[Federal Register Volume 69, Number 48 (Thursday, March 11, 2004)]
[Notices]
[Pages 11673-11678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5547]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26379; File No. 812-13053]


Jackson National Life Insurance Company, et al.

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

ACTION: Notice of Application for an amended 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 ``JNL Separate 
Account''), Jackson National Life Insurance Company of New York (``JNL 
New York,'' and collectively with Jackson National, the ``Insurance 
Companies''), JNLNY Separate Account I (the ``JNLNY Separate Account,'' 
and collectively with JNL Separate Account, the ``Separate Accounts''), 
and Jackson National Life Distributors, Inc. (``Distributor,'' 
collectively with the Insurance Companies and Separate Accounts, 
``Applicants'').
    Summary of Application: Applicants seek an order under section 6(c) 
of the Act to amend an existing order to the extent necessary to permit 
the recapture, under specified circumstances, of certain contract 
enhancements applied to purchase payments made under the flexible 
premium, deferred variable annuity contracts described herein that 
Jackson National will issue through the JNL Separate Account (the 
``Amended JNL Contract'') and that JNL New York will issue through the 
JNLNY Separate Account (the ``Amended JNLNY Contract,'' and 
collectively with the Amended JNL Contract, the ``Amended 
Contract(s)''), as well as other contracts that the Insurance Companies 
may issue in the future through their existing or future separate 
accounts (``Other Accounts'') that are substantially similar in all 
material respects to the Amended 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 Amended 
Contracts or Future Contracts (``Affiliated Broker-Dealers''), and any 
successors in interest to the Applicants.
    Filing Date: The application was filed on December 23, 2003.
    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.

[[Page 11674]]

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, c/o Susan Rhee, 
Esq., Jackson National Life Insurance Company, 1 Corporate Way, 
Lansing, Michigan 48951; copies to Joan 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. JNL New York is a stock life insurance company organized under 
the laws of the state of New York in July 1995. Its legal domicile and 
principal address is 2900 Westchester Avenue, Purchase, New York 10577. 
JNL New York is admitted to conduct life insurance and annuity business 
in Delaware, Michigan and New York. JNL New York is ultimately a 
wholly-owned subsidiary of Prudential plc (London, England).
    3. The JNL 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. The JNLNY Separate Account was established by JNL New York 
on September 12, 1997, pursuant to the provisions of New York law and 
the authority granted under a resolution of JNL New York's Board of 
Directors. Jackson National and JNL New York each is the depositors of 
its respective Separate Account. Each of the Separate Accounts meets 
the definition of a ``separate account'' under the federal securities 
laws and each is registered with the Commission as a unit investment 
trust under the Act (File Nos. 811-08664 and 811-08401, respectively). 
JNL Separate Account and JNLNY Separate Account will fund, 
respectively, the variable benefits available under the Amended JNL 
Contracts and the Amended JNLNY Contracts. The offering of the Amended 
Contracts will be registered under the Securities Act of 1933 (the 
``1933 Act'').
    4. The Distributor is a wholly-owned subsidiary of Jackson National 
and serves as the distributor of the Amended 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 Amended Contracts are 
sold by licensed insurance agents, where the Amended Contracts may be 
lawfully sold, who are registered representatives of broker-dealers 
which are registered under the 1934 Act and are members of the NASD.
    5. The Amended 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 the relevant 
Insurance Company is required for aggregate premium payments of over 
$1,000,000.
    6. The Amended JNL Contracts permit owners to accumulate contract 
values on a fixed basis through allocations to one of seven fixed 
accounts (the ``Fixed Accounts''), including four ``Guaranteed Fixed 
Accounts'' which offer guaranteed crediting rates for specified periods 
of time (currently, 1, 3, 5, or 7 years), two ``DCA+ Fixed Accounts'' 
(used in connection with dollar cost averaging transfers, each of which 
from time to time offers special crediting rates) and an ``Indexed 
Fixed Option'' (with a minimum guaranteed return and additional 
possible returns based on the performance of the S&P 500 Index).
    7. The Amended JNLNY Contracts permit owners to accumulate contract 
values on a fixed basis through allocations to one of four ``Guaranteed 
Fixed Accounts'' which offer guaranteed crediting rates for specified 
periods of time (currently, 1, 3, 5, or 7 years).
    8. The Amended Contracts also permit owners to accumulate contract 
values on a variable basis, through allocations to one or more of the 
sub-accounts of the Separate Accounts (the ``Investment Divisions,'' 
and collectively with the Fixed Accounts, the ``Allocation Options''). 
There are currently 55 Investment Divisions expected to be offered 
under the Amended 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. Each Investment Division will invest in 
shares of a corresponding series of JNL Series Trust or JNL Variable 
Fund LLC. Not all Investment Divisions may be available.
    9. 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 Amended 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.
    10. The owner is also offered certain optional endorsements (for 
fees described below) 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 Amended 
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 Amended 
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), plus remaining premiums in 
the Indexed Fixed Option (the amount allocated to the Indexed Fixed 
Option accumulated at 3% annually, and adjusted for any amounts 
cancelled or withdrawn for charges, deductions, withdrawals or any 
taxes due).
    11. Second, the owner of an Amended JNL Contract (but not an 
Amended JNLNY Contract) is offered the following five optional death 
benefits (that would replace the base death benefit): (i) A ``4% Roll-
Up Death Benefit'', (ii) a ``5% Roll-Up Death Benefit'', (iii) a 
``Highest Anniversary Value Death Benefit'', (iv) a ``Combination 4% 
Roll-Up and Highest

