[Federal Register Volume 67, Number 223 (Tuesday, November 19, 2002)]
[Rules and Regulations]
[Pages 69974-69982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29312]



[[Page 69973]]

-----------------------------------------------------------------------

Part VI





Securities and Exchange Commission





-----------------------------------------------------------------------



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; Final Rule

  Federal Register / Vol. 67, No. 223 / Tuesday, November 19, 2002 / 
Rules and Regulations  

[[Page 69974]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239 and 274

[Release Nos. 33-8147; IC-25802; 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: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission is adopting amendments 
to the registration form for insurance company separate accounts that 
are registered as unit investment trusts and that offer variable 
annuity contracts. The amendments revise the format of the fee table to 
require disclosure of the range of total expenses for all of the mutual 
funds offered through the separate account, rather than disclosure of 
the expenses of each fund. In addition, the Commission is amending the 
fee table of the registration form for variable life insurance policies 
to require disclosure of the range of total expenses of all of the 
mutual funds offered, consistent with the amendments to the fee table 
of the registration form for variable annuities.

DATES: Effective Date: December 23, 2002.
    Compliance Dates:
    1. Initial Compliance Date: All new registration statements, and 
post-effective amendments that are annual updates to effective 
registration statements, filed on Form N-4 or Form N-6 on or after 
January 1, 2003, must comply with the amendments to Form N-4 or Form N-
6, respectively.
    2. Final Compliance Date: All insurance company separate accounts 
that are registered as unit investment trusts and that currently offer 
variable annuity contracts or variable life insurance policies with 
effective registration statements must comply with the amendments to 
Form N-4 or Form N-6, respectively, for post-effective amendments that 
are annual updates to their registration statements on Form N-4 or N-6 
filed on or after January 1, 2003, and no later than January 1, 2004.

FOR FURTHER INFORMATION CONTACT: Katy Mobedshahi, Senior Counsel, (202) 
942-0721, Office of Disclosure Regulation, Division of Investment 
Management, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting 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''). 
The Commission is also adopting amendments to Form N-6 [17 CFR 239.17c; 
17 CFR 274.11d], the form used by separate accounts organized as unit 
investment trusts and offering variable life insurance policies to 
register under the Investment Company Act and to offer their securities 
under the 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.\1\ 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'').\2\
---------------------------------------------------------------------------

    \1\ Item 3(a) of Form N-4.
    \2\ 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. A ``Portfolio Company'' may be a 
registered investment company, or a series of a registered 
investment company, in the case of a series company.
---------------------------------------------------------------------------

    Today, the Commission is adopting amendments that will require that 
the fee table of Form N-4 disclose the range of expenses for the 
Portfolio Companies offered through the separate account, rather than 
the expenses of each Portfolio Company. As we stated in the release 
proposing these amendments (``Proposing Release''), we believe that the 
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.\3\ The number of investment options available 
through a typical variable annuity contract has expanded considerably 
in recent years.\4\ 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.\5\
---------------------------------------------------------------------------

    \3\ Investment Company Act Release No. 25521 (Apr. 12, 2002) [67 
FR 19886, 19886 (Apr. 23, 2002)].
    \4\ Rick Carey, 9-Month Variable Annuity Sales Fell 17.8% To 
$113 Billion Last Year, National Underwriter Life & Health/Financial 
Services Edition, March 11, 2002, at 16 (estimating that average 
number of funds available in a variable annuity contract increased 
from five in 1988 to 33 in 2001).
    \5\ 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).
---------------------------------------------------------------------------

    We received four comment letters on the proposed amendments.\6\ Two 
of the commenters supported the proposed requirement for disclosure of 
the range of expenses for all of the Portfolio Companies offered, while 
one commenter favored disclosure of the expenses of each Portfolio 
Company in the variable annuity prospectus.
---------------------------------------------------------------------------

    \6\ The comment letters and a summary of comments prepared by 
our staff are available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth St., NW., Washington, 
DC 20549, in File No. S7-07-02. Public comments submitted 
electronically and a summary of comments are also available 
electronically on our website at www.sec.gov.
---------------------------------------------------------------------------

    We continue to believe that our approach will assist investors in 
understanding the fees and charges that they will pay for a variable 
annuity contract. The amendments will streamline the fee table in the 
contract prospectus and make it more understandable, while at the same 
time investors will continue to have access to information about the 
fees and expenses of each Portfolio Company. We recently 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 
require that every mutual fund that offers its shares as an investment 
option for a variable annuity contract include a fee table in its 
prospectus.\7\ Investors

