[Federal Register Volume 70, Number 5 (Friday, January 7, 2005)]
[Notices]
[Pages 1478-1481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-18]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26716; File No. 812-13109]


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

January 3, 2005.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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    Applicants: Principal Life Insurance Company (``Principal Life''), 
Principal Life Insurance Company Separate Account B (the ``Account''), 
and Princor Financial Services Corporation (``Princor'') (collectively 
``Applicants'').

SUMMARY: Applicants seek an order to permit, under specified 
circumstances, the recovery of certain credits previously applied to 
purchase payments made under: (i) Certain deferred variable annuity 
contracts, described herein, that Principal Life issues through the 
Account (the contracts, including certain data pages and endorsements, 
are collectively referred to as the ``Contracts''), and (ii) contracts 
that Principal Life may issue in the future through the Account, any of 
its other existing separate accounts, or any separate accounts that it 
may establish in the future (collectively, ``Future Accounts''), which 
contracts are substantially similar in all material respects to the 
Contracts (the ``Future Contracts''). Applicants also request that the 
order being sought extend to any other broker-dealer controlling, 
controlled by, or under common control with Principal Life, whether 
existing or created in the future, that serves as a distributor or 
principal underwriter of the Contracts or any Future Contracts offered 
through the Account or any Future Accounts (collectively, ``Affiliated 
Broker-Dealers'').

DATES: Filing Date: The application was filed on July 16, 2004, and 
amended on October 18, 2004.
    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 January 31, 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 requester'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, SEC, 450 5th Street, NW., Washington, DC 20549-
0609. Applicants, c/o Principal Financial Group, 711 High Street, Des 
Moines, Iowa 50392.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Zandra Y. Bailes, Branch Chief, Office of Insurance Products, 
Division of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, 
DC 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. Principal Life was organized under the laws of Iowa in 1879. It 
is authorized to transact life insurance and annuity business in 50 
states and the District of Columbia. Principal Life is a stock life 
insurance company and a wholly owned subsidiary of Principal Financial 
Group Inc.
    2. The Account was established in 1970 by Principal Life as a 
separate account under Iowa law and is registered with the Commission 
as a unit investment trust under the Act (File No. 811-02091). The 
Account funds the benefits available under the Contracts and other 
variable annuity contracts issued by Principal Life. The offering of 
the Contracts by Principal Life is registered under the Securities Act 
of 1933 (the ``1933 Act'') (File No. 333-116220). That portion of the 
assets of the Account that is equal to the reserves and other contract 
liabilities with respect to the Account is not chargeable with 
liabilities arising out of any other business of Principal Life. Any 
income, gains or losses, realized or unrealized, from assets allocated 
to the Account are, in accordance with the various contracts, credited 
to or charged against the Account without regard to other income, gains 
or losses of Principal Life.
    3. Princor is an Iowa corporation controlled by Principal Financial 
Group, Inc., and is the principal underwriter of the Contracts. Princor 
is registered as a broker-dealer under the Securities Exchange Act of 
1934, as amended, and is a member of NASD, Inc. Sales of the Contracts 
are made by registered representatives of broker-dealers authorized by 
Princor to sell the Contracts. Such registered representatives are also 
licensed insurance agents of Principal Life.
    4. The Contracts are flexible purchase payment individual deferred 
combination fixed and variable annuity contracts. The Contracts may be 
issued either as tax-qualified contracts (``qualified Contracts'') or 
as non-tax-qualified contracts (``non-qualified Contracts'').
    5. The minimum initial purchase payment is $5,000 for non-qualified 
Contracts and $2,000 for qualified Contracts. The minimum subsequent 
purchase payment is $500. Lesser minimums may apply in the case of 
certain retirement plans or payroll deduction or automated investment 
programs. Principal Life may limit total Contract purchase payments to 
$2,000,000.
    6. At the time of issuance, a Contract owner may elect to purchase 
the Premium Payment Credit Rider (``Credit Rider''). If the Credit 
Rider is elected, Principal Life will add a 5% payment enhancement or 
credit to the owner's Contract upon receipt of each purchase payment 
from the Contract owner during the first contract year (the 
``Credit''). After the first contract year, additional purchase 
payments will not receive a Credit. Principal Life will fund Credits 
from its general account assets and will allocate Credits among 
investment options (excluding certain fixed benefit options used for 
dollar cost averaging) in the same proportion as the applicable 
purchase payment. Principal Life will recover Credits (i) if the 
Contract owner returns the Contract for a refund during the ``free 
look'' period, and (ii) if the Contract owner elects to receive annuity 
payments prior to the third contract anniversary. Principal Life will 
not seek to recover any Credit in connection with partial withdrawals 
or surrenders of a Contract.
    7. The free look period is the 10-day period (or such longer period 
required by a state) during which a Contract

