[Federal Register Volume 68, Number 18 (Tuesday, January 28, 2003)]
[Notices]
[Pages 4251-4258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1810]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25908: File No. 812-12837]


The Travelers Insurance Company, et al.

January 21, 2003.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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    Applicants: The Travelers Insurance Company (``Travelers 
Insurance''), The Travelers Life and Annuity Company (``Travelers 
Life''), The Travelers Fund U for Variable Annuities (``Fund U''), The 
Travelers Separate Account Five for Variable Annuities (``Account 
Five''), The Travelers Separate Account Six for Variable Annuities 
(``Account Six''), Travelers Growth and Income Stock Account (``Account 
GIS''), Travelers Money Market Account (``Account MM''), Travelers 
Quality Bond Account (``Account QB''), Travelers Timed Aggressive Stock 
Account (``Account TAS''), Travelers Timed Growth and Income Stock 
Account (``Account TGIS''), Travelers Timed Short-Term Bond Account 
(``Account TSB''), and Travelers Distribution LLC (``Travelers 
Distribution'') (Fund U, Account GIS, Account MM, Account QB, Account 
TAS, Account TGIS, and Account TSB, collectively, ``UA Accounts'') 
(Account Five and Account Six, collectively (``TRA Accounts'') 
(Travelers Insurance, Travelers Life, UA Accounts, TRA Accounts, and 
Travelers Distribution, collectively, the ``Applicants'').
SUMMARY: Applicants seek an order pursuant to section 11(a) of the Act 
approving the terms of a proposed offer of exchange. Under the terms of 
the proposed exchange, certain contract owners of Universal Annuity 
contracts offered by Travelers Insurance (the ``UA contracts'') through 
the UA Accounts would be offered the opportunity to exchange their 
variable annuity contracts for the Travelers Retirement Account annuity 
contracts (the ``TRA contracts'') offered by Travelers Insurance and 
Travelers Life through the TRA Accounts.

DATES: The application was filed on June 17, 2002, and amended and 
restated on December 4, 2002.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Secretary of 
the Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on February 14, 2003, and should be accompanied 
by proof of service on Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the writer's interest, the reason for the request, and the 
issues contested. Persons may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, Kathleen A. McGah, 
Esq., The Travelers Insurance Company, One Tower Square, Hartford, CT 
06183.

FOR FURTHER INFORMATION CONTACT: Leland B. Erickson, Staff Attorney, or 
Zandra Y. Bailes, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

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

Applicants' Representations

    1. Travelers Insurance is a stock insurance company. It is licensed 
to conduct life insurance business in all fifty states, the District of 
Columbia, Puerto Rico, Guam, the U.S. Virgin

[[Page 4252]]

Islands, the British Virgin Islands, and the Bahamas. Travelers 
Insurance is an indirect wholly owned subsidiary of Citigroup Inc.
    2. Travelers Life is a stock insurance company. It is licensed to 
conduct life insurance business in a majority of the states of the 
United States, the District of Columbia, and Puerto Rico, and intends 
to seek licensure in the remaining states, except New York. Travelers 
Life is an indirect wholly owned subsidiary of Citigroup Inc.
    3. Travelers Insurance established Fund U as a separate account on 
May 16, 1983. Fund U is divided into subaccounts, 35 of which are 
offered in the UA contracts. Fund U is registered with the Commission 
as a unit investment trust under the 1940 Act.\1\
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    \1\ File No. 811-3575.
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    4. Travelers Insurance established Accounts GIS, QB, MM, TGIS, TSB 
and TAS as managed separate accounts on the following dates: Account 
GIS--September 22, 1967; Account QB--July 29, 1974; Account MM--
December 29, 1981, Accounts TGIS and TSB--October 30, 1986; and Account 
TAS--January 2, 1987. Each managed separate account is registered with 
the Commission as a diversified open-end management investment company 
under the 1940 Act.\2\
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    \2\ File No. 811-1539 (Account GIS); File No. 811-2571 (Account 
QB); File No. 811-3409 (Account MM); File No. 811-5090 (Account 
TGIS); File No. 811-5089 (Account TSB); and File No. 811-5091 
(Account TAS).
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    5. Travelers Insurance established Account Five as a separate 
account on June 6, 1998. Account Five is divided into subaccounts, 61 
of which are offered in the TRA contracts. Account Five is registered 
with the Commission as a unit investment trust under the 1940 Act.\3\
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    \3\ File No. 811-08867.
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    6. Travelers Life established Account Six on June 6, 1998. Account 
Six is divided into subaccounts, 61 of which are offered in the TRA 
contracts. Account Six is registered with the Commission as a unit 
investment trust under the 1940 Act.\4\
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    \4\ File No. 811-08869.
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    7. Under Connecticut law, the assets of each respective separate 
account (``Account'') attributable to the Contracts are owned either by 
Travelers Insurance or Travelers Life, but are held separately from the 
other assets of Travelers Insurance or Travelers Life for the benefit 
of the owners of, and the persons entitled to payment under those 
contracts. Income, gains and losses, whether or not realized, from the 
assets of each Account are credited to or charged against that Account 
without regard to the other income, gains, or losses of Travelers 
Insurance or Travelers Life. In addition, the assets of any such 
Account equal to the reserves and other contract liabilities with 
respect to that Account are not chargeable with liabilities arising out 
of any other business Travelers Insurance or Travelers Life may 
conduct.
    8. Travelers Distribution is registered as a broker-dealer under 
the Securities Exchange Act of 1934 (``1934 Act'') and is a member of 
the NASD. Travelers Distribution serves as the principal underwriter 
for the UA and TRA contracts, and is affiliated with Travelers 
Insurance and Travelers Life.
    9. Each contract is a flexible premium variable annuity contract. 
Travelers Insurance registered the UA contracts under the Securities 
Act of 1933 on Form N-4 (File No. 2-79529); Travelers Insurance and 
Travelers Life registered the TRA contracts under the Securities Act of 
1933 on Form N-4 (File Nos. 333-58783 (Account Five) and 333-58809 
(Account Six)).\5\ Each contract may be used in connection with certain 
types of retirement plans that receive favorable treatment under the 
Internal Revenue Code of 1986, as amended, (the ``Code'') (``Qualified 
Contracts''), and the UA contract may be issued to an owner who is not 
purchasing the contract for use in such tax-favorable retirement plans 
(``Non-Qualified Contracts''). Each contract provides for the 
accumulation of values on a variable basis, fixed basis, or both, 
during the accumulation period, and provides for settlement or annuity 
payment options on a variable or fixed basis.
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    \5\ There is a market value adjustment feature under the TRA 
contract. Each Company registered this feature with the Commission 
on Form S-2 under the Securities Act of 1933 (File Nos. 333-69793 
(Travelers Insurance) and 333-69753 (Travelers Life).
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Universal Annuity Contract

