[Federal Register Volume 69, Number 212 (Wednesday, November 3, 2004)]
[Notices]
[Pages 64119-64123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2991]



[[Page 64119]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26644; File No. 812-13080]


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

October 28, 2004.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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    Applicants: Pacific Life Insurance Company (``Pacific Life''), 
Separate Account A of Pacific Life (``Pacific Separate Account A''), 
Pacific Select Variable Annuity Separate Account of Pacific Life 
(``PSVA Separate Account''), Pacific Life and Annuity Company 
(``PL&A'') (together with Pacific Life and any other life insurance 
company that is a successor in interest to Pacific Life or PL&A, the 
``PL Insurers''), Separate Account A of PL&A (``PL&A Separate Account 
A) (together with Pacific Separate Account A and PSVA Separate Account, 
and any other separate account of PL Insurers supporting variable 
annuity contracts, the ``Separate Accounts''), and Pacific Select 
Distributors (``PSD'') (together with the PL Insurers and the Separate 
Accounts, the ``Applicants'').
    Filing Date: The application was filed on April 30, 2004, and 
amended and restated on August 20, 2004.
    Summary of Application: Applicants seek an amended order to permit, 
under specified circumstances, (i) the recapture of certain credit 
enhancements (``Credit Enhancements'') applied to the ``Contract 
Value'' (as defined herein) of Contractholders \1\ under: (a) Pacific 
Value variable annuity, a flexible premium deferred variable annuity 
contract that PL&A issues through PL&A Separate Account A (``PL&A 
Pacific Value''), (b) Pacific Value variable annuity, a flexible 
premium deferred variable annuity contract that Pacific Life issues 
through Pacific Separate Account A (``Pacific Value'') and (c) other 
Variable Contracts and any Future Variable Contracts offered by the PL 
Insurers that would be funded by a Separate Account or a separate 
account that will be established in the future by a PL Insurer to 
support variable annuity contracts issued by a PL Insurer (``Future 
Account''), provided that any such Variable Contract or Future Variable 
Contract is substantially similar in all material respects to PL&A 
Pacific Value and Pacific Value; and (ii) the recapture of any amounts 
credited under Pacific Portfolios variable annuity (``Pacific 
Portfolios''), Pacific Innovations Select variable annuity (``Pacific 
Innovations Select''), and Pacific One variable annuity (``Pacific 
One''), each a flexible premium deferred variable annuity contract 
funded by Pacific Separate Account A; Pacific Select Variable Annuity, 
a flexible premium deferred annuity and variable accumulation contract 
funded by Pacific Select Variable Annuity Separate Account (``PSVA''), 
Pacific Innovations Select variable annuity, a flexible premium 
deferred variable annuity contract funded by PL&A Separate Account A 
(``PL&A Pacific Innovations Select''), or any Variable Contract or 
Future Variable Contract that is sold to Contractholders in situations 
where selling and/or maintenance costs associated with the Variable 
Contracts are reduced (``Cost Reduction Credit'') \2\ or to 
Contractholders who meet certain criteria as established by the 
relevant PL Insurer (``Eligible Person Credit''),\3\ provided that any 
such Variable Contract or Future Variable Contract is substantially 
similar in all material respects to PSVA, Pacific Portfolios, Pacific 
One, Pacific Innovations Select or PL&A Pacific Innovations Select.\4\
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    \1\ Unless otherwise designated, the term ``Contractholder,'' 
for purposes of the Application, refers to contractholders of any 
variable annuity contract funded by a Separate Account (each a 
``Variable Contract'' and collectively, ``Variable Contracts''), and 
also to contractholders of any variable annuity contract funded in 
the future by a Separate Account or a Future Account (collectively, 
``Future Variable Contracts'').
    \2\ Such situations may include the sale of several Contracts to 
the same Contractholder(s), sales of large Contracts, sales of 
Contracts in connection with a group or sponsored arrangement or 
mass transactions over multiple Contracts.
    \3\ For example, for purposes of Pacific Innovations Select 
variable annuity, Pacific Select Variable Annuity and Pacific 
Portfolios variable annuity issued by Pacific Life, and Pacific 
Innovations Select variable annuity issued by PL&A, an Eligible 
Person may include current and retired officers, directors and 
employees of Pacific Life and its affiliates, trustees of Pacific 
Select Fund, registered representatives and employees of broker/
dealers with a current broker/dealers, employees of affiliated asset 
management firms and certain other service providers, and immediate 
family members of such persons.
    \4\ The current order grants Applicants exemptions from Sections 
2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder in order to permit the recapture of Credit Enhancements, 
Cost Reduction Credit, and Eligible Person Credit applied to a 
Contract Value when a Contractholder returns a contract during the 
free-look period. Pacific Life Insurance Company, et al., Inventment 
Company Act Rel. Nos. IC-25998 (April 9, 2003) (Notice) and 26042 
(May 2, 2003) (Order).
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    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, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m., on November 22, 2004, 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 Secretary of the 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicant: Pacific Life Insurance 
Company, 700 Newport Center Drive, Newport Beach, CA 92660, Attn: Robin 
S. Yonis, Esq.

