[Federal Register Volume 69, Number 48 (Thursday, March 11, 2004)]
[Notices]
[Pages 11669-11673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5546]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26378; File No. 812-13040]


Jackson National Life Insurance Company, et al.

March 5, 2004.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order under 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 to permit the recapture of contract enhancements 
applied to purchase payments made under certain flexible premium 
deferred variable annuity contracts.

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Applicants: Jackson National Life Insurance Company (``Jackson 
National''), Jackson National Separate Account--I (the ``Separate 
Account'') and Jackson National Life Distributors, Inc. 
(``Distributor,'' and collectively, ``Applicants'').

Summary of Application: Applicants seek an order under Section 6(c) of 
the Act to the extent necessary to permit the recapture, under 
specified circumstances, of certain contract enhancements applied to 
purchase payments made under the deferred variable annuity contracts 
described in the application that Jackson National will issue through 
the Separate Account (the ``Contracts''), as well as other contracts 
that Jackson National may issue in the future through their existing or 
future separate accounts (``Other Accounts'') that are substantially 
similar in all material respects to the Contracts (``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 with, Jackson National, whether existing or created in 
the future, that serves as distributor or principal underwriter for the 
Contracts or Future Contracts (``Affiliated Broker-Dealers''), and any 
successors in interest to the Applicants.

Filing Date: The Application was filed on November 13, 2003, and 
amended on February 24, 2004.

[[Page 11670]]


Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, in person 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on March 29, 2004, and should be accompanied by proof of 
service on the 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 Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, Jackson National 
Life Insurance Company, 1 Corporate Way, Lansing, Michigan 48951, Attn: 
Susan Rhee, Esq.; copies to Joan E. Boros, Esq., Jorden Burt LLP, 1025 
Thomas Jefferson Street, NW., Suite 400 East, Washington, DC 20007-
0805.

FOR FURTHER INFORMATION CONTACT: Harry Eisenstein, Senior Counsel, at 
(202) 942-0552, or Zandra Y. Bailes, Branch Chief, 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 
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 
20549-0102 ((202) 942-8090).