    10. Travelers Insurance issues the UA contract to individuals or 
groups.\6\ An owner may purchase a UA contract for a minimum initial 
payment of $1,000 for a Non-Qualified Contract or an IRA contract ($20 
for a Qualified Contract), and submit additional payments of $100 ($20 
for a Qualified Contract) thereafter.
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    \6\ For the purposes of this notice, the term ``contract'' 
includes a certificate under a group contract, and the term 
``owner'' includes participant under a group contract.
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    11. An owner may allocate his or her payments to and transfer cash 
value among the variable funding options and the Fixed Account (where 
the current interest rate is 3.5%). The variable funding options 
include six managed separate accounts (Account GIS, Account MM, Account 
QB, Account TAS, Account TGIS, and Account TSB) and one UIT/separate 
account, Fund U. Fund U has 34 subaccounts that are available for 
investment by UA owners. Each subaccount of Fund U invests in shares of 
a fund or portfolio of a mutual fund.
    12. An owner may transfer all or a portion of his or her investment 
between and among the UA Accounts and the Fixed Account and may make 
transfers between the Fixed Account and the VA Accounts. Certain 
limitations, however, may apply. Travelers Insurance currently does not 
charge for such transfers, but reserves the right to assess such a 
charge in the future.
    13. An owner may elect to enter into a separate advisory agreement 
with CitiStreet Financial Services LLC (``CitiStreet''), an affiliate 
of Travelers Insurance and Travelers Life and an investment adviser 
registered under the Investment Company Act of 1940. For a fee, 
CitiStreet provides asset allocation advice under either its CHART 
Program[reg] or its Tactical Asset Allocation Program. Under the CHART 
Program[reg], CitiStreet will allocate all of an owner's purchase 
payments among the CitiStreet Funds available in the UA Contract. Under 
the Tactical Asset Allocation Program, CitiStreet will transfer an 
owner's contract value among TGIS, TSB and TAS (the ``Market Timed 
Accounts''). An owner also may invest in the Market Timed Accounts 
through an asset allocation program of an adviser not affiliated with 
Travelers Insurance, subject to the approval of Traveler's Insurance; 
and an owner may invest in those Accounts without the assistance of an 
investment adviser. However, if an owner invests in the Market Timed 
Accounts without a tactical asset allocation agreement, he or she may 
bear a higher proportion of the expenses associated with separate 
account portfolio turnover.
    14. A UA owner may surrender his or her UA contract or make a 
withdrawal of that contract's cash surrender value at any time before 
the contract's maturity date. In addition, an owner may take 
withdrawals using a systematic withdrawal program. An owner may 
instruct Travelers Insurance to calculate and make the minimum 
distributions that may be required by the Internal Revenue Service upon 
the owner's reaching age 70\1/2\.
    15. There are various charges and deductions made under the UA 
contract. Travelers Insurance assesses a mortality and expense risk 
charge against the assets of the managed separate accounts and Fund U 
in an amount, computed daily, at an annual

[[Page 4253]]