[[Page 69975]]

in variable annuity contracts now have access to information about the 
fees and expenses of each Portfolio Company in the prospectus for the 
Portfolio Company.\8\ The amendments that we are adopting to the fee 
table of Form N-4 will require a statement referring investors to the 
Portfolio Company prospectuses for more detail concerning Portfolio 
Company fees and expenses. In addition, the requirement that the fee 
table of Form N-4 include the range of Portfolio Company expenses will 
clearly indicate to investors the maximum fees that may be charged by 
any of the Portfolio Companies offered, so investors will receive 
disclosure in the variable annuity contract prospectus of the highest 
possible amount of Portfolio Company expenses that they may pay.
---------------------------------------------------------------------------

    \7\ Investment Company Act Release No. 25522 (Apr. 12, 2002) [67 
FR 19847, 19860 (Apr. 23, 2002)] (``N-6 Adopting Release''); Item 3 
of Form N-1A. Prior to this amendment, a mutual fund that offered 
its shares exclusively as investment options for variable life 
insurance policies and variable annuity contracts was permitted to 
omit the fee table from its prospectus. See 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).
    \8\ Investors in variable annuity contracts receive the 
prospectuses for both the separate account unit investment trust and 
the Portfolio Companies they have selected.
---------------------------------------------------------------------------

    We note, further, that the amendments we are adopting to Form N-4 
will 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 required disclosure of the range of expenses for the 
Portfolio Companies. This approach will provide registrants with the 
flexibility to include this detailed information when they determine 
that it would be helpful, and not overwhelming, to investors.\9\
---------------------------------------------------------------------------

    \9\ Instruction 20 to Item 3(a) of Form N-4; Instruction 4(f) to 
Item 3 of Form N-6.
---------------------------------------------------------------------------

    We are, however, modifying our proposal to require disclosure of 
the range of total Portfolio Company expenses.\10\ Our proposal would 
have required line item disclosure of the range of each of several 
categories of Portfolio Company expenses, including management fees, 
distribution (12b-1) fees, and other expenses, as well as total annual 
operating expenses. Two commenters suggested that we require disclosure 
of the range of total annual operating expenses only, rather than the 
ranges of the various categories. The commenters reasoned that 
disclosing the minimum and maximum expenses for several categories of 
expense, as well as total annual operating expenses, would result in 
two columns of category expenses in the fee table that would not 
necessarily add up to the minimum and maximum total operating expenses 
shown. For example, if Portfolio Company A had management fees of 0.5%, 
12b-1 fees of 0.25%, other expenses of 0.3%, and total expenses of 
1.05%; Portfolio Company B had management fees of 0.9%, 12b-1 fees of 
0%, other expenses of 0.25%, and total expenses of 1.15%; and Portfolio 
Company C had management fees of 1.0%, 12b-1 fees of 0%, other expenses 
of 0.25%, and total expenses of 1.25%, then the range of total expenses 
for all three Portfolio Companies required to be disclosed would be 
1.05% to 1.25%, rather than the sum of the minimum and maximum category 
expenses columns, which would be 0.75% (0.5% + 0% + 0.25%) to 1.55% 
(1.0% + 0.25% + 0.3%). We were persuaded by the commenters that this 
result might confuse investors, rather than simplifying disclosure. In 
order to help investors understand the types of expenses that are 
included in total Portfolio Company operating expenses, we are revising 
the caption in the Portfolio Company expenses section of the fee table 
to state explicitly that total expenses include management fees, 
distribution (12b-1) fees, and other expenses.\11\
---------------------------------------------------------------------------

    \10\ Item 3(a) and Instruction 17(a) to Item 3(a) of Form N-4.
    \11\ Item 3(a) of Form N-4. If none of the Portfolio Companies 
offered by a variable annuity contract charge distribution (12b-1) 
fees, the reference to these fees may be omitted.
---------------------------------------------------------------------------

    We are also amending Form N-6, the registration form for insurance 
company separate accounts that are registered as unit investment trusts 
and that offer variable life insurance policies, to require disclosure 
of the range of total expenses for all the Portfolio Companies, rather 
than line item disclosure of the range of each category of 
expenses.\12\ We had indicated in the Proposing Release that if we 
modified the proposed amendments to the fee table of Form N-4 in 
response to comments, we intended to make conforming changes to Form N-
6.\13\
---------------------------------------------------------------------------

