[Federal Register Volume 69, Number 248 (Tuesday, December 28, 2004)]
[Notices]
[Pages 77782-77788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28273]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26712; File No. 812-13122]


Merrill Lynch Life Insurance Group, et al. Notice of Application

December 21, 2004.
AGENCY: The Securities and Exchange Commission (``Commission'').

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

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    Applicants: Merrill Lynch Life Insurance Company (``MLLIC''), 
Merrill Lynch Life Variable Annuity Separate Account A (``Account A''), 
Merrill Lynch Variable Annuity Separate Account C (``Account C''), 
Merrill Lynch Variable Annuity Separate Account D (``Account D''), ML 
Life Insurance Company of New York (``MLNY''), ML of New York Variable 
Annuity Separate Account A (``NY Account A''), ML of New York Variable 
Annuity Separate Account C (``NY Account C''), ML of New York Variable 
Annuity Separate Account D (``NY Account D''), and Merrill Lynch, 
Pierce, Fenner & Smith Incorporated (``MLPF&S'') (except for MLLIC, 
MLNY, and MLPF&S, each a ``separate account'' as defined in Section 
2(a)(37) of the Investment Company Act of 1940, as amended (the 
``Act''); each separate account collectively referred to herein as the 
``Separate Accounts'') (all foregoing parties collectively referred to 
herein as the ``Applicants'').
    Summary of Application: The Applicants request an order exempting 
them with respect to the variable annuity contracts described herein 
(the ``Contracts'') and other variable annuity contracts that are 
substantially similar in all material respects to the contracts 
described herein, that MLLIC and/or MLNY (together, the ``Companies'') 
may issue in the future (``Future Contracts''), and any other separate 
accounts of the Companies and their successors in interest (``Future 
Accounts'') that support Future Contracts, and certain NASD member 
broker-dealers which in the future, may act as principal underwriter of 
such contracts (``Future Underwriters''), from the provisions of 
Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, 
pursuant to Section 6(c) of the Act, to the extent necessary to permit 
the recapture of all or a portion of the bonus amounts (previously 
attributable to premium payments under the bonus class of the Contract 
(the ``XC Class'')) where the bonus amounts were applied and a contract 
owner (``Owner'') (1) returns the Contract during the ``Ten Day Right 
to Review'' period (the ``Free Look Period''); (2) dies within six 
months of receipt and acceptance by MLLIC or MLNY of a premium payment 
(unless the Contract is continued under the spousal benefit 
continuation option); or (3) surrenders the Contract (in full or in 
part) or the surrender value is paid to the Owner (because the Contract 
has been terminated for inactivity) within three years of receipt and 
acceptance by MLLIC or MLNY of a premium payment (pursuant to a bonus 
recapture schedule).
    Filing Date: The Application was filed on September 3, 2004 and 
amended on December 20, 2004.
    Hearing or Notification of Hearing: An order granting the 
Application will be issued unless the Commission orders a hearing. 
Interested person 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 January 18, 2005, 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 may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, c/o Edward W. Diffin, 
Jr., Esq., Merrill Lynch Insurance Group, Inc., 1300 Merrill Lynch 
Drive, 2nd Floor, Pennington, New Jersey 08534. Copies to Mary E. 
Thornton, Esq., Sutherland Asbill & Brennan LLP, 1275 Pennsylvania 
Ave., NW., Washington, DC 20004.

FOR FURTHER INFORMATION CONTACT: Robert Lamont, Attorney, at (202) 942-
0676, or Lorna MacLeod, 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 may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 5th Street, NW., 
Washington, DC 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. MLLIC is a stock life insurance company that is domiciled in 
Arkansas. MLLIC was incorporated under the laws of the State of 
Washington on January 27, 1986, and redomesticated to the State of 
Arkansas on August 31, 1991. MLLIC is authorized to operate as a life 
insurance company in forty-nine states, the District of Columbia, the 
U.S. Virgin Islands, Guam, and Puerto Rico. Its principal offices are 
located at 1300 Merrill Lynch Drive, 2nd Floor, Pennington, New Jersey 
08534. MLLIC is a wholly owned subsidiary of Merrill Lynch Insurance 
Group, Inc. (``MLIG''). MLLIC is an indirect wholly owned subsidiary of 
Merrill Lynch & Co., Inc., a publicly held company whose shares are 
traded on the New York Stock Exchange.
    2. MLNY is a stock life insurance company that was organized under 
the

