[Federal Register Volume 73, Number 48 (Tuesday, March 11, 2008)]
[Notices]
[Pages 13052-13057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4686]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-28181; File No. 812-13423]


CUNA Mutual Insurance Society, et al; Notice of Application

March 4, 2008.
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'' or ``1940 
Act'') granting exemptions from the provisions of Sections 2(a)(32) and 
27(i)(2)(A) of the Act and Rule 22c-1 thereunder.

-----------------------------------------------------------------------

     Applicants: CUNA Mutual Insurance Society (``Company''), CUNA 
Mutual Variable Annuity Account (``Variable Account'') and CUNA 
Brokerage Services, Inc. (``CUNA Brokerage'').
     Summary of Application: Applicants seek an order under Section 
6(c) of the Act, exempting them from Sections 2(a)(32) and 27(i)(2)(A) 
of the Act and Rule 22c-1 thereunder, to permit, the recapture of 
credits previously applied to purchase payments of certain flexible 
premium deferred variable annuity contracts issued by the Company (the 
``Contracts'') under the following circumstances: (1) If the Contract 
owner (``Owner'') returns the Contract during the right to examine 
period; or (2) within twelve (12) months of the annuitant's death when 
the Company pays a death benefit. Applicants further request that the 
exemptive relief extend to: (1) any other variable annuity contracts 
that the Company may issue in the future (``Future Contracts'') that 
are substantially similar in all material respects to the Contracts, 
and are funded through the Variable Account or through other separate 
accounts of the Company (``Future Accounts''); and (2) any other 
broker-dealer, which is a member of the Financial Industry Regulatory 
Authority, Inc. (``FINRA'') and which in the future may act as 
distributor of and/or principal underwriter for, the Contracts or 
Future Contracts offered through the Variable Account or Future 
Accounts (``Future Underwriters'').
     Filing Date: The application was filed on September 7, 2007 and 
amended and restated on February 5, 2008.
     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 March 31, 2008, 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, 100 F Street, NE., Washington, DC 20549-
1090. Applicants, c/o Pamela M. Krill, Esq., CUNA Mutual Insurance 
Society, 5910 Mineral Point Road, Madison, Wisconsin 53705.

FOR FURTHER INFORMATION CONTACT: Sally Samuel, Senior Counsel, or Joyce 
M. Pickholz, Branch Chief, Office of Insurance Products, Division of 
Investment Management at 202-551-6795.

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, 100 F Street, NE., Washington, DC 
20549 (tel. (202) 551-8090).

Applicants' Representations

    1. The Company is a mutual life insurance company originally 
organized

[[Page 13053]]

