Federal Register, Volume 68 Issue 69 (Thursday, April 10, 2003)

[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]

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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.

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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:

[[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