[Federal Register Volume 68, Number 69 (Thursday, April 10, 2003)]
[Notices]
[Pages 17684-17692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8729]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC -25991; File No. 812-12880]


The Prudential Insurance Company of America, et al.; Notice of 
Application

April 4, 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 (the ``Act'') approving the terms of 
certain offers of exchange, and for an order under section 6(c) of the 
Act granting exemptions from the provisions of sections 2(a)(32), 22(c) 
and 27(i)(2)(A) of the Act and rule 22c-1 thereunder to permit the 
recapture of certain bonus credits.

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

Summary of Application:  Applicants seek an order approving the terms 
of a proposed offer of exchange of the ``Discovery Plus'', ``Variable 
Investment Plan'' and ``Qualified Variable Investment Plan'' individual 
variable annuity contracts (the ``Old Contracts'') for a version of the 
Strategic Partners Annuity One individual variable annuity (the ``New 
Contracts'') to be offered by Pruco Life Insurance Company and Pruco 
Life Insurance Company of New Jersey. Applicants also seek an order 
approving the terms of a proposed exchange program under their 
Strategic Partners FlexElite variable annuity contract. In addition, 
Applicants seek an order to permit the recapture of any bonus credits 
granted with respect to purchase payments under the New Contracts (a) 
if the New Contract is cancelled during the applicable free-look period 
or (b) for credits granted within one year prior to death where the 
death benefit is equal to contract value.
    Applicants: The Prudential Insurance Company of America 
(``Prudential Life''), the Prudential Individual Variable Contract 
Account and the Prudential Qualified Individual Variable Contract 
Account (each such Account, the ``Old Prudential Account''); Pruco Life 
Insurance Company (``Pruco Life''); Pruco Life Flexible Premium 
Variable Annuity Account (the ``New Pruco Life Account''); Pruco Life 
Insurance Company of New Jersey (``PLNJ,'' and collectively with Pruco 
Life and Prudential Life, the ``Insurance Companies''); Pruco Life of 
New Jersey Flexible Premium Variable Annuity Account (the ``New PLNJ 
Account,'' and collectively with the Old Pruco Life Accounts and the 
New Pruco Life Account, the ``Accounts''); and Prudential Investment 
Management Services LLC (``PIMS,'' and collectively with the Insurance 
Companies and the Accounts, ``Applicants'').
    Filing Date: The application was filed on September 9, 2002, and 
amended and restated on April 3, 2003.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the SEC orders a hearing. Interested 
persons may request a hearing by writing to the SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on April 
29, 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 requester'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: The Prudential 
Insurance Company of America, 213 Washington Street, Newark, NJ 07102.

[[Page 17685]]


FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or 
William J. Kotapish, Assistant Director, at (202) 942-0670, Office of 
Insurance Products, Division of Investment Management.

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

Applicants' Representations

    1. Prudential Life is a stock life insurance company founded in 
1875 under the laws of New Jersey. It is licensed to sell life 
insurance and annuities in the District of Columbia, Guam, the U.S. 
Virgin Islands and in all states. Pruco Life is a stock life insurance 
company organized in 1971 under the laws of the State of Arizona and is 
licensed to sell life insurance and annuities in the District of 
Columbia, Guam, and in all states except New York. PLNJ is a stock life 
insurance company organized in 1982 under the Laws of the State of New 
Jersey and is licensed to sell life insurance and annuities in the 
states of New Jersey and New York. PLNJ is a wholly-owned subsidiary of 
Pruco Life, which is a wholly-owned subsidiary of Prudential Life. PIMS 
is registered with the Commission as a broker-dealer under the 
Securities Exchange Act of 1934 and is a member of the National 
Association of Securities Dealers, Inc. PIMS is the principal 
underwriter for the Old Contracts and the New Contracts and for certain 
other of Prudential Life's variable insurance products, including the 
Strategic Partners FlexElite variable annuity. PIMS is an affiliate of 
Prudential Life.
    2. Each Old Prudential Account was established on October 12, 1982, 
in accordance with authorization by the Board of Directors of 
Prudential Life and registered under the Act as a unit investment trust 
(File Nos. 811-03622 and 811-03625). The Prudential Individual Variable 
Contract Account is the separate account through which Prudential Life 
issues the Discovery Plus individual variable annuity contracts 
(``Discovery Plus Contracts'') and the Variable Investment Plan 
Contracts. The Prudential Qualified Individual Variable Contract 
Account is the separate account through which Prudential Life issues 
the Qualified Variable Investment Plan Contracts (collectively with the 
Variable Investment Plan Contracts, the ``VIP Contracts'').
    3. The New Pruco Life Account was established on June 16, 1995, in 
accordance with authorization by the Board of Directors of Pruco Life 
and registered under the Act as a unit investment trust (File No. 811-
07325). It is the separate account in which Pruco Life will set aside 
and invest assets attributable to the New Contracts.
    4. The New PLNJ Account was established on May 20, 1996, in 
accordance with authorization by the Board of Directors of PLNJ and 
registered under the Act as a unit investment trust (File No. 811-
07975). It is the separate account in which PLNJ will set aside and 
invest assets attributable to PLNJ's version of the New Contracts.

