[Federal Register Volume 72, Number 172 (Thursday, September 6, 2007)]
[Notices]
[Pages 51274-51281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-17573]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-27960; File No. 812-13365]


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

August 30, 2007.
AGENCY: The Securities and Exchange Commission (``Commission'').

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

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    Applicants: Minnesota Life Insurance Company (``Minnesota Life''), 
Variable Annuity Account (``Separate Account''), and Securian Financial 
Services, Inc. (``SFS'') (collectively, ``Applicants'').
    Summary of Application: Applicants seek an order pursuant to 
Section 6(c) of the 1940 Act, exempting them from the provisions of 
Sections 2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder to the extent necessary to permit recapture of certain 
credit enhancements (``Credit Enhancements'') applied to purchase 
payments made in consideration of certain deferred variable annuity 
contracts, including data pages, riders and endorsements, described 
herein that Minnesota Life intends to issue (the ``Current 
Contracts''). Applicants also request that the exemptive relief extend 
to: (1) Any deferred variable annuity contracts, including data pages, 
riders and endorsements, substantially similar to the Current Contracts 
that Minnesota Life may issue in the future (the ``Future Contracts'') 
(Current Contracts and Future Contracts referred to collectively as the 
``Contracts''); (2) any other separate accounts of Minnesota Life and 
their successors in interest (``Future Accounts'') that support the 
Contracts; and (3) any National Association of Securities Dealers, Inc. 
(``NASD'') member broker-dealers controlling, controlled by, or under 
common control with any Applicant, whether existing or created in the 
future, that in the future, may act as principal underwriter for the 
Contracts (``Future Underwriters''). The circumstances under which the 
Contracts would allow the recapture of all or a portion of certain 
Credit Enhancements (previously applied to premium payments) are where 
the Credit Enhancements were applied and: (1) The Contract owner 
exercises his or her right to cancellation or ``free look'' right to 
surrender the Contract; (2) in the event of death within twelve months 
of the Credit Enhancement being applied

[[Page 51275]]

(unless the Contract is continued under the surviving spouse benefit 
continuation option); or (3) partial withdrawal, annuitization, or 
surrender of the Contract in the first seven Contract Years, (pursuant 
to the Credit Enhancement recapture formula set forth below). A 
``Contract Year'' is a period of one year beginning with the contract 
issue date and continuing up to, but not including, the next contract 
anniversary or beginning with a contract anniversary and continuing up 
to, but not including, the next contract anniversary.
    Filing Date: The application was filed on February 15, 2007, and 
amended on August 27, 2007.
    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 September 24, 2007, 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, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants, c/o Michael P. Boyle, 
Senior Counsel, Minnesota Life Insurance Company, 400 Robert Street 
North, St. Paul, Minnesota 55101.

FOR FURTHER INFORMATION CONTACT: Ellen J. Sazzman, Senior Counsel, at 
(202) 551-6762, or Harry Eisenstein, Branch Chief, at (202) 551-6795, 
Office of Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
Application. The complete Application is available for a fee from the 
SEC's Public Reference Branch, 100 F Street, NE., Washington, DC 20549 
((202) 551-8090).