under the laws of Wisconsin in 1935. Effective May 3, 2007, the Company 
was redomesticated in Iowa.
    2. Effective January 1, 2008, CUNA Mutual Life Insurance Company 
merged into the Company. Upon consummation of the merger, CUNA Mutual 
Life Insurance Company's separate corporate existence ceased by 
operation of law, and the Company assumed legal ownership of all of the 
assets of CUNA Mutual Life Insurance Company, including the Variable 
Account and its assets.
    3. The Variable Account was established by CUNA Mutual Life 
Insurance Company as a separate account on December 14, 1993. The 
Variable Account is registered with the Commission as a unit investment 
trust under the 1940 Act. The Variable Account is domiciled in the 
State of Iowa and is a separate account under Iowa law.
    4. The Variable Account is divided into 15 subdivisions (the 
``Subaccounts''), each of which invests only in shares of a designated 
portfolio of certain management investment companies (the ``Funds'') 
that serve as variable investment options under the Contracts.
    5. CUNA Brokerage is an affiliate of the Company. CUNA Brokerage is 
registered as a broker-dealer with the Commission under the Securities 
Exchange Act of 1934, as well as with the securities commissions in the 
states in which it operates. It is a member of FINRA. CUNA Brokerage 
serves as distributor and principal underwriter for the Contracts.
    6. The Contracts are flexible premium deferred variable annuity 
contracts, issued by the Company and funded through the Variable 
Account, that have been registered with the Commission under the 
Securities Act of 1933, as amended, (File No. 333-148426). The 
Contracts may be sold to or in connection with retirement plans that do 
not qualify for special tax treatment, as well as retirement plans that 
qualify for special tax treatment under the Internal Revenue Code of 
1986, as amended (the ``Code''). During the accumulation period of a 
Contract, Owners may allocate funds to one or more of the Subaccounts 
and/or to the fixed account. During the payout period, the Contracts 
provide for a variety of fixed and variable income payout options.
    7. Owners can select one of several different charge structures, 
each referred to as a ``Class.'' Each Class imposes different levels of 
surrender charges, and mortality and expense risk charges, as described 
more fully below. The Class must be selected before a Contract is 
issued; once the Contract is issued, the Class cannot be changed.
    8. The Owner determines at the time of application for a Contract 
how purchase payments will be allocated among the Subaccounts and/or 
the fixed account. An allocation to a Subaccount must be for at least 
1% of a purchase payment and be in whole percentages. An allocation to 
the fixed account must be for at least $1,000. The ``Contract Value,'' 
which is the sum of the amounts of contract value in the fixed account 
and in the Variable Account as of the end of the valuation period, will 
vary with the investment performance of the Subaccounts selected. The 
Owner bears the entire risk for amounts allocated to the Subaccounts.
    9. For each net purchase payment of at least $500,000, the Company 
will enhance the Owner's Contract Value by an amount that varies by the 
Owner'scumulative net purchase payment level (``Contract Value Increase 
Enhancement''). The enhancement equals cumulative net purchase 
payments, multiplied by the applicable increase percentage (0.5% for 
cumulative net purchase payments between $500,000 and $999,999.99, and 
0.7% for cumulative net purchase payments in excess of $1,000,000), 
minus any prior increases to Contract Value as a result of the Contract 
Value Increase Enhancement. The Company will allocate the amount of the 
Contract Value Increase Enhancement according to the Owner's current 
purchase payment allocation instructions. The Company funds the 
Contract Value Increase Enhancement from its general account, and does 
not charge Owners for the Contract Value Increase Enhancement. The 
Company treats the Contract Value Increase Enhancement as Contract 
earnings. The Contract Value Increase Enhancement is not subject to any 
applicable surrender charge and will not be recouped if the Owner 
returns a Contract during the right to examine period. Nor will the 
Company recoup a Contract Value Increase Enhancement when the Company 
pays a death benefit. Accordingly, the Company is not seeking to 
recapture Contract Value Increase Enhancements.
    10. If an Owner elects the Purchase Payment Credit endorsement to 
the Contract, the Company will enhance an Owner's Contract Value by 4% 
(for cumulative net purchase payments of up to $250,000) or 5% (for 
cumulative net purchase payments of at least $250,000) each time the 
Owner makes a purchase payment. The amount of increase in Contract 
Value will equal cumulative net purchase payments, multiplied by the 
applicable credit percentage, minus any prior credits to Contract Value 
as a result of the endorsement (``Purchase Payment Credits''). The 
Company will allocate the amount of the Purchase Payment Credits 
according to the Owner's current allocation instructions for purchase 
payments. The Contract's mortality and expense risk charges and 
surrender charges are higher if an Owner elects to receive Purchase 
Payment Credits. The Company will treat Purchase Payment Credits as 
Contract earnings for purposes of assessing surrender charges and taxes 
under the Contract. If an Owner elects the Purchase Payment Credit 
endorsement, he or she will not receive the Contract Value Increase 
Enhancement. The Purchase Payment Credit endorsement is not available 
if an Owner elects L-Share Class or the Earnings Enhanced Death Benefit 
Rider.
    11. During the right to examine period, an Owner has the right to 
return the Contract within 10 days after receiving it (or longer if 
required by state law). If an Owner returns a Contract during the right 
to examine period to which the Purchase Payment Credits endorsement 
applies, then the Company proposes to recapture any Purchase Payment 
Credits applied, but not to recapture any gains or to bear any losses 
attributable to such Purchase Payment Credits.
    12. The Company will not assess surrender charges against a 
Contract returned during the right to examine period nor would it 
assess any market value adjustments.
    13. During the accumulation period if: (a) An Owner dies, then no 
death benefit will be paid and any surviving Owner becomes the sole 
Owner; (b) the sole Owner (who is not also the annuitant) dies, then no 
death benefit will be paid and the annuitant becomes the new Owner; (c) 
the sole Owner (who is also an annuitant) dies--and if the deceased 
Owner is the sole annuitant, then the death benefit proceeds will be 
paid to the person to whom proceeds are payable on the death of the 
annuitant (``Beneficiary''), or if the deceased Owner was one of two 
joint annuitants, then no death benefit will be paid and the Contract 
will continue with the surviving annuitant as the Owner; or (d) the 
sole annuitant dies before the date the Owner elects to begin receiving 
income payments (``Payout Date''), the Company will pay the death 
benefit proceeds to the Beneficiary named by the Owner in a lump sum or 
under an income payout option (provided certain conditions are met), as 
elected by the Beneficiary; if the Beneficiary is the deceased 
annuitant's