The Exchange Offer

    5. The Exchange Offer proposed by the Applicants will be made only 
to owners of the Old Contracts whose current account value equals or 
exceeds $ 20,000, whose Old Contract is no longer subject to a 
withdrawal charge, and who are aged 80 or younger on the date of the 
exchange.
    6. The New Contracts will be registered with the SEC and will be 
offered as individual tax-deferred flexible premium variable annuity 
contracts. They will permit contract values to be accumulated on a 
variable, fixed, or combination of variable and fixed basis. They 
require a minimum initial premium payment of $20,000. Subsequent 
purchase payments generally must be at least $500.
    7. On the day the exchange is effected (the ``Exchange Date'') 
eligible owners would receive a bonus based on the contract value of 
each Old Contract surrendered in exchange for an enhanced New Contract 
(the ``New Credit''). The New Credit would be equal to 1.5%, 2%, 2.5%, 
or 3%, depending on the amount exchanged and the age of the owner. 
Specifically, the New Credit percentage is 2% for purchase payments 
less than $250,000, 2.5% for purchase payments of $250,000 or more (but 
less than $1 million), and 3% with respect to a purchase payment of $1 
million or more if the contract owner is age 80 or younger (for 
jointly-owned contracts, if the older owner is 80 or younger). The New 
Credit percentage is 1.5% for contract owners aged 81 or older (for 
jointly-owned contracts, if the older owner is 81 or older), regardless 
of the amount of the purchase payment. Under the New Contracts, the New 
Credit will vest upon the expiration of the free look period (except 
for New Credits applied within 12 months of death where the death 
benefit amount is equal to contract value). Specifically, if a New 
Credit is applied to a purchase payment within one year of death and 
the death benefit amount is equal to contract value, then any Credit 
attributable to that purchase payment will be recaptured in calculating 
the death benefit.
    8. The New Contracts will provide for a base death benefit equal to 
the greater of (a) contract value or (b) total purchase payments (less 
withdrawals). The guaranteed minimum death benefit option (``GMDB'') 
guarantees that the death benefit will be no lower than a certain 
``protected value'' equal to the ``step-up value'' or the ``roll-up 
value'' or the greater of the ``step-up value'' or the ``roll-up 
value''. The step-up value equals the highest value of the contract on 
any contract anniversary date (on each contract anniversary, the new 
step-up value becomes the higher of the previous step-up value and the 
current contract value). Between anniversary dates, the step-up value 
is only increased by additional purchase payments and reduced 
proportionally by withdrawals. The roll-up value equals the total of 
all invested purchase payments compounded daily at an effective annual 
rate of 5.0%. The New Contract will offer a minimum of three annuity 
payment options, including annuity payments for a fixed period, life 
income annuity option, and an interest payment settlement option.
    9. Contract values under the New Contracts may be invested in 
several different investment company portfolios (``Underlying Funds''). 
New Underlying Funds may be added in the future. All but one of the 
Underlying Funds are portfolios of The Prudential Series Fund (``Series 
Fund Portfolios''). The other Underlying Fund is a portfolio of Janus 
Aspen Series. In addition, contract values under the New Contracts may 
be allocated to certain companion fixed options and market value 
adjustment options.
    10. Contract values may be transferred among the subaccounts 
funding the New Contracts without charge for the first twelve such 
transfers per contract year. After the twelfth, a charge of up to $30 
for each additional transfer will be imposed. New Contract owners may 
enroll in a dollar-cost averaging transfer program (the ``DCA 
Program''). Contract owners who enroll under the DCA Program may then 
systematically transfer either a fixed dollar amount or a percentage 
out of any variable investment option and into any other variable 
investment option. The New Contracts also will offer an auto-
rebalancing feature. The contract owner may choose an allocation among 
the

[[Page 17686]]

variable investment options, and on a periodic basis (monthly, 
quarterly, semi-annually, or annually) automatic transfers occur to 
return the contract to the chosen allocation. In addition to the DCA 
Program, the New Contract will offer a dollar cost averaging fixed rate 
option (the ``DCA Fixed Rate Option''). Purchase payments allocated to 
the DCA Fixed Rate Option will be allocated to the insurer's general 
account, and will earn interest at prevailing rates. Those purchase 
payments will be transferred, in either six or twelve monthly 
installments, to the variable investment options selected by the 
contract owner.
    11. Contract values under the New Contracts may be accessed at any 
time prior to the annuity commencement date by means of partial 
surrenders or full surrender. The New Contracts will permit withdrawal 
of up to 10% of purchase payments per contract year without charge. 
This annual withdrawal amount, which is not subject to the contingent 
deferred sales charge (``CDSC''), is also referred to herein as the 
``charge-free-amount''. Earnings (the contract value in excess of 
purchase payments) are also not subject to the CDSC when withdrawn. No 
CDSC is imposed on amounts withdrawn to meet minimum distribution 
requirements. Purchase payments are deemed to be withdrawn before any 
earnings. The CDSC under the New Contracts will be as follows:

------------------------------------------------------------------------
                                                              Withdrawal
       Contract anniversaries since purchase payment            charge
                                                              (percent)
------------------------------------------------------------------------
0..........................................................            8
1..........................................................            8
2..........................................................            8
3..........................................................            8
4..........................................................            7
5..........................................................            6
6..........................................................            5
7 or more..................................................            0
------------------------------------------------------------------------