rate of 1.25% of the daily net asset value of those Accounts. Travelers 
Insurance also assesses a semiannual contract administrative charge of 
$15.
    16. Travelers Insurance assesses charges for certain transactions 
an owner may make under the UA contract. If an owner surrenders his 
contract or takes a withdrawal, Travelers Insurance may assess a 
contingent deferred sales charge of 5% of the payment surrendered or 
withdrawn if the owner surrenders or withdraws the payment within five 
years of the payment's date. However, beginning in the second contract 
year, the owner may withdraw up to 10% of the cash value of his or her 
contract annually without Travelers Insurance assessing the contingent 
deferred sales charge. Travelers Insurance also reserves the right to 
assess a transfer charge on transfers an owner may make among the 
investments options available in the UA contract.
    17. Each underlying fund and managed separate account has its own 
fees and expenses. Total annual operating expenses for the variable 
funding options range from .26% to 2.11% (based on the average daily 
net assets of the funding option, after expense reimbursement, as of 
December 31, 2001). Some of the underlying funds charge a 12b-1 fee 
against their assets. The total annual operating expenses for the 
Market Timed Accounts include market timing fees equal on an annual 
basis to 1.25% of the current value of the assets participating in the 
Tactical Asset Allocation program with CitiStreet. Travelers Insurance 
deducts this fee daily from the assets of the Market Timed Accounts. 
CitiStreet also charges a $30 Tactical Asset Allocation application 
fee.
    18. Travelers Insurance will deduct charges for any premium tax or 
other tax levied by any governmental entity from payments or cash value 
at death, surrender or annuitization, but no earlier than the time the 
contract incurs the tax.
    19. If the owner or annuitant dies before an UA contract's maturity 
date, Travelers Insurance will pay the beneficiary a death benefit. The 
amount paid on the death of the annuitant depends on the age of the 
annuitant at death. If the annuitant dies on or after age 75, Travelers 
Insurance will pay the beneficiary the cash value of the contract. If 
the Annuitant dies before age 75, and before the maturity date, 
Travelers Insurance will pay the beneficiary the greater of: (a) Cash 
value; (b) total purchase payments made; or (c) the cash value on the 
most recent 5th multiple contract year anniversary less any withdrawals 
made since that anniversary before Travelers Insurance receives proof 
of death. If an owner who is not the annuitant dies before the maturity 
date, Travelers Insurance will pay the beneficiary the cash value of 
the contract. If any owner or annuitant dies on or after the maturity 
date, Travelers Insurance will pay the beneficiary any benefit 
remaining under the annuity or income option then in effect.
    20. If the annuitant is living on the maturity date, Travelers 
Insurance will pay the owner or his or her designated payee annuity or 
income payments beginning on that date. These payments may be in a 
single lump-sum payment, under five annuity options (i.e., payments 
made based on the life of the annuitant), under three income options 
(i.e., payments made for a fixed time not based on the life of the 
annuitant), or under any other mutually agreed upon annuity option. The 
owner may choose whether he or she would like all or part of his or her 
annuity payments to be made on a fixed or variable basis.

TRA Contract

    21. Travelers Insurance and Travelers Life (depending on the state 
where the owner purchases the contract) issue the TRA contract to 
individuals or groups. An owner may purchase a TRA contract for a 
minimum initial payment of $20,000 and submit additional payments of 
$5,000 thereafter. Travelers Insurance/Travelers Life will add a 
purchase payment credit to each purchase payment that an owner makes if 
that owner elects the optional death benefit. Each company funds the 
purchase payment credits from the assets of its general account. The 
companies assess a higher mortality and expense risk charge for the 
optional death benefit, but will not require the owner to repay the 
amount of purchase payment credit to the relevant company should the 
owner surrender after the ``right to return'' period or take a 
withdrawal from his or her contract. Specifically, during the ``right 
to return'' period, a TRA owner who surrenders and who elects the 
optional death benefit will receive either purchase payments or 
contract value, depending on applicable state law; the owner will not 
bear any contract fees associated with the purchase payment credits. 
Should the owner exercise his or her ``right to return'' rights, the 
owner will be in the same position as if he or she had exercised the 
``right to return'' right in a variable annuity contract that did not 
have purchase payment credits. The owner would, however, receive any 
gains, and the relevant company would bear any losses attributable to 
the purchase payment credits.
    22. An owner may allocate his or her payments to and transfer cash 
value among the variable funding options and the Fixed Account (where 
the current interest rate is 4% annually). Account Five and Account Six 
offer the same underlying fund options; each separate account has 61 
subaccounts that are available for investment by TRA contract owners. 
These subaccounts invest in shares of a fund or portfolio of a mutual 
fund.
    23. Subject to certain restrictions, an owner may transfer all or a 
portion of his or her investment between and among the subaccounts and 
the Fixed Account and between the Fixed Account and the subaccounts. 
Travelers Insurance and Travelers Life currently do not charge for 
transfers, but reserve the right to assess a transfer charge of up to 
$10 on transfers exceeding 12 per year.
    24. An owner may elect to enter into a separate advisory agreement 
with CitiStreet. For a fee, CitiStreet provides asset allocation advice 
under its CHART Program[reg].
    25. A TRA owner may surrender his or her TRA contract or make a 
withdrawal of that contract's cash value at any time before the 
contract's maturity date. In addition, an owner may take withdrawals 
using a systematic withdrawal program. An owner also may choose to 
participate in the Managed Distribution Program, under which the owner 
may instruct Travelers Insurance/Travelers Life to calculate and make 
the minimum distributions that may be required by the Internal Revenue 
Service upon the owner's reaching age 70\1/2\.
    26. There are various charges and deductions made under the TRA 
contract. Travelers Insurance/Travelers Life assesses a mortality and 
expense risk charge against the assets of Account Five/Account Six in 
an amount, computed daily, at an annual rate of .80% of the daily net 
asset value if the owner elects the standard death benefit, or 1.25%, 
if the owner elects the optional death benefit.
    27. Travelers Insurance/Travelers Life will assess charges for 
certain transactions an owner may make under the TRA contract. If an 
owner surrenders his contract or makes a withdrawal, Travelers 
Insurance/Travelers Life may assess a withdrawal charge if the owner 
surrenders or withdraws the payment within five years of when the owner 
made that payment.
    The charge is a percentage of the purchase payment and any 
applicable