[[Page 77783]]

laws of the State of New York on November 28, 1973. MLNY is authorized 
to sell life insurance and annuities in nine states. Its principal 
offices are located at 222 Broadway, 14th Floor, New York, New York 
10038. MLNY is a wholly owned subsidiary of MLIG. MLNY also is an 
indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
    3. Account A was established by MLLIC under the insurance laws of 
the State of Arkansas on August 6, 1991. Account A is registered with 
the Commission under the Act as a unit investment trust. The assets of 
Account A support certain individual flexible premium variable annuity 
contracts. A registration statement to register interests in Account A 
offered through the Contracts has been filed with the Commission under 
the Securities Act of 1933, as amended (the ``1933 Act'') on Form N-4 
(333-118362). Account A is a ``separate account'' as defined in Section 
2(a)(37) of the Act. MLLIC is the legal owner of the assets in Account 
A. Any income, gain, or loss (whether or not realized) from the assets 
of Account A are credited to or charged against Account A without 
regard to MLLIC's other income, gain, or loss. Assets of Account A 
equal to its reserves and other liabilities under the Contracts may not 
be charged with liabilities arising from any other MLLIC business. 
Account A is comprised of various subdivisions called subaccounts (the 
``Subaccounts''), which were established to receive and invest premium 
payments under the Contracts and other annuity contracts.
    4. Account C was established by MLLIC under the insurance laws of 
the State of Arkansas on November 16, 2001. Account C is registered 
with the Commission under the Act as a unit investment trust. The 
assets of Account C support certain individual flexible premium 
variable annuity contracts. A registration statement to register 
interests in Account C offered through the Contracts will be filed with 
the Commission under the 1933 Act on Form N-4 in the near future. 
Account C is a ``separate account'' as defined in Section 2(a)(37) of 
the Act. MLLIC is the legal owner of the assets in Account C. Any 
income, gain, or loss (whether or not realized) from the assets of 
Account C are credited to or charged against Account C without regard 
to MLLIC's other income, gain, or loss. Assets of Account C equal to 
its reserves and other liabilities under the Contracts may not be 
charged with liabilities arising from any other MLLIC business. Account 
C is comprised of various Subaccounts.
    5. Account D was established by MLLIC under the insurance laws of 
the State of Arkansas on June 21, 2002. Account D is registered with 
the Commission under the Act as a unit investment trust. The assets of 
Account D support certain individual flexible premium variable annuity 
contracts. A registration statement to register interests in Account D 
offered through the Contracts has been filed with the Commission under 
the 1933 Act on Form N-4 (333-119364). Account D is a ``separate 
account'' as defined in Section 2(a)(37) of the Act. MLLIC is the legal 
owner of the assets in Account D. Any income, gain, or loss (whether or 
not realized) from the assets of Account D are credited to or charged 
against Account D without regard to MLLIC's other income, gain, or 
loss. Assets of Account D equal to its reserves and other liabilities 
under the Contracts may not be charged with liabilities arising from 
any other MLLIC business. Account D is comprised of various 
Subaccounts.
    6. NY Account A was established by MLNY under the insurance laws of 
the State of New York on August 14, 1991. NY Account A is registered 
with the Commission under the Act as a unit investment trust. The 
assets of NY Account A support certain individual flexible premium 
variable annuity contracts. A registration statement to register 
interests in NY Account A offered through the Contracts has been filed 
with the Commission under the 1933 Act on Form N-4 (333-119611). NY 
Account A is a ``separate account'' as defined in Section 2(a)(37) of 
the Act. MLNY is the legal owner of the assets in NY Account A. Any 
income, gain, or loss (whether or not realized) from the assets of NY 
Account A are credited to or charged against NY Account A without 
regard to MLNY's other income, gain, or loss. Assets of NY Account A 
equal to its reserves and other liabilities under the Contracts may not 
be charged with liabilities arising from any other MLNY business. NY 
Account A is comprised of various Subaccounts.
    7. NY Account C was established by MLNY under the insurance laws of 
the State of New York on May 16, 2002. NY Account C is registered with 
the Commission under the Act as a unit investment trust. The assets of 
NY Account C support certain individual flexible premium variable 
annuity contracts. A registration statement to register interests in NY 
Account C offered through the Contracts will be filed with the 
Commission under the 1933 Act on Form N-4 in the near future. NY 
Account C is a ``separate account'' as defined in Section 2(a)(37) of 
the Act. MLNY is the legal owner of the assets in NY Account C. Any 
income, gain, or loss (whether or not realized) from the assets of NY 
Account C are credited to or charged against NY Account C without 
regard to MLNY's other income, gain, or loss. Assets of NY Account C 
equal to its reserves and other liabilities under the Contracts may not 
be charged with liabilities arising from any other MLNY business. NY 
Account C is comprised of various Subaccounts.
    8. NY Account D was established by MLNY under the insurance laws of 
the State of New York on July 23, 2002. NY Account D is registered with 
the Commission under the Act as a unit investment trust. The assets of 
NY Account D support certain individual flexible premium variable 
annuity contracts. A registration statement to register interests in NY 
Account D offered through the Contracts has been filed with the 
Commission under the 1933 Act on Form N-4 (333-119797). NY Account D is 
a ``separate account'' as defined in Section 2(a)(37) of the Act. MLNY 
is the legal owner of the assets in NY Account D. Any income, gain, or 
loss (whether or not realized) from the assets of NY Account D are 
credited to or charged against NY Account D without regard to MLNY's 
other income, gain, or loss. Assets of NY Account D equal to its 
reserves and other liabilities under the Contracts may not be charged 
with liabilities arising from any other MLNY business. NY Account D is 
comprised of various Subaccounts.
    9. MLPF&S, an indirect wholly owned subsidiary of Merrill Lynch & 
Co., Inc. and an affiliate of the Companies, is the principal 
underwriter and distributor of the Contracts. MLPF&S was organized in 
1958 under the laws of the state of Delaware and is registered with the 
Commission as a broker-dealer under the Securities Exchange Act of 
1934, as amended, and is a member of the NASD.
    10. Each Subaccount invests only in shares of a designated 
portfolio of certain management investment companies (the ``Funds''). 
The Companies may also make fixed account options available under the 
Contracts in the future.
    11. The Contracts are individual flexible premium deferred variable 
annuity contracts issued by the Companies through the Separate 
Accounts. The Contracts provide for the accumulation of values on a 
variable basis during the accumulation period, and provide for a 
variety of annuity settlement options. Certain Contracts may be 
purchased on a non-qualified tax basis. Certain Contracts also may be 
purchased and used in connection with