    12. Some versions of the New Contracts may offer lower withdrawal 
charges. In no event, however, will the withdrawal charge after a given 
number of contract anniversaries exceed the charge shown in the above 
schedules.
    13. Other charges under the New Contract will include the 
following: (a) Asset-based insurance and administrative charges of 
1.20%, 1.45%, and 1.55% for the base death benefit, Roll-up or Step-up 
guaranteed minimum death benefit, and greater of Roll-up or Step-up 
guaranteed minimum death benefit, respectively; (b) where the 
guaranteed minimum income benefit feature (``GMIB'') has been elected, 
a charge at an annual rate of 0.45% of the Roll-Up value, which is 
deducted proportionally from the net assets of each sub-account on each 
contract anniversary and pro-rata upon partial withdrawals (when the 
remaining contract value is less than the amount of the charge), 
annuitization, the contract owner's election to discontinue the 
feature, and surrender of the contract; (c) where the Earnings 
Appreciator supplemental death benefit feature has been elected, a 
charge at an annual rate of 0.30% of the contract value which is 
deducted from the contract value on the contract anniversary and upon 
annuitization, death of the sole or last surviving owner prior to 
annuitization, surrender of the contract, and partial withdrawal if the 
contract value remaining is insufficient to cover the then applicable 
charge; (d) in those jurisdictions in which premium taxes are assessed, 
a charge to cover these taxes, either when the contract is issued or 
when annuity payments begin; and (e) for each transfer among 
subaccounts after the twelfth in a single contract year, a charge up to 
$30 assessed pro rata from the subaccounts involved in the transfer; 
and (f) a charge equal to .25% of contract value for the optional 
Income Appreciator benefit that pays a benefit designed to help the 
owner defray the taxes that will be owed on annuity payments.
    14. The Discovery Plus Contract is offered pursuant to a 
registration statement under the Securities Act of 1933 (``1933 Act'') 
(File No. 33-25434), and permits contract values to be accumulated on a 
variable, fixed or combination variable and fixed basis. The Discovery 
Plus Contract requires a minimum initial premium payment of $10,000, 
and each subsequent premium payment must be at least $1000. Contract 
values of the Discovery Plus Contracts currently may be allocated to 13 
subaccounts, each of which corresponds to a portfolio of the Prudential 
Series Fund, Inc. Contract values may also be accumulated on a 
guaranteed basis by allocation to Prudential Life's general account.
    15. Contract values may be transferred among the Discovery Plus 
subaccounts without charge for the first four such transfers per 
contract year. The contract owner does not have a contractual right to 
more than four transfers a year, although Prudential Life currently 
permits such excess transfers. The Discovery Plus Contract offers a DCA 
Program similar to the one available under the New Contracts. Unlike 
the New Contracts, however, the Discovery Plus Contract's DCA Program 
permits transfers to come only out of the Money Market Portfolio.
    16. The Discovery Plus Contract provides a bonus credit of 1% of 
each purchase payment during the first three contract years, up to a 
maximum credit of $ 1,000 per contract year. Prudential Life has the 
contractual discretion to grant the 1% bonus for purchase payments made 
after the third contract year, and currently does so. The credit does 
not vest at all until the end of the surrender charge period, at which 
point the entire credit vests. Applicants represent that each owner of 
a Discovery Plus Contract to whom an Exchange Offer is extended will be 
fully vested in his/her bonus amounts. Any withdrawal or surrender 
during the surrender charge period results the in recapture of any 
credit corresponding to the amount withdrawn. Contract values under the 
Discovery Plus Contracts may be accessed at any time prior to the 
annuity commencement date by means of partial surrenders or full 
surrender. The Discovery Plus Contract permits a charge-free withdrawal 
of all earnings and up to 10% of the contract value each contract year 
less any prior withdrawals of purchase payments (``net premium 
payments'').
    17. The Discovery Plus Contract provides for a death benefit equal 
to the greater of (a) the contract value and (b) net premium payments. 
In addition, the death benefit is subject to a one-time step-up on the 
sixth contract anniversary, at which time the minimum death benefit is 
guaranteed to be the greater of (a) the contract value on the sixth 
contract anniversary, increased by any additional premium payments and 
reduced by any withdrawals, (b) the contract value, and (c) net premium 
payments. The Discovery Plus Contract offers the same annuity options 
available under the New Contracts.
    18. The Discovery Plus Contracts assess a CDSC against partial or 
full surrenders in excess of the free withdrawal amount. The length of 
time from receipt of a premium payment to the time of surrender 
determines the percentage of the CDSC. During the first five contract 
years after each premium payment, a CDSC will be assessed against the 
surrender of premium payments. The CDSC is a percentage of the amount 
surrendered (not to exceed the aggregate amount of the premium payments 
made) and equals:

------------------------------------------------------------------------
                                                              Withdrawal
       Contract anniversaries since purchase payment            charge
                                                              (percent)
------------------------------------------------------------------------
0-2........................................................            7
3..........................................................            6
4..........................................................            5
5..........................................................            4

[[Page 17687]]

 
6 or more..................................................            0
------------------------------------------------------------------------

    Prudential Life deducts an M&E charge and an administration fee 
from contract value at an aggregate annual rate equal to 1.20% of 
amounts invested in the contract's variable investment options. A 
charge for administrative expenses relating to the maintenance of the 
Discovery Plus Contract is deducted annually on each contract 
anniversary and upon surrender from the contract value. This 
maintenance fee is $30, and is waived on contracts with a $10,000 
contract value or greater on the contract anniversary or full 
surrender. Charges for the Underlying Funds of the Discovery Plus 
Contracts (as of December 31, 2002) ranged on an annual basis from 
0.37% to 0.82% of average daily net assets.
    19. The VIP Contracts are individual, flexible premium variable 
annuity contracts that allow the contract owner to allocate purchase 
payments to 13 portfolios of The Prudential Series Fund, Inc., to the 
Prudential Variable Contract Real Property Account and to a fixed 
interest-rate option. These contracts are registered under the 1933 Act 
on Form N-4 (File No. 2-80897). The Qualified Variable Investment Plan 
Contracts (``QVIP Contracts'') are also registered under the 1933 Act 
on Form N-4 (File No. 2-81318) and generally have the same features as 
the VIP contracts, except that they are sold only to certain retirement 
arrangements. Except as indicated, the discussion herein concerning the 
VIP Contracts applies equally to the Qualified Variable Investment Plan 
Contracts, and references to the VIP contracts encompass both VIP and 
QVIP Contracts. The total expenses of the Prudential Series Fund 
portfolios available under the VIP contracts (as of December 31, 2002) 
ranged from 0.37% to 0.82% annually.
    20. The VIP Contracts also offer a DCA Program, under which the 
contract owner can systematically transfer amounts from the money 
market sub-account into any other variable investment option. During 
the first three years of the contract, Prudential Life adds an 
additional 1% bonus to each purchase payment made by an owner. This 1% 
bonus vests over a period of eight contract anniversaries. Prudential 
Life has the contractual discretion to grant the 1% bonus for purchase 
payments made after the third contract year, and currently does so. 
Applicants represent that each owner of a VIP Contract to whom an 
exchange offer is extended will be fully vested in his/her bonus 
amounts. The VIP Contract offers several annuity and settlement 
options, including life annuity with 10 years certain and an interest 
payment option. If the annuitant under a VIP Contract dies, the 
beneficiary will receive the total value of the contract, or, depending 
on the age of the annuitant, the total amount invested in the contract 
(reduced proportionately by withdrawals), whichever is greater.
    21. Each day, Prudential Life deducts a mortality and expense risk 
charge under the VIP contracts equal, on an annual basis, to 1.20% of 
the daily value of the contract invested in the variable investment 
options. During the accumulation phase, Prudential Life deducts an 
annual contract fee of $30 if the contract value is less than $10,000 
on the contract anniversary date. Each contract year, the contract 
owner can withdraw earnings, plus up to 10% of the owner's total 
contract value without paying a withdrawal charge. With respect to 
contracts issued in states that impose a premium tax, Prudential Life 
makes a deduction from the contract value to pay some or all of these 
taxes. There is a CDSC under the VIP Contracts according to the 
following schedule:

------------------------------------------------------------------------
                                                              Withdrawal
       Contract anniversaries since purchase payment            charge
                                                              (percent)
------------------------------------------------------------------------
0..........................................................            8
1..........................................................            7
2..........................................................            6
3..........................................................            5
4..........................................................            4
5..........................................................            3
6..........................................................            2
7..........................................................            1
8..........................................................            0
------------------------------------------------------------------------

    22. Prudential proposes to offer eligible owners of Old Contracts 
the opportunity to exchange their Old Contracts for New Contracts by 
means of the Exchange Offer. To be eligible for the Exchange Offer, Old 
Contract owners must not be subject to a CDSC on their contract, have a 
minimum contract value of $ 20,000, and not be older than 80 on the 
date of the exchange. Only Old Contracts held in IRAs and outside any 
tax-qualified arrangement will be eligible for the Exchange Offer. 
Pruco Life and PLNJ, as applicable will provide from their general 
accounts a Credit to each owner of an Old Contract who accepts the 
offer (equal to either 1.5%, 2%, 2.5%, or 3% as discussed above). The 
Exchange Offer will provide that, upon acceptance of the offer, a New 
Contract will be issued with a contract value equal to the contract 
value of the Old Contract surrendered in the exchange, increased by the 
amount of the applicable Credit. Any such Credit will be recaptured if 
the New Contract is surrendered during the free look period or if the 
Credit was granted within 12 months prior to death and the death 
benefit amount is equal to the contract value.
    23. After an initial notification of the Exchange Offer to Old 
Contract owners and contacts made by Prudential's registered 
representatives, the Exchange Offer will be made by providing eligible 
owners of Old Contracts who express an interest in learning the details 
of the offer a prospectus for the New Contracts, accompanied by a 
letter explaining the offer and a piece of sales literature that 
compares the applicable contracts. The offering letter will advise 
owners of an Old Contract that the Exchange Offer is specifically 
designed for those contract 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 contract owners, and that it is 
especially not appropriate for any contract owner who anticipated 
surrendering all or a significant part (i.e., more than 10% of purchase 
payments on an annual basis) of his or her contract before seven years 
have elapsed. In this regard, the letter will encourage contract owners 
to carefully evaluate their personal financial situation when deciding 
whether to accept or reject the Exchange Offer. In addition, the 
offering letter will explain how an owner of an Old Contract 
contemplating an exchange may want to decline the offer to avoid the 
applicable CDSC on the New Contract if more than the annual ``free 
withdrawal amount'' is surrendered. In this regard, the offering letter 
will state in clear plain English that if the New Contract is 
surrendered during the initial CDSC period, a contract owner may be 
worse off than if he or she had rejected the Exchange Offer, because 
the amount of the CDSC will exceed the amount of the New Credits 
granted.
    24. The contract value of an Old Contract (``Exchange Value'') 
together with the New Credit and any additional premium payments 
submitted with an internal Exchange Application Form for the New 
Contract will be applied to the New Contract as of the Exchange Date. 
Because only Old Contract owners who are no longer subject to a CDSC 
charge will be eligible for the Exchange Offer, no CDSC will be 
deducted upon the surrender of an Old Contract in connection with an 
exchange. If a contract owner surrenders his New Contract prior to the 
completion of the

[[Page 17688]]

CDSC period, Prudential will apply the applicable CDSC according to the 
seven-year schedule detailed above. If a contract owner exercises his 
or her right to cancel the New Contract, the New Credit will be 
returned to Prudential and the Old Contract will be reinstated with 
contract values that reflect the investment experience while the New 
Contract was held, or such other value as is required by state law. 
After expiration of the New Contract's right to cancel period, 
withdrawals will be governed by the terms of the New Contract for 
purposes of calculating any CDSC. The Exchange Date will be the issue 
date of the New Contract for purposes of determining contract years and 
anniversaries after the Exchange Date.
    25. To accept the Exchange Offer, an owner of an Old Contract must 
complete an Internal Exchange Application Form. Contract values will be 
allocated to the New Contract investment options selected by the owner. 
Contract values may subsequently be reallocated under the New Contract 
pursuant to contract owner instructions. Payments submitted with the 
Internal Exchange Application Form will be assumed to be payments under 
the New Contract as of the date of issue of the New Contract.
    26. No adverse tax consequences generally will be incurred by those 
Old Contract owners who accept the Exchange Offer. The exchanges will 
constitute tax-free exchanges pursuant to Section 1035 of the Internal 
Revenue Code (for nonqualified annuities) or tax-free transfers (in 
connection with Old Contracts held under IRAs). Prudential designed the 
terms of the Exchange Offer (particularly the New Credit) in response 
to similar offers currently being made by its competitors as a means to 
maintain the existing Old Contract business.
    27. The following chart summarizes the salient features of the Old 
Contracts and the New Contracts.