[[Page 13054]]

surviving spouse, then the Beneficiary may elect to continue the 
Contract. (Owners and Beneficiaries also may name successor 
Beneficiaries.) If there is no surviving Beneficiary, the Company will 
pay the death benefit to the Owner or the Owner's estate.
    14. An Owner may elect a standard death benefit or an enhanced 
death benefit. The death benefit will be reduced by any outstanding 
loan amount and any applicable premium expense charges not previously 
deducted; no surrender charge will apply. The Company proposes to 
recapture any Purchase Payment Credits applied to the Contract Value 
within 12 months of the annuitant's death when the Company pays a death 
benefit. However, the Company will not recapture any investment gains 
attributable to such Purchase Payment Credits--these gains stay with 
the Owner.
    15. During the accumulation period, an Owner may transfer Contract 
Value among the Subaccounts or to or from the fixed account. Although 
no fee is currently charged for transfers, the Company reserves the 
right to charge $10 for each transfer. Additional restrictions apply to 
the frequency and amounts of transfers to and from the fixed account, 
and the Company may impose limitations on transfers in an attempt to 
detect, deter, and prevent frequent, large, or short-term transfer 
activity among the Subaccounts that may adversely affect Owners and 
other Fund shareholders.
    16. At any time on or before the date income payments begin (the 
``Payout Date''), the Owner may surrender the Contract and receive its 
surrender value. The surrender value will be paid in a lump sum unless 
the Owner requests payment under an income payout option. At any time 
on or before the Payout Date, an Owner may make withdrawals of the 
surrender value. There is no minimum amount for withdrawals, but the 
maximum amount is that which would leave the remaining surrender value 
equal to $2,000. A partial withdrawal request that would reduce the 
surrender value to less than $2,000 is treated as a request for a full 
surrender of the Contract.
    17. If an Owner surrenders a Contract or makes a partial 
withdrawal, the Company will withdraw the amount requested and may 
deduct a surrender charge from the remaining Contract Value. The 
Company deducts such a surrender charge to compensate it for expenses 
related to the sale of the Contracts. Upon partial withdrawal 
(including periodic partial withdrawals made under the systematic 
withdrawal plan available under the Contract), the Company also may 
apply a market value adjustment. Upon surrender, the Company will 
deduct any applicable Contract fee, accrued but uncollected rider 
charges, applicable premium expense charges, a market value adjustment, 
and any applicable adjustment or deduction provided for by an 
endorsement to the Contract.
    18. The amount of the surrender charge, and the length of time a 
surrender charge may be assessed depends on the share Class the Owner 
elects and whether the Purchase Payment Credits endorsement is elected. 
The surrender charge is calculated by multiplying the applicable charge 
percentage (as shown in the table below) by the amount of each purchase 
payment in excess of the free withdrawal amount that is surrendered.

------------------------------------------------------------------------
                                        Charge as a
 Number of full      Charge as a       percentage of       Charge as a
  years between     percentage of   purchase payment--    percentage of
date of purchase      purchase       purchase payment       purchase
payment and date  payment--B-share    credits elected   payment--L-share
  of surrender          class                                 class
------------------------------------------------------------------------
              0                 8                  9                  8
              1                 7                  8                  7
              2                 6                  7                  6
              3                 5                  6                  5
              4                 4                  5                  0
              5                 3                  4                  0
              6                 2                  3                  0
            7 +                 0                  0                  0
------------------------------------------------------------------------