[[Page 1479]]

owner may return a Contract after it has been delivered. Upon such 
return, the Contract owner generally will receive a full refund of the 
accumulated value of the Contract, less the amount of the Credits. The 
Contract owner will retain any net earnings attributable to the Credits 
or, if there has been a net decline in the value of the Credits, will 
bear the loss from such decline. Where applicable state law requires 
that the full amount of the purchase payment be refunded, the Contract 
owner will receive the greater of that amount or the Contract value 
less, in either case, the amount of the Credits.
    8. The Contracts provide for the return of the Credit if the owner 
elects to receive annuity payments before the end of the third Contract 
year. The Contract owner will retain any net earnings attributable to 
the Credits or, if there has been a net decline in the value of the 
Credits, will bear the loss from the decline.
    9. The Credits to be recovered will be taken from the sub-accounts 
under the Contract in which the Credits are invested in the same 
proportion that the accumulated value based on such sub-accounts bears 
to the accumulated value of the Contract. The recovery will be effected 
by redeeming the number of units from each sub-account that are 
necessary to fund that sub-account's share of the recovery. The number 
of units to be redeemed in each sub-account will be calculated based on 
the unit value for each sub-account determined at the time the 
withdrawal to recover the Credit is made. In the case of early 
annuitization, the withdrawal is made on the annuitization date, which 
is the date the accumulated value is applied to make annuity payments.
    10. Contract owners may allocate their purchase payments among a 
fixed account, two different fixed, dollar cost averaging options 
(which will not be available to Contract owners who elect the Credit 
Rider), and a number of sub-accounts of the Account. Each sub-account 
invests in shares of a corresponding portfolio of an underlying mutual 
fund (``Underlying Fund''). Principal Life may, subject to compliance 
with applicable law, add other sub-accounts, eliminate or combine 
existing sub-accounts or transfer assets in one sub-account to another 
sub-account established by Principal Life.
    11. The Contracts provide for the following charges: (i) A 
withdrawal or contingent deferred sales charge (``CDSC'') as a 
percentage of amounts withdrawn attributable to purchase payments that 
have been in the Contract less than seven complete contract years, with 
the applicable percentage charge declining from a maximum of 6% for 
withdrawals attributable to purchase payments that have been in the 
Contract for completed contract years zero, one and two to 0.0% for 
contract year seven and thereafter; \1\ (ii) an annual contract fee 
that is the lesser of $30 or 2% of the accumulated value (which may be 
waived under certain circumstances); (iii) a daily mortality and 
expense risk charge in an amount equal on an annual basis to 1.25% of 
the value of each variable investment option, deducted from each sub-
account; and (iv) any applicable state or local premium taxes up to 
3.5%, depending on the Contract owner's state of residence or the state 
in which the Contract was sold. Principal Life may impose a daily 
administrative charge in an amount not to exceed on an annual basis 
0.15% of the value of each variable investment option, deducted from 
each sub-account. Principal Life imposes additional charges for an 
enhanced death benefit and other benefits provided by rider. It also 
reserves the right to impose a transaction fee for unscheduled 
withdrawals exceeding 12 in a contract year and a transfer fee for each 
unscheduled transfer. In addition, the Underlying Funds impose 
management, distribution and administrative fees which vary depending 
upon which Underlying Funds are selected. There is no withdrawal charge 
or CDSC made in connection with the annuitization of the Contract.\2\
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    \1\ With respect to the seven-year withdrawal charge schedule, 
the CDSC is 6% for years zero, 1 and 2, 5% for year 3, 4% for year 
4, 3% for year 5, 2% for year 6, and 0.0% for any year thereafter. 
There is never a withdrawal charge with respect to earnings 
accumulated in a Contract, certain other ``free withdrawal'' amounts 
or purchase payments that have been in the Contract for more than 
seven complete contract years.
    \2\ The CDSC is not applied against Credits which, for this 
purpose, are considered investment earnings, not purchase payments.
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    12. If the Credit Rider is elected, the Contracts will provide for 
a higher CDSC, namely, a percentage of amounts withdrawn attributable 
to purchase payments that have been in the Contract less than nine 
complete contract years, with the applicable percentage charge 
declining from a maximum of 8% for withdrawals attributable to purchase 
payments that have been in the Contract for completed contract years 
zero and one, to 0.0% for contract year nine and thereafter.\3\ In 
addition to the charges enumerated above, the Credit Rider provides for 
a charge payable for the first 8 contract years, in an amount equal on 
an annual basis to 0.60% of the value of each variable investment 
option, deducted from each sub-account.
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    \3\ 3 With respect to the nine-year withdrawal charge schedule, 
the CDSC is 8% for years zero and one, 7% for year 2, 6% for year 3, 
5% for year 4, 4% for year 5, 3% for year 6, 2% for year 7, 1% for 
year 8, and 0.0% for any year thereafter. There is never a 
withdrawal charge with respect to earnings accumulated in a 
Contract, certain other ``free withdrawal'' amounts or purchase 
payments that have been in the Contract more than nine complete 
contract years.
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    13. Because of the higher charges applicable to a Contract with the 
Credit Rider, the prospectus description of the Rider will include a 
statement to the effect that the amount of the Credits may be more than 
offset by the fees and charges associated with the Credit Rider. The 
prospectus also will state that there may be circumstances in which a 
Contract owner may be worse off for having the Credit Rider because of 
the higher charges. In addition, the prospectus will state that a 
purchaser of a Contract will be worse off with the Credit Rider if, at 
the time of recapture of the Credit, the Contract has experienced a 
negative investment performance. This is because the Credit recovered 
by Principal Life will not reflect the adverse performance attributable 
to the Credit, as a result of which the Contract value will be less 
than the value it would otherwise have been had the Credit not been 
made.