    \12\ Item 3 and Instructions 4 and 5 to Item 3 of Form N-6.
    \13\ Proposing Release, supra note 3, 67 FR at 19888.
---------------------------------------------------------------------------

B. Other Fee Table Changes

    We are adopting other amendments to the format and instructions for 
the fee table of Form N-4 substantially as proposed, with minor changes 
to address commenters' suggestions.
    Expense Reimbursement and Fee Waiver Arrangements. We are adopting, 
as proposed, a requirement 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.\14\
---------------------------------------------------------------------------

    \14\ Instructions 18(a), 19, and 22(a) to Item 3(a) of Form N-4. 
We intend that the staff construe the amendments to the fee table of 
Form N-4 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. See Proposing Release, supra note 3, 67 FR 
at 19887 n.15.
---------------------------------------------------------------------------

    Expense Example. We are adopting, substantially as proposed, 
amendments to the expense example and accompanying instructions of the 
fee table of Form N-4. These amendments would require an expense 
example based on the maximum expenses charged by any of the Portfolio 
Companies.\15\ Registrants would be permitted to provide an additional 
example, based on the minimum expenses charged by any of the Portfolio 
Companies.\16\ 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.\17\
---------------------------------------------------------------------------

    \15\ Instruction 21(b) to Item 3(a) of Form N-4. 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 
amendments to the expense example requirements of Form N-4 
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.
    \16\ Instruction 21(b) to Item 3(a) of Form N-4.
    \17\ Id.
---------------------------------------------------------------------------

    In response to a commenter's suggestion, we are modifying the 
Instructions to the expense example of Item 3(a) regarding conversion 
of annual contract fees to a percentage basis by providing that the 
total amount of the contract fees collected during the year should be 
divided by the total average net assets for the contract (which 
includes both general account and separate account assets), rather than 
only separate account assets, as we had proposed and as the 
instructions to Item

[[Page 69976]]

3(a) of Form N-4 currently require.\18\ This revision will result in a 
more accurate calculation of the annual contract fee percentage, by 
attributing the contract fee to both separate account and general 
account assets.
---------------------------------------------------------------------------

    \18\ Instruction 21(f) to Item 3(a) of Form N-4; Instruction 
21(e) to Item 3(a) of current Form N-4.
---------------------------------------------------------------------------

    In addition, in response to a commenter's suggestion, we are 
revising the narrative that would be required to precede the expense 
example, to clarify that expenses reflected in the example include 
separate account fees and charges, as well as the maximum expenses 
charged by any of the Portfolio Companies.\19\
---------------------------------------------------------------------------

    \19\ Item 3(a) and Instructions 21(a) and (b) to Item 3(a) of 
Form N-4.
---------------------------------------------------------------------------

    Requirement to Disclose All Fees and Charges. We are adopting, as 
proposed, an instruction to the fee table of Form N-4 that would 
require registrants to disclose all recurring fees and charges, 
including fees and charges for all optional features.\20\ One commenter 
suggested that we clarify the instruction requiring disclosure of all 
recurring fees and charges, to indicate that mutually exclusive fees 
(such as fees for mutually exclusive death benefit options) do not need 
to be presented in the fee table. We disagree with this approach 
because it would result in charges for some available features not 
being disclosed. As a result, investors who are considering these 
features would be unable to assess their cost. Registrants may, 
however, indicate, through a footnote or other means, that charges for 
certain features shown in the fee table are mutually exclusive. We note 
that registrants should not include multiple mutually exclusive fees in 
the expense example, but should include the highest of these charges. 
For example, if a contract offers two mutually exclusive death benefit 
options, with mortality and expense risk charges of 1.25% and 1.40%, 
respectively, the expense example should reflect a mortality and 
expense risk charge of 1.40%.
---------------------------------------------------------------------------

    \20\ Instruction 15 to Item 3(a) of Form N-4.
---------------------------------------------------------------------------