Applicants' Representations

    1. Jackson National is a stock life insurance company organized 
under the laws of the state of Michigan in June 1961. Its legal 
domicile and principal business address is 1 Corporate Way, Lansing, 
Michigan 48951. Jackson National is admitted to conduct life insurance 
and annuity business in the District of Columbia and all states except 
New York. Jackson National is ultimately a wholly-owned subsidiary of 
Prudential plc (London, England).
    2. The Separate Account was established by Jackson National on June 
14, 1993, pursuant to the provisions of Michigan law and the authority 
granted under a resolution of Jackson National's Board of Directors. 
Jackson National is the depositor of the Separate Account. The Separate 
Account meets the definition of a ``separate account'' under the 
federal securities laws and is registered with the Commission as a unit 
investment trust under the Act (File No. 811-08664). The Separate 
Account will fund the variable benefits available under the Contracts. 
The offering of the Contracts will be registered under the Securities 
Act of 1933 (the ``1933 Act'').
    3. The Distributor is a wholly-owned subsidiary of Jackson National 
and serves as the distributor of the Contracts. The Distributor is 
registered with the Commission as a broker-dealer under the Securities 
Exchange Act of 1934 (the ``1934 Act'') and is a member of the NASD. 
The Distributor enters into selling group agreements with affiliated 
and unaffiliated broker-dealers. The Contracts are sold by licensed 
insurance agents who are registered representatives of broker-dealers 
that are registered under the 1934 Act and are members of the NASD.
    4. The Contracts require a minimum initial premium payment of 
$5,000 under most circumstances ($2,000 for a qualified plan contract). 
Subsequent payments may be made at any time during the accumulation 
phase. Each subsequent payment must be at least $500 ($50 under an 
automatic payment plan). Prior approval by Jackson National is required 
for aggregate premium payments of over $1,000,000.
    5. The Contracts permit owners to accumulate contract values on a 
fixed basis through allocations to one of four fixed accounts (the 
``Fixed Accounts''), as made available from time to time which offer 
guaranteed crediting rates for specified periods of time (currently 
one, three, five and seven years).
    6. The Contracts also permit owners to accumulate contract values 
on a variable basis, through allocations to one or more of the 
investment divisions of the Separate Account (the ``Investment 
Divisions,'' collectively with the Fixed Accounts, the ``Allocation 
Options''). 55 Investment Divisions are expected to be offered under 
the Contracts, but additional Investment Divisions may be offered in 
the future and some of those currently expected to be offered could be 
eliminated or combined with other Investment Divisions in the future. 
Similarly, Future Contracts may offer additional or different 
Investment Divisions.
    7. Transfers among the Investment Divisions are permitted. The 
first 15 transfers in a contract year are free; subsequent transfers 
cost $25. Certain transfers to, from and among the Fixed Accounts are 
also permitted during the Contracts' accumulation phase, but are 
subject to certain adjustments and limitations. Dollar cost averaging 
and rebalancing transfers are offered at no charge and do not count 
against the 15 free transfers permitted each year.
    8. Each time an owner makes a premium payment during the first 
contract year, Jackson National will add an additional amount to the 
owner's contract value (a ``Contract Enhancement''). All Contract 
Enhancements are paid from Jackson National's general account assets. 
The Contract Enhancement is equal to five or six percent of the premium 
payment. Jackson National will allocate the Contract Enhancement to the 
Fixed Accounts and/or Investment Divisions in the same proportion as 
the premium payment allocation. The Contract Enhancement is not 
credited to any premiums received after the first contract year.
    9. Jackson National will recapture all or a portion of any Contract 
Enhancements by imposing a recapture charge whenever an owner: (i) 
Makes a total withdrawal within the recapture charge period or a 
partial withdrawal of corresponding premiums within the recapture 
charge period in excess of those permitted under the Contracts' free 
withdrawal provisions, unless the withdrawal is made for certain 
health-related emergencies specified in the Contracts; (ii) elects to 
receive payments under an income option within the recapture charge 
period; or (iii) returns the Contract during the free look period.
    10. The amount of the recapture charge varies, depending upon which 
Contract Enhancement is elected, when the charge is imposed and which 
withdrawal charge schedule is elected, as follows:

                                      Contract Enhancement Recapture Charge
                                [As a percentage of first year premium payments]
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   Completed Years Since Premium Receipt      0      1      2      3      4      5      6      7      8+
----------------------------------------------------------------------------------------------------------
Charge (5 or 6% Contract Enhancement).....    4.5   3.75   3.25   2.75      2   1.25     .5      0      0
Charge (6 year withdrawal charge option)..    4.5   3.75   3.25   2.75      2   1.25      0      0      0
----------------------------------------------------------------------------------------------------------------


[[Page 11671]]