Applicants' Representations

    1. Minnesota Life is a Minnesota stock life insurance company. 
Minnesota Life was formerly known as the Minnesota Mutual Life 
Insurance Company (``Minnesota Mutual''), a mutual life insurance 
company organized in 1880 under the laws of Minnesota. Effective 
October 1, 1998, Minnesota Mutual reorganized by forming a mutual 
insurance holding company named ``Minnesota Mutual Companies, Inc.'' 
Minnesota Mutual continued its corporate existence following conversion 
to a Minnesota stock life insurance company named Minnesota Life 
Insurance Company. All of the shares of the voting stock of Minnesota 
Life are owned by a second tier intermediate stock holding company 
named ``Securian Financial Group, Inc.,'' which in turn is a wholly-
owned subsidiary of a first tier intermediate stock holding company 
named ``Securian Holding Company.'' Securian Holding Company is a 
wholly-owned subsidiary of the ultimate parent, Minnesota Mutual 
Companies, Inc.
    2. Minnesota Life is authorized to sell insurance and annuities in 
all states (except New York), and the District of Columbia. For 
purposes of the 1940 Act, Minnesota Life is the depositor and sponsor 
for the Separate Account. Minnesota Life also serves as depositor for 
several other separate accounts. Minnesota Life may establish one or 
more additional Future Accounts for which it will serve as depositor.
    3. Minnesota Life established the Separate Account as a segregated 
investment account under Minnesota law on September 10, 1984. Under 
Minnesota law, the assets of the Separate Account attributable to the 
Separate Account Contracts and any other variable annuity contracts 
through which interests in the Separate Account are issued are owned by 
Minnesota Life, but are held separately from all other assets of 
Minnesota Life, for the benefit of the owners of, and the persons 
entitled to payment under, Contracts issued through the Separate 
Account. Consequently, such assets are not chargeable with liabilities 
arising out of any other business that Minnesota Life may conduct. 
Income, gains and losses, realized or unrealized, from each sub-account 
of the Separate Account (described below), are credited to or charged 
against that sub-account without regard to any other income, gains or 
losses of Minnesota Life. The Separate Account is a ``separate 
account'' as defined by Section 2(a)(37) of the 1940 Act, is registered 
with the Commission as a unit investment trust (File No. 811-5626), and 
interests in the Separate Account offered through the Contracts are 
registered under the Securities Act of 1933 on Form N-4.
    4. The Separate Account currently is divided into a number of sub-
accounts. Each sub-account invests exclusively in shares representing 
an interest in a separate corresponding investment portfolio of one of 
several series-type, open-end management investment companies. The 
assets of the Separate Account support one or more varieties of 
variable annuity contracts. Minnesota Life may issue Future Contracts 
through the Separate Account. Minnesota Life also may issue Contracts 
through Future Accounts.
    5. SFS is a wholly-owned subsidiary of Securian Financial Group, 
Inc., which is in turn a wholly-owned subsidiary of Securian Holding 
Company, which is a wholly-owned subsidiary of Minnesota Mutual 
Companies, Inc. SFS serves as the principal underwriter of Minnesota 
Life separate accounts registered as unit investment trusts under the 
1940 Act, including the Separate Account, and is the distributor of 
variable life insurance policies and variable annuity contracts issued 
through such separate accounts, including the Contracts. SFS is 
registered as a broker-dealer under the Securities Exchange Act of 1934 
and is a member of the NASD. SFS may act as principal underwriter for 
Future Accounts of Minnesota Life and as distributor for Future 
Contracts. Future Underwriters also may act as principal underwriter 
for the Accounts and as distributor for any of the Contracts.
    6. The Contracts are deferred combination variable and fixed 
annuity contracts that Minnesota Life may issue to individuals on a 
``non-qualified'' basis or in connection with certain types of 
retirement plans that receive favorable federal income tax treatment 