II. Effective Date and Compliance Date

    The effective date of these amendments is December 23, 2002. All 
new registration statements, and post-effective amendments that are 
annual updates to effective registration statements, filed on Form N-4 
or N-6 on or after January 1, 2003, must comply with these amendments. 
The final compliance date for filing amendments to effective 
registration statements to conform to these amendments is January 1, 
2004. A registrant may, at its option, comply with the requirements of 
these amendments to Forms N-4 and N-6 at any time after the effective 
date.
    As noted above, the Commission recently amended Form N-1A, the 
registration form for mutual funds, to require a Portfolio Company that 
offers its shares exclusively as investment options for variable 
annuity contracts and variable life insurance policies to include a fee 
table in its prospectus.\21\ Registrants on Form N-1A are required to 
comply with this amendment with respect to all new registration 
statements, and post-effective amendments that are annual updates to 
effective registration statements, filed on or after September 1, 
2002.\22\ During the transition period, a separate account that is 
registered on Form N-4 or Form N-6 should include in Item 3(a) of Form 
N-4, or Item 3 of Form N-6, a fee table for any Portfolio Company whose 
Form N-1A has not been updated to include a fee table.\23\
---------------------------------------------------------------------------

    \21\ See supra note 7 and accompanying text.
    \22\ N-6 Adopting Release, supra note 7, 67 FR at 19860 
(discussing compliance date for amendment to Form N-1A).
    \23\ Id. at 19860 n.83.
---------------------------------------------------------------------------

III. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules on affected persons and entities. In the Proposing Release, 
we requested comment and specific data regarding the costs and benefits 
of the proposed amendments, but received none.
    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.\24\ 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 amendments adopted today will 
revise the fee table in the prospectus of Form N-4 to require 
registrants to disclose the range of total expenses for all of the 
Portfolio Companies offered, rather than separately disclosing the fees 
and expenses of each Portfolio Company. Registrants will 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. In addition, the amendments that we are 
adopting include a conforming change to the fee table of Form N-6, to 
require disclosure of only the range of total expenses for all the 
Portfolio Companies, and not line item disclosure of the range of each 
category of expenses.
---------------------------------------------------------------------------

    \24\ 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.
---------------------------------------------------------------------------

    The amendments will 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, and for purposes of 
consistency with the disclosure of the range of Portfolio Company 
expenses, as described in the Proposing Release. These changes will 
improve transparency of fee disclosure. These amendments, discussed in 
more detail in the Proposing Release, include the following:
    [sbull] Revising the expense example in the fee table to require 
only an example based on the maximum expenses charged by any Portfolio 
Company.
    [sbull] Making other modifications to the format of the example.
    [sbull] Prescribing narrative explanations to precede each section 
of the fee table.
    [sbull] Adding an instruction requiring disclosure of all recurring 
fees and charges other than Portfolio Company operating expenses.

A. Benefits

    We believe that the amendments adopted today 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, shorter and more comprehensible. 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 
amendments will 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 amendments will make technical changes to the format and 
instructions of the fee table of Form N-4, in order to improve 
transparency of the fees and

[[Page 69977]]

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 adopting are limited 
in nature.
    The 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.\25\ We do not expect that any of the other changes 
in the amendments will lengthen the variable annuity prospectus, as 
these changes will 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.\26\ Based on an estimate of 814 variable annuity contracts 
currently being actively marketed, therefore, these printing and 
postage savings could total $814,000 annually.\27\
---------------------------------------------------------------------------

    \25\ The amendments will 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 current Form 
N-4.
    \26\ An insurance company that issues variable annuities 
provided the staff with estimates of the typical print run of a 
prospectus and the associated printing and mailing costs.
    \27\ The estimate of 814 variable annuity contracts is based on 
the number of contracts tracked by Morningstar, Inc. Morningstar, 
Principia Pro Plus, Variable Annuities/Life (May 2002). While 
Morningstar tracks a substantial majority of variable annuity 
contracts, it does not track all existing contracts.
---------------------------------------------------------------------------

    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.\28\ 
We believe that these cost savings will be relatively small, however.
---------------------------------------------------------------------------

    \28\ 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.
---------------------------------------------------------------------------

    Finally, the conforming amendments we are adopting to the fee table 
of Form N-6 will reduce the potential for confusion to investors that 
may occur if the disclosure of the range of minimum and maximum 
expenses for each category of Portfolio Company operating expenses 
results in two columns that do not add up to the range of minimum and 
maximum total operating expenses. This change will streamline the Form 
N-6 fee table, while continuing to ensure that investors have access to 
fee information about the Portfolio Companies in which they invest.