[[Page 77784]]

plans qualifying for favorable federal income tax treatment. The 
Contracts currently offer four different charge structures, each 
referred to as a ``Class.'' Each Class, including an XC Class described 
in more detail below, imposes different surrender charges and asset-
based insurance charges.
    12. The Owner determines at the time of application for a Contract 
how premium payments will be allocated among the Subaccounts of the 
applicable Separate Account. The Owner generally may allocate premium 
payments to up to 20 of any of the available Subaccounts. The Contract 
Value, which is the total value of an Owner's interest in the Contract, 
will vary with the investment performance of the Subaccounts selected, 
and the Owner bears the entire risk for amounts allocated to the 
Subaccounts.
    13. During the Free Look Period, an Owner has the right to return 
his or her Contract within ten days (or longer if required by state 
law). If the Contract is returned during the Free Look Period, the 
amount refunded will equal the Contract Value as of the date MLLIC or 
MLNY receives the returned Contract. However, in those states that 
require a return of premium payments in the event of Contract 
cancellation, the Companies will instead return the greater of all 
premium payments paid into the Contract (less any withdrawals) or the 
Contract Value as of the date MLLIC or MLNY receives the returned 
Contract.
    In states that require a return of premium payments, the Companies 
will allocate all premium payments to a money market Subaccount during 
the first fourteen days following the Contract Date. In those states, 
the Companies bear any investment risk associated with the premium 
payments during the Free Look Period; otherwise, the Owner will bear 
any investment risk associated with the premium payments during the 
Free Look Period.
    The Companies will not assess surrender charges against a Contract 
returned during the Free Look Period. The Companies will generally pay 
the refund within seven days after they receive the returned Contract. 
The Contract will then be considered void. As described in more detail 
below, the Companies intend to recapture bonus amounts added to the 
Contract Value if the Owner returns the Contract during the Free Look 
Period.
    14. The Owner may surrender the Contract or make a partial 
withdrawal from Contract Value during the accumulation period. The 
minimum amount that may be withdrawn is $100, and at least $5,000 must 
remain in the Contract after a partial withdrawal (and any associated 
surrender charge) is made. If an Owner surrenders a Contract or takes a 
partial withdrawal, the Companies may deduct a surrender charge to 
compensate them for expenses relating to the sale of the Contracts, 
such as commissions, preparation of sales literature, and other 
promotional activity. Upon partial withdrawal, the Companies also may 
deduct any applicable premium taxes. Upon surrender, the Companies also 
will deduct any applicable contract fee, accrued but uncollected rider 
charges, and premium taxes. The surrender charge will be reduced using 
the ``free withdrawal amount'' provided for in the Contract. The free 
withdrawal amount is the portion of any partial withdrawal or surrender 
that is not subject to a surrender charge. The free withdrawal amount 
is the greater of: (a) 10% of the amount of each premium subject to a 
surrender charge (not to exceed the amount of each premium that had not 
been previously withdrawn as of the beginning of the Contract year), 
less any prior withdrawals during that Contract year; and (b) the 
``gain'' in the Contract plus premiums remaining in the Contract that 
are no longer subject to a surrender charge. Any amount previously 
withdrawn from the Contract during that Contract year will be taken 
into account in determining the ``free withdrawal amount'' available as 
of the date of the withdrawal request. For the purpose of calculating 
the surrender charge, the Companies make withdrawals as if gain is 
withdrawn first, followed by premiums. Premium payments are assumed to 
be withdrawn on a first-in, first-out (``FIFO'') basis.
    The surrender charge equals a percentage of each premium withdrawn. 
With regard to the XC Class offered under the Contracts, each premium 
is subject to the charge for the applicable period specified below from 
the date it is received and accepted by MLLIC or MLNY, as follows:

------------------------------------------------------------------------
                                                             Surrender
                                                              charge
                                                          percentage (as
     Complete years elapsed since payment of premium       a percentage
                                                          of the premium
                                                             payment)
------------------------------------------------------------------------
0.......................................................             8.0
1.......................................................             8.0
2.......................................................             7.0
3.......................................................             7.0
4.......................................................             6.0
5.......................................................             6.0
6.......................................................             5.0
7.......................................................             4.0
8.......................................................             3.0
9.......................................................               0
------------------------------------------------------------------------

    As described in more detail below, the Companies may recapture all 
or a portion of the bonus amounts added to the Contract Value if the 
Owner surrenders the Contract or makes a partial withdrawal within 
three years of MLLIC's or MLNY's receipt and acceptance of a premium 
payment.
    15. Under certain circumstances, the Contract may be terminated due 
to inactivity. If no premiums have been received during the prior 24 
months, the total of all premiums paid (less any partial withdrawals) 
is less than $2,000, and the Contract Value is less than $2,000, then 
the Contract may be terminated. No Contract will be terminated solely 
due to negative investment performance. Termination for inactivity is 
treated as a surrender for purposes of bonus recapture.
    16. During the accumulation period, the Companies will pay a death 
benefit upon the Owner's death (upon the death of the first Owner to 
die if there are Co-Owners, or upon the death of the first Annuitant if 
any Owner is not a natural person). Unless the Owner selects an 
optional guaranteed minimum death benefit (``GMDB''), the death benefit 
will equal the Contract Value.
    17. The Contracts provide four GMDB options that an Owner may 
select to purchase for an additional charge if the Owner (or the older 
Owner, if the Contract has Co-Owners, or the Annuitant, if the Owner is 
a non-natural person) is age 75 or under. If the Owner dies within 90 
days of the Contract Date or within one year of the date of a change of 
Owner, any GMDB will equal the Contract Value. Some GMDB options may 
not be available in every state. If the Owner purchases a GMDB, the 
death benefit equals the greater of the Contract Value or the GMDB 
Base. The current calculation for each GMDB Base is described below.
    18. In addition to the above death benefits and for an additional 
charge, an Owner may elect the Additional Death Benefit Rider if the 
Owner (or the older Owner, if the Contract has Co-Owners, or the older 
Annuitant, if the Owner is a non-natural person) is age 75 or under. 
This rider is designed to help offset expenses, including income taxes, 
attributable to payment of death benefit proceeds. The Additional Death 
Benefit Rider may not be available in all states. Upon payment of the 
death benefit, the Companies may deduct any applicable premium taxes.
    19. As described in more detail below, the Companies will recapture 
any bonus amounts added to the Contract Value if the Owner (the first 
Owner to die, if there are Co-Owners, or the first Annuitant, if any 
Owner is not a natural

[[Page 77785]]

person) dies within six months of MLLIC's or MLNY's receipt and 
acceptance of the corresponding premium payment. However, if an Owner 
dies and the Contract is continued under the spousal benefit 
continuation option, any bonus amounts not previously recaptured will 
no longer be subject to recapture as of the spousal continuation date.
    20. If an Owner elects the XC Class under the Contracts, then the 
Companies will add a bonus amount to the Contract Value each time the 
Owner makes a premium payment. With regard to an initial premium 
payment, the Companies will apply the corresponding bonus amount to an 
Owner's Contract Value on the Contract Date. With regard to each 
additional premium payment, the Companies will apply a corresponding 
bonus amount to an Owner's Contract Value at the end of the valuation 
period during which that premium payment is received and accepted at 
MLLIC's or MLNY's Service Center.
    21. To calculate each bonus amount, the Companies will allocate the 
corresponding premium payment to one or more bonus tiers based on the 
amount of cumulative premium payments made under the Contract, as 
follows:

------------------------------------------------------------------------
                                         Then                    Then
                                        maximum      Then       minimum
                                         bonus      current   guaranteed
 If cumulative premium payments are:    amount       bonus       bonus
                                      percentage  percentage  percentage
                                          is:         is:         is:
------------------------------------------------------------------------
Less than or equal to $25,000.......         5.0         4.5         3.0
Greater than $25,000 but less than           5.5         4.5         3.0
 or equal to $125,000...............
Greater than $125,000 but less than          5.5         4.5         3.5
 or equal to $500,000...............
Greater than $500,000 but less than          6.0         5.5         4.0
 or equal to $1,000,000.............
Greater than $1,000,000.............         7.0         5.5         4.5
------------------------------------------------------------------------