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

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 (tel. (202) 942-8090).

Applicants' Representations

    1. Pacific Life is a life insurance company that is domiciled in 
California. Along with subsidiaries and affiliates, Pacific Life's 
operations include life insurance, annuities, pension and institutional 
products, group employee benefits, broker/dealer operations and 
investment advisory services. Pacific Life is authorized to conduct 
life insurance and annuity business in the District of Columbia and all 
states except New York. Its principal offices are located at 700 
Newport Center Drive, Newport Beach, California 92660.
    2. Pacific Separate Account A was established on September 7, 1994, 
as a segregated asset account of Pacific Life and is registered with 
the Commission as a unit investment trust under the 1940 Act. Pacific 
Life is the legal owner of the assets in Pacific Separate Account A. 
Pacific Separate Account A funds the variable benefits available under 
Pacific Value, Pacific Innovations Select, Pacific Portfolios, Pacific 
One, Pacific One Select variable annuity (``Pacific One Select''), 
Pacific Innovations variable annuity (``Pacific Innovations''),

[[Page 64120]]

and Pacific Odyssey variable annuity (``Pacific Odyssey''). Interests 
in Pacific Separate Account A under Pacific Value, Pacific Innovations 
Select, Pacific Portfolios, Pacific One, Pacific One Select, Pacific 
Innovations, and Pacific Odyssey are registered under the Securities 
Act of 1933, as amended (the ``1933 Act'').
    3. Pacific Separate Account A currently has 41 subaccounts or 
``Variable Investment Options.'' Each Variable Investment Option 
invests in a corresponding series of Pacific Select Fund (``Select 
Fund''), an open-end registered management investment company for which 
Pacific Life serves as investment adviser; or The Prudential Series 
Fund, Inc., an open-end registered investment company for which 
Prudential Investments Fund Management LLC (``PIFM'') serves as 
investment adviser; or the One Group Investment Trust, an open-end 
registered investment company for which Banc One Investment Advisors 
(``BOIA'') serves as investment adviser. It is anticipated that Pacific 
Life will offer Variable Contracts that will provide Variable 
Investment Options that invest in funds that are not sponsored or 
advised by Pacific Life or its affiliates. Neither PIFM nor BOIA is an 
``affiliated person'' of Pacific Life as such term is defined in 
Section 2(a)(3) of the 1940 Act.
    4. PSVA Separate Account was established on November 30, 1989, as a 
segregated asset account of Pacific Life and is registered with the 
Commission as a unit investment trust under the 1940 Act. Pacific Life 
is the legal owner of the assets in PSVA Separate Account. PSVA 
Separate Account currently has 31 Variable Investment Options. Each 
Variable Investment Option invests in a corresponding series of Select 
Fund. PSVA Separate Account currently funds the variable benefits 
available under a variable annuity contract designated as PSVA. 
Interests in PSVA Separate Account under PSVA are registered under the 
1933 Act.
    5. PL&A is a life insurance company domiciled in Arizona. PL&A's 
operations include life insurance, annuity and institutional products, 
group life and health insurance and various other insurance products 
and services. At the end of 2003, PL&A's total statutory assets were 
$1,155 million. PL&A is authorized to conduct life insurance and 
annuity business in Arizona, New York and certain other states. PL&A's 
principal office is located at 700 Newport Center Drive, Newport Beach, 
California 92660.
    6. PL&A Separate Account A was established on January 25, 1999, as 
a segregated asset account of PL&A and is registered with the 
Commission as a unit investment trust under the 1940 Act. PL&A is the 
legal owner of the assets in PL&A Separate Account A. PL&A Separate 
Account A currently has 31 Variable Investment Options. Each Variable 
Investment Option invests in a corresponding series of Select Fund. 
PL&A Separate Account A funds the variable benefits available under 
variable annuity contracts designated as PL&A Pacific Innovations 
Select and will fund the variable benefits available under variable 
annuity contracts designated as PL&A Pacific Odyssey and PL&A Pacific 
Value. Interests in PL&A Separate Account A under PL&A Pacific 
Innovations Select, PL&A Pacific Odyssey and PL&A Pacific Value are 
registered under the 1933 Act.
    7. PSD, a wholly owned subsidiary of Pacific Life, serves as the 
principal underwriter for the Variable Contracts issued by the PL 
Insurers. It is also anticipated that PSD will serve as the principal 
underwriter for any Future Variable Contracts issued by the PL 
Insurers. PSD is registered with the Commission as a broker/dealer 
under the Securities Exchange Act of 1934, as amended. The PL Insurers 
and PSD have entered into selling agreements with various broker/
dealers, under which such broker/dealers act as agents of the relevant 
PL Insurer and PSD in the sale of the relevant PL Insurer's Variable 
Contracts.
    8. Pacific Value and PL&A Pacific Value offer a ``Credit 
Enhancement'' feature under which PL Insurers automatically add an 
amount to each Contractholder's overall ``Contract Value'' at the time 
any amount is paid to PL Insurers by or on behalf of the Contractholder 
as consideration of the benefits provided under the Variable Contract 
(referred to herein as ``Purchase Payments''). For purposes of the 
Application, the term ``Contract Value'' refers to the sum (as 
calculated at the end of each business day) of: (i) The aggregate 
amount of Purchase Payments and any prior Credit Enhancements, and any 
earnings or losses thereon, less any fees and charges, held for a 
Contractholder's Variable Contract in any Variable Investment Option; 
(ii) the aggregate amount of Purchase Payments and any prior Credit 
Enhancements, and any interest earned thereon, less any fees and 
charges held for a Contractholder's Variable Contract in any fixed 
option available under his or her Variable Contract; (iii) the amount, 
including any interest accrued, held to secure the principal amount the 
Contractholder has on any outstanding loan under his or her Variable 
Contract; less (iv) the amount, including any associated withdrawal 
charge, of any withdrawal from the Variable Contract.
    9. Credit Enhancements are allocated among a Contractholder's 
investment options then in effect in the same proportion that the 
applicable Purchase Payment is allocated. The Credit Enhancement with 
respect to each Purchase Payment is based on the Contractholder's total 
Purchase Payments made into Pacific Value and PL&A Pacific Value less 
total withdrawals, including any withdrawal charges, from Pacific Value 
and PL&A Pacific Value as of the date the Purchase Payment is applied. 
The Credit Enhancement available under Pacific Value and PL&A Pacific 
Value, expressed as a percentage of the relevant Purchase Payment, is 
set forth below:

             For Contracts Issued on or After April 1, 2000
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                                                              Credit
     Total purchase payments less total withdrawals         enhancement
                                                             (percent)
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Less than $250,000......................................             4.0
$250,000 or more........................................             5.0
Less than $100,000......................................             3.0
At least $100,000 but less than $2.5 million............             4.0
$2.5 million or more....................................             5.0
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    10. PL Insurers may agree to credit a Cost Reduction Credit under 
the Variable Contracts (other than Pacific Innovations), in situations 
where selling and/or maintenance costs associated with the Variable 
Contracts are reduced, such as the sale of several Variable Contracts 
to the same Contractholder(s), sales of large Variable Contracts, sales 
of Variable Contracts in connection with a group or sponsored 
arrangement or mass transactions over multiple Variable Contracts.
    11. The amount of any Cost Reduction Credit will be determined 
based upon the amount of reduction in the selling and/or maintenance 
cost associated with the sale of that particular Variable Contract. A 
Cost Reduction Credit may be applied at the time that a Purchase 
Payment is made. Any Cost Reduction Credit applied at that time will 
not exceed 1.45% of the amount of such Purchase Payment. Alternatively, 
Cost Reduction Credits may be credited on the basis of Contract Value. 
Any Cost Reduction Credit credited on the basis of Contract Value will 
not exceed 1.45% of Contract Value at the time it is credited. The PL 
Insurers wish to reserve the flexibility to offer the Cost Reduction 
Credit under Variable Contracts and Future Variable Contracts,