B. Costs

    Although the 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 amendments will make mostly 
minor changes to the current format of the Form N-4 fee table, and will 
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.\29\ We therefore estimate the one-time 
cost attributable to the proposed amendments to Form N-4 to be $47,000. 
We requested comment on these cost estimates in the Proposing Release, 
but received none.
---------------------------------------------------------------------------

    \29\ 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 collect information about the expenses 
for each Portfolio Company offered through the contract, in order to 
determine the minimum and maximum total operating expenses of the 
Portfolio Companies offered through the contract. 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 Form N-6 fee 
table 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.
    Finally, we do not anticipate that the conforming changes we are 
making to the fee table of Form N-6 will result in any increased costs 
to issuers or investors. Issuers will be required to disclose only the 
range of total Portfolio Company operating expenses, rather than the 
range of each category of expenses as well as the range of total 
expenses. In addition, issuers have only recently begun using new Form 
N-6, or have not yet begun doing so. Therefore, any cost for training 
personnel to apply the amendment to the fee table of Form N-6 may be 
incorporated in the overall cost for training personnel in the 
disclosure requirements of Form N-6 as a whole.

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.\30\ The Commission has considered these factors. We 
requested comments regarding the effects of the proposed amendments on 
efficiency, competition and capital formation and received none.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 77b(b), 78c(f), and 80a-2(c).
---------------------------------------------------------------------------

    The amendments to Form N-4 and Form N-6 are expected to have 
minimal effects on efficiency and competition among issuers of variable 
insurance products. As adopted, the amendments will 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

[[Page 69978]]

fees and expenses of each Portfolio Company. The amendments will 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. In addition, the amendments will revise the fee 
table of Form N-6 to require disclosure of the range of total expenses 
for all the Portfolio Companies offered, and not disclosure of the 
range of each category of Portfolio Company expenses, consistent with 
the amendments to the fee table of Form N-4. The amendments will allow 
fee table disclosure of Portfolio Company expenses in both Form N-4 and 
Form N-6 to be shorter, and generally make fee table disclosure clearer 
and more understandable to investors. However, we do not expect the 
amendments to have any significant effect on competition and efficiency 
because they will not change the quantity of information about fees and 
expenses that investors in variable annuity contracts receive. 
Similarly, it is unclear whether the amendments to Form N-4 and Form N-
6 will affect capital formation.

V. Paperwork Reduction Act

    As explained in the Proposing Release, certain provisions of Form 
N-4 contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3501 et 
seq.]. 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.
    We published a notice soliciting comments on the collection of 
information requirements of Form N-4 in the Proposing Release. The 
Commission did not receive any comments on the Paperwork Reduction Act 
portion of the Proposing Release.
    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].\31\ As stated above, 
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.
---------------------------------------------------------------------------

    \31\ OMB approved the collection of information requirements 
contained in Form N-6 (OMB Control No. 3235-0503) The title for the 
collection of information is ``Form N-6 Under the Investment Company 
Act of 1940 and the Securities Act of 1933, Registration Statement 
of Variable Life Insurance Separate Accounts Registered as Unit 
Trust.''
---------------------------------------------------------------------------

    The Commission proposed 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 will 
be required to disclose only the range of the expenses for all of the 
Portfolio Companies in which the separate account invests. Variable 
annuity investors will 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 will be included in its 
prospectus under the requirements of Form N-1A. The amendments will 
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-6 and Form N-1A.
    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, and therefore the amendments to Form N-4 will not impose any 
additional collection of information on registrants. We expect that in 
preparing their fee tables for Form N-4, registrants will still need to 
collect information about the total operating 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 amendments modifying the format of the Form N-4 
fee table to conform more closely to the fee tables of Forms N-6 and 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.
    In addition, we expect that the conforming amendments we are 
adopting to Form N-6, the registration form for insurance company 
separate accounts that are registered as unit investment trusts and 
that offer variable life insurance policies, requiring disclosure of 
only the range of total expenses for all of the Portfolio Companies 
offered through the separate account rather than line item disclosure 
of the range of each category of expenses as well as the range of total 
expenses, will have no effect on the burden of completing Form N-6. 
Form N-6 already requires variable life insurance issuers to calculate 
the range of total expenses for each Portfolio Company offered through 
a variable life insurance policy, and therefore the amendments will not 
impose any additional costs on issuers.