----------------------------------------------------------------------------------------------------------------
             Features                     New contract             Discovery plus                  VIP
----------------------------------------------------------------------------------------------------------------
A. Investment Options:
    1. Number of underlying funds  27.......................  13......................  13.
    2. Fixed rate option (and MVA  Yes......................  Yes.....................  Yes.
     option).
    3. Dollar cost averaging       Yes......................  N/A.....................  N/A.
     fixed rate option.
    4. Dollar cost averaging       Yes......................  Yes.....................  Yes.
     feature.
    5. Asset allocation program..  Yes......................  N/A.....................  N/A.
    6. Auto-rebalancing..........  Yes......................  N/A.....................  N/A.
    7. Number of Free Transfers..  12.......................  4.......................  4.
B. Death Benefit:
    1. Base death benefit          Yes......................  Yes.....................  Yes.
     (greater of total purchase
     payments less withdrawals or
     contract value).
    2. Step-up or roll-up GMDB...  Yes......................  N/A.....................  N/A.
    3. Greater of Step-up or Roll- Yes......................  N/A.....................  N/A.
     up GMDB.
    4. Earnings Appreciator        Yes......................  N/A.....................  N/A.
     supplemental death benefit.
C. Annuity Options:
    1. Annuity payments for a      Yes......................  Yes.....................  Yes.
     fixed period.
    2. Life income annuity         Yes......................  Yes.....................  Yes.
     option..
    3. Interest payment option...  Yes......................  Yes.....................  Yes.
    4. Other annuity options.....  Yes......................  Yes.....................  Yes.
    5. Automated withdrawals.....  Yes......................  Yes.....................  Yes.
D. Guaranteed Minimum Income       Yes......................  N/A.....................  N/A.
 Benefit.
E. Spousal Continuance Benefit...  Yes......................  N/A.....................  N/A.
F. Credit Amount/Bonus...........  Up to 3%.................  1%......................  1%.
G. Fees and Charges:
    1. Maximum transfer fee......  $30.00...................  N/A.....................  N/A.
    2. Contract maintenance        $0.00....................  $30.00..................  $30.00.
     charge.
    3. Base Death Benefit; or....  1.20%....................  1.20%...................  1.20%.
        GMDB--Roll-up or Step-up;  1.45%....................  N/A.....................  N/A.
         or.
        GMDB greater of Roll-up    1.55%....................  N/A.....................  N/A.
         and Step-up.
    4. Earnings appreciator        .30%.....................  N/A.....................  N/A.
     charge.
    5. Income Appreciator charge.  .25%.....................  N/A.....................  N/A.
    6. GMIB charge...............  .45%.....................  N/A.....................  N/A.
    7. Underlying fund charge      .37%-1.30%...............  .37%-.82%...............  .37%-.82%.
     range (after Expense
     reimbursement).
----------------------------------------------------------------------------------------------------------------

    28. Applicants submit that the Exchange Offer is meant to encourage 
existing Old Contract owners who might otherwise surrender their 
contracts in exchange for a competitor's product offering a similar 
bonus to remain with Prudential instead. If imposing the New Contract's 
CDSC on the New Contract is not permitted, Applicants believe some 
contract owners might exchange their New Contracts with the intent to 
take advantage of the New Credit and then surrender the New Contract 
without a CDSC. Without the CDSC, Prudential would have no assurance 
that a contract owner who accepted the Exchange Offer would persist for 
long enough for the New Credit and any payments to registered 
representatives to be recouped through standard fees from the ongoing 
operation of the New Contracts. Old Contract owners will be informed in 
the offering letter that Prudential reserve the right to terminate the 
Exchange Offer at any time, and will be referred to a toll-free 
telephone number to call for information concerning the current status 
of the Exchange Offer.

The FlexElite Exchange Program

    29. In addition to seeking an order under section 11(a) with 
respect to the Exchange Offer described above, PLIC, PLNJ, the New PLIC 
Account, the New PLNJ Account, and PIMS also seek Commission approval 
of an exchange offer to be made with respect to each of PLIC's and 
PLNJ's Strategic Partners FlexElite variable annuity contract (such 
exchange offer is referred to hereinafter as the ``FlexElite Exchange 
Program''). PLIC currently offers a Strategic Partners FlexElite 
variable annuity contract through the New PLIC Account. (File

[[Page 17689]]

No. 333-75702). PLIC's Strategic Partners FlexElite variable annuity 
has a withdrawal charge, equal to 7% of the amount withdrawn (in excess 
of the permitted free withdrawal amount), that applies in each of the 
first three years of the contract. No withdrawal charge applies after 
the third contract year, unless the contract owner makes the credit 
election described below. Before each contract's third contract 
anniversary, PLIC will offer the owner of such contract the opportunity 
to receive a credit equal to 1% of the contract value as of the third 
contract anniversary (the ``1% Credit''). If the owner chooses to 
receive the 1% Credit, PLIC will re-impose the three-year, 7% surrender 
charge schedule discussed above. PLIC also will offer the 1% Credit 
before the sixth anniversary of the contract, and will re-impose the 
three-year, 7% surrender charge schedule on any contract owner who 
accepts that offer. It is the offer of the 1% Credit before the third 
and sixth contract anniversaries, coupled with the re-imposition of the 
three-year, 7% surrender charge schedule, that arguably causes the 
FlexElite Exchange Program to need an exemption from section 11(a) of 
the Act. However, apart from the re-imposition of the surrender charge 
schedule on contract owners who accept the 1% Credit, a contract owner 
will experience no change in contract features as a consequence of 
accepting the 1% Credit.
    30. PLNJ has filed with the Commission a Form N-4 registration 
statement to register its version of the Strategic Partners FlexElite 
variable annuity (File No. 333-99275). The 1% Credit, surrender 
charges, and re-imposition of surrender charge provisions of the PLNJ 
version are substantially similar in all material respects to those 
under the PLIC version of Strategic Partners FlexElite. PLNJ's version 
of Strategic Partners FlexElite otherwise is substantially similar in 
all material respects to the PLIC version.
    31. PLIC and PLNJ seek Commission approval of the FlexElite 
Exchange Program under section 11(a) of the Act. To the extent 
described below, Applicants would adhere to the conditions set forth 
below with respect to the Exchange Offer. By adhering to those 
conditions, Applicants believe that contract owners will be fully 
apprised of the fact that the economic benefits of accepting the 1% 
Credit would be negated if the owner surrenders his/her contract during 
the ensuing three-year surrender charge period. Specifically, 
Applicants represent that they will adhere to the offering letter 
requirements set forth in condition 1 below, except that (a) they will 
not contrast an old contract with a new contract because no new 
contract will be issued and (b) they will not reserve any right to 
terminate the FlexElite Exchange Program. Applicants also will adhere 
to the terms of condition 2 below. Applicants will adhere to the terms 
of condition 3 below, except as respects the reference in that 
condition to the contract number of the old and new contracts (i.e., 
there is only a single security, having a single 1933 Act registration 
number, involved). Finally, Applicants will comply with condition 4 
below, in that the offering letter will disclose in concise, plain 
English the one feature of the exchange that could be less favorable 
than not accepting the exchange offer (i.e., the possible imposition of 
a surrender charge).