    19. The surrender charge is generally calculated using the 
assumption that earnings are surrendered before any purchase payments 
and that purchase payments are surrendered on a first-in-first-out 
(``FIFO'') basis. If the Owner elects to receive Purchase Payment 
Credits, however, the Company will assume that Contract Value is 
withdrawn as follows: (a) Purchase payments no longer subject to 
surrender charges (``old purchase payments''); (b) the free withdrawal 
amount (i.e., old purchase payments plus 10% of purchase payments 
subject to surrender charges at the time of the withdrawal--the 
``annual free withdrawal amount''); (c) purchase payments subject to 
surrender charges (``new purchase payments'') on a FIFO basis; and (d) 
earnings and Purchase Payment Credits.
    20. Other available Contract benefits described in the Application 
are available for an addditonal charge. They include the: Guaranteed 
Minimum Withdrawal Benefit Rider, Guaranteed Minimum Accumulation 
Benefit Rider, Income Payment Increase Endorsement, Loan Account 
Endorsement, Change of Annuitant Endorsement, Spousal Continuation 
Endorsement, Fixed Account Endorsement, Additional Income Option 
Endorsement, and Waiver of Surrender Charge Endorsement.
    21. Certain other charges are made in connection with the 
Contracts. Among these charges are: a current annual Contract fee of 
$30 (currently waived if the Contract Value is $50,000 or more); a 
mortality and expense risk charge that is computed and deducted on a 
daily basis and varies by share Class and whether the Owner elected to 
receive Purchase Payment Credits; a daily administrative charge (annual 
rate of 0.15% of the average daily net assets of the Variable Account); 
and Fund fees and expenses. The mortality and expense risk charge is 
deducted at an annual rate of 1.15% of average daily net assets of the 
Variable Account for B-Share Class Contracts, 1.6% of the average daily 
net assets of the Variable Account if an Owner elects to receive 
Purchase Payment Credits, and 1.65% of the average daily net assets of 
the Variable Account for L-Share Class Contracts.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule, or regulation under the 1940 Act to 
the extent that the 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.

[[Page 13055]]