[[Page 64121]]

provided that any such Variable Contract or Future Variable Contract is 
substantially similar in all material respects to Pacific Innovations 
Select, Pacific Portfolios, PL&A Pacific Innovations Select, Pacific 
One, or PSVA.
    12. PL Insurers may agree to credit an Eligible Person Credit under 
the Variable Contracts (other than Pacific One Select) owned by persons 
who meet criteria established by the relevant PL Insurer. These persons 
may include current and retired officers, directors and employees of 
Pacific Life and its affiliates, trustees of Pacific Select Fund, 
registered representatives and employees of broker/dealers with a 
current selling agreement with Pacific Life or PL&A, respectively, and 
the affiliates of those broker/dealers, employees of affiliated asset 
management firms and certain other service providers, and immediate 
family members of such persons (collectively referred to as ``Eligible 
Persons''). Under the Eligible Person Credit Program, the relevant PL 
Insurer credits additional amounts to Pacific Innovations Select, 
Pacific Portfolios, PSVA or PL&A Pacific Innovations Select Variable 
Contracts owned by Eligible Persons if such Variable Contracts are 
purchased directly through PSD. Under these circumstances, Eligible 
Persons will not be afforded the benefit of services of any other 
broker/dealer nor will any commission be payable to any broker/dealer 
in connection with such purchases. Rather, Eligible Persons must 
contact the relevant PL Insurer or PSD directly with servicing 
questions, changes in their Variable Contracts and related matters.
    13. The amount currently credited to Variable Contracts owned by 
Eligible Persons will approximate the reduction in expenses realized by 
the relevant PL Insurer by not incurring brokerage commission in 
selling such Variable Contracts, with the determination of the expense 
reduction and of such crediting being made in accordance with 
administrative procedures established by the relevant PL Insurer. 
Eligible Persons are currently credited with a 5% Eligible Person 
Credit on each Purchase Payment plus a .25% (annualized) Credit of 
Contract Value, payable quarterly in advance, from the second Contract 
Year through the third Contract Year for Pacific Innovations Select and 
PL&A Pacific Innovation Select and a 1% (annualized) Credit of Contract 
Value, payable quarterly in advance from the fourth Contract Year until 
annuitization, on an annual basis. The PL Insurers wish to reserve the 
flexibility to offer the Eligible Person Credit under Variable 
Contracts and Future Variable Contracts, provided that any such 
Variable Contract or Future Variable Contract is substantially similar 
in all material respects to Pacific Portfolios, Pacific One, PSVA, 
Pacific Innovations Select or PL&A Pacific Innovations Select.
    14. In the future, PL Insurers may credit Contracts issued to 
Eligible Persons with Eligible Persons Credit greater than 5% of each 
Purchase Payment, except that with respect to the Purchase Payments 
made during: (i) The relevant free-look period; and (ii) after the 
relevant free-look period has expired, but during the first Contract 
month, the amount of any Eligible Person Credit will be limited to no 
more than 9% of such Purchase Payment.
    15. Although the PL Insurers currently offer Credit Enhancements, 
Eligible Person Credits and Cost Reduction Credits (collectively, 
``Credits'') through Variable Contracts and Future Variable Contracts, 
no PL Insurer currently applies, and no PL Insurer will apply in the 
future, more than one Credit to the Contract Value of a 
Contractholder's Variable Contract or Future Variable Contract. Thus if 
a PL Insurer applies the Credit Enhancement Credit to the Contract 
Value of a particular Variable Contract or Future Variable Contract, it 
will not also apply an Eligible Person Credit or a Cost Reduction 
Credit. Similarly, if a PL Insurer applies the Eligible Person Credit 
to the Contract Value of a particular Variable Contract or Future 
Variable Contract, it will not also apply a Cost Reduction Credit or a 
Credit Enhancement. If a PL Insurer offers a Cost Reduction Credit to 
the Contract Value of a particular Variable Contract or Future Variable 
Contract, it will not also apply an Eligible Person Credit or a Credit 
Enhancement.
    16. Under the Variable Contracts issued by the PL Insurers, death 
benefit proceeds may be payable prior to the Annuity Date as of the 
date that a PL Insurer receives, in proper form: (i) Proof of death of 
the sole surviving annuitant, or of the first Contractholder who is 
also an annuitant; and (ii) instructions regarding payment of death 
benefit proceeds (``Notice Date''). Unless the Contractholder has 
purchased an optional rider that would provide a larger death benefit, 
the amount of the death benefit (``Death Benefit Amount'') will equal 
the greater of: (i) A Contractholder's Contract Value as of the Notice 
Date; or (ii) the Contractholder's aggregate Purchase Payments reduced 
by an amount for each withdrawal, which is calculated by multiplying 
the aggregate Purchase Payments received prior to each withdrawal by 
the ratio of the amount of the withdrawal, including any withdrawal 
charge, to the Contract Value immediately prior to each withdrawal.
    17. PL Insurers may make further deductions from the death benefit 
proceeds in the following two situations. First, if any Pacific Value 
or PL&A Pacific Value Contractholder or sole surviving annuitant dies 
before the annuity date, then the relevant PL Insurer will deduct the 
amount of any Credit Enhancement added to the Contract Value of a 
Pacific Value or PL&A Pacific Value Contractholder during the 12-month 
period prior to the date of death. The death benefit proceeds will be 
reduced by the amount of any such deduction. Second, the amount of any 
Cost Reduction Credit or Eligible Person Credit that is added to the 
Contract Value of a Pacific One, Pacific Portfolios, PSVA, Pacific 
Innovations Select, and PL&A Pacific Innovations Select Contractholder 
during the 12-month period prior to the date of death of the 
Contractholder or sole surviving annuitant may be deducted from the 
death benefit proceeds. Applicants seek relief to permit PL Insurers to 
deduct from the death benefit proceeds the amounts of any Credit 
Enhancement, Cost Reduction Credit or Eligible Person Credit added to 
the Contract Value of any Variable Contract or Future Variable 
Contract, funded by a Separate Account or a Future Account added to the 
Contract Value, during the 12-month period prior to the date of death 
of the sole surviving annuitant, or of the first Contractholder who is 
also an annuitant.