under the Internal Revenue Code of 1986, as amended. The Contracts make 
available a number of sub-accounts of the Separate Account to which an 
owner may allocate net premium payments and associated bonus credits, 
called Credit Enhancement(s), which are described below.
    7. The Contracts also offer fixed-interest allocation options under 
which Minnesota Life credits guaranteed rates of interest for various 
periods. These include several dollar cost averaging (DCA) fixed 
account options and guaranteed term account options. A market value 
adjustment may apply to the fixed-interest allocation options under the 
Contracts in certain circumstances.
    8. An owner's initial purchase payment must be at least $10,000. 
Thereafter, an owner may choose the amount and frequency of purchase 
payments, except that the minimum subsequent purchase payment is $500 
($100 for automatic payment plans). An owner may make transfers of 
Contract Value among and between the sub-accounts and, subject to 
certain restrictions, among and between the sub-accounts and the fixed-
interest

[[Page 51276]]

allocation options at any time. Contract Value is the sum of a Contract 
owner's values in the DCA fixed accounts, Fixed Accounts, guarantee 
periods of the guaranteed term account and sub-accounts of the Separate 
Account on any valuation date before the annuity commencement date.
    9. The Contracts offer an owner a variety of annuity payment 
options. The owner may annuitize any time following the second contract 
anniversary. If a deferred sales charge would otherwise apply to 
Contract withdrawals at the time of annuitization, the deferred sales 
charge will be waived for amounts applied to provide annuity payments. 
In the event of an owner's (or the annuitant's, if any owner is not an 
individual) death prior to annuitization, the beneficiary may elect to 
receive the death benefit in the form of one of several annuity payment 
options instead of a lump sum.
    10. Minnesota Life may deduct a premium tax charge from premium 
payments in certain states, but otherwise deducts a charge for premium 
taxes upon annuitization of the Contract, depending upon the 
jurisdiction. The Contracts provide for an annual administrative charge 
of $35 that Minnesota Life deducts from the Contract's accumulation 
value on each contract anniversary and upon a full surrender of a 
Contract if the greater of: (a) Contract Value or (b) purchase payments 
less withdrawals, is less than $75,000. A daily mortality and expense 
risk charge is deducted from the assets of the Separate Account at a 
rate described in the Contract. In addition, the mortality and expense 
risk charge is reduced after Contract Year 9 and later. As a result, 
the mortality and expense risk charge for the base Contract is 1.70% 
annually for Contract Years 1 through 9; to 1.10% for Contract Years 10 
and after. A daily administrative charge is deducted from the assets of 
the Separate Account at an annual rate of 0.15%. The Contracts provide 
for a charge of $10 for each transfer of Contract Value in excess of 
twelve transfers per Contract Year (which charge Minnesota Life 
currently waives). The Contracts have a deferred sales charge which is 
applicable on surrender and withdrawal of accumulation values as 
described more fully below. A quarterly charge may be assessed 
depending on the type of optional living benefit elected, if any.
    11. Minnesota Life does not deduct sales load from purchase 
payments before allocating them to a Contract owner's Contract Value. 
If a Contract owner withdraws Contract Value, Minnesota Life may deduct 
a contingent deferred sales charge, which is referred to as a deferred 
sales charge (``DSC''). The DSC is equal to a percentage of each 
purchase payment surrendered or withdrawn. The DSC is separately 
calculated and applied to each purchase payment at any time that the 
purchase payment (or part of the purchase payment) is surrendered or 
withdrawn. The amount of the DSC depends on how long a Contract owner's 
purchase payment has been held under the Contract. The DSC applicable 
to each purchase payment diminishes to zero over time as the purchase 
payment remains in the Contract.
    12. The Contracts offer a standard DSC schedule as follows:

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Contract Years Since Payment..............    0-1    1-2    2-3    3-4    4-5    5-6    6-7    7-8    8-9     9+
Deferred Sales Charge.....................   6.5%   6.5%   5.9%   5.9%   5.9%     5%     4%     3%     2%     0%
----------------------------------------------------------------------------------------------------------------

    The DSC does not apply to:
     The annual free withdrawal amount (as discussed below).
     Amounts withdrawn to pay the annual maintenance fee, any 
transfer charge or any periodic charges for optional riders.
     Any amount attributable to recaptured Credit Enhancements.
     Amounts payable as a death benefit upon the death of the 
owner or the annuitant, if applicable.
     Amounts applied to provide annuity payments under an 
annuity option.
     Amounts withdrawn because of an excess contribution to a 
tax-qualified contract (including, for example, IRAs and tax sheltered 
annuities).
     The difference between any required minimum distribution 
due (according to Internal Revenue Service rules) on the Contract and 
any annual free withdrawal amount allowed.
     A surrender or withdrawal requested any time after the 
first Contract Anniversary and if a Contract owner meets the 
requirements of a qualifying confinement in a hospital or medical care 
facility.
     A surrender or withdrawal requested any time after the 
first Contract Anniversary and in the event that a Contract owner is 
diagnosed with a terminal illness as described in the Contract.
    13. The amount withdrawn plus any DSC is deducted from the Contract 
Value. The amount of the DSC is determined from the percentages shown 
in the table above. For purposes of determining the amount of DSC, 
withdrawal amounts will be allocated to Contract gain up to the free 
withdrawal amount, and then to purchase payments on a first-in, first-
out, basis. The amount of the DSC is determined by: (a) Calculating the 
number of years each purchase payment being withdrawn has been in the 
Contract; (b) multiplying each purchase payment being withdrawn by the 
appropriate DSC percentage from the table; and (c) adding the DSC from 
all purchase payments calculated in (b). Unless otherwise instructed, 
the DSC will be deducted pro rata from all sub-accounts. During the 
first Contract Year, the annual free withdrawal amount is 10% of 
purchase payments, measured at the time of withdrawal, less any prior 
withdrawals made in that Contract Year. Thereafter, the annual free 
withdrawal amount is equal to 10% of the sum of purchase payments 
received by Minnesota Life within 9 years and not previously withdrawn 
as of the most recent Contract Anniversary. The free withdrawal amount 
does not apply when a Contract is surrendered.
    14. Subject to state availability, an owner may elect to purchase 
optional living benefit riders. The optional Guaranteed Income Provider 
Benefit (the ``GIPB Rider'') is a minimum guaranteed income benefit 
rider. It guarantees that a minimum amount of annuity income will be 
available to the owner, regardless of fluctuating market conditions, if 
the owner annuitizes his or her Contract on or after the rider's 
exercise date. The minimum guaranteed amount of annuity income will 
depend on the amount of purchase payments made to the Contract and any 
Credit Enhancements applied to the Contract, if applicable, during the 
specified number of Contract Years after the owner purchases the GIPB 
Rider; how the owner allocates the Contract Value among the sub-
accounts and fixed-interest allocations; and any withdrawals and 
transfers the owner makes while the GIPB Rider is in effect. A daily 
charge for the GIPB Rider is deducted from the assets of the Separate 
Account at an annual rate of 0.50%. The charge does not apply after 
annuitization.
    15. The optional guaranteed minimum withdrawal benefit rider (the 
``GMWB Rider'') guarantees that a