    Thus, the Companies may apply different bonus percentages to each 
premium payment (unless cumulative premium payments are less than or 
equal to $25,000) by breaking out the payment according to the ranges 
in the above table and multiplying the portion of the payment allocated 
to each tier by that tier's current bonus amount percentage. However, a 
premium payment will only be allocated to the first tier if cumulative 
premium payments are less than or equal to $25,000. If the initial 
premium payment exceeds $25,000, the first tier will not apply and the 
second tier will apply to all cumulative premiums less than or equal to 
$125,000. For example, an initial premium payment of $20,000 would 
receive a maximum bonus amount of $1,000 ($20,000 x 0.05 (tier 1)). If 
the initial premium payment is $100,000, the maximum bonus amount would 
be $5,500 ($100,000 x 0.055 (tier 2)). However, an initial premium 
payment of $700,000 would receive a maximum bonus amount of $39,500 
($125,000 x 0.055 (tier 2) + $375,000 x 0.055 (tier 3) + $200,000 x 
0.06 (tier 4)).
    No bonus amount (or subsequent recapture thereof, as discussed 
below) will be based on a percentage that exceeds the maximum bonus 
amount percentages shown in the above table. When calculating each 
bonus amount, ``cumulative premium payments'' do not include bonus 
amounts previously added to Contract Value. The bonus amount is 
allocated among the Subaccounts in the same manner as the corresponding 
premium payment. The Companies may change the current bonus amount 
percentage, but it will never be less than the minimum guaranteed bonus 
amount percentage listed in the table.
    From time to time, the Companies may offer promotional programs 
with promotional rates for XC Class Contracts issued within specified 
periods of time (each, a ``Promotional Period''). Such promotional 
programs may apply to initial and/or subsequent premium payments 
received during the Promotional Period. Initial and/or subsequent 
premium payments received after the Promotional Period will receive the 
current bonus amount percentage in effect at that time. The Promotional 
Period will never exceed the maximum bonus amount. The Companies may 
terminate any promotional programs or offer other promotional programs 
at any time in their sole discretion.
    22. If the Owner returns the Contract during the Free Look Period, 
then the Owner will not receive any portion of the bonus amounts (i.e., 
the Companies will ``recapture'' the full amount of each bonus). In the 
event of the death of the Owner (or upon the death of the first Owner 
to die if there are Co-Owners, or upon the death of the first Annuitant 
if any Owner is not a natural person), the Companies will recapture any 
bonus amounts corresponding to premium payments received and accepted 
within the previous six months of death. Thus, under the XC Class, if 
an optional guaranteed minimum death benefit (``GMDB'') is not chosen 
the death benefit equals the Contract Value less any bonus amounts 
credited in the prior six months. If a GMDB is chosen, the death 
benefit equals the greater of the Contract Value less any bonus amounts 
credited in the prior six months or the GMDB Base (as defined above). 
However, in the event the Contract is continued under the spousal 
benefit continuation option, any bonus amounts not previously 
recaptured will no longer be subject to recapture as of the spousal 
continuation date. In the event of partial withdrawal or surrender 
within three years of MLLIC's or MLNY's receipt and acceptance of a 
premium payment, the Companies may recapture all or a portion of the 
corresponding bonus amount based on the bonus recapture percentages 
presented in the following schedule.

------------------------------------------------------------------------
                                                                Bonus
                                                              recapture
                                                              percentage
  Completed years since receipt and acceptance of premium        for
                          payment                             surrenders
                                                             and partial
                                                             withdrawals
------------------------------------------------------------------------
0..........................................................          100
1..........................................................           65
2..........................................................           30
3+.........................................................            0
------------------------------------------------------------------------

    23. The Companies will recapture any bonus amounts subject to 
recapture from the Owner's Contract Value at the end of the valuation 
period during which the transaction request is received and accepted at 
MLLIC's or MLNY's Service Center. For each premium payment, the bonus 
amount subject to recapture is equal to the applicable bonus recapture 
percentage multiplied by (a) minus (b) where: (a) is the bonus amount 
attributable to that premium; and (b) is the sum of each