[[Page 11675]]

Anniversary Value Death Benefit'' or (v) a ``Combination 5% Roll-Up and 
Highest Anniversary Value Death Benefit.''
    12. The Amended 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 
Insurance Companies may also offer other income payment options.
    13. In addition to the Earnings Protection Benefit and optional 
death benefit endorsements described above and the optional Contract 
Enhancements endorsements defined below, additional optional 
endorsements are offered with the Amended Contracts, four of which 
relate to withdrawals: (i) An endorsement that expands the percentage 
of premiums (that remain subject to a withdrawal charge) that may be 
withdrawn in a contract year with no withdrawal charge imposed from 10% 
to 20%; (ii) an endorsement that reduces the withdrawal charges 
applicable under the Amended Contract and shortens the period for which 
withdrawal charges are imposed from seven years to five years or three 
years; (iii) an endorsement, the Guaranteed Minimum Withdrawal Benefit 
(``GMWB''), that permits partial withdrawals prior to the Income Date 
(so long as gross partial withdrawals taken within any one contract 
year do not exceed 7% of net premium payments) 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); and (iv) on May 1, 2004, an additional 
5% for Life GMWB will be offered, which will permit partial withdrawals 
prior to the Income Date for the longer of the duration of the owner's 
life or until total periodic withdrawals equals (a) the total net 
premium payments if elected at issue or (b) contract value net of any 
recapture charges if elected after issue.
    14. If one of the optional Contract Enhancement endorsements is 
elected, each time an owner makes a premium payment during the first 
contract year, Jackson National or JNL New York will add an additional 
amount to the owner's contract value (a ``Contract Enhancement''). All 
Contract Enhancements are paid from the Insurance Companies' general 
account assets. The Contract Enhancement is equal to 2%, 3%, or 4% of 
the premium payment. At issue, an Amended Contract Owner can choose 
only one of the Contract Enhancement endorsements. An owner may not 
elect the 3% or 4% Contract Enhancements if the 20% additional free 
withdrawal endorsement is elected. The Insurance Companies will 
allocate the Contract Enhancement to the guaranteed 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.
    15. There is an asset-based charge for each of the Contract 
Enhancements. The 2% Contract Enhancement has a 0.395% charge that 
applies for five years. The asset-based charges for the other Contract 
Enhancements apply for seven years and are 0.42% and 0.56%, 
respectively, for the 3% and 4% Contract Enhancements. These charges 
will also be assessed against any amounts an Amended Contract owner has 
allocated to the guaranteed accounts, resulting in a lower credited 
interest rate than the annual credited interest rate that would apply 
to the guaranteed account if the Contract Enhancement had not been 
elected.
    16. The Insurance Companies 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 (five 
years after a first year payment in the case of the 2% Contract 
Enhancement and seven years after a first year payment in the case of 
the other Contract Enhancements) or a partial withdrawal of 
corresponding premiums within the recapture charge period in excess of 
those permitted under the Amended Contracts' free withdrawal provisions 
(including free withdrawals permitted by a 20% additional free 
withdrawal endorsement), unless the withdrawal is made for certain 
health-related emergencies specified in the Amended Contracts (not all 
of which are available in the Amended JNLNY contracts); (ii) elects to 
receive payments under an income option within the recapture charge 
period; or (iii) returns the Amended Contract during the free look 
period
    17. The amount of the recapture charge varies, depending upon which 
Contract Enhancement is elected and when the charge is imposed, as 
follows:

                                      Contract Enhancement Recapture Charge
                                [As a Percentage of First Year Premium Payments]
----------------------------------------------------------------------------------------------------------------
Completed years since receipt of premium     0        1        2        3        4        5        6        7+
----------------------------------------------------------------------------------------------------------------
 
Recapture Charge (2% Credit)............       2%       2%    1.25%    1.25%     0.5%        0        0        0
Recapture Charge (3% Credit)............       3%       3%       2%       2%       2%       1%       1%        0
Recapture Charge (4% Credit)............       4%       4%     2.5%     2.5%     2.5%    1.25%    1.25%        0
----------------------------------------------------------------------------------------------------------------