[[Page 51277]]

certain amount may be withdrawn annually regardless of market 
performance and even if the Contract Value is reduced to zero. The 
Contract offers the guaranteed withdrawal amount until the GMWB Base 
(as defined in the GMWB Rider) is completely recovered. The GMWB Rider 
is subject to conditions and limitations. Minnesota Life will deduct a 
maximum annual charge of 1.00% (currently, 0.50%) of the GMWB Base (as 
set forth in the GMWB Rider). One quarter of the GMWB Rider charge will 
be taken on the GMWB effective date and at the end of every three 
months thereafter. The charge does not apply after annuitization.
    16. The optional Guaranteed Living Withdrawal Benefit Rider (``GLWB 
Rider'') also guarantees that a certain amount may be withdrawn 
annually regardless of market performance and even if the Contract 
Value is reduced to zero. However, the GLWB Rider guarantees the 
withdrawal amounts for the life of the Contract owner. The GLWB Rider 
is subject to conditions and limitations. Minnesota Life will deduct an 
annual charge of 0.60% of Contract Value. One quarter of the GLWB Rider 
charge will be taken on the GLWB Rider effective date and at the end of 
every three months thereafter. The charge does not apply after 
annuitization.
    17. If an owner dies before the annuity start date, the Contract 
provides for a death benefit payable to a beneficiary computed as of 
the date Minnesota Life receives written notice and due proof of death. 
The death benefit payable to the beneficiary depends on the death 
benefit option selected by the owner. The options are the guaranteed 
minimum death benefit which is included as part of the base Contract; 
or one of two optional death benefits: the Highest Anniversary Value 
death benefit; or the Premier Death Benefit, as each is described 
below. In the future, Minnesota Life may offer other death benefit 
riders.
    18. The guaranteed minimum death benefit is part of the base 
Contract and is the ``standard'' death benefit. It equals the greater 
of the: (1) Contract Value; or, (2) the total purchase payments and 
Credit Enhancements, adjusted pro rata for withdrawals and transfers, 
less total Credit Enhancements applied within twelve months prior to 
death. The charge associated with this base Contract death benefit is 
built into the mortality and expense risk charge for the Contract.
    19. The Highest Anniversary Value (HAV) death benefit is an 
optional death benefit which may be elected. It equals the greater of 
the: (1) Contract Value; and, (2) the previous highest anniversary 
value adjusted for any purchase payments and Credit Enhancements, 
reduced pro rata for withdrawals and transfers, less Credit 
Enhancements applied within twelve months prior to death. The daily 
charge for the HAV death benefit is the annual rate of 0.15% of the 
variable Contract Value and is deducted from amounts held in the 
Separate Account. The charge does not apply after annuitization.
    20. The Premier Death Benefit equals the greater of: (1) The HAV 
death benefit value or (2) the 5% Death Benefit Increase Value. The 5% 
Death Benefit Increase Value is equal to (on the date the death benefit 
is determined) the sum of: (a) The portion of the Contract Value in any 
fixed account and guaranteed term account; and (b) purchase payments 
and transfers into the Separate Account adjusted pro rata for 
withdrawals or transfers out of the Separate Account, accumulated to 
the earlier of the date Minnesota Life receives due proof of death or 
the Contract Anniversary following the Contract owner's eightieth 
birthday at an interest rate of 5% compounded annually. The sum of (a) 
and (b) is reduced by any Credit Enhancements granted within the 
previous 12 months. The 5% Death Benefit Increase Value shall not 
exceed 200% of the sum of purchase payments adjusted pro rata for any 
amounts previously withdrawn. The charge for the Premier Death Benefit 
is the annual rate of 0.35% of the variable Contract Value and is 
deducted from amounts held in the Separate Account. This charge does 
not apply after annuitization.
    21. The Contract is a ``bonus'' annuity. Minnesota Life will credit 
the Contract value allocated to the sub-accounts and the fixed-interest 
accounts with a Credit Enhancement in an amount equal to a percentage 
of each purchase payment made during the first Contract Year. The 
Credit Enhancement amount is treated as earnings for federal tax 
purposes. Minnesota Life allocates the Credit Enhancement for the 
applicable purchase payment among the sub-accounts and fixed-interest 
accounts the owner selects in proportion to the purchase payment 
allocations. Minnesota Life applies the credit to an owner's Contract 
Value either by ``purchasing'' accumulation units of an appropriate 
sub-account or adding to the owner's fixed-interest allocation option 
values. The Credit Enhancement equals 7% of each purchase payment made 
in the first Contract Year. Minnesota Life reserves the right to 
increase or decrease the amount of the Credit Enhancement or 
discontinue the Credit Enhancement in the future.
    22. Minnesota Life recaptures or retains the Credit Enhancements in 
several circumstances. First, Minnesota Life recaptures or retains 100% 
of the Credit Enhancements in the event that the owner exercises his or 
her cancellation right during the ``free look'' period. Second, 
Minnesota Life recaptures the Credit Enhancements applied to purchase 
payments made within twelve months of the date a death benefit is paid 
(unless the Contract is continued under the surviving spouse benefit 
continuation option). Third, Minnesota Life also will recapture part or 
all of the applicable Credit Enhancement upon surrender, withdrawal or 
where amounts are applied to provide annuity payments, within seven 
years of the Contract effective date.
    23. In the event of a surrender, withdrawal or where amounts are 
applied to provide annuity payments, within seven years of the Contract 
effective date, Minnesota Life will recapture or deduct an amount equal 
to a percentage of the Credit Enhancement(s) not yet vested. On each 
Contract Anniversary, an amount equal to 14.2857% or one-seventh (1/7) 
of the Credit Enhancement(s) not previously recaptured will vest. All 
Credit Enhancements will be fully vested at the end of seven years from 
the Contract effective date. The value of the Credit Enhancement(s) 
only fully vests, or belongs irrevocably to the owner, when the 
recapture period for the Credit Enhancement expires. The following 
table summarizes the vesting schedule and recapture percentage of the 
Credit Enhancements:

------------------------------------------------------------------------
                                                              Credit
                                 Percentage                 enhancement
        Contract year              vested       Fraction     recapture
                                                            percentage
------------------------------------------------------------------------
0 (issue up to 1st                     0               0        100
 anniversary)................

[[Page 51278]]

 
1............................         14.2857        1/7         85.7143
2............................         28.5714        2/7         71.4286
3............................         42.8571        3/7         57.1429
4............................         57.1429        4/7         42.8571
5............................         71.4286        5/7         28.5714
6............................         85.7143        6/7         14.2857
7+...........................        100             7/7          0
------------------------------------------------------------------------

    24. The percentage that will be recaptured may be calculated by 
subtracting any applicable free withdrawal amount from the amount 
requested as a withdrawal, surrender or amount to be applied as annuity 
payments, and dividing the result by the Contract Value immediately 
prior to the requested transaction. The amount of the Credit 
Enhancements that will be recaptured if the owner takes a withdrawal, 
surrender the contract or annuitize the contract in the first seven 
years may be calculated with the following formula:
[GRAPHIC] [TIFF OMITTED] TN06SE07.000

    25. The dollar amount of the Credit Enhancement recaptured will 
never exceed the dollar amount of the Credit Enhancement added to the 
contract. In other words, Minnesota Life does not recapture the 
investment gain/loss--only the dollar amount of the Credit Enhancement 
added to the Contract. Minnesota Life will not recapture Credit 
Enhancements attributable to amounts withdrawn representing the annual 
free withdrawal amount.
    26. With regard to variable Contract Value, several consequences 
flow from the foregoing. First, increases in the value of accumulation 
units representing Credit Enhancements accrue to the owner immediately, 
but the initial value of such units only belongs to the owner when, or 
to the extent that, the Credit Enhancements vest. Second, decreases in 
the value of accumulation units representing Credit Enhancements do not 
diminish the dollar amount of Contract Value subject to recapture. 
Therefore, additional accumulation units must become subject to 
recapture as their value decreases. Stated differently, the 
proportionate share of any owner's variable Contract Value (or the 
owner's interest in the Separate Account) that Minnesota Life needs to 
``recapture'' to avoid anti-selection increases as variable Contract 
Value (or the owner's interest in the Separate Account) decreases. This 
has the potential to dilute somewhat the contract owner's interest in 
his/her contract as compared to other contract owners who do not 
trigger the recapture provisions. (Anti-selection in this context 
refers to the risk to Minnesota Life that contract owners with a 
declining contract value and who choose to withdraw or surrender their 
contract would be doing so at a point in time where accumulation units 
have a lower value.) Lastly, because it is not administratively 
feasible to track the unvested value of Credit Enhancements in the 
Separate Account, Minnesota Life deducts the daily mortality and 
expense risk charge and the daily administrative charge from the entire 
net asset value of the Separate Account. As a result, the daily 
mortality and expense risk charge, the daily administrative charge, and 
any optional benefit charges paid by any owner may be greater than that 
which he or she would pay without the Credit Enhancement. In other 
words, any asset based fees taken on a dollar amount that is 
subsequently recaptured cannot be refunded to contract owners.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to Section 6(c) of the 1940 Act to exempt Applicants with respect to 
(1) the Contracts, (2) Future Accounts that support the Contracts, and 
(3) Future Underwriters of the Contracts from the provisions of 
Sections 2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder, to the extent necessary to permit the recapture of all or a 
portion of the Credit Enhancements (previously applied to premium 
payments) where the Credit Enhancements were applied and (1) the 
Contract owner exercises his or her ``free look'' right, (2) in the 
event of death within twelve months of the Credit Enhancements being 
applied (unless the Contract is continued under the surviving spouse 
benefit continuation option), or (3) partial withdrawal, annuitization, 
or surrender of the Contract in the first seven Contract Years 
(pursuant to the Credit Enhancement recapture formula described above).
    2. Section 6(c) of the 1940 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 1940 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 1940 Act.
    3. Subsection (i) of Section 27 provides that Section 27 does not 
apply to any registered separate account supporting variable annuity 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of 
subsection (i). Paragraph (2) provides that it shall be unlawful for a 
registered separate account or sponsoring insurance company to sell a 
variable annuity contract supported by the separate account unless the 
`` * * * contract is a redeemable security; and * * * [t]he insurance 
company complies with Section 26(e) * * *. ''
    4. 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 proportionate share of the issuer's current net 
assets, or the cash equivalent thereof.

