New Policy in connection with an exchange, except that a one-time $200 
charge for the costs of processing the exchange will be imposed. 
Applicants represent that this charge will not exceed their costs of 
processing the exchange.
    42. No additional sales load will be imposed at the time of the 
exchange. The first-year Sales Charge of the New Policies will apply 
only if the Policy owner chooses to make a policy adjustment that will 
increase the base premium of the policy. The additional Sales Charge 
would not exceed 44% of the increase in the base premium.
    43. Optional Additional Benefits attached to an Old Policy 
surrendered in an exchange will carry over to the New Policy acquired 
in the exchange only if that additional benefit (or a substantially 
equivalent additional benefit) is available under the New Policies. 
Optional insurance additional benefits available under the New Policies 
but not the Old Policies may be acquired at the time of the exchange, 
but, as noted above, may occasion the need for new evidence of 
insurability. Optional additional benefits available under the Old 
Policies but not the New Policies and their related charges, if any, 
will not be carried over to the New Policies.
    44. Loans under an Old Policy must be repaid in cash or by means of 
a partial surrender (in the amount of the unpaid loan and interest 
thereon) prior to the exchange. In the event a loan is repaid by taking 
a partial surrender, the face amount of the Old Policy will be reduced, 
as with any partial surrender, and the face amount of the New Policy 
received will be the face amount of the Old Policy after that partial 
surrender. Any letters to Old Policy owners describing the exchange 
offer will include the fact that loans must be repaid prior to the 
exchange and disclosure that repayment of a loan by means of a partial 
surrender could have adverse tax consequences to the Old Policy owner. 
Minnesota Life will waive the transaction charge that would otherwise 
be applicable to a partial surrender made in connection with accepting 
the exchange offer and that is used solely to pay off an outstanding 
loan.
    45. To accept the exchange offer, an Old Policy owner must return 
his or her Old Policy (or else submit a lost policy statement) and must 
submit a supplemental application that indicates how Policy values are 
to be allocated among the investment options of the New Policy. 
Payments submitted with the supplemental application requesting the 
exchange will be assumed to be payments under the New Policy as of the 
date of issue of the New Policy.
    46. The suicide clause time period(s), incontestability time 
period(s), and free look time period(s) of the Old Policy will apply to 
the New Policy acquired in an exchange.