    18. The recapture charge percentage will be applied to the 
corresponding premium reflected in the amount withdrawn or the amount 
applied to income payments that remains subject to a withdrawal charge. 
The amount recaptured will be taken from the Investment Divisions and 
the guaranteed accounts in the same proportion as the withdrawal 
charge.
    19. 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).
    20. The Insurance Companies do not assess the recapture charge on 
any payments paid out as: death benefits; withdrawals necessary to 
satisfy the minimum distribution requirements of the Internal Revenue 
Code; if permitted by the owner's state, withdrawals of up to $250,000 
from the Separate Account or from the Fixed Accounts other than the 
Indexed Fixed Option in connection with the owner's terminal illness or 
if the owner needs extended hospital or nursing home care as provided 
in the Amended Contract; or if permitted by the owner's state, 
withdrawals of up to 25% of contract value (12.5% for each

[[Page 11676]]

of two joint owners) in connection with certain serious medical 
conditions specified in the Amended Contract.
    21. 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 Amended Contracts will be considered 
earnings under the Amended Contract for tax purposes and for purposes 
of calculating free withdrawal amounts.
    22. The Amended JNL Contracts have a ``free look'' period of ten 
(twenty for Amended JNLNY Contracts) days after the owner receives the 
Amended Contract (or any longer period required by state law). Contract 
value 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.
    23. In addition to the Contract Enhancement charges and the 
Contract Enhancement recapture charges, the Amended JNL Contracts have 
the following charges: mortality and expense risk charge of 1.10% (as 
an annual percentage of average daily account value); administration 
charge of 0.15% (as an annual percentage of average daily account 
value); contract maintenance charge of $35 per year (waived if contract 
value is $50,000 or more at the time the charge is imposed); Earnings 
Protection Benefit charge of 0.30% (as an annual percentage of daily 
account value--only applies if related optional endorsement is 
elected); GMIB charge of .60% per year (0.15% per quarter) of the 
``GMIB Benefit Base;'' GMWB charge of .70% (the current charge for GMWB 
is .35% and currently there is an increase in the charge to .55% when a 
``step-up'' is elected); 5% for Life GMWB charge is an annual asset 
based charge that will vary by age; 20% additional free withdrawal 
benefit charge of 0.30% (as an annual percentage of daily account 
value--only applies if related optional endorsement is elected); five-
year withdrawal charge period charge of 0.30% (as an annual percentage 
of daily account value--only applies if related optional endorsement is 
elected); three-year withdrawal charge period charge of 0.45% (as an 
annual percentage of daily account value--only applies if related 
optional endorsement is elected); optional death benefit charge of 
either 0.30% or 0.55% (as an annual percentage of daily account value--
only applies if related optional endorsement is elected) depending upon 
which (if any) optional death benefit endorsement is elected; transfer 
fee of $25 for each transfer in excess of 15 in a contract year (for 
purposes of which dollar cost averaging and rebalancing transfers are 
excluded); commutation fee that applies only upon withdrawals from 
income payments for a fixed period, measured by the difference in 
values paid upon such a withdrawal due to using a discount rate of 1% 
greater than the assumed investment rate used in computing the amounts 
of income payments; and a withdrawal charge that applies to total 
withdrawals, partial withdrawals in excess of amounts permitted to be 
withdrawn under the Amended JNL Contract's free withdrawal provisions 
(or the 20% additional free withdrawal endorsement) and on the income 
date (the date income payments commence) if the income date is within a 
year of the date the Amended JNL Contract was issued.
    24. The withdrawal charge for the Amended JNL Contracts varies, 
depending upon the contribution year of the premium withdrawn as 
follows:

                                                Withdrawal Charge
                                      [As a Percentage of Premium Payments]
----------------------------------------------------------------------------------------------------------------
Completed years since receipt of premium     0        1        2        3        4        5        6        7+
----------------------------------------------------------------------------------------------------------------
Withdrawal Charge.......................      8.5        8        7        6        5        4        2        0
Withdrawal Charge if Five-Year Period is        8        7        6        4        2        0        0        0
 elected................................
Withdrawal Charge if Three-Year Period        7.5      6.5        5        0        0        0        0        0
 is elected.............................
----------------------------------------------------------------------------------------------------------------