[[Page 51279]]

    5. Rule 22c-1 imposes requirements with respect to both the amount 
payable on redemption of a redeemable security and the time as of which 
such amount is calculated. In the pertinent part, Rule 22c-1 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 
of such security.
    6. Applicants submit that to the extent that the recapture of the 
Credit Enhancement arguably could be seen as a discount from the net 
asset value, or arguably could be viewed as resulting in the payment to 
an owner of less than the proportional share of the issuer's net 
assets, in violation of Sections 2(a)(32) or 27(i)(2)(A) of the 1940 
Act, the Credit Enhancement recapture would then trigger the need for 
relief absent some exemption from the 1940 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), 27(c)(1), 
27(c)(2) and 27(d) of the 1940 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. Applicants 
assert, however, that the Credit Enhancement recapture is not a sales 
load but a recapture of a Credit Enhancement previously applied to an 
owner's purchase payments. Minnesota Life provides the Credit 
Enhancement from its general account on a guaranteed basis. The 
Contracts are designed to be long-term investment vehicles. In 
undertaking this financial obligation, Minnesota Life contemplates that 
an owner will retain a Contract over an extended period, consistent 
with the long-term nature of the Contracts. Minnesota Life contends 
that it designed the Contract so that it would recover its costs 
(including the Credit Enhancements) over an anticipated duration while 
a Contract is in force. If an owner withdraws his or her money during 
the free look period, a death benefit is paid, or a withdrawal or 
surrender is made before this anticipated period, Minnesota Life 
asserts it must recapture the Credit Enhancement subject to recapture 
in order to avoid a loss.
    7. Applicants submit that the proposed Credit Enhancement would not 
violate Sections 2(a)(32) or 27(i)(2)(A) of the 1940 Act. Minnesota 
Life would grant Credit Enhancements out of its general account assets 
and the amount of the Credit Enhancement (although not the earnings on 
such amounts) would remain Minnesota Life's until such amounts vest 
with the owner. Until the appropriate recapture period expires, 
Minnesota Life retains the right to and interest in each owner's 
Contract Value representing the dollar amount of any unvested Credit 
Enhancement. Therefore, Applicants submit that if Minnesota Life 
recaptures any Credit Enhancements or part of a Credit Enhancement in 
the circumstances described above, it would merely be retrieving its 
own assets. Applicants further submit that to the extent that Minnesota 
Life may grant and recapture Credit Enhancements in connection with 
variable Contract Value, it would not, at either time, deprive any 
owner of his or her then proportionate share of the Separate Account's 
assets.
    8. Applicants further submit that the dynamics of the proposed 
Credit Enhancements would not violate Section 2(a)(32) or 27(i)(2)(A) 
of the 1940 Act because the recapture of Credit Enhancements would not, 
at any time, deprive an owner of his or her proportionate share of the 
current net assets of the Separate Account. Section 2(a)(32) defines a 
redeemable security as one ``under the terms of which the holder, upon 
presentation to the issuer, is entitled to receive approximately his 
proportionate share of the issuer's current net asset value.'' 
Applicants assert that taken together, these two sections of the 1940 
Act do not require that the holder receive the exact proportionate 
share that his or her security represented at a prior time. Therefore, 
Applicants submit that the fact that the proposed Credit Enhancement 
provisions have a dynamic element that may cause the relative ownership 
positions of Minnesota Life and a Contract owner to shift due to 
Separate Account performance and the vesting schedule of such Credit 
Enhancements, would not cause the provisions to conflict with Sections 
2(a)(32) or 27(i)(2)(A). Nonetheless, in order to avoid any uncertainty 
as to full compliance with the 1940 Act, Applicants seek exemptions 
from these two sections.
    9. Minnesota Life's granting of Credit Enhancements would have the 
result of increasing an owner's Contract Value in a way that arguably 
could be viewed as the purchase of an interest in the Separate Account 
at a price below the current net asset value. Similarly, Minnesota 
Life's recapture of any Credit Enhancements arguably could be viewed as 
the redemption of such an interest at a price above the current net 
asset value. If such is the case, then the Credit Enhancements arguably 
could be viewed as conflicting with Rule 22c-1. Applicants contend that 
these are not correct interpretations or applications of these 
statutory and regulatory provisions. Applicants also contend that the 
Credit Enhancements do not violate Rule 22c-1.
    10. Rule 22c-1 was intended to eliminate or reduce, as far as was 
reasonably practicable: (1) 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 at a price 
above net asset value; or (2) other unfair results, including 
speculative trading practices. Applicants submit that the industry and 
regulatory concerns prompting the adoption of Rule 22c-1 were primarily 
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 permitted 
certain 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 shares.
    11. Applicants submit that the Credit Enhancements do not give rise 
to either of the two concerns that Rule 22c-1 was designed to address. 
First, Applicants contend that the proposed Credit Enhancements pose no 
such threat of dilution. An owner's interest in his or her Contract 
Value or in the Separate Account would always be offered at a price 
based on the net asset value next calculated after receipt of the 
order. The granting of a Credit Enhancement does not reflect a 
reduction of that price. Instead, Minnesota Life would purchase with 
its general account assets, on behalf of the owner, an interest in the 
Separate Account equal to the Credit Enhancement. Because the Credit 
Enhancement will be paid out of the general account assets, not the 
Separate Account assets, Applicants submit that no dilution will occur 
as a result of the Credit Enhancement. Recaptures of Credit 
Enhancements result in a redemption of Minnesota Life's interest in an 
owner's Contract Value or in the Separate Account at a price determined 
based on the Separate Account's current net asset value and not at an 
inflated price. Moreover, the amount recaptured will always equal the 
amount that Minnesota Life paid from its general account for the Credit 
Enhancement.