Applicants' Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from the provisions of the Act and the rules 
promulgated thereunder if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants request that the Commission, 
pursuant to Section 6(c) of the Act, grant the exemptions requested 
below with respect to the Contracts, and any Future Contracts funded by 
the Account or Future Accounts, that are issued by Principal Life and 
underwritten or distributed by Princor or Affiliated Broker-Dealers. 
Applicants undertake that Future Contracts will be substantially 
similar in all material respects to the Contracts. Applicants believe 
that the requested exemptions are appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policies and provisions of the Act.
    2. Applicants previously have received exemptive relief to permit,

[[Page 1480]]

with respect to an earlier class of contracts, the recapture of a 
credit in connection with exercise of a free look right.\4\ That order 
encompassed relief for ``future contracts,'' contracts substantially 
similar in all material respects to the earlier class of contracts. 
Applicants assert that the Contracts described in the current 
application and amended application differ from the prior class of 
contracts by providing more investment options and certain enhanced 
guaranteed benefits available by rider. In addition to the Credit 
Rider, the new class of Contracts may also be combined with the 
Investment Protector Plus Rider or the Enhanced Death Benefit Rider, 
options not available to the old class of contracts.\5\ Because of the 
substantial differences between the old class of contracts and the new 
class of Contracts (depending on the riders selected for the new 
class), Applicants represent that they do not believe the new Contracts 
fall within the scope of ``future contracts'' as contemplated under the 
prior order granting relief to recapture a credit. Consequently, 
Applicants are seeking the relief set forth below.
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    \4\ Principal Life Insurance Company, et al., Investment Company 
Act Release Nos. 24725 (Nov. 2, 2000) (Notice) and 24752 (Nov. 28, 
2000) (Order) (SEC File No. 812-12136).
    \5\ The Investment Protector Plus Rider provides a guaranteed 
minimum withdrawal benefit regardless of the Contract's surrender 
value, subject to various conditions including a bar on the use of 
certain sub-accounts. The Enhanced Death Benefit Rider provides an 
optional death benefit that pays the greater of the standard death 
benefit (determined in the same manner as under the old class of 
contracts) or a death benefit that has as a floor premiums paid plus 
interest at 5% per annum with an adjustment for partial withdrawals.
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    3. Applicants seek exemption pursuant to Section 6(c) from Sections 
2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder 
to the extent deemed necessary to permit Principal Life to recover 
Credits previously applied to purchase payments under the Contracts or 
Future Contracts if a Contract owner returns the Contract or Future 
Contract for a refund during the free look period or annuitizes the 
Contract prior to the end of the third contract year. The Commission 
previously has granted similar exemptive relief to permit the recovery 
of certain bonus credit amounts previously credited.
    4. 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 a ``redeemable 
security'' as any security, other than short-term paper, under the 
terms of which the holder, upon presentation to the issuer, is entitled 
to receive approximately his or her proportionate share of the issuer's 
current net assets, or the cash equivalent thereof.
    5. Applicants submit that the recovery of Credits in the 
circumstances set forth in the application does not deprive a Contract 
owner of his or her proportionate share of the issuer's current net 
assets. Applicants state that a Contract owner's interest in the 
Credits allocated to the accumulated value of his or her Contract is 
not fully vested until after the end of the third contract year. 
Applicants submit that until this period has expired and the Credits 
have fully vested, Principal Life retains the rights and interests 
described herein. Therefore, Applicants represent that when Principal 
Life recovers any Credits, it is merely retrieving its own assets; the 
Contract owner is not deprived of a proportionate share of the 
Account's assets because the Contract owner's interest in such Credit 
has not vested in all respects.
    6. Under the Credit Rider, Principal Life provides Credits from its 
general account on a guaranteed basis. Applicants assert that in 
undertaking this financial obligation, Principal Life contemplates that 
a Contract owner will retain a Contract over an extended period, 
consistent with the long-term nature of the Contracts. Applicants 
assert that Principal Life designed its product so that it would 
recover its costs (including the Credit) over an anticipated duration 
while a Contract is in force. Applicants further assert that permitting 
a Contract owner to retain Credits upon an early annuitization could 
serve to encourage such annuitizations and the series of early 
withdrawals associated therewith in a manner inconsistent with the 
durations assumed in the design of the Contract. In addition, 
Applicants submit that permitting a Contract owner to retain Credits 
upon the exercise of the free look return could encourage the purchase 
of Contracts for a quick profit rather than with the intention of 
making a long-term investment.
    7. Applicants submit that the exemptive relief requested is 
consistent with and serves the stated purpose of the National 
Securities Markets Improvement Act of 1996 (``NSMIA'') in amending the 
Act to ``provide more effective and less burdensome regulation.'' 
Sections 26(e) and 27(i) were added to the Act to implement the 
purposes of NSMIA and Congressional intent. Applicants assert that the 
application of Credits to purchase payments under the Contracts should 
not raise any questions as to Principal Life's compliance with the 
provisions of Section 27(i). However, Applicants represent that to 
avoid any uncertainty as to full compliance with the Act, they request 
an exemption from Sections 2(a)(32) and 27(i)(2)(A) of the Act, to the 
extent deemed necessary, to permit the recovery of Credits under the 
circumstances described in the application with respect to Contracts 
and Future Contracts, 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 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 thereunder prohibits a 
registered investment company issuing a 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. Principal Life's recovery of Credits as described herein 
might arguably be viewed as involving the redemption of redeemable 
securities for a price other than one based on the current net asset 
value. Applicants believe that the recovery of Credits does not violate 
Section 22(c) and Rule 22c-1. Applicants assert that such recovery does 
not involve either of the harms that Rule 22c-1 was intended to 
eliminate or reduce, 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. These harms resulted from 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. Such 
backward pricing allowed investors to

