[Federal Register Volume 68, Number 138 (Friday, July 18, 2003)]
[Notices]
[Pages 42789-42792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18189]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-26098; File No. 812-12921]


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

July 14, 2003.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to section 6(c) of 
the Investment Company Act of 1940 (the ``Act'') granting exemptions 
from the provisions of sections 2(a)(32) and 27(i)(2)(A) of the Act and 
Rule 22c-1 thereunder.

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    Applicants: Integrity Life Insurance Company (``Integrity''), 
National Integrity Life Insurance Company (``National Integrity,'' 
together with ``Integrity'', the ``Companies''), Separate Account I of 
Integrity Life Insurance Company, Separate Account I of National 
Integrity Life Insurance Company (together with Separate Account I of 
Integrity Life Insurance Company, the ``Account''), and Touchstone 
Securities, Inc. (``Touchstone'').
    Summary of Application: Applicants seek an order of exemption 
pursuant to section 6(c) of the Act to the extent necessary to permit 
the recapture, under specified circumstances, of credits applied to 
contributions made under certain flexible premium variable annuity 
contracts that the Companies will issue through the Accounts (the 
``Contracts''), as well as other contracts that the Companies may issue 
in the future through their existing or future separate accounts 
(``Other Accounts'') that are substantially similar to the Contracts in 
all material respects (``Future Contracts''). Applicants also request 
that the order being sought extend to any other National Association of 
Securities Dealers, Inc. (``NASD'') member broker-dealer controlling or 
controlled by, or under common control or affiliated with, Touchstone, 
whether existing or created in the future, that serves as distributor 
or principal underwriter for the Contracts or Future (``Affiliated 
Broker-Dealers'').
    Filing Date: The application was filed on January 21, 2003 and 
amended and restated on July 11, 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 must be received SEC by 5:30 p.m. on August 13, 2003, 
and should be accompanied by proof of service on Applicants in the form 
of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants c/o G. Stephen 
Wastek, Esq., Assistant General Counsel, Integrity Life Insurance 
Company, 515 West Market Street, Louisville, Kentucky 40202.

FOR FURTHER INFORMATION CONTACT: Alison White, Senior Counsel, or Lorna 
J. MacLeod, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
SEC's Public Reference Branch, 450 5th Street, NW., Washington, DC 
20549-0102 ((202) 942-8090).

Applicants' Representations

    1. Integrity is a stock life insurance company organized under the 
laws of Ohio. It is authorized to sell life insurance and annuities in 
47 states and the District of Columbia. Integrity is a subsidiary of 
Western and Southern Life Insurance Company (``Western and Southern''), 
a mutual life insurance company organized under the laws of Ohio.
    2. National Integrity is a stock life insurance company organized 
under the laws of New York. It is authorized to sell life insurance and 
annuities in 4 states and the District of Columbia. National Integrity 
is a direct subsidiary of Integrity and an indirect subsidiary of 
Western and Southern.
    3. Separate Account I of Integrity Life Insurance Company was 
established in 1986 as a separate account under Ohio law for the 
purpose of funding variable annuity contracts issued by Integrity. It 
is a segregated asset account of Integrity and is registered with the 
Commission as a unit investment trust under the Act.
    4. Separate Account I of National Integrity Life Insurance Company 
was established in 1986 as a separate account under New York law for 
the purpose of funding variable annuity contracts issued by National 
Integrity. It is a segregated asset account of National Integrity and 
is registered with the Commission as a unit investment trust under the 
Act.
    5. The Accounts will fund the variable benefits available under the 
Contracts. Each Company's offering of the Contracts is registered under 
the Securities Act of 1933. That portion of the assets of the Accounts 
that is equal to the reserves and other Contract liabilities with 
respect to the Accounts is not chargeable with liabilities arising out 
of any other business of the Companies. Any income, gains or losses, 
realized or unrealized, from assets allocated to the Accounts are, in 
accordance with the Contracts, credited to or charged against the 
Accounts, without regard to other income, gains or losses of the 
Companies.
    6. Touchstone is the principal underwriter of the Contracts. 
Touchstone is registered with the Commission as a broker-dealer under 
the Securities Exchange Act of 1934 and is a member of the NASD. The 
Contracts are sold by registered representatives of broker-dealers that 
have entered into distribution agreements with Touchstone. Touchstone 
is a wholly owned subsidiary of Western and Southern.
    7. The minimum initial contribution is $20,000. An owner may make