Applicants' Legal Analysis

    1. Applicants seek exemptive relief pursuant to Section 6(c) from 
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act and Rule 22c-
1 thereunder to the extent deemed necessary to permit the PL Insurers 
to recapture Credit Enhancements, Cost Reduction Credits and Eligible 
Person Credits in the manner described herein.
    2. Subsection (i) of Section 27 of the 1940 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 separate account, except as provided 
in paragraph (2) of that 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

[[Page 64122]]

``(A) such contract is a redeemable security.'' Section 2(a)(32) of the 
1940 Act 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 shares of the issuer's current net assets, or the 
cash equivalent thereof.
    3. Because the death benefit proceeds may not include the amount of 
any Credit Enhancement, Cost Reduction Credit or Eligible Person Credit 
added to the Contractholder's Contract Value during the 12-month period 
prior to the date of death, the Contractholder arguably is not 
receiving his or her proportionate share of the applicable Separate 
Account's then-current net assets. Applicants submit, however, that the 
recapture of the Credit Enhancement offered under Pacific Value and 
PL&A Pacific Value or the Cost Reduction Credit and the Eligible Person 
Credit offered under the Variable Contracts, as described in this 
Application, would not deprive a Contractholder of his or her 
proportionate share of the issuer's current net assets.
    4. The recapture of any Credit Enhancement, Cost Reduction Credit 
or Eligible Person Credit is intended only to protect the relevant PL 
Insurer against anti-selection under certain specified contingencies. 
``Anti-selection'' can generally be described as a risk that persons 
obtain coverage based on knowledge that a contingency that triggers 
payment of an insurance benefit is likely to occur, or is to occur 
shortly. In the case of the Variable Contracts, the Credit Enhancement, 
Cost Reduction Credit or Eligible Person Credit is provided on a 
guaranteed issue basis. The protection against anti-selection by 
persons who are ill is the reduction of the death benefit proceeds by 
the amount of the Credit Enhancement, Cost Reduction Credit or Eligible 
Person Credit applied to Purchase Payments made within 12 months prior 
to the date of death of the Contractholder or sole surviving annuitant.
    5. A Contractholder's interest in the amount of a Credit 
Enhancement, Cost Reduction Credit or an Eligible Person Credit 
allocated to his or her Contract Value will not vest if the credits 
applied to the Contract Value relate to Purchase Payments made within 
12 months of the date of death of the Contractholder or sole surviving 
annuitant. Unless and until the amount of the Credit Enhancement, Cost 
Reduction Credit or Eligible Person Credit is vested, the relevant PL 
Insurer retains the right and interest in the amount of the Credit 
Enhancement, Cost Reduction Credit or the Eligible Person Credit. Thus, 
when the relevant PL Insurer recaptures any Credit Enhancement, Cost 
Reduction Credit or the Eligible Person Credit, it is simply retrieving 
its own assets, and because a Contractholder's interest in the Credit 
Enhancement, Cost Reduction Credit and/or Eligible Person Credit is not 
vested, the Contractholder is not deprived of a proportionate share of 
the net assets of the applicable Separate Account. Based on the 
foregoing, 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 Credit Enhancement, Cost Reduction Credit and Eligible Person 
Credit in the manner described above with respect to the Variable 
Contracts and any Future Variable Contracts, without losing the relief 
from Section 27 provided by Section 27(i).
    6. Section 22(c) of the 1940 Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company. 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.
    7. PL Insurers' deduction of the amount of certain Credit 
Enhancements, Cost Reduction Credits or Eligible Person Credits applied 
to Contract Value from the death benefit proceeds of the Contract if 
those Credit Enhancements, Cost Reduction Credits or Eligible Person 
Credits were applied to the Contract Value during the 12-month period 