[[Page 4254]]

purchase payment credits withdrawn as follows:

------------------------------------------------------------------------
                                                              Withdrawal
             Years since purchase payment made               charge  (in
                                                               percent)
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0-1........................................................            5
2..........................................................            4
3..........................................................            3
4..........................................................            2
5..........................................................            1
6 or more..................................................            0
------------------------------------------------------------------------

    However, subject to the provisions of the Code, an owner may 
withdraw up to 20% of the contract value of his or her contract 
annually without Travelers Insurance/Travelers Life assessing the 
withdrawal charge.
    28. In addition, should a group contract owner surrender its TRA 
contract (other than because of plan termination due to the dissolution 
or liquidation of the employer under U.S. Code Title 11 procedures), or 
should Travelers Insurance/Travelers Life discontinue the TRA contract, 
Travelers Insurance/Travelers Life will assess a market value 
adjustment on any contract value held in the Fixed Account. The market 
value adjustment will reflect the relationship between the interest 
rate credited to amounts in the Fixed Account at the time of 
termination and the interest rate credited on new deposits in the Fixed 
Account at the time of termination.
    29. Each underlying fund has its own fees and expenses. Total 
annual operating expenses for the variable funding options range from 
.40% to 1.72% (based on the average daily net assets of the funding 
option, after expense reimbursement, as of December 31, 2001). Some of 
the underlying funds charge a 12b-1 fee against their assets.
    30. Should an owner elect to participate in the CHART[reg] program, 
the owner will be charged for the investment advisory services 
CitiStreet provides. This charge is equal to a maximum of .80% of the 
assets subject to the CHART[reg] Program, and will be paid by quarterly 
withdrawals from the contract value allocated to the asset allocation 
funds.
    31. As discussed below, Travelers Insurance/Travelers Life offers a 
Variable Annuitization Floor Benefit. If the owner elects this option 
during the annuitization period, Travelers Insurance/Travelers Life 
will deduct a charge upon election; the charge will vary based on 
market conditions, but will never increase an owner's annual separate 
account charge by more than 3%. An owner also may elect a liquidity 
benefit on certain options during the annuitization period (as 
discussed below). If the owner elects the liquidity benefit and takes a 
withdrawal, Travelers Insurance/Travelers Life will charge a surrender 
charge of 5% on the amounts withdrawn.
    32. If the owner or annuitant dies before a TRA contract's maturity 
date, Travelers Insurance/Travelers Life will pay the beneficiary a 
death benefit. The amount paid on death of the annuitant depends on the 
age of the annuitant on the contract date and the death benefit option 
selected. Under the standard death benefit, if the annuitant's age on 
the contract date was less than age 80, Travelers Insurance/Travelers 
Life will pay the beneficiary the greater of contract value or the 
total purchase payments made less any withdrawals (and related 
charges). If the annuitant's age on the contract date equaled or was 
greater than age 80, Travelers Insurance/Travelers Life will pay the 
beneficiary contract value.
    33. Under the optional death benefit, if the annuitant's age on the 
contract date was less than age 70, Travelers Insurance/Travelers Life 
will pay the beneficiary the greater of contract value, total purchase 
payments less any withdrawals (and related charges), or maximum step-up 
value (described below) associated with contract date anniversaries 
beginning with the 5th and ending with the last before the annuitant's 
76th birthday. If the annuitant's age on the contract date was between 
70 to 75, Travelers Insurance/Travelers Life will pay the beneficiary 
the greater of contract value, total purchase payments less any 
withdrawals (and related charges), or the step-up death benefit value 
associated with the 5th contract date anniversary. If the annuitant's 
age on the contract date was between ages 76 to 80, Travelers 
Insurance/Travelers Life will pay the beneficiary the greater of 
contract value or total purchase payments less any withdrawals (and 
related charges). If the beneficiary was over age 80 on the contract 
date, Travelers Insurance/Travelers Life will pay the beneficiary 
contract value. Travelers Insurance/Travelers Life will establish a 
separate step-up death benefit value on the fifth contract date 
anniversary and on each subsequent contract date anniversary on or 
before the date the death is reported to the company. The step-up death 
benefit value initially equals the contract value on that anniversary. 
After a step-up death benefit value has been established, Travelers 
Insurance/Travelers Life will recalculate it each time a purchase 
payment is made or a withdrawal is taken.
    34. If the annuitant is living on the maturity date, Travelers 
Insurance will pay the owner or his or her designated payee annuity 
payments beginning on that date. These payments may be in a single 
lump-sum payment, under any combination of five annuity/income options, 
or under any other option mutually agreed upon. Should the owner elect 
to apply his or her contract value to purchase an annuity, Travelers 
Insurance/Travelers Life, where permitted by law, will add an 
annuitization credit to the amount applied to purchase the annuity. The 
credit equals .5% of contract value if the owner annuitizes during 
contract years 2-5, 1% during contract years 6-10, and 2% after 
contract year 10.
    35. Travelers Insurance/Travelers Life offers four annuity/income 
options on a fixed or variable basis; the fifth option is offered only 
on a fixed payment basis. For fixed annuities, an owner may elect to 
receive a level payment or a payment that will increase by a certain 
percentage chosen by the owner.
    36. Travelers Insurance/Travelers Life will offer two optional 
annuity benefits. Under the variable annuitization floor benefit, 
Travelers Insurance/Travelers Life guarantees that, regardless of the 
performance of the funding options the owner selects, the owner's 
annuity payments will never be less than a certain percentage of the 
owner's first variable annuity payment. This percentage will vary 
depending on market conditions, but will never be less than 50%. As 
previously discussed, there is a charge for this benefit.
    37. Under the liquidity benefit, if an owner selects any annuity 
option which guarantees payments for a minimum period of time (either a 
life annuity with a number of payments assured or a fixed annuity), the 
owner may take a lump sum payment any time after the first contract 
year. There is a surrender charge of 5% of the amount withdrawn under 
this option.