[[Page 51280]]

Similarly, although an owner is entitled to retain any investment gains 
attributable to the Credit Enhancement, the amount of such gains would 
always be computed at a price determined based on net asset value.
    12. Second, Applicants submit that speculative trading practices 
calculated to take advantage of backward pricing will not occur as a 
result of Minnesota Life's recapture of the Credit Enhancement. 
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 importantly, the 
Credit Enhancement recapture simply does not create the opportunity for 
speculative trading.
    13. Applicants submit that Rule 22c-1 should have no application to 
the Credit Enhancement available, as neither of the harms that Rule 
22c-1 was intended to address arise in connection with the proposed 
Credit Enhancement. Nonetheless, in order to avoid any uncertainty as 
to full compliance with the 1940 Act, Applicants request an exemption 
from the provisions of Rule 22c-1.
    14. Applicants submit that the Commission should grant the 
exemptions requested in this Application even if the Credit Enhancement 
arguably conflicts with Sections 2(a)(32) or 27(i)(2)(A) of the 1940 
Act or Rule 22c-1 thereunder. Applicants assert that the Credit 
Enhancement is generally beneficial to an owner. The recapture tempers 
this benefit somewhat, but unless the owner dies very soon after 
Contract issue, the owner retains the ability to avoid the Credit 
Enhancement recapture in the circumstances described herein. While 
there would be a small downside in a declining market where losses on 
the Credit Enhancement amount would vest with him or her immediately, 
it is the converse of the benefits an owner would receive on the Credit 
Enhancement amounts in a rising market because earnings on the Credit 
Enhancement amount vest with him or her immediately. As any earnings on 
Credit Enhancements applied would not be subject to recapture and thus 
would be immediately available to an owner, likewise any losses on 
Credit Enhancements would also not be subject to recapture and thus 
would be immediately available to an owner. Applicants submit that the 
Credit Enhancement recapture does not diminish the overall value of the 
Credit Enhancement.
    15. Applicants assert that the Credit Enhancement recapture 
provision is necessary for Minnesota Life to offer the Credit 
Enhancement and avoid anti-selection against it. Applicants submit it 
would be unfair to Minnesota Life to permit an owner to keep his or her 
Credit Enhancement upon his or her exercise of the Contract's ``free 
look'' provision. Because no DSC applies to the exercise of the ``free 
look'' provision, the owner could obtain a quick profit in the amount 
of the Credit Enhancement at Minnesota Life's expense by exercising 
that right. Similarly, the owner could take advantage of the Credit 
Enhancement by taking withdrawals within the recapture period, because 
the cost of providing the Credit Enhancement is recouped through 
charges imposed over a period of years. Likewise, because no additional 
DSC applies upon death of an owner (or annuitant), a death shortly 
after the award of Credit Enhancement would afford an owner or a 
beneficiary a similar profit at Minnesota Life's expense.
    16. Applicants submit that in the event of such profits to an owner 
or beneficiary, Minnesota Life could not recover the cost of granting 
the Credit Enhancements. This is because Minnesota Life intends to 
recoup the costs of providing the Credit Enhancement through the 
charges under the Contract, particularly the daily mortality and 
expense risk charge and the daily administrative charge. Applicants 
assert that if the profits described above are permitted, an owner 
could take advantage of them, reducing the base from which the daily 
charges are deducted and greatly increasing the amount, and cost, of 
Credit Enhancements that Minnesota Life must provide. Therefore, the 
recapture provisions are a price of offering the Credit Enhancements. 
Applicants submit that Minnesota Life simply cannot offer the proposed 
Credit Enhancements without the ability to recapture those Credit 
Enhancements in the limited circumstances described herein.
    17. Applicants state that the Commission's authority under Section 
6(c) of the 1940 Act to grant exemptions from various provisions of the 
1940 Act and rules thereunder is broad enough to permit orders of 
exemption that cover classes of unidentified persons. Applicants 
request an order of the Commission that would exempt them, Minnesota 
Life's successors in interest, Future Accounts and Future Underwriters 
from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the 1940 
Act and Rule 22c-1 thereunder with respect to the Contracts. The 
exemption of these classes of persons is appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act 
because all of the potential members of the class could obtain the 
foregoing exemptions for themselves on the same basis as the 
Applicants, but only at a cost to each of them that is not justified by 
any public policy purpose. As discussed below, the requested exemptions 
would only extend to persons that in all material respects are the same 
as the Applicants. Applicants submit that the Commission has previously 
granted exemptions to classes of similarly situated persons in various 
contexts and in a wide variety of circumstances, including class 
exemptions for recapturing bonus-type credits under variable annuity 
contracts.
    18. Applicants represent that any Future Contracts will be 
substantially similar in all material respects to the Current 
Contracts, but particularly with respect to the Credit Enhancements and 
recapture of Credit Enhancements and that each factual statement and 
representation about the Credit Enhancement feature will be equally 
true of any Contracts in the future. Applicants also represent that 
each material representation made by them about the Separate Account 
and SFS will be equally true of Future Accounts and Future 
Underwriters, to the extent that such representations relate to the 
issues discussed in the Application. In particular, each Future 
Underwriter will be registered as a broker-dealer under the Securities 
Exchange Act of 1934 and be an NASD member.
    19. Based upon the foregoing, Applicants submit that the proposed 
Credit Enhancement involves none of the abuses to which provisions of 
the 1940 Act and rules thereunder are directed. The owner will always 
retain the investment experience attributable to the Credit Enhancement 
and will retain the principal amount in all cases except under the 
circumstances described herein. Further, Applicants assert that 
Minnesota Life should be able to recapture such Credit Enhancement to 
limit potential losses associated with such Credit Enhancements.

Conclusions

    Applicants submit that the exemptions requested are necessary or 
appropriate in the public interest, consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the 1940 Act, and consistent with and supported by Commission 
precedent. Applicants also submit that the

[[Page 51281]]

provisions for recapture of any Credit Enhancement under the Contracts 
does not violate Section 2(a)(32) and 27(i)(2)(A) of the 1940 Act and 
Rule 22c-1 thereunder.
    Applicants hereby request that the Commission issue an order 
pursuant to Section 6(c) of the 1940 Act to exempt the Applicants with 
respect to (1) the Contracts, (2) Future Accounts that support the 
Contracts, and (3) Future Underwriters from the provisions of Sections 
2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder, to 
the extent necessary to permit the recapture of all or a portion of the 
Credit Enhancement(s) (previously applied to purchase payments) where 
the credit was applied and (1) the Contract owner exercises his or her 
``free look'' right, (2) in the event of death within twelve months of 
the Credit Enhancement being applied (unless the Contract is continued 
under the surviving spouse benefit continuation option), or (3) partial 
withdrawal, annuitization, or surrender of the Contract in the first 
seven Contract Years (pursuant to the Credit Enhancement recapture 
formula described above).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-17573 Filed 9-5-07; 8:45 am]
BILLING CODE 8010-01-P