    11. The recapture charge percentage will be applied to the 
corresponding premium reflected in the amount withdrawn or the amount 
applied to income payments that remain subject to a withdrawal charge. 
The amount recaptured will be taken from the Investment Divisions and 
the Fixed Accounts in the same proportion as the withdrawal charge.
    12. Recapture charges will be waived upon death, but will be 
applied upon electing to commence income payments, even in a situation 
where the withdrawal charge is waived. Partial withdrawals will be 
deemed to remove premium payments on a first-in-first-out basis (the 
order that entails payment of the lowest withdrawal and recapture 
charges).
    13. Jackson National does not assess the recapture charge on any 
payments paid out as: Death benefits; withdrawals taken under the free 
withdrawal provision; withdrawals necessary to satisfy the minimum 
distribution requirements of the Internal Revenue Code (if the 
withdrawal requested exceeds the minimum required distribution, the 
recapture charge will not be waived on the minimum required 
distribution); if permitted by the owner's state, withdrawals of up to 
$250,000 from the contract value in connection with the owner's 
terminal illness or if the owner needs extended hospital or nursing-
home care as provided in the Contract; or if permitted by the owner's 
state, withdrawals of up to 25% of contract value (12.5% for each of 
two joint owners) from the contract value in connection with certain 
serious medical conditions specified in the Contract.
    14. The contract value will reflect any gains or losses 
attributable to a Contract Enhancement described above. Contract 
Enhancements, and any gains or losses attributable to a Contract 
Enhancement, distributed under the Contracts will be considered 
earnings under the Contract for tax purposes and for purposes of 
calculating free withdrawal amounts.
    15. If the owner dies during the accumulation phase of the 
Contracts the beneficiary named by the owner is paid a death benefit by 
Jackson National. The Contracts' base death benefit, which applies 
unless an optional death benefit has been elected, is a payment to the 
beneficiary of the greater of: (i) Contract value on the date Jackson 
National receives proof of death and completed claim forms from the 
beneficiary or (ii) the total premiums paid under that Contract minus 
any prior withdrawals (including any applicable charges and 
adjustments), annual contract maintenance charges, transfer charges, 
any applicable charges due under any optional endorsement and premium 
taxes).
    16. The owner is also offered certain optional endorsements that 
can change the death benefit paid to the beneficiary. First, an 
``Earnings Protection Benefit Endorsement'' is offered to owners who 
are no older than age 75 when their Contracts are issued. This 
endorsement would add to the death benefit otherwise payable an amount 
equal to a specified percentage (that varies with the owner's age at 
issue) of earnings under the Contract up to a cap of 250% of remaining 
premiums (premiums not previously withdrawn), excluding remaining 
premiums paid in the 12 months prior to the date of death (other than 
the initial premium if the owner dies in the first contract year).
    17. Second, the owner of a Contract is offered the following five 
optional death benefits (that would replace the base death benefit): 
(i) 5% Roll-Up Death Benefit, (ii) 4% Roll-Up Death Benefit, (iii) 
Highest Anniversary Value Death Benefit, (iv) Combination 5% Roll-Up & 
Highest Anniversary Value Death Benefit or a (v) Combination 4% Roll-Up 
& Highest Anniversary Value Death Benefit.
    18. The Contracts offer fixed and variable versions of the 
following four types of annuity payment or ``income payment:'' life 
income, joint and survivor, life annuity with 120 or 240 monthly 
payments guaranteed to be paid (although not guaranteed as to amount if 
variable), and income for a specified period of from 5 to 30 years. The 
Contracts also offer an optional Guaranteed Minimum Income Benefit 
endorsement. Jackson National may also offer other income payment 
options.
    19. In addition to the Earnings Protection Benefit and optional 
death benefit endorsements described above, additional optional 
endorsements are offered with the Contracts, two of which relate to 
withdrawals: (i) An endorsement that reduces the withdrawal charges 
applicable under the Contract and shortens the period for which 
withdrawal charges are imposed to six years; and (ii) an endorsement 
that permits an owner to make partial withdrawals, prior to the Income 
Date that, in total, equal the amount of net premium payments made (if 
elected after issue, the contract value, less any recapture charges, 
will be used instead of the net premium payment at issue). Jackson 
National may offer additional endorsements, including optional income 
and death benefits, but in no event will such additional features be 
related to or affect the Contract Enhancement.
    20. The Contracts have a ``free look'' period of ten days after the 
owner receives the Contract (or any longer period required by state 
law). Contract value, without the deduction for any sales charges, is 
returned upon exercise of free look rights by an owner unless state law 
requires the return of premiums paid. The Contract Enhancement 
recapture charge reduces the amount returned.
    21. In addition to the Contract Enhancement recapture charges and 
transfer charges, the Contracts have the following charges: Mortality 
and expense risk charge of 1.50%; an administration charge of 0.15% (as 
an annual percentage of average daily account value); a contract 
maintenance charge of $35 per year (waived if contract value is $50,000 
or more at the time the charge is imposed); a charge for the optional 
Earnings Protection Benefit of .30% (as an annual percentage of daily 
account value); a charge for the optional Guaranteed Minimum Income 
Benefit of .40% (as an annual percentage of the ``GMIB Benefit Base''); 
charge for the optional limit on the withdrawal charge period to six 
years of .35% (as an annual percentage of daily account value); a 
charge for optional death benefits of either .25%, .30%, .40%, .45% or 
.55% (as an annual percentage of daily account value), depending on 
which optional death benefit endorsement (if any) is elected; a charge 
for the optional guaranteed minimum withdrawal benefit of .35% (as an 
annual percentage of daily account value); a commutation fee that 
applies only upon withdrawals from income payments for a fixed period, 
measured by the difference in values paid on such a withdrawal due to 
using a discount rate of one percent greater than the assumed 
investment rate used in computing the amounts of income payments; and a 
withdrawal charge that applies to total withdrawals, to certain partial 
withdrawals, and on the income date (the date income payments commence) 
if the income date is within a year of the date the Contract was 
issued.
    22. The withdrawal charge for the Contracts varies, depending upon 
the contribution year of the premium withdrawn, (but in no event will 
be greater than) as follows:

[[Page 11672]]



                                                Withdrawal Charge
                                      [As a percentage of premium payments]
----------------------------------------------------------------------------------------------------------------
 Completed years since receipt of premium     0      1      2      3      4      5      6      7      8      9+
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Charge....................................    8.5      8      7      6      5      4      3      2      1      0
Charge if 6 year period is elected........      8      7    5.5      4    2.5      1      0      0      0      0
----------------------------------------------------------------------------------------------------------------

    23. The withdrawal charge is waived upon withdrawals to satisfy the 
minimum distribution requirements of the Internal Revenue Code (if the 
withdrawal requested exceeds the minimum required distribution, the 
withdrawal charge will not be waived on the minimum required 
distribution) and, to the extent permitted by state law, the withdrawal 
fee is waived in connection with withdrawals of: (i) Up to $250,000 
from the contract value in connection with the terminal illness of the 
owner of a Contract, or in connection with extended hospital or nursing 
home care for the owner; and (ii) up to 25% (12.5% each for two joint 
owners) of contract value in connection with certain serious medical 
conditions specified in the Contract.

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 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 funded by 
the Separate Account or Other Accounts that are issued by Jackson 
National and underwritten or distributed by the Distributor or 
Affiliated Broker-Dealers. Applicants undertake that Future Contracts 
funded by the Separate Account or Other Accounts, in the future, will 
be substantially similar in all material respects to the Contracts. 
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. 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 proportionate share of the issuer's 
current net assets, or the cash equivalent thereof.
    3. Applicants submit that the recapture of the Contract Enhancement 
in the circumstances set forth in the application would not deprive an 
owner of his or her proportionate share of the issuer's current net 
assets. A Contract owner's interest in the amount of the Contract 
Enhancement allocated to his or her Contract value upon receipt of a 
premium payment is not fully vested until three complete years 
following a premium. Until or unless the amount of any Contract 
Enhancement is vested, Jackson National retains the right and interest 
in the Contract Enhancement amount, although not in the earnings 
attributable to that amount. Thus, Applicants urge that when Jackson 
National recaptures any Contract Enhancement it is simply retrieving 
its own assets, and because a Contract owner's interest in the Contract 
Enhancement is not vested, the Contract owner has not been deprived of 
a proportionate share of the Separate Account's assets, i.e., a share 
of the Separate Account's assets proportionate to the Contract owner's 
contract value.
    4. In addition, Applicants state that it would be patently unfair 
to allow a Contract owner exercising the free-look privilege to retain 
the Contract Enhancement amount under a Contract that has been returned 
for a refund after a period of only a few days. If Jackson National 
could not recapture the Contract Enhancement, Applicants claim that 
individuals could purchase a Contract with no intention of retaining it 
and simply return it for a quick profit. Furthermore, Applicants state 
that the recapture of the Contract Enhancement relating to withdrawals 
or receiving income payments within the first seven years of a premium 
contribution is designed to protect Jackson National against Contract 
owners not holding the Contract for a sufficient time period. According 
to Applicants, it would provide Jackson National with insufficient time 
to recover the cost of the Contract Enhancement, to its financial 
detriment.
    5. Applicants represent that it is not administratively feasible to 
track the Contract Enhancement amount in the Separate Accounts after 
the Contract Enhancement(s) is applied. Accordingly, the asset-based 
charges applicable to the Separate Accounts will be assessed against 
the entire amounts held in the Separate Accounts, including any 
Contract Enhancement amounts. As a result, the aggregate asset-based 
charges assessed will be higher than those that would be charged if the 
Contract owner's Contract value did not include any Contract 
Enhancement. Jackson National nonetheless represents that the 
Contracts' fees and charges, in the aggregate, are reasonable in 
relation to service rendered, the expenses expected to be incurred, and 
the risks assumed by Jackson National.
    6. Applicants submit that the provisions for recapture of any 
Contract Enhancement under the Contracts do not violate Sections 
2(a)(32) and 27(i)(2)(A) of the Act. Applicants assert that the 
application of a Contract Enhancement to premium payments made under 
the Contracts should not raise any questions as to compliance by 
Jackson National with the provisions of Section 27(i). However, to 
avoid any uncertainty as to full compliance with the Act, Applicants 
request an exemption from Sections 2(a)(32) and 27(i)(2)(A), to the 
extent deemed necessary, to permit the recapture of any Contract 
Enhancement under the circumstances described in the Application, 
without the loss of relief from Section 27 provided by Section 27(i).
    7. 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, the