Comparison of the UA and TRA Contract Features

    38. Applicants submit that the features and benefits of the TRA 
contract, in almost every respect, are more favorable than under the UA 
contract.
    39. Applicants note that there is a higher threshold for purchase 
payments under the TRA contract than under the UA contract and that 
there are fewer funding options available under the UA contract than 
under the TRA contract. Asset allocation, systematic withdrawal 
programs, and a Managed Distribution Program are available in both the 
UA contract and the TRA contract. There is,

[[Page 4255]]

however, an additional asset allocation program available under the UA 
contract, the Tactical Asset Allocation program, that is not offered in 
the TRA contract.
    40. An owner may invest in the Fixed Account under each of the 
contracts. However, under certain situations, a group contract owner 
may be assessed a market value adjustment for amounts withdrawn from 
the Fixed Account under the TRA contract.
    41. The UA and TRA contracts provide for similar annuity payment 
options, but differ greatly on the benefits available during the 
annuitization period. The UA contract provides for five annuity options 
and the TRA contract provides for a choice of five annuity options. The 
UA contract offers three income options; the TRA contract offers one 
income option. It is the optional features that set the contracts apart 
and make the point that the focus of the TRA contract is retirement 
income. The TRA contract provides for several benefits during the 
annuitization period, including a liquidity option, an annuitization 
credit, a variable annuitization floor benefit, and an increasing 
benefit option for fixed annuities. These benefits are not available 
under the UA contract.
    42. The death benefit under the UA contract is, under certain 
circumstances, potentially not as generous as the standard death 
benefit under the TRA contract. There is an optional death benefit 
available for a fee under the TRA contract that provides owners with 
purchase payment credits and a potentially more generous benefit.
    43. Each contract allows the owner to take a withdrawal at any time 
before the maturity date. However, the free withdrawal amount available 
under the UA contract is less than what is available under the TRA 
contract. A systematic withdrawal option and a Managed Distribution 
Program are offered in both the UA and TRA contracts.
    44. Applicants represent that the fees and charges of the basic TRA 
contract will be no higher than those of the UA contract.
    45. Asset-based charges are higher under the UA contract than they 
are under the TRA contract. Under the UA contract, Travelers Insurance 
imposes a mortality and expense risk charge as a percentage of average 
daily net assets of UA Accounts of 1.25% annually. Under the TRA 
contract, Travelers Insurance/Travelers Life imposes a mortality and 
expense risk charge as a percentage of average daily net assets of 
Account Five or Account Six, as relevant, of .80% for the standard 
death benefit and 1.25% for the enhanced death benefit.
    46. Under the UA contract, the owner is assessed a semiannual 
administrative charge of $15. This charge is not assessed under the TRA 
contract.
    47. Currently, under both the UA contract and TRA contract, no 
transfer charge is assessed. However, under each contract, the company 
reserves the right to assess the charge in the future.
    48. The contingent deferred sales charge is higher under the UA 
contract than it is under the TRA contract. Under the UA contract, a 
contingent deferred sales charge of 5.00% is assessed if a purchase 
payment is withdrawn within 5 years after that purchase payment is 
made. The charge does not decline. Similarly, under the TRA contract a 
withdrawal charge is assessed if a purchase payment (including 
applicable credits) is withdrawn within 5 years after that payment is 
made. However, unlike with the UA contract, under the TRA contract the 
withdrawal charge declines each year so that the amount of the charge 
is 0% if the purchase payment is withdrawn 5 or more years after the 
purchase payment is made.