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. 
The initial certification was attached to the Proposing Release as 
Appendix A. We requested comments on the certification, but received 
none.
    Pursuant to Section 605(b) of the Regulatory Flexibility Act [5 
U.S.C. 605(b)], the Commission certifies that the amendments to Form N-
6 adopted as part of this Adopting Release will not have a significant 
economic impact on a substantial number of small entities. The 
amendments will revise the fee table of Form N-6 to require only 
disclosure of the range of total expenses for all of the Portfolio 
Companies offered through a variable life insurance policy, rather than 
line item disclosure of the range of each category of expenses as well 
as the range of total expenses. The economic impact of the amendments 
will not be significant. Form N-6 already requires variable life 
insurance issuers to calculate the range of total expenses for each 
Portfolio Company offered through a variable life insurance policy, and 
therefore the amendments will not impose any additional costs on 
issuers.

VII. Statutory Authority

    The amendments to Form N-4 and Form N-6 are being adopted 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].

[[Page 69979]]

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 Form Amendments

    For the reasons set out in the preamble, the Commission amends 
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 continues 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.
    Section 274.101 is also issued under secs. 3(a) and 302, Pub. L. 
107-204, 116 Stat. 745.

    3. Form N-4 (referenced in Sec. Sec.  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 22.
    The additions and revisions read as follows:

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

Form N-4

* * * * *

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 item shows the minimum and maximum total operating 
expenses charged by the portfolio companies that you may pay 
periodically during the time that you own the contract. More detail 
concerning each [portfolio company's] fees and expenses is contained in 
the prospectus for each [portfolio company].

----------------------------------------------------------------------------------------------------------------
              Total Annual [Portfolio Company] Operating Expenses                   Minimum          Maximum
----------------------------------------------------------------------------------------------------------------
(Expenses that are deducted from [portfolio company] assets, including             ----------%      ----------%
 management fees, distribution [and/or service] (12b-1) fees, and other
 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. These costs include contract owner 
transaction expenses, contract fees, separate account annual 
expenses, and [portfolio company] fees and expenses.
    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

[[Page 69980]]

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 total operating expenses, add another caption 
describing it and list the (maximum) amount or basis on which the 
charge is deducted.

Total Annual [Portfolio Company] Operating Expenses

* * * * *
    17. (a) If a Registrant has multiple sub-accounts, it should 
disclose the minimum and maximum ``Total Annual [Portfolio Company] 
Operating Expenses'' for any portfolio company. ``Total Annual 
[Portfolio Company] Operating Expenses'' include all expenses 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) ``Total Annual [Portfolio Company] Operating 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 included, materially affect the minimum or maximum amounts 
shown in the table, disclose in a footnote to the table what the 
minimum and maximum ``Total Annual [Portfolio Company] Operating 
Expenses'' would have been had the extraordinary expenses been 
included.
    18. (a) Base the percentages of ``Total 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 
``Total Annual [Portfolio Company] Operating Expenses.''
    (b) If there have been any changes in ``Total 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 ``Total 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 ``Total 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.
    19. A Registrant may reflect minimum and maximum actual total 
[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.
    20. A Registrant may include additional tables showing annual 
operating expenses separately for each portfolio company immediately 
following the required table of ``Total 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

    21. 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 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.
    22. New Registrants. For purposes of this Item, a ``New 
Registrant'' is a Registrant that does not include in Form N-4 
financial statements reporting operating results or that includes 
financial statements for the Registrant's initial fiscal year reporting 
operating results for a period of 6 months or less.

[[Page 69981]]

The following Instructions apply to New Registrants:
    (a) Base the percentages in ``Total 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 
expenses that are not established pursuant to contract. Disclose in a 
footnote to the table that ``Total Annual [Portfolio Company] Operating 
Expenses'' are based, in part, 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 
the minimum and/or maximum total [portfolio company] operating expenses 
shown in the table. 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.
* * * * *
    4. Form N-6 (referenced in Sec.  239.17c and Sec.  274.11d), Item 3 
is amended by:
    a. Revising the introductory text and fee tables; and
    b. Revising Instructions 4 and 5.
    The revisions read as follows:

    Note: The text of Form N-6 does not and these amendments will 
not appear in the Code of Federal Regulations.