[[Page 11673]]

redeemable securities of any registered investment company to 
accomplish the same purposes as contemplated by Section 22(a). 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 which is 
next computed after receipt of a tender of such security for redemption 
or of an order to purchase or sell such security.
    8. It is possible that someone might view Jackson National's 
recapture of the Contract Enhancements as resulting in the redemption 
of redeemable securities for a price other than one based on the 
current net asset value of the Separate Accounts. Applicants contend, 
however, that the recapture of the Contract Enhancement does not 
violate Rule 22c-1. The recapture of some or all of the Contract 
Enhancement does not involve either of the evils that Rule 22c-1 was 
intended to eliminate or reduce as far as reasonably practicable, 
namely: (i) The dilution of the value of outstanding redeemable 
securities of registered investment companies through their sale at a 
price below net asset value or repurchase at a price above it; and (ii) 
other unfair results, including speculative trading practices. To 
effect a recapture of a Contract Enhancement, Jackson National will 
redeem interests in a Contract owner's Contract value at a price 
determined on the basis of the current net asset value of the Separate 
Accounts. The amount recaptured will be less than or equal to the 
amount of the Contract Enhancement that Jackson National paid out of 
its general account assets. Although Contract owners will be entitled 
to retain any investment gains attributable to the Contract Enhancement 
and to bear any investment losses attributable to the Contract 
Enhancement, the amount of such gains or losses will be determined on 
the basis of the current net asset values of the Separate Accounts. 
Thus, no dilution will occur upon the recapture of the Contract 
Enhancement. 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 Contract Enhancement. Applicants assert 
that, because neither of the harms that Rule 22c-1 was meant to address 
is found in the recapture of the Contract Enhancement, Rule 22c-1 
should not apply to any Contract Enhancement. However, to avoid any 
uncertainty as to full compliance with Rule 22c-1, Applicants request 
an exemption from the provisions of Rule 22c-1 to the extent deemed 
necessary to permit them to recapture the Contract Enhancement under 
the Contracts.
    9. Applicants submit that extending the requested relief to 
encompass Future Contracts and Other Accounts is appropriate in the 
public interest because it promotes competitiveness in the variable 
annuity market by eliminating the need to file redundant exemptive 
applications prior to introducing new variable annuity contracts. 
Applicants assert that investors would receive no benefit or additional 
protection by requiring Applicants to repeatedly seek exemptive relief 
that would present no issues under the Act not already addressed in the 
Application.
    Applicants further submit, for the reasons stated herein, that 
their exemptive request meets the standards set out in Section 6(c) of 
the Act, 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.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-5546 Filed 3-10-04; 8:45 am]
BILLING CODE 8010-01-P