[[Page 42790]]

additional contributions of at least $100 at any time. The Companies 
may limit total contributions to $1,000,000 if the owner is under age 
76 and to $250,000 if the owner is age 76 or older.
    8. The Companies will credit an extra amount to the Contracts equal 
to a maximum of 8% of a contribution made within the first twelve 
months of issuance (the ``Credit''). Currently the Credit is 5%. The 
minimum Credit that may be offered is 4%. The Companies will allocate 
the Credit pro rata among the investment options in the same proportion 
as the corresponding contribution. The Companies will fund the Credit 
from their general account assets.
    9. The Credit is not part of the amount an owner will receive if he 
or she exercises the free look provision. Credits applied within twelve 
months of the date of receipt of due proof of death will be recaptured 
and are not included in the amount payable as a death benefit. 
Similarly, all or part of a Credit applied within twelve months of a 
withdrawal made pursuant to a withdrawal charge waiver (due to, for 
example, unemployment, terminal illness, nursing home care, or 
disability) will be recaptured in the same proportion as the withdrawal 
bears to the value of the Contract (for example, if 50% of account 
value is withdrawn, 50% of the Credit will be recaptured). In addition, 
Integrity will recapture all or part of a Credit if the owner 
annuitizes within the first five years of the date of issuance. 
Regardless of whether or not the Credit is vested, all gains or losses 
attributable to such Credit are part of the owner's account value and 
are immediately vested.
    10. The free look period is the 10-day period (or longer if 
required by state law) during which an owner may return a Contract 
after it has been delivered and receive a full refund of the account 
value, less any Credit applied. Unless the law requires that the full 
amount of the contribution be refunded, less any withdrawals, the 
owners bears the investment risk from the time of purchase until he or 
she returns the Contract and the refund amount may be more or less than 
the contributions the owner made. The Credit will not be part of the 
amount an owner will be paid if the free look provision is exercised.
    11. The Contracts provide for a standard death benefit and an 
optional death benefit. Integrity's Contract also provides for an 
enhanced earnings benefit rider. Any Credit applied within twelve 
months of the date of receipt of due proof of death will be recaptured 
and will not be included in the death benefit paid under the Contracts. 
The Credit will be recaptured whether or not the owner's spouse elects 
to continue the Contract. However, recapture of the Credit will never 
cause the amount of the death benefit to decrease below the amount of 
the owner's total contributions minus the amount of any withdrawals.
    12. An owner may make withdrawals from the Contracts at any time 
before annuitization. Withdrawals in excess of the 10% annual free 
withdrawal amount are subject to a withdrawal charge during the first 
nine years after a contribution is made. Under certain circumstances, 
the withdrawal charge may be waived. Under the Contract issued by 
Integrity, the withdrawal charge may be waived for withdrawals made due 
to unemployment, terminal illness, or nursing home care. Under the 
Contract issued by National Integrity, the withdrawal charge may be 
waived for withdrawals made due to disability, terminal illness, or 
nursing home care.
    13. In those cases, where the withdrawal charge is waived, any 
Credit applied within twelve months of such a withdrawal will be 
recaptured in the same proportion as the amount of the withdrawal in 
excess of the 10% annual free withdrawal bears to the account value. 
For example, if 50% of account value is withdrawn, 10% of which falls 
within the annual free withdrawal amount, only 40% of the Credit will 
be recaptured; however, if the entire annual free withdrawal amount has 
previously been withdrawn, 50% of the Credit will be recaptured. There 
will be no recapture if a withdrawal charge is imposed or in connection 
with amounts withdrawn that fall within the 10% annual free withdrawal.
    14. In the case of the Contract issued by Integrity, if an owner 
annuitizes during the first five years after issuance, the Credit will 
be recaptured according to the following schedule:

------------------------------------------------------------------------
                                                          Percentage  of
                      Contract Year                           Credit
                                                            Recaptured
------------------------------------------------------------------------
1.......................................................             100
2.......................................................              90
3.......................................................              80
4.......................................................              70
5.......................................................              60
------------------------------------------------------------------------