[[Page 77786]]

previously recaptured bonus amount attributable to that premium payment 
divided by the bonus recapture percentage on the date such amount was 
recaptured.
    24. The Companies will deduct bonus amounts subject to recapture 
based on the associated premiums withdrawn from the Contract, which are 
determined on a ``first-in, first out'' (or ``FIFO'') basis. Currently, 
the Companies do not recapture any bonus amounts on withdrawals that 
are within the ``free withdrawal amount.'' The Companies reserve the 
right to recapture bonus amounts on withdrawals that are within the 
``free withdrawal amount'' in the future. The amount actually 
recaptured is based on the bonus amount subject to recapture multiplied 
by the ratio of: (i) the associated premium payment withdrawn that was 
subject to a surrender charge to (ii) the total amount of that premium 
payment remaining in the Contract immediately prior to the withdrawal 
that was subject to a surrender charge. The Companies will deduct any 
recaptured bonus amounts on a pro rata basis from among the Subaccounts 
the Owner is invested in, based on the ratio of the Owner's Subaccount 
value to his or her total Subaccount value before the partial 
withdrawal.
    25. If the Companies recapture a bonus amount, they will take back 
the bonus amount as if it had never been applied. However, the 
accumulated gain or loss on bonus amounts is never subject to 
recapture. Thus, an Owner bears any investment loss and retains any 
investment gain attributable to bonus amounts. The Companies will not 
re-credit any charges, including asset-based insurance charges, imposed 
on bonus amounts subsequently recaptured.
    26. Although not currently permitted, in the future the Companies 
may permit an Owner to partially annuitize the Contract. Partial 
annuitizations would be considered to be partial withdrawals for 
purposes of calculations under the Contract, including bonus 
recaptures.
    27. In addition to the fees and charges discussed above, the 
Companies deduct various other fees and charges. These currently 
include an asset-based insurance charge that varies by Subaccount 
(under the XC Class Contract this charge currently ranges from 1.55% to 
1.80% of Subaccount assets (guaranteed not to exceed 2.00%)); a current 
annual contract fee of $50 (guaranteed not to exceed $75), which will 
apply if the greater of Contract Value or premiums less withdrawals is 
less than $50,000; transfer fee of $25 (guaranteed not to exceed $30) 
for each transfer above 12 per Contract year; premium taxes or other 
taxes by any governmental entity; and fees for optional benefits or 
riders.

Applicants' Legal Analysis

    1. The Applicants respectfully request that the Commission, 
pursuant to Section 6(c) of the Act, grant the exemptions set forth 
below to permit the Applicants to recapture all or a portion of bonus 
amounts attributable to premium payments under the Contract's XC Class 
when an Owner (1) returns the Contract during the Free Look Period; (2) 
dies within six months of receipt and acceptance by MLLIC or MLNY of a 
premium payment (unless the Contract is continued under the spousal 
benefit continuation option); or (3) surrenders the Contract (in full 
or in part) or the surrender value is paid to the Owner (because the 
Contract has been terminated for inactivity) within three years of 
receipt and acceptance by MLLIC or MLNY of a premium payment (pursuant 
to a bonus recapture schedule).
    2. Because the provisions described below may be inconsistent with 
a recapture of bonus amounts, the Applicants request exemptions for the 
Contracts described herein, and for Future Contracts, from Sections 
2(a)(32) and 27(i)(2)(a) of the Act, and Rule 22c-1 thereunder, 
pursuant to Section 6(c), to the extent necessary to recapture the 
bonus amounts, as described above. The Applicants seek exemptions 
therefrom in order to avoid any questions concerning the Contracts' 
compliance with the Act and rules thereunder. For the reasons discussed 
below, the exemptions requested herein are necessary or appropriate in 
the public interest and consistent with the protection of investors and 
purposes fairly intended by the policy and provisions of the Act.
    3. To the extent that the bonus amount recapture might be seen as a 
discount from the net asset value, or might be viewed as resulting in 
the payment to an Owner of less than the proportionate share of the 
issuer's net assets, the bonus amount recapture would trigger the need 
for relief absent some exemption from the Act. Rule 6c-8 provides, in 
relevant part, that a registered separate account, and any depositor of 
such account, shall be exempt from Sections 2(a)(32), 22(c), 27(c)(1), 
27(c)(2), and 27(d) of the Act and Rule 22c-1 thereunder to the extent 
necessary to permit them to impose a deferred sales load on any 
variable annuity contract participating in such account. However, the 
bonus amount recapture is not a sales load, but a recapture of bonus 
amounts MLLIC or MLNY previously attributed to an Owner's premium 
payments. The Companies provide the bonus amounts from their general 
accounts on a guaranteed basis. The Contracts are designed to be long-
term investment vehicles. In undertaking this financial obligation, the 
Companies contemplate that an Owner will retain a Contract over an 
extended period, consistent with the long-term nature of the Contracts. 
The Companies designed the product so that they would recover their 
costs (including the bonus amounts) over an anticipated duration while 
a Contract is in force. If an Owner withdraws his money during the Free 
Look Period, or a death benefit is paid, or a withdrawal or surrender 
is made, before this anticipated period, the Companies must recapture 
the bonus amounts subject to recapture in order to avoid a loss.
    4. The recapture of bonus amounts does not violate Section 2(a)(32) 
of the Act. The bonus amount recapture provision pursuant to the 
Contract's XC Class does not deprive the Owner of his or her 
proportionate share of the issuer's current net assets. In the case of 
death of the Owner, an Owner will have the full right to any bonus 
amounts not previously recaptured six months following MLLIC's or 
MLNY's receipt and acceptance of the corresponding premium payment. In 
the case of partial or full surrender, an Owner's right to a portion of 
a bonus amount not previously recaptured will begin one year following 
MLLIC's or MLNY's receipt and acceptance of the corresponding premium 
payment, and an Owner will have the full right to any such remaining 
bonus amount three years following MLLIC's or MLNY's receipt and 
acceptance of the corresponding premium payment. Until that time, the 
Companies retain the right and interest in the dollar amount of any 
bonus amounts subject to recapture. Thus, when the Companies recapture 
all or a portion of a bonus amount, they are only retrieving their own 
assets, and because an Owner does not have an interest in the bonus 
amount, such Owner would not be deprived of a proportionate share of 
the applicable Separate Account's assets (the issuer's current net 
assets) in violation of Section 2(a)(32). Therefore, such recapture 
does not reduce the amount of the applicable Separate Account's current 
net assets an Owner would otherwise be entitled to receive. However, to 
avoid uncertainty as to full compliance with the Act, the Applicants 
request an exemption from the