Applicants' Conditions

    If the requested order is granted, Applicants consent to the 
following conditions:
    1. The offering letter will contain concise plain English 
statements that (a) the Exchange Offer is suitable only for contract 
owners who expect to hold their contracts as long term investments, and 
(b) if the New Contract is surrendered during the initial CDSC period, 
a contract owner may be worse off than if he or she had rejected the 
Exchange Offer, because the amount of the CDSC will exceed the amount 
of the New Credit, and (c) disclose each aspect of the New Contract 
that will be less favorable than the Old Contracts, and (d) Applicants 
reserve the right to terminate the Exchange Offer at any time, and 
contract owners can call a toll-free telephone number for information 
concerning the current status of the Exchange Offer.
    2. Prudential will provide a means of confirming that a contract 
owner choosing to make an exchange was told the statements in the 
offering letter (stated in Condition No. 1). Prudential will send the 
offering letter directly to eligible contract owners. A contract owner 
choosing to exchange 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 Prudential. If 
the internal exchange form is more than two pages in length, Prudential 
will use a separate document to obtain contract owner acknowledgement 
of the statements required in condition No. 1.
    3. Prudential 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 the total number of contract owners eligible to exchange 
(quarterly as a percentage of the number eligible), (b) copies of any 
form of offering letter and other written materials or scripts for 
presentations by representatives regarding the Exchange Offer (if 
Prudential prepared or approved the materials), including the date(s) 
used; (c) records showing information about each exchange transaction 
that occurs, including the name of the contract owner, Old and New 
Contract number(s), Credit paid, registered representative's name, CRD 
number, firm affiliation, branch office address and telephone number, 
and name of the registered representative's broker-dealer, commission 
paid, internal exchange form (and separate document, if any, used to 
obtain contract owner acknowledgement of the statements required in 
condition No. 1) showing the name, date of birth, address and telephone 
number of the contract owner, and date internal exchange form (or 
separate document) was signed, amount of contract value exchanged, and 
persistency information relating to the New Contract (date surrendered 
and CDSC paid), and (d) logs showing any contract owner complaints 
about the exchange, state insurance department inquiries about the 
exchange, or litigation, arbitration or other proceedings regarding any 
exchange. The following information will be included on the log's date 
of complaint or commencement of proceedings, name, address of the 
person making the complaint or commencing the proceeding, nature of the 
complaint or proceeding, and persons named or involved in the complaint 
or proceeding.
    Records specified in conditions No. 3(a) and (d) will be retained 
for six years from creation of the 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 CDSC period of the New 
Contract.
    4. The offering letter will disclose in concise plain English each 
aspect of the New Contracts that will be less favorable than the Old 
Contracts.

Applicants' Legal Analysis

    1. Section 11(a) of the 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 any other

[[Page 17690]]

open-end investment company, to exchange his security for a security in 
the same or another such company on any basis other than the relative 
net asset values of the respective securities, unless the terms of the 
offer have first been submitted to and approved by the Commission or 
are in accordance with Commission rules adopted under section 11. 
Section 11(c) of the Act, in pertinent part, requires, in effect, that 
any offer of exchange of the securities of a registered unit investment 
trust for the securities of any other investment company be approved by 
the Commission or satisfy applicable rules adopted under section 11, 
regardless of the basis of the exchange. Each Account is registered 
under the Act as a unit investment trust. Accordingly, the proposed 
Exchange Offer constitutes an offer of exchange of two securities, each 
of which is offered by a registered unit investment trust. Thus, unless 
the terms of the Exchange Offer are consistent with those permitted by 
Commission rule, Applicants may make the proposed Exchange Offer only 
after the Commission has approved the terms of the offer by an order 
pursuant to section 11(a) of the Act.
    2. As noted by the Commission when proposing rule 11a-3 under the 
Act, the purpose of section 11 of the Act is to prevent ``switching''. 
``Switching is a term of art that refers to the practice of inducing 
security holders of one Investment Company to exchange their securities 
for those of a different investment company ``solely for the purpose of 
exacting additional selling charges.'' That type of practice was found 
by Congress to be widespread in the 1930's prior to adoption of the 
Act.
    3. Rule 11a-2 adopted in 1983 under section 11 of the Act, by its 
express terms provides blanket Commission approval of certain types of 
offers of exchange of one variable annuity contract for another or of 
one variable life insurance contract for another. Variable annuity 
exchanges are permitted by rule 11a-2, provided that the only variance 
from a relative net asset value exchange is an administrative fee 
disclosed in the offering account's registration statement and a sales 
load or sales load differential calculated according to method 
prescribed in the rule. No exchange is permitted under rule 11a-2 that 
involves a security acquired or exchanged that has both a front-end and 
a deferred sales load. Adoption of rule 11a-3, which takes a similar 
approach to that of rule 11a-2, represents the most recent Commission 
action under section 11 of the Act. As with rule 11a-2, the focus of 
rule 11a-3 is primarily on sales or administrative charges that would 
be incurred by investors for effecting exchanges.