Proposed Exchange

    49. Applicants propose to offer eligible owners of UA contracts the 
opportunity to exchange their UA contracts for TRA contracts. To be 
eligible to participate in the exchange offer:
    [sbull] The UA owner must have purchased his or her contract in 
connection with a retirement plan that met the requirements under 
section 403(b) or 457 under the Code;
    [sbull] The plan under which the UA owner purchased his or her 
contract no longer uses The Travelers Insurance Company as its primary 
insurance carrier for the employer's section 403(b) or 457 plan or the 
UA owner no longer actively contributes to his or her contract;
    [sbull] The UA owner meets the minimum eligibility requirements to 
purchase the TRA contract (i.e., the owner must be at least 40 years of 
age and make an initial purchase payment of at least $20,000); and
    [sbull] The UA owner's contract must be at least 5 years old.
    Applicants submit that the program will be beneficial to owners 
who, because of the terms of their employer's 403(b) or 457 plan, may 
no longer be able to contribute to their UA contract because it 
provides such owners the opportunity to invest in the lower cost TRA 
contract that offers them innovative death benefits options and more 
annuitization options (including liquidity and guaranteed floor 
provisions).
    50. After an initial notification of the exchange offer in 
quarterly reports or other communications to eligible UA contract 
owners and contacts made by Travelers Distribution's registered 
representatives, the exchange offer will be made by providing eligible 
owners of the UA contracts who express an interest in learning the 
details of the offer a prospectus for the TRA contract, accompanied by 
a letter explaining the offer, a piece of sales literature that 
compares the UA contract to the TRA contract, and an internal exchange 
form. The offering letter will advise owners of a UA contract that the 
exchange offer is specifically designed for those owners who intend to 
continue to hold their contracts as long-term investment vehicles. The 
letter will state that the offer is not intended for all owners, and 
that it is not appropriate for any owner who anticipates surrendering 
all or a significant part (i.e., more than 20% on an annual basis) of 
his or her contract before the end of five years. Further, the letter 
will encourage owners to carefully evaluate their personal financial 
situations when deciding whether to accept or reject the exchange 
offer.
    51. Applicants represent that the offering letter also will explain 
how an owner of a UA contract contemplating an exchange may avoid the 
applicable withdrawal charge on the TRA contract if no more than the 
``free withdrawal amount'' is surrendered and any subsequent deposits 
are held until the expiration of the withdrawal period. In this regard, 
the offering letter will state in plain English that if the TRA 
contract is surrendered during the withdrawal charge period:
    [sbull] Any purchase payment credit that the owner may receive if 
he or she elects the optional death benefit, may be more than offset by 
the withdrawal charge; and
    [sbull] An owner may be worse off than if he or she had rejected 
the exchange offer.
    52. An internal exchange application form, which will accompany the 
offering letter, will include an owner acknowledgement section with 
check-off boxes setting forth specific questions designed, among other 
things, to determine a contract owner's suitability for the exchange 
offer. In particular, the form will seek affirmative confirmation that 
an owner does not anticipate a need to withdraw more than 20% per year 
(plus earnings) from the TRA contract during the withdrawal period. 
Other questions on the form will seek owner acknowledgment that the 
exchange offer is suitable only for an owner if he or she

[[Page 4256]]

expects to hold the TRA contract through annuitization, and that the 
owner may be better off rejecting the exchange offer if he or she plans 
to surrender the TRA contract during the withdrawal period. All boxes 
on the form must be checked off with affirmative responses before 
Travelers Insurance/Travelers Life will process the exchange. After 
making a suitability determination, each broker-dealer will be required 
to forward completed forms to Travelers Insurance/Travelers Life for 
processing. In the event either company receives an incomplete form 
(i.e., a form with one or more acknowledgment boxes not checked off), 
Travelers Insurance/Travelers Life will not process the exchange, 
treating the transaction as ``not in good order.'' Travelers Insurance/
Travelers Life intends to contact any broker-dealer who submits a form 
not in good order, however, in no event will Travelers Insurance/
Travelers Life process exchange transactions based on incomplete forms.
    53. Travelers Insurance/Travelers Life will apply the cash value of 
the UA contract, together with any applicable purchase payment credit, 
and any additional purchase payments submitted with an internal 
exchange application form for the TRA contract to the TRA contract on 
the exchange date. Travelers Insurance will not deduct a contingent 
deferred sales charge upon the surrender of a UA contract in connection 
with the exchange offer.
    54. After expiration of the TRA contract's right to return period, 
surrenders and withdrawals will be governed by the terms of the TRA 
contract for purposes of calculating any withdrawal charge. This means, 
in part, that Travelers Insurance/Travelers Life will not recapture any 
purchase payment credit applied to the contract value of the TRA 
contract, unless the owner were to cancel the contract during the right 
to return period.
    55. The exchange date will be the issue date of the TRA contract 
for purposes of determining contract years and anniversaries after the 
exchange date.
    56. To accept the exchange offer, a UA contract owner must complete 
an internal exchange application form. Contract values under the TRA 
contract will be allocated according to owner instructions. Travelers 
Insurance/Travelers Life will assume purchase payments submitted with 
the internal exchange application form to be payments under the TRA 
contract as of the date of issue of the TRA contract.
    57. UA owners who accept the exchange offer will not be subject to 
any adverse tax consequences. The exchanges will constitute tax-free 
exchanges under section 1035 of the Code.
    58. Travelers Insurance/Travelers Life will compensate broker-
dealers in connection with the proposed exchange offer. These broker-
dealers will receive the same compensation they would have received had 
there been a new sale of a TRA contract without the exchange program.