[[Page 77787]]

provisions of Sections (2)(a)(32) and 27(i)(2)(A) to the extent deemed 
necessary to permit them to recapture all or a portion of the bonus 
amounts under the Contracts and Future Contracts.
    5. As a result of the bonus amounts available under the Contract's 
XC Class, an Owner who made an initial premium payment of $10,000 in 
the first Contract year could be viewed as having a Contract Value of 
$10,400 before any earnings accrued. The Companies' addition of bonus 
amounts might arguably be viewed as resulting in an Owner purchasing a 
redeemable security for a price below the current net asset value. 
Further, by recapturing the bonus amounts, the Companies might arguably 
be redeeming a redeemable security for a price other than one based on 
the current net asset value of the applicable Separate Account.
    6. An Owner's interest in his or her Contract Value would always be 
offered at a price based on the net asset value next calculated after 
receipt of the order. The granting of bonus amounts does not reflect a 
reduction of that price. Instead, the Companies will purchase with 
their own general account assets an interest in the applicable Separate 
Account equal to the bonus amounts. Because the bonus amounts will be 
paid out of MLLIC's or MLNY's assets, not the applicable Separate 
Account's assets, no dilution will occur as a result of the bonus 
amounts.
    7. The recapture of bonus amounts does not involve either of the 
two harms that the Commission intended to eliminate or reduce with Rule 
22c-1. The Commission's stated purposes in adopting Rule 22c-1 were to 
avoid or minimize: (1) Dilution of the interests of other security 
holders; and (2) speculative trading practices that are unfair to such 
holders. These two concerns were the result of backward pricing, the 
practice of basing the price of a mutual fund share 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, and thereby the values of outstanding mutual fund shares 
were diluted.
    8. The proposed recapture of bonus amounts under the Contracts does 
not pose such threat of dilution. The bonus amount recapture will not 
alter an Owner's net asset value. The Companies will determine an 
Owner's surrender value (an amount equal to the Contract Value reduced 
by any charges (including the surrender charge) and increased by any 
credits applied upon surrender) under a Contract in accordance with 
Rule 22c-1 on a basis next computed after receipt of an Owner's request 
for surrender (likewise, the calculation of death benefits and annuity 
payment amounts will be in full compliance with the forward pricing 
requirement of Rule 22c-1). The amount recaptured will equal all or a 
portion of bonus amounts that MLLIC or MLNY paid out of its general 
account assets.
    It is not administratively feasible to track the bonus amount in 
the Separate Accounts after the Companies apply the bonus. As a result, 
the asset-based charges applicable to the Separate Accounts will be 
assessed against the entire amount held in the Separate Accounts, 
including the bonus amount, during the time the bonus amount is subject 
to recapture. During this time, the aggregate asset-based charges 
assessed against an Owner's Contract Value will be higher than those 
that would be charged if the Owner's Contract Value did not include the 
bonus amount, but the increment will obviously be only a small 
percentage of the bonus amount. On the other hand, an Owner will retain 
any investment benefit from the bonus amount. Although an Owner will 
retain any investment gain attributable to the bonus amounts, the 
Companies will determine the amount of such gain on the basis of the 
current net asset value of the Subaccount. Thus, no dilution will occur 
upon the recapture of bonus amounts.
    9. Further, the other harm that Rule 22c-1 was designed to address 
(speculative trading practices calculated to take advantage of backward 
pricing) will not occur as a result of MLLIC's or MLNY's recapture of a 
bonus amount. Variable annuities are designed for long-term investment, 
and by their nature, do not lend themselves to the kind of speculative 
short-term trading that Rule 22c-1 was designed to prevent. More to the 
point, the bonus recapture simply does not create the opportunity for 
speculative trading.
    10. Rule 22c-1 should have no application to a bonus amount, as 
neither of the harms that Rule 22c-1 was designed to address are 
present in the recapture of bonus amounts. However, to avoid 
uncertainty as to full compliance with the Act, the Applicants request 
an exemption from the provisions of Rule 22c-1 to the extent deemed 
necessary to permit them to recapture bonus amounts available through 
the XC Class under the Contracts and Future Contracts.
    11. The Commission should grant the exemptions requested in this 
Application, even if the bonus amounts described herein arguably 
conflicts with Sections 2(a)(32) or 27(i)(2)(A) of the Act or Rule 22c-
1 thereunder. The bonus amount provisions are generally beneficial to 
Owners. The recapture provisions temper this benefit somewhat, but only 
if an Owner redeems his or her money under the circumstances described 
herein. While there would be a small downside in a declining market 
where an Owner would bear any losses attributable to the bonus amounts, 
it is the converse of the benefits an Owner would receive on the bonus 
amounts in a rising market. As any earnings on bonus amounts applied 
would not be subject to recapture and thus would be immediately 
available to an Owner, likewise any losses on bonus amounts would also 
not be subject to recapture and thus would be immediately available to 
an Owner. The bonus amount recapture provision does not diminish the 
overall value of the bonus amounts.
    12. MLLIC's or MLNY's recapture of bonus amounts is designed to 
prevent anti-selection against it. The risk of anti-selection would be 
that an Owner could make significant premium payments into the Contract 
solely in order to receive a quick profit from the bonus amounts. By 
recapturing the bonus amounts, the Companies protect themselves against 
the risk that an Owner will make such large premium payments, receive 
the bonus amounts, and then withdraw his or her money from the 
Contract. The Companies generally protect themselves from this kind of 
anti-selection, and recover their costs in situations where an Owner 
withdraws his or her money early in the life of a Contract, by imposing 
a surrender charge. However, where an Owner withdraws his money during 
the Free Look Period or a death benefit is paid, the Companies do not 
apply this charge.
    13. The Applicants seek relief herein not only for themselves with 
respect to the support of the Contracts, but also with respect to 
Future Accounts or Future Contracts described herein. The Applicants 
represent that the terms of the relief requested with respect to any 
Contracts or Future Contracts funded by the Separate Accounts or Future 
Accounts are consistent with the standards set forth in Section 6(c) of 
the Act and Commission precedent. The Commission has previously granted 
class relief (from certain specified provisions of the Act for separate 
accounts that support variable annuity contracts) that is materially 
similar to the relief described in this Application.