The Exchange Offer

    4. Applicants submit that the terms of the proposed Exchange Offer 
do not represent the abuses against which section 11 was intended to 
protect. The Exchange Offer was not created ``solely for the purpose'' 
of exacting additional sales charges. Rather, the Exchange Offer was 
designed to allow Prudential to compete on a level playing field with 
its competitors who are making bonus offers to its current Old Contract 
owners. No additional sales load or other fee will be imposed at the 
time of exercise of the Exchange Offer. In stark contrast with the 9-
10% front-end commissions deducted in the ``switching'' exchanges that 
led to the adoption of section 11, each contract owner accepting the 
Exchange Offer will be provided with a New Credit, funded from Pruco 
Life's or PLNJ's general account. The effect of this Credit is to add 
the New Credit to the Old Contract value at the time of exchange to the 
New Contract value. An owner of an Old Contract who intends to continue 
to hold the contract as a long-term retirement planning vehicle will be 
significantly advantaged by the Exchange Offer because this New Credit 
will automatically be added to his or her contract value upon receipt 
of an enhanced New Contract. No sales charge will ever be paid on the 
amounts rolled over in the exchange unless the New Contract is 
surrendered before expiration of the New Contract's CDSC period.
    5. Given the terms of the exchange, Applicants are precluded from 
relying on rule 11a-2. Accordingly, section 11(a) requires that 
Applicants submit the terms of the offer to the Commission for 
approval. Although section 11 does not prescribe specific standards for 
Commission approval of exchange offers, Applicants believe that the 
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.
    6. Applicant submit that the Exchange Offer is available to all 
eligible Old Contract owners on an entirely voluntary basis. While the 
Exchange Offer would not be in the interests of all contract owners 
(i.e., those contract owners who anticipate a need to access a 
significant portion of their contract's value--more than 10% of net 
premium payments on an annual basis--sometime before the expiration of 
the initial CDSC period), the determination of whether to accept or 
reject the Exchange Offer will be made by each contract owner. 
Applicants state that the terms of the proposed Exchange Offer are 
similar to offers currently being made to Old Contract owners by 
Prudential's competitors, which are permissible pursuant to a no-action 
letter issued to Alexander Hamilton Funds, SEC No-Action Letter (pub. 
avail. July 20, 1994). Accordingly, an offer such as the Exchange Offer 
would be permitted to be made by Prudential to owners of competitor's 
contracts under section 11(a) because the Accounts would be permitted 
to rely on the Alexander Hamilton letter. In fact, competitors can and 
do make such offers. The relief sought here would do no more than 
permit Prudential to offer its longstanding clients an enhanced 
contract and bonus similar to those they may be offered by Prudential's 
competitors.
    7. Applicants represent that the description of the proposed 
Exchange Offer in letters to owners of Old Contracts and in the New 
Contracts' prospectus will provide full disclosure of the material 
differences in the applicable contracts. Assuming no premature 
surrender, the New Contracts should be no more expensive than the Old 
Contracts for contract owners unless they affirmatively choose to add 
additional features. In each case, existing contract owners would be 
offered a better contract and a Credit under terms that would be on an 
equal footing with similar offers made daily by Prudential's 
competitors.
    8. Far from being a way to extract additional charges from 
investors, as contemplated by the prohibitions of section 11, 
Applicants state that the proposed Exchange Offer would provide an 
immediate and enduring economic benefit to investors. The New Credit 
would be applied immediately and the fact that asset-based charges 
would not be increased by the Exchange Offer, and that no contract 
maintenance charge would apply, also would contribute significantly to 
this enduring economic benefit. To the extent that a contract owner 
ultimately did not benefit from accepting the offer, it would most 
likely be as a result of his or her own subsequent decision to 
surrender the New Contract during the new CDSC period. The Exchange 
Offer will provide much more explicit disclosure about the 
inadvisability of accepting the Exchange Offer if the owner may require 
access to a significant portion of the amount invested in the contract 
during the CDSC period than would be the case with competitors' offers 
that pose the identical risk. The disclosure provided

[[Page 17691]]

in the offering materials will give owners of Old Contracts sufficient 
information to determine which contract will be best for them.

The Flexelite Exchange Program

    9. Applicants submit that the legal rationale supporting the 
FlexElite Exchange Program is comparable to that posited for the 
Exchange Offer. The FlexElite Exchange Program was not designed 
``solely for the purpose'' of exacting additional sales charges. 
Rather, that Program is designed to allow investors who do not 
anticipate making a withdrawal within the succeeding three years to 
receive a 1% addition to their contract value. As required by the 
conditions set forth above, Applicants will give investors ample notice 
of the fact that acceptance of the 1% Credit carries with it the 
reimposition of the three year surrender charge. Applicants anticipate 
that through that notice, investors who envision needing to make a 
significant withdrawal within the succeeding three years will be 
steered away from accepting the 1% Credit. On the other hand, investors 
who accept the 1% Credit and make no withdrawals during the succeeding 
three year period will receive an immediate monetary benefit in the 
form of the Credit, but will avoid any withdrawal charge.
    10. According to the Applicants, approval of the FlexElite Exchange 
Program also is warranted because it will promote competition in the 
variable annuity marketplace. The promotion of competition is a 
relevant consideration in evaluating whether the terms of an exchange 
offer are consistent with the protection of investors. Applicants state 
that several of their competitors currently offer variable annuity 
products featuring a ``persistency bonus'' coupled with a reimposition 
of the withdrawal charge. By granting the requested relief, the 
Commission will permit Applicants to offer and operate the Strategic 
Partners FlexElite contract as described herein--adding that product to 
the menu of such variable annuities already available in the 
marketplace.
    11. Applicants submit that the Exchange Offer does not present any 
duplication of sales loads or administrative fees to those Contract 
owners who intend to hold their Contracts as long-term retirement 
vehicles. Similarly, the FlexElite Exchange Program will entail no 
reassessment of surrender charges on a contract owner who accepts the 
1% Credit, so long as the owner holds the contract longer than the 
three-year surrender charge period. Applicants also submit that the 
Exchange Offer and FlexElite Exchange Program are consistent with the 
protections provided by section 11 of the Act, do not involve any of 
the switching abuses that led to the adoption of section 11, and assure 
an immediate and enduring economic benefit to persisting Contract 
owners. Furthermore, permitting Contract owners to evaluate the 
relative merits of the Old and New Contracts under the Exchange Offer 
and to select the one that best suits their circumstances and 
preferences fosters competition and is consistent with the public 
interest and the protection of investors. Accordingly, approval of the 
terms of the Exchange Offer and the FlexElite Exchange Program is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
policies and provisions of the Act.