Applicants' Legal Analysis

    47. Section 11(a) of the Act makes it unlawful for any registered 
open-end investment company, or any principal underwriter for such a 
company, to make or cause to be made an offer to the holder of a 
security of such company, or of any other open-end investment company, 
to exchange that security for a security in the same or another such 
company on any basis other than the relative net asset values of the 
respective securities, unless the terms of the offer have first been 
submitted to and approved by the Commission or are in accordance with 
Commission rules adopted under section 11.
    48. Section 11(c) of the Act, in pertinent part, requires, in 
effect, that any offer of exchange of the securities of a registered 
unit investment trust for the securities of any other investment 
company be approved by the Commission or satisfy applicable rules 
adopted under section 11, regardless of the basis of the exchange.
    49. The Account is registered under the Act as a unit investment 
trust. Accordingly, the proposed exchange offer constitutes an offer of 
exchange of two securities, each of which is offered by a registered 
unit investment trust. Thus, unless the terms of the exchange offer are 
consistent with those permitted by Commission rule, Applicants may make 
the proposed exchange offer only after the Commission has approved the 
terms of the offer by an order pursuant to section 11(a) of the Act.
    50. As noted by the Commission when proposing Rule 11a-3 under the 
Act, the purpose of section 11 of the Act is to prevent ``switching,'' 
the practice of inducing security holders of one investment company to 
exchange their securities for those of a different investment company 
``solely for the purpose of exacting additional selling charges.'' That 
type of practice was found by Congress to be widespread in the 1930's 
prior to adoption of the Act.
    51. Section 11(c) of the Act requires Commission approval (by order 
or by rule) of any exchange, regardless of its basis, involving 
securities issued by a unit investment trust, because investors in unit 
investment trusts were found by Congress to be particularly vulnerable 
to switching operations.
    52. Applicants assert that the legislative history of section 11 
makes it clear that the potential for harm to investors perceived in 
switching was its use to extract additional sales charges from those 
investors. Applications under section 11(a) and orders granting those 
applications appropriately have focused on sales loads or sales load 
differentials and administrative fees to be imposed for effecting a 
proposed exchange and have ignored other fees and charges, such as 
relative advisory fee charges of the exchanged and acquired securities.
    53. Rule 11a-2, adopted in 1983 under section 11 of the Act, by its 
express terms, provides blanket Commission approval of certain types of 
offers of exchange of one variable annuity contract for another or of 
one variable life insurance contract for another. However, there is 
Commission language in the release adopting Rule 11a-2 that suggests 
that the rule may have been intended to permit exchanges of funding 
options within a single variable life insurance policy but not the 
exchange of one such policy for another. Variable annuity exchanges are 
permitted by Rule 11a-2 provided that the only variance from a relative 
net asset value exchange is an administrative fee disclosed in the 
offering account's registration statement and a sales load or sales 
load differential calculated according to methods prescribed in the 
rule. Variable life insurance exchanges may vary from relative net 
asset exchanges only by reason of disclosed administrative fees; no 
sales loads or sales load differentials are permitted under the rule 
for such exchanges. Applicants believe that the exchange of the Old 
Policies for the New Policies would satisfy Rule 11a-2, if Rule 11a-2 
applied.
    54. Adoption of Rule 11a-3, which takes a similar approach to that 
of Rule 11a-2, represents the most recent Commission action under 
Section 11 of

[[Page 63713]]

the Act. As with Rule 11a-2, the focus of Rule 11a-3 is primarily on 
sales or administrative charges that would be incurred by investors for 
effecting exchanges. Applicants assert that the terms of the proposed 
offer are consistent with the Commission's recent substantive approach 
in Rule 11a-3, because no additional sales charges will be incurred as 
a result of the exchange and no administrative fees will be charged to 
effect the exchange. However, because the investment company involved 
in the proposed exchange offer is a separate account and because it is 
organized as a unit investment trust rather than as a management 
investment company, Applicants may not rely upon Rule 11a-3 despite the 
fact that their proposal would satisfy its substantive provisions.
    55. Applicants assert that the terms of the proposed exchange offer 
do not present the abuses against which Section 11 was intended to 
protect. No additional sales load will be imposed at the time of 
exchange. No charge will be imposed at that time, other than a $200 
exchange fee to reimburse Minnesota Life for all or a portion of its 
administrative costs associated with the exchange. No new evidence of 
insurability will be required for the exchange.
    56. The policy value and death benefit of a New Policy acquired in 
the proposed exchange will be precisely the same immediately after the 
exchange as that of the Old Policy exchanged immediately prior to the 
exchange. Accordingly, the exchanges, in effect, will be relative net 
asset value exchanges that would be permitted under Section 11(a) if 
the Account were registered as a management investment company rather 
than as a unit investment trust.
    57. Policy owners will receive sufficient information to determine 
which Policy is best for them.

Conclusion

    For the reasons summarized above, Applicants represent that the 
Exchange Offer is consistent with the protections provided by Section 
11 of the Act and does not involve any of the switching abuses that led 
to the adoption of Section 11. Permitting Policy owners to evaluate the 
relative merits of the Old and New Policies and to select the one that 
best suits their circumstances and preferences fosters competition and 
is consistent with the public interest and the protection of investors. 
Approval of the terms of the Exchange Offer is necessary or appropriate 
in the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policies and provisions of the 
Act.
    For the Commission, by the Division of Investment Management, 
pursuant to the delegated authority.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26154 Filed 10-11-02; 8:45 am]
BILLING CODE 8010-01-P