    25. The withdrawal charge is waived upon withdrawals to satisfy the 
minimum distribution requirements of the Internal Revenue Code 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 Investment 
Divisions or the Guaranteed Fixed Accounts of the Amended Contracts in 
connection with the terminal illness of the owner of an Amended 
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 (excluding values allocated to the Indexed Fixed Option) 
in connection with certain serious medical conditions specified in the 
Amended Contract.
    26. The Amended JNLNY Contracts are identical to the Amended JNL 
Contracts in the operation of Contract Enhancements, Contract 
Enhancement charges and Contract Enhancement recapture charges.
    27. The Amended JNLNY Contracts are identical in other aspects as 
well, with the following exceptions: (i) The Indexed Fixed Option, 
DCA+Fixed Account, waivers of withdrawal charges for terminal illness 
and specified medical conditions, and the three optional death benefits 
which replace the base death benefit will not be available under the 
Amended JNLNY Contracts; (ii) the death benefit of the Amended JNLNY 
Contracts will be the greatest of: contract value on the date that JNL 
New York receives proof of death and an election of the type of payment 
from the beneficiary, total premiums minus withdrawals (including any 
applicable charges and adjustments), and premium taxes and the maximum 
contract value on any anniversary prior to the owner's 86th birthday, 
minus any withdrawals and withdrawal charges, and plus any premiums 
paid after that anniversary; (iii) the mortality and expense risk 
charge for the Amended JNLNY Contracts is 1.20% (as an annual 
percentage of average daily account value); and (iv) the annual 
contract maintenance fee is $30 for the Amended JNLNY Contracts 
(applicable only when contract value is less than $50,000).
    28. The withdrawal charges of the Amended JNLNY Contracts are as 
follows:

[[Page 11677]]



                                                Withdrawal Charge
                                      [As a percentage of premium payments]
----------------------------------------------------------------------------------------------------------------
  Contribution year of premium payment       1        2        3        4        5        6        7        8+
----------------------------------------------------------------------------------------------------------------
Withdrawal Charge.......................        7        6        5        4        3        2        1        0
Withdrawal Charge if Five-Year Period is      6.5        5        3        2        1        0        0        0
 elected................................
Withdrawal Charge if Three-Year Period          6        4        2        0        0        0        0        0
 is elected.............................
----------------------------------------------------------------------------------------------------------------

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 Amended Contracts and any Future Contracts 
funded by the Separate Accounts or Other Accounts that are issued by 
the Insurance Companies and underwritten or distributed by the 
Distributor or Affiliated Broker-Dealers. Applicants undertake that 
Future Contracts funded by the Separate Accounts or Other Accounts, in 
the future, will be substantially similar in all material respects to 
the Amended 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. An Amended 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 five or seven 
complete years following a premium. Until or unless the amount of any 
Contract Enhancement is vested, the Insurance Companies retain the 
right and interest in the Contract Enhancement amount, although not in 
the earnings attributable to that amount. Thus, Applicants urge that 
when the Insurance Companies recapture any Contract Enhancement they 
are simply retrieving their own assets, and because an Amended Contract 
owner's interest in the Contract Enhancement is not vested, the Amended 
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 Amended Contract owner's contract value.
    4. In addition, Applicants state that it would be patently unfair 
to allow an Amended Contract owner exercising the free-look privilege 
to retain the Contract Enhancement amount under an Amended Contract 
that has been returned for a refund after a period of only a few days. 
If the Insurance Companies could not recapture the Contract 
Enhancement, Applicants claim that individuals could purchase an 
Amended 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 five or seven years of a premium contribution 
is designed to protect the Insurance Companies against Amended Contract 
owners not holding the Amended Contract for a sufficient time period. 
According to Applicants, it would provide the Insurance Companies 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 
Amended Contract owner's Contract value did not include any Contract 
Enhancement. The Insurance Companies nonetheless represent that the 
Amended 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 the Insurance Companies.
    6. Applicants represent that the Contract Enhancement will be 
attractive to and in the interest of investors because it will permit 
owners to put 102%, 103% or 104% of their first-year premium payments 
to work for them in the Investment Divisions and the guaranteed 
accounts. In addition, the owner will retain any earnings attributable 
to the Contract Enhancements recaptured, as well as the principal of 
the Contract Enhancement amount once vested.
    7. Applicants submit that the provisions for recapture of any 
Contract Enhancement under the Amended 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 Amended Contracts should not raise any questions as to 
compliance by the Insurance Companies 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 Contract Enhancement under the circumstances described in the 
application, without the loss of relief from section 27 provided by 
section 27(i).
    8. Section 22(c) of the Act authorizes the Commission to make rules 
and regulations applicable to registered

[[Page 11678]]

investment companies and to principal underwriters of, and dealers in, 
the 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.
    9. It is possible that someone might view the Insurance Companies' 
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, the Insurance Companies 
will redeem interests in an Amended 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 the Insurance Companies 
paid out of their general account assets. Although Amended 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 Amended Contracts.
    10. 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. 
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. 04-5547 Filed 3-10-04; 8:45 am]
BILLING CODE 8010-01-P