Annuitization does not trigger recapture of the Credit under National 
Integrity's Contract.
    15. Owners of the Contracts may allocate their contributions among 
sixty-three investment options, sixty variable investment options and 
three fixed investment options. Each subaccount of the Accounts is a 
variable investment option that will invest in shares of a 
corresponding portfolio of Fidelity's Variable Insurance Product Funds, 
Franklin Templeton Variable Insurance Products Trust, Janus Aspen 
Series, J.P. Morgan Series Trust II, MFS Variable Insurance Trust, 
Putnam Variable Trust Funds, Scudder Variable Insurance Trust, 
Touchstone Variable Series Trust, or Van Kampen Life Portfolios.
    16. The Companies, at a later date, may decide to create additional 
subaccounts to invest in any additional funding options as may now or 
in the future be available. The Companies, from time to time, also may 
combine or eliminate subaccounts or transfer assets to and from 
subaccounts.
    17. The Contracts provide for a death benefit, various death 
benefit options, annuity benefits, and annuity payout options, as well 
as transfer privileges, dollar cost averaging, asset allocation and 
rebalancing, and other features. The Contracts assess the following 
charges: (a) A withdrawal charge as a percentage of contributions 
withdrawn declining from 9% in contribution year 1 to 0% in 
contribution year 10; (b) an annual maintenance fee of $40 for 
Contracts with account value of $75,000 or less; (c) an annual 
administrative fee of .15%; (d) a mortality and expense risk charge of 
1.52% in the first nine years after issuance and 1.00% thereafter; (e) 
a transfer charge of $20 after the first twelve transfers during a 
Contract year; (f) any applicable death benefit option charge; and (g) 
any applicable state premium tax. In addition, assets invested in the 
subaccounts are charged with the annual operating expenses of the 
underlying portfolios.
    18. Applicants seek exemption pursuant to section 6(c) from 
sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder 
to the extent deemed necessary to permit the Companies to recapture 
part or all of a Credit in the following instances: (a) When an owner 
exercises the Contracts' free look provision; (b) when a death benefit 
is payable and the date of receipt of due proof of death is within 
twelve months of a Credit being applied; (c) when a withdrawal is made 
within twelve months of a Credit being applied under circumstances when 
the withdrawal charge is waived; or (d) in the case of Integrity only, 
when the Contract is annuitized during the first five years after 
issuance.

Applicants' Legal Analysis

    1. 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

[[Page 42791]]

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 Contracts and any Future Contracts issued by the 
Companies, funded by the Accounts or Other Accounts, and underwritten 
or distributed by Touchstone or Affiliated Broker-Dealers. Applicants 
undertake that Future Contracts will be substantially similar to the 
Contracts in all material respects. Applicants believe that the 
requested exemptions are appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.
    2. Applicants represent that is not administratively feasible to 
track a Credit in the Accounts after the Credit is applied. 
Accordingly, the asset-based charges applicable to the Accounts will be 
assessed against the entire amount held in the Accounts, including the 
Credit, during the recapture periods. As a result, during such periods, 
the aggregate asset-based charges assessed against an owner's account 
value will be higher than those that would be charged if the owner's 
account value did not include the Credit. The account value includes 
all assets in the Accounts and the fixed accounts, including any 
Credit.
    3. Subsection (i) of section 27 of the Act provides that section 27 
does not apply to any registered separate account funding variable 
insurance contracts, or to 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. 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 or her proportionate share of the issuer's 
current net assets, or the cash equivalent thereof.
    4. Applicants submit that the recapture of the Credit 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. 
An owner's interest in the Credit allocated to his or her account value 
is not fully vested until the sixth Contract year for Contracts issued 
by Integrity and the third Contract year for Contracts issued by 
National Integrity. Until the right to recapture has expired and any 
applicable Credit is vested, the Companies retain the right and 
interest in the Credit, although not in the earnings attributable to 
that amount. Thus, when the Companies recapture any Credit, they are 
merely retrieving their own assets, and the owner has not been deprived 
of a proportionate share of the applicable Accounts' assets because his 
or her interest in the Credit has not vested.
    5. In addition, Applicants state that permitting an owner to retain 
a Credit under a Contract upon the exercise of the free look provision 
would not only be unfair, but would also encourage individuals to 
purchase a Contract with no intention of keeping it and to return it 
for a quick profit. Furthermore, the recapture of any Credit applied to 
contributions made within the first twelve months after issuance is 
designed to provide the Companies with a measure of protection against 
anti-selection. The anti-selection risk is that an owner can collect a 
Credit shortly before death, a free withdrawal, or annuitization, 
thereby leaving the Companies little time to recover the cost of the 
Credit. As noted earlier, the amount recaptured equals the Credits 
provided by the Companies from their general account assets, and any 
gain would remain part of the owner's account value.
    6. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put up to 
108% of their contributions to work for them in the selected investment 
options. In addition, the owner will retain any earnings attributable 
to the Credit, as well as the principal amount of the Credit once 
vested.
    7. Applicants further submit that the recapture of any Credit only 
applies in relation to the risk of anti-selection against the 
Companies. Anti-selection can generally be described as a risk that 
owners obtain an undue advantage. This undue advantage is based on 
elements of fairness to the Companies and the actuarial and other 
factors taken into account in designing the Contracts and Future 
Contracts. The Companies provide the Credit from their general account 
assets on a guaranteed basis. Thus, they undertake a financial 
obligation that contemplates the retention of the Contracts and Future 
Contracts by their owners over an extended period, consistent with the 
long-term nature of retirement planning. The Companies generally expect 
to recover their costs, including the amount of the Credit, over an 
anticipated duration while a Contract or Future Contract is in force. 
The right to recapture Credits applied to contributions made within the 
first twelve months after issuance protects the Companies against the 
risk that an owner will purchase a Contract or Future Contract or make 
larger or additional contributions with the knowledge that the 
contingency that triggers payment of a benefit is likely or about to 
occur. With respect to refunds paid upon the return of the Contracts or 
Future Contracts within the free look period, the amount payable by the 
Companies must be reduced by the amount of the Credit. Otherwise, 
investors could purchase a Contract or Future Contract for the sole 
purpose of exercising the free look provision and making a quick 
profit.
    8. Applicants submit that the provisions for recapture of Credits 
under the Contracts and Future Contracts do not violate sections 
2(a)(32) and 27(i)(2)(A) of the Act. Sections 26(e) and 27(i) were 
added to the Act to implement the purposes of the National Securities 
Markets Improvement Act of 1996 and Congressional intent. The 
application of a Credit to contributions made under the Contracts 
should not raise any questions as to the Companies' compliance with the 
provisions of section 27(i). However, to avoid any uncertainty as to 
full compliance with the Act, Applicants request an exemption from 
section 2(a)(32) and 27(i)(2)(A), to the extent deemed necessary, to 
permit the recapture of any Credit under the circumstances described in 
this application without the loss of relief from section 27 provided by 
section 27(i).
    9. Rule 22c-1 under the Act 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 
next computed after receipt of a tender of such security for redemption 
or of an order to purchase or sell such security.
    10. The Companies' recapture of a Credit might arguably be viewed 
as resulting in the redemption of redeemable securities for a price 
other than one based on the current