Recapture of Credit Under the New Contracts

    12. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions, from the provisions of the Act and the 
rules promulgated thereunder if and to the extent that such exemption 
is necessary or appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act. Applicants request that the 
Commission, pursuant to section 6(c) of the Act, grant the exemptions 
requested below with respect to the New Contracts. Applicants believe 
that the requested exemptions are appropriate in the public interest 
and consistent with the protections of investors and the purposes 
fairly intended by the policy and provisions of the Act.
    13. Applicants seek exemption pursuant to section 6(c) from 
sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and rule 22c-l 
thereunder to the extent necessary to permit Pruco Life and PLNJ to 
recapture all or the unvested portion of certain Credits in the 
following instances: (a) The contract is canceled under the free look 
provision; or (b) death occurs within one year of a purchase payment 
where the death benefit amount is equal to contract value. Applicants 
represent that it is not administratively feasible to track the Credit 
amount in the subaccounts after the Credit is applied. Accordingly, the 
asset-based charges applicable to the subaccounts will be assessed 
against the entire amounts held in the respective subaccounts, 
including the Credit amount, during the period when the owner's 
interest in the credit is not completely vested. As a result, during 
such periods, the aggregate asset-based charges assessed against an 
owner's contract value will be higher than those that would be charged 
if the owner's contract value did not include the Credit. Applicants 
note, however, that any earnings attributable to Credit amounts vest 
immediately and are not subject to recapture.
    14. Section 27 of the Act provides that such section does not apply 
to any registered separate account funding variable insurance 
contracts, or the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of the 
subsection. Paragraph (2) provides that it shall be unlawful for such a 
separate account or sponsoring insurance company to sell a contract 
funded by the registered separate account unless such contract is a 
redeemable security.
    15. Section 2(a)(32) defines ``redeemable security'' as any 
security, other than short-term paper, under the terms of which the 
holder, upon presentation to the issuer, is entitled to receive 
approximately his proportionate share of the issuer's current net 
assets, or the cash equivalent thereof. Applicants submit that the 
recapture of the credit amount in the circumstances set forth in this 
Application would not deprive an owner of his or her proportionate 
share of the issuer's current net assets. With respect to Credit 
recaptures upon exercise of the free-look privilege, it would be unfair 
to allow an owner exercising that privilege to retain a Credit amount 
under a contract that has been returned for a refund after a period of 
only a few days. If Pruco Life and PLNJ could not recapture the Credit, 
individuals could purchase a contract with no intention of retaining 
it, and simply return it for a quick profit. Furthermore, the recapture 
of Credits relating to purchase payments made within one year prior to 
death or after death is designed to provide Pruco Life and PLNJ with a 
measure of protection against ``anti-selection''. The risk here is 
that, rather than holding the New Contract for a number of years, an 
owner will exchange an existing contract for a New Contract shortly 
before death, thereby leaving Pruco Life and PLNJ less time to recover 
the cost of the Credits applied, to their financial detriment. Again, 
the amounts recaptured equal the Credits provided by Pruco Life and 
PLNJ from their own general account assets and any gain would remain as 
part of the New Contract's value when annuity payments begin. For the 
foregoing

[[Page 17692]]

reasons, Applicants submit that the provisions for recapture of any 
Credits under the New Contracts does not violate section 2(a)(32) and 
27 (i)(2)(A) of the Act.
    16. Section 22(c) of the Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, their redeemable 
securities to accomplish the same purposes as contemplated by section 
22(c). Rule 22c-1 thereunder prohibits a registered investment company 
issuing any redeemable security, a person designated in such issuer's 
prospectus as authorized to consummate transactions in any such 
security, and a principal underwriter of, or dealer in, such security, 
from selling, redeeming or repurchasing any such security except at a 
price based on the current net asset value of such security which is 
next computed after receipt of a tender of such security for redemption 
or of an order to purchase or sell such security.
    17. Applicants state that Pruco Life's and PLNJ's recapture of the 
Credit might arguably be viewed as resulting in the redemption of 
redeemable securities for a price other than the one based on the 
current net asset value of the Accounts. Applicants contend, however, 
that the recapture of the Credit does not violate section 22(c) and 
rule 22c-1.

Conclusion

    For the reasons summarized above, Applicants submit that the 
Exchange Offer and the FlexElite Exchange Program are consistent with 
the protections provided by section 11 of the Act and that their 
approval is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policies and provisions of the Act. Applicants further 
submit that their request for exemptions from sections 2(a)(32), 22(c) 
and 27(i)(2)(A) of the Act and rule 22c-1 thereunder meet the standards 
set out in section 6(c) of the Act. Applicants submit that the 
requested order should therefore be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8729 Filed 4-9-03; 8:45 am]
BILLING CODE 8010-01-P