Applicants' Legal Analysis

    1. Section 11 of the 1940 Act makes it unlawful for any registered 
open-end 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 his or 
her 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 to be exchanged, unless the terms of the offer have first 
been submitted to and approved by the Commission or are in accordance 
with Commission rules and regulations adopted under section 11. Section 
11(c) of the 1940 Act, in pertinent part, makes section 11(a) 
applicable to an offer of exchange of the securities of a registered 
unit investment trust for the securities of any other investment 
company, irrespective of the basis of the exchange. Accounts GIS, MM, 
QB, TAS, TGIS, and TSB are registered with the SEC as open-end 
diversified management investment companies, and Fund U and Accounts 
Five and Six are registered with the SEC as unit investment trusts. 
Accordingly, the proposed exchange offer is subject to section 11(a) 
under the 1940 Act and can only be made after the Commission has 
approved the terms of the offer under section 11(a). Applicants submit 
that the terms of the proposed exchange offer do not present the abuses 
section 11 was designed to prevent, and are consistent with public 
policy and Commission precedent.
    2. As noted by the Commission when proposing rule 11a-3 under the 
1940 Act, the purpose of section 11 of the Act is to prevent 
``switching.'' ``Switching'' is 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. This practice was found by 
Congress to be widespread in the 1930's before the adoption of the 1940 
Act.
    3. Section 11(c) of the 1940 Act requires Commission approval (by 
order or 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. Applicants note that the legislative history 
of section 11 makes clear that the potential for harm to investors 
perceived in switching was its use to extract additional sales charges 
from investors.
    4. Applicants represent that the terms of the proposed exchange 
offer do not present the abuses (i.e., the additional sales charges 
that result from abusive switching practices) against which section 11 
was designed to prevent. Applicants submit that the purpose of their 
exchange offer is not to earn additional sales commissions; rather, the 
purpose of the offer is to give investors, many of whom because of the 
terms of their employer's 403(b) and 457 plans may no longer be able to 
contribute towards their retirement, an opportunity to invest in a 
lower cost contract that has innovative death benefit and annuitization 
features. In stark contrast with the 9-10% front-end commission 
deducted in the ``switching'' exchanges that led to adoption of section 
11, each UA owner accepting the exchange offer may be able to receive a 
2% purchase payment credit added to each purchase payment should the 
owner elect the optional death benefit. The effect of the credit is to 
add to cash value at the time of the exchange. This credit provides a 
significant benefit to the owner because neither Travelers Insurance 
nor Travelers Life will recapture the amount of that credit should the 
owner make a withdrawal from or surrender his or her contract after the 
expiration of the TRA contract's right to return period. Further, the 
TRA contract offers the owner the opportunity to receive additional 
economic benefits upon annuitization. At that time, each company will 
add an annuitization credit to the value of an owner's contract. In 
addition, no sales charges will be imposed on amounts surrendered from 
a UA contract and applied to a TRA contract, and no sales charges ever 
will be paid on amounts rolled over in the exchange unless the TRA 
contract is surrendered before the expiration of the TRA contract's 
initial withdrawal charge period.
    5. Rule 11a-2 permits an offer to exchange one variable annuity 
contract which has a contingent deferred sales load for another 
variable annuity contract which also has a contingent deferred sales 
load of the same or of an affiliated insurer without obtaining 
Commission approval, as long as (i) no

[[Page 4257]]

surrender charge is deducted at the time of the exchange, and (ii) in 
computing the surrender charge for the new contract, the insurer gives 
credit for the period during which the contract owner held the old 
contract (the ``tacking requirement''). Amounts exchanged from a UA 
contract and deposited into the TRA contract are precluded from relying 
on rule 11a-2 because, in computing the withdrawal charge on amounts 
surrendered or withdrawn from a UA contract and deposited into the TRA 
contract, Travelers Insurance/Travelers Life will not give credit for 
the period during which the owner held the amount in the UA 
contract.\7\ Applicants state that it is not economically feasible for 
Travelers Insurance/Travelers Life to ``tack'' for purposes of 
assessing the withdrawal charge under the TRA contract.
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    \7\ Applicants not that the proposed exchange may not be 
considered to be at relative net asset value because of the addition 
of the purchase payment credit to amounts exchanged into a TRA 
contract should the owner elect the optional death benefit.
---------------------------------------------------------------------------

    6. Applicants submit that tacking is not a requirement of section 
11. Instead, it is a creation of rule 11a-2 designed to approve the 
terms of exchange offers ``sight unseen.'' Congress adopted section 11 
well before the first contingent deferred sales load.
    7. Applicants state that tacking focuses on the closest thing to 
multiple deductions of sales charges that is possible in the contingent 
deferred sales charges context--i.e., whether there are multiple sales 
loads upon surrender and redemption. Applicants note that if that 
safeguard, as well as other safeguards provided by rule 11a-2 are 
present, the Commission has determined that there is no need for it or 
its staff to evaluate the offer. Applicants submit that tacking should 
be viewed as a useful way to avoid the need to scrutinize the terms of 
an offer of exchange to make sure that there is no abuse; tacking 
should not be relevant in situations where the SEC will fully 
scrutinize the terms of an exchange offer. The absence of tacking does 
not mean that the proposed exchange offer is without clear benefits to 
investors. Applicants believe that the proposed exchange offer presents 
less potential for the type of abuses that led to the adoption of 
section 11 than in connection with exchanges that would be permitted 
under rule 11a-2.
    8. Applicants submit that they are offering a beneficial investment 
opportunity to certain UA owners. The proposed exchange offer is 
offered to those owners many of whom, because of the terms of their 
employer's 403(b) or 457 plans, may no longer be able to contribute to 
their current UA contracts, or to those UA owners who no longer 
actively contribute to his or her contract. Applicants represent that 
the proposed exchange offers such individuals the opportunity to once 
again contribute towards their retirement under the lower cost TRA 
contract. Far from being a way to extract additional charges from 
investors, as contemplated by the prohibitions of section 11, 
Applicants submit that the proposed exchange offer would assure, in 
most instances, an immediate and enduring economic benefit to 
investors. The 2% purchase payment credit would be applied immediately 
should the owner elect the optional death benefit, and the fact that 
asset-based and other charges would remain the same or be decreased by 
the exchange (asset-based charges only would be decreased if an owner 
were to elect the standard death benefit) would ensure that the benefit 
would endure. Further, Applicants note that the TRA contract offers 
several features which are not available under the UA contract which 
the UA contract owner may enjoy. These include: the optional death 
benefit with purchase payment credits, a greater free withdrawal amount 
(20% of contract value) without the imposition of the withdrawal 
charge, a declining withdrawal charge, an annuitization credit, a 
liquidity option during the annuitization period, and the ability to 
receive variable annuity payments in at least a certain minimum amount. 
Applicants believe that, in almost every respect, the proposed exchange 
would be beneficial to the offerees. Applicants represent that the only 
significant downside that may occur as a result of the exchange is if 
the owner, instead of holding his or her investment for the long-term, 
as variable annuity contracts are designed to be, surrenders or 
withdraws certain amounts from his or her TRA contract before the end 
of the withdrawal period.
    9. Applicants state that the exchange offer will be available to 
all owners who meet the applicable eligibility and suitability 
standards on a voluntary basis. The decision to participate in the 
exchange offer will be made by each owner, after he or she has been 
given the opportunity to evaluate the proposed exchange offer. 
Applicants note that the offering letter from Travelers Insurance will 
give a UA contract owner a full explanation of both the advantages and 
disadvantages of the exchange.
    10. Applicants submit that the proposed exchange offer is 
consistent with the purposes of the National Securities Improvement Act 
of 1996 (``NSMIA''). The purpose of NSIMA was to promote competition 
and capital formation as well as to ``eliminate[ ] burdens and enhance[ 
] innovation and efficiency for investment companies.'' \8\ These 
concepts are codified in section 2 of the 1940 Act. Applicants submit 
that the proposed exchange offer will promote competition because it 
will allow Travelers Insurance to retain business it otherwise might 
have lost because it is no longer the primary insurance carrier for 
certain 403(b) and 457 plans.
---------------------------------------------------------------------------