Form N-6

* * * * *

Item 3. Risk/Benefit Summary: Fee Table

    Include the following information, in plain English under rule 
421(d) under the Securities Act [17 CFR 230.421(d)], after Item 2:
    The following tables describe the fees and expenses that you will 
pay when buying, owning, and surrendering the Policy. The first table 
describes the fees and expenses that you will pay at the time that you 
buy the Policy, surrender the Policy, or transfer cash value between 
investment options.

                                                                    Transaction Fees
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 Charge                                           When charge is deducted                     Amount deducted
--------------------------------------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Premiums (Load)
-------------------------------------------------------------------------
Premium Taxes
-------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
-------------------------------------------------------------------------
Other Surrender Fees
-------------------------------------------------------------------------
Transfer Fees
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The next table describes the fees and expenses that you will pay 
periodically during the time that you own the Policy, not including 
[Portfolio Company] fees and expenses.

                                           Periodic Charges Other Than [Portfolio Company] Operating Expenses
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 Charge                                           When charge is deducted                     Amount deducted
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cost of Insurance *:
    Minimum and Maximum Charge
-------------------------------------------------------------------------
    Charge for a [Representative Contractowner]
-------------------------------------------------------------------------
    Annual Maintenance Fee
-------------------------------------------------------------------------
    Mortality and Expense Risk Fees
-------------------------------------------------------------------------
    Administrative Fees
--------------------------------------------------------------------------------------------------------------------------------------------------------
* [Footnote: Include disclosure required by Instruction 3(b).]

    The next item shows the minimum and maximum total operating 
expenses charged by the portfolio companies that you may pay 
periodically during the time that you own the contract. More detail 
concerning each [Portfolio Company's] fees and expenses is contained in 
the prospectus for each [Portfolio Company].

----------------------------------------------------------------------------------------------------------------
              Total Annual [Portfolio Company] Operating Expenses                   Minimum          Maximum
----------------------------------------------------------------------------------------------------------------
(Expenses that are deducted from [Portfolio Company] assets, including             ----------%      ----------%
 management fees, distribution [and/or service] (12b-1) fees, and other
 expenses)
----------------------------------------------------------------------------------------------------------------


[[Page 69982]]

Instructions

* * * * *
    4. Total Annual [Portfolio Company] Operating Expenses.
    (a) The Registrant may substitute the term used in the prospectus 
to refer to the Portfolio Companies for the bracketed portion of the 
caption provided.
    (b) If a registrant has multiple sub-accounts, it should disclose 
the minimum and maximum ``Total Annual [Portfolio Company] Operating 
Expenses'' for any Portfolio Company. ``Total Annual [Portfolio 
Company] Operating Expenses'' include all expenses 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]).
    (c) ``Total Annual [Portfolio Company] Operating 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 included, materially affect the minimum or maximum amounts 
shown in the table, disclose in a footnote to the table what the 
minimum and maximum ``Total Annual [Portfolio Company] Operating 
Expenses'' would have been had the extraordinary expenses been 
included.
    (d)(i) Base the percentages of ``Total 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 
``Total Annual [Portfolio Company] Operating Expenses.''
    (ii) If there have been any changes in ``Total Annual [Portfolio 
Company] Operating Expenses'' that would materially affect the 
information disclosed in the table:
    (A) Restate the expense information using the current fees as if 
they had been in effect during the previous fiscal year; and
    (B) In a footnote to the table, disclose that the expense 
information in the table has been restated to reflect current fees.
    (iii) A change in ``Total 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 ``Total 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.
    (e) A Registrant may reflect minimum and maximum actual total 
[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.
    (f) A Registrant may include additional tables showing annual 
operating expenses separately for each Portfolio Company immediately 
following the required table of ``Total 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.''
    5. New Registrants. For purposes of this Item, a ``New Registrant'' 
is a Registrant that does not include in Form N-6 financial statements 
reporting operating results or that includes financial statements for 
the Registrant'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 ``Total 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 
expenses that are not established pursuant to contract. Disclose in a 
footnote to the table that ``Total Annual [Portfolio Company] Operating 
Expenses'' are based, in part, 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 
the minimum and/or maximum total [Portfolio Company] operating expenses 
shown in the table. 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.

    Dated: November 13, 2002.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-29312 Filed 11-18-02; 8:45 am]
BILLING CODE 8010-01-U