[[Page 42792]]

accumulation unit value of the Accounts. Applicants contend, however, 
that the recapture of the Credit does not violate Rule 22c-1. To effect 
a recapture of a Credit, the Companies will redeem interests in a 
Contract at a price determined on the basis of the current accumulation 
unit value of the subaccounts to which the owner's account value is 
allocated. The amount recaptured will equal the amount of the Credit 
paid out of the Companies' general account assets. Although the owner 
will be entitled to retain any investment gain attributable to the 
Credit, the amount of that gain will be determined on the basis of the 
current accumulation unit values of the applicable subaccounts. Thus, 
no dilution will occur upon the recapture of the Credit. Applicants 
also submit that the second harm that Rule 22c-1 was designed to 
address, namely speculative trading practices calculated to take 
advantage of backward pricing, will not occur as a result of the 
recapture of the Credit. Because neither of the harms that Rule 22c-1 
was meant to address is found in the recapture of the Credit, Rule 22c-
1 should not apply. However, to avoid any uncertainty as to full 
compliance with the Act, Applicants request an exemption from the 
provisions of Rule 22c-1 to the extent deemed necessary to permit them 
to recapture the Credit under the Contracts and Future Contracts.

Conclusion

    Applicants submit that their request for an order that applies to 
the Accounts and any Other Accounts established by the Companies, in 
connection with the issuance of the Contracts and Future Contracts, is 
appropriate in the public interest. Applicants state that such an order 
would promote competitiveness in the variable annuity market by 
eliminating the need to file redundant exemptive applications, thereby 
reducing administrative expenses and maximizing the efficient use of 
Applicants' resources. Applicants state that investors would not 
receive any benefit or additional protection by requiring Applicants to 
repeatedly seek exemptive relief that would present no issue under the 
Act that has not already been addressed in this application. Applicants 
submit that having Applicants file additional applications would impair 
Applicants' ability to take advantage of business opportunities as they 
arise. Further, Applicants state that if Applicants were required 
repeatedly to seek exemptive relief with respect to the same issues 
addressed in this application, investors would not receive any benefit 
or additional protection thereby.
    Applicants submit, based on the grounds summarized above, that 
their exemptive requests meet the standards set out in section 6(c), 
namely, that the exemptions requested are 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, 
and that, therefore, the Commission should grant the requested order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-18189 Filed 7-17-03; 8:45 am]
BILLING CODE 8010-01-P