    \8\ H.R. Conf. Rep. No. 104-864, at 40 (Sept. 28, 1996).
---------------------------------------------------------------------------

    11. Applicants submit that there is ample precedent to support the 
various features of their exchange offer, including precedent relating 
to the compensation of salesmen, the granting of an order where the 
exchange might be disadvantageous to certain owners, and relief from 
rule 11a-2's tacking requirement.

Conditions

    If the requested order is granted, Applicants consent to the 
following conditions which are intended to support the understanding 
that the exchange offers are being made to owners who expect to 
persist:
    1. The offering letter will contain concise plain English 
statements that: (a) The exchange offer is suitable only for UA owners 
who expect to hold their contracts as long-term investments; and (b) if 
the TRA contract is surrendered during the withdrawal charge period:
    [sbull] Any purchase payment credit that the owner may receive if 
he or she elects the optional death benefit, may be more than offset by 
the withdrawal charge; and
    [sbull] An owner may be worse off than if he or she had rejected 
the exchange offer.
    2. Travelers Insurance/Travelers Life will provide a means of 
confirming that an owner choosing to participate in the exchange offer 
was told of the statements required in the offering letter (stated in 
condition no. 1). Travelers Insurance will send the offering letter 
directly to eligible UA owners. An owner choosing to participate in the 
program will then complete and sign an internal exchange form, which 
will prominently restate in concise, plain English the statements 
required in condition no. 1 and return it to Travelers Insurance. If 
the internal exchange form is more than two pages in length, Travelers 
Insurance will use a separate document to obtain owner acknowledgment 
of the statements required by condition no. 1.

[[Page 4258]]

    3. Travelers Insurance and Travelers Life, as appropriate, will 
maintain the following separately identifiable records in an easily 
accessible place, for the time periods specified below in this 
condition no. 3, for review by the Commission upon request: (a) Records 
showing the level of exchange activity and how it relates to total 
number of owners eligible for the exchange offer (quarterly as a 
percentage of the number eligible); (b) copies of any form of offering 
letter and other written materials and scripts for presentations by 
representatives regarding the exchange offer (if Travelers Insurance 
prepared or approved the materials), including the dates(s) used; (c) 
records showing information about each exchange transaction that 
occurs, including the name of the owner; the UA contract and TRA 
contract number(s); contingent deferred sales charge waived at 
surrender of the UA contract; purchase payment credit applied, if any; 
registered representative's name, CRD number, firm affiliation, branch 
office address and telephone number, and the name of the registered 
representative's broker-dealer; commission paid; internal exchange form 
(and separate document, if any, used to obtain owner acknowledgment of 
the statements required in condition no. 1) showing the name, date of 
birth, address and telephone number of the owner, and date the internal 
exchange form (or separate document) was signed; amount of cash value 
exchanged; and persistency information relating to the TRA contract 
(date surrendered and withdrawal charge paid); and (d) logs showing any 
owner complaints about the exchange offer, state insurance department 
inquiries about the exchange offer, or litigation, arbitration or other 
proceedings regarding any exchange. The following information will be 
included on the logs: date of complaint or commencement of the 
proceeding; nature of the complaint or proceeding; and persons named or 
involved in the complaint or proceeding.
    4. Records specified in condition no. 3(a) and (d) will be retained 
for six years from creation of record. Records specified in condition 
no. 3(b) will be retained for six years after the date of last use, and 
records specified in condition no. 3(c) will be retained for two years 
from the end of the initial withdrawal period of the TRA contract.
    5. The offering letter will disclose in concise plain English each 
aspect of the TRA contract that is less favorable than the UA contract.

Conclusion

    For the reasons stated above, Applicants believe that the requested 
exemption in accordance with the standards of section 11(a), are 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1810 Filed 1-27-03; 8:45 am]
BILLING CODE 8010-01-P