[[Page 77788]]

    14. In addition, the Applicants seek relief herein with respect to 
Future Underwriters (i.e., a class consisting of NASD member broker-
dealers that may also act as principal underwriter of the Contracts and 
Future Contracts). The Commission has regularly granted relief to 
``future underwriters'' that are not named, and are not affiliates of 
the applicants. The Applicants represent that the terms of the relief 
requested with respect to any Future Underwriters are consistent with 
the standards set forth in Section 6(c) of the Act and Commission 
precedent.
    15. Without the requested class relief, exemptive relief for any 
Future Account, Future Contract, or Future Underwriter would have to be 
requested and obtained separately. These additional requests for 
exemptive relief would present no issues under the Act not already 
addressed herein. If the Applicants were to repeatedly seek exemptive 
relief with respect to the same issues addressed herein, investors 
would not receive additional protection or benefit, and investors and 
the Applicants could be disadvantaged by increased costs from preparing 
such additional requests for relief. The requested class relief is 
appropriate in the public interest because the relief will promote 
competitiveness in the variable annuity market by eliminating the need 
for the Companies to file redundant exemptive applications, thereby 
reducing administrative expenses and maximizing efficient use of 
resources. Elimination of the delay and the expense of repeatedly 
seeking exemptive relief would enhance the Applicants' ability to 
effectively take advantage of business opportunities as such 
opportunities arise. The Applicants' request for class exemptions 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, and that an order of the Commission 
including such class relief, should, therefore, be granted. Any entity 
that currently intends to rely on the requested exemptive order is 
named as an Applicant. Any entity that relies upon the requested order 
in the future will comply with the terms and conditions contained in 
this Application.

For the Commission, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-28273 Filed 12-27-04; 8:45 am]
BILLING CODE 8010-01-P