prior to the date of death, might arguably be viewed as resulting in 
the redemption of redeemable securities for a price other than one 
based on the current net asset value of the applicable Variable 
Investment Option of a Separate Account. In other words, because any 
such Credit Enhancements, Cost Reduction Credits and Eligible Person 
Credits credited by a PL Insurer are immediately added, on a 
conditional basis, to the Contract Value of certain Contractholders, 
and further because these amounts are allocated by the Contractholder 
to certain Variable Investment Options for the benefit of the 
participating Contractholder, the net asset value of each Variable 
Investment Option arguably is affected by these credits. Applicants 
contend, however, that the recapture of the Credit Enhancement, Cost 
Reduction Credit and Eligible Person Credit under the circumstances 
described in this Application should not be deemed to be a violation of 
Section 22(c) and Rule 22c-1.
    8. The recapture of the Credit Enhancement, Cost Reduction Credit 
and the Eligible Person Credit does not involve either of the practices 
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 their redemption 
or repurchase at a price above it, and (ii) other unfair results, 
including speculative trading practices. Those practices were the 
result of backward pricing, the practice of basing the price of mutual 
fund shares on the net asset value per share determined as of the close 
of the market on the previous day. Backward pricing allowed investors 
to take advantage of increases or decreases in net asset value that 
were not yet reflected in the price, thereby diluting the values of 
outstanding mutual fund shares.
    9. The proposed recapture of the Credit Enhancement, Cost Reduction 
Credit and the Eligible Person Credit poses no such threat of dilution. 
To effect a recapture of a Credit Enhancement, Cost Reduction Credit or 
an Eligible Person Credit, PL Insurers redeem interests in a 
Contractholder's Variable Investment Option at a price determined on 
the basis of the current net asset value of each of the Variable 
Investment Options of the Separate Account in which the 
Contractholder's Contract Value is allocated. The amount recaptured 
will be equal to the amount of the Credit Enhancement, Cost Reduction 
Credit or the Eligible Person Credit paid out of the general account 
assets of the relevant PL Insurer. Although Contractholders will be 
entitled to retain any investment gain attributable to the Credit 
Enhancement, Cost Reduction Credit or an Eligible Person Credit, the 
amount of such gain will be determined based upon the current net asset 
value of each of the Variable Investment Options of the Separate 
Account in which the Contractholder's Contract Value is allocated. 
Thus, no dilution will occur upon the recapture of a Credit 
Enhancement, Cost Reduction Credit or an Eligible Person Credit.

[[Page 64123]]

    10. Applicants also submit that the second practice 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 Enhancement, Cost Reduction 
Credit or the Eligible Person Credit.
    11. Because neither of the practices that Rule 22c-1 was meant to 
address is found in the recapture of the Credit Enhancement, Cost 
Reduction Credit, or the Eligible Person Credit, Rule 22c-1 and Section 
22(c) of the 1940 Act are not implicated. However, to avoid any 
uncertainty as to full compliance with the 1940 Act, Applicants request 
an exemption from the provisions of Section 22(c) and Rule 22c-1 to the 
extent deemed necessary to permit the recapture of any Credit 
Enhancement, Cost Reduction Credit and Eligible Person Credit in the 
manner described above.

Conclusion

    Applicants request an order pursuant to Section 6(c) of the 1940 
Act exempting them from Sections 2(a)(32), 22(c), and 27(i)(2)(A) of 
the 1940 Act and Rule 22c-1 thereunder to the extent deemed necessary 
to permit the PL Insurers to recapture Credit Enhancements, Cost 
Reduction Credits and Eligible Person Credits in the manner described 
herein. Applicants submit that their request for an order for the 
exemptive relief described above is appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policies and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-2991 Filed 11-2-04; 8:45 am]
BILLING CODE 8010-01-P