[[Page 1481]]

take advantage of increases or decreases in net asset value that were 
not yet reflected in the price, thereby diluting the value of 
outstanding fund shares.
    9. Applicants submit that the recovery of Credits as described in 
the application and amended application does not pose such a threat of 
dilution. In effecting such recoveries, Principal Life will redeem 
accumulation units from the sub-accounts in which premiums have been 
invested on the basis of the net asset value determined at the time the 
withdrawal to recover the Credit is made. Under these circumstances, in 
Applicants' view, the recovery of the Credits does not involve 
dilution. 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 recovery of the Credits. Applicants argue that because 
neither of the harms that Rule 22c-1 was meant to address are found in 
the recovery of Credits, Rule 22c-1 and Section 22(c) should not be 
construed as applicable thereto. However, Applicants submit that to 
avoid any uncertainty in this regard, they request an exemption from 
the provisions of Section 22(c) and Rule 22c-1 to the extent deemed 
necessary to permit them to recover Credits under the Contracts and 
Future Contracts as described in the application and amended 
application.
    10. Applicants submit that their request for an order that applies 
to Future Accounts and Future Contracts that are substantially similar 
in all material respects to the Contracts and underwritten or 
distributed by Princor or Affiliated Broker-Dealers is appropriate in 
the public interest. Applicants assert that such an order would promote 
competitiveness in the variable annuity market by eliminating the need 
to file redundant exemptive applications, thereby reducing 
administrative expenses and maximizing the efficient use of Applicants' 
resources. Applicants state that investors will not receive any benefit 
or additional protection if Applicants are required repeatedly to seek 
exemptive relief presenting no issue under the Act that has not already 
been addressed. Having Applicants file additional applications would 
impair Applicants' ability to effectively take advantage of business 
opportunities as they arise. Applicants undertake that Future Contracts 
funded by the Account or Future Accounts which seek to rely on the 
order issued pursuant to the application will be substantially similar 
in all material respects to the Contracts.
    Conclusion: Section 6(c) of the Act, in pertinent part, provides 
that the Commission, by order upon application, may conditionally or 
unconditionally exempt any person, security or transaction, or any 
class or classes of persons, securities or transactions, from any 
provision or provisions of the Act, or any rule or regulation 
thereunder, 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 submit, for the reasons stated above, 
that their exemptive request meets the standards set out in Section 
6(c) of the Act and that an order should, therefore, be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-18 Filed 1-6-05; 8:45 am]
BILLING CODE 8010-01-P