    2. Applicants request that the Commission issue an order pursuant 
to Section 6(c) of the 1940 Act, granting exemptions from 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 Purchase Payment 
Credits added to a Contract: (a) When an Owner returns a Contract 
during the right to examine period, or (b) within 12 months of the 
annuitant's death when a death benefit is paid.
    3. Section 27(i)(2)(A) of the 1940 Act, in pertinent part, makes it 
unlawful for any registered separate account funding variable insurance 
contracts, or for the sponsoring insurance company of such account, to 
sell any such contract unless such contract is a redeemable security. 
Section 2(a)(32) of the 1940 Act defines ``redeemable security'' as any 
security under the terms of which the holder, upon its 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. To the extent that the recapture of the Purchase 
Payment Credits 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 approximately proportionate share of the issuer's current net 
assets, the recapture of Purchase Payment Credits would trigger the 
need for relief absent some exemption from the 1940 Act.
    4. Applicants submit that the Contracts are ``redeemable 
securities'' consistent with Section 2(a)(32) of the 1940 Act. The 
Contracts provide for withdrawals and surrenders of Contract Value. The 
contingent nature of Purchase Payment Credit recapture will be 
disclosed in the prospectuses for the Contracts. Accordingly, there are 
no restrictions on, or impediments to, withdrawals or surrenders that 
should cause the Contracts to be considered anything other than 
redeemable securities within the meaning of the 1940 Act.
    5. Applicants further submit that the recapture of the Purchase 
Payment Credits does not deprive an Owner of his or her approximately 
proportionate share of the current net assets of the Variable Account. 
Applicants submit that the Owner's interest in the Purchase Payment 
Credits does not vest until the expiration of the right to examine 
period and of the 12-month period following the application of a 
Purchase Payment Credit to the Owner's Contract: until such time, the 
Company generally retains the right to and interest in each Owner's 
Contract Value representing the dollar amount of any unvested bonus 
amounts. Therefore, when the Company recaptures the unvested Purchase 
Payment Credits, the Company is only retrieving its own assets. The 
Company grants Purchase Payment Credits out of its general account 
assets, and the amount of such Purchase Payment Credits remains assets 
of the Company until such bonus amounts vest with the Owner. Arguably, 
then, an Owner is not deprived of his or her proportionate share of the 
Variable Account's interests when the Company grants and recaptures 
unvested Purchase Payment Credits in connection with variable Contract 
Value. Accordingly, the recapture of Purchase Payment Credits could be 
viewed as a legitimate ``charge'' for a benefit under the Contracts, 
and not as a means of reducing the amount of the Variable Account 
assets that an Owner otherwise would be entitled to receive.
    6. It is the nature of the Purchase Payment Credits applied to 
variable Contract Value that an Owner obtains a benefit from Purchase 
Payment Credits in a rising market because any earnings on the bonus 
amount vest with him or her immediately. Over time this would, of 
course, increase the Owner's share of Contract Value in the Variable 
Account more than it would have increased without the Purchase Payment 
Credits. Conversely, in a falling market an Owner would suffer a 
detriment from Purchase Payment Credits because losses on the bonus 
amount would also ``vest'' with him or her immediately. Over time this 
would decrease the Owner's share of Contract Value in the Variable 
Account by more than it would have decreased had the Purchase Payment 
Credits never been applied.
    7. Applicants submit that the operation of the Purchase Payment 
Credits endorsement and the proposed method of recapturing Purchase 
Payment Credits do not violate Section 2(a)(32) or 27(i)(2)(A) of the 
1940 Act. 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. Under these circumstances, 
the fact that the application of Purchase Payment Credits has a dynamic 
element that may cause the relative ownership positions of the Company 
and an Owner to shift as a result of Variable Account performance and 
the vesting schedule of such Purchase Payment Credits does not cause 
the proposed operation of the Purchase Payment Credit endorsement and 
the proposed method of recapturing Purchase Payment Credits to conflict 
with Section 2(a)(32) or 27(i)(2)(A) of the 1940 Act. Nonetheless, to 
avoid any uncertainty as to full compliance with the 1940 Act, 
Applicants seek exemptions from the provisions of Sections (2)(a)(32) 
and 27(i)(2)(A) of the 1940 Act to the extent deemed necessary to 
permit them to recapture the Purchase Payment Credits.
    8. Rule 22c-1, promulgated under Section 22(c) of the 1940 Act, in 
pertinent part, prohibits a registered investment company issuing a 
redeemable security (and a person designated as authorized to 
consummate transactions in such security, and a principal underwriter 
of, or dealer in, any 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. As a result of the Purchase Payment Credits 
available under the Contract, an Owner who made an initial purchase 
payment of $10,000 in the first Contract year, for example, could be 
viewed as having a Contract Value of $10,400 before any earnings 
accrued. The Company's addition of a Purchase Payment Credit 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 Purchase Payment Credits, the Company might arguably be 
redeeming a ``redeemable security'' for a price other than one based on 
the current net asset value of interests in the Variable Account. 
Applicants contend that these interpretations and applications of the 
relevant statutory and regulatory provisions are incorrect, and that 
the Purchase Payment Credit provisions do not conflict with Section 
22(c) and Rule 22c-1.
    9. Applicants submit that the recapture of Purchase Payment Credits 
would not trigger either of the two harms that the Commission intended 
to eliminate with Rule 22c-1: (a) Dilution of the interests of other 
security holders; and (b) speculative trading practices that are unfair 
to such holders. The proposed recapture of Purchase Payment Credits 
under the Contracts does not pose such threat of dilution. The 
recapture will not alter an Owner's interest in his or her Contract 
Value or in the Variable Account. An Owner's interest in his or her 
Contract Value or in the Variable Account would always be offered under 
the Contracts at a price determined on the basis of net asset value. 
The granting of a bonus amount (here, a Purchase Payment Credit) does 
not reflect a reduction of that price. Instead, the Company will 
purchase with its own money and on behalf of an Owner an interest in 
the Variable

[[Page 13056]]

Account equal to the amount of the Purchase Payment Credits. Because 
the Company funds Purchase Payment Credits with its own general account 
assets and not with Variable Account assets, no dilution will occur 
from the awarding of Purchase Payment Credits under the Contracts. The 
amount recaptured will equal the amount that the Company paid out of 
its general account assets for Purchase Payment Credits. (Applicants 
represent that it is not administratively feasible to track the bonus 
amount in the Variable Account after the Company applies a Purchase 
Payment Credit. As a result, the asset-based charges applicable to the 
Variable Account will be assessed against the entire amount held in the 
Variable Account, including the bonus amount, during the time the 
Purchase Payment Credit 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 
be only a small percentage of the bonus amount.) An Owner will retain 
any investment gains and bear any investment losses attributable to 
recaptured Purchase Payment Credits. The Company will determine the 
amount of any gain or loss attributable to Purchase Payment Credits on 
the basis of the current net asset value of Subaccount units. Thus, no 
dilution will occur under the proposed method for recapture of Purchase 
Payment Credits.
    10. Applicants further submit that 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 the 
Company's recapture of the Purchase Payment Credits. 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. Even if they could be so used, the recapture 
of Purchase Payment Credits would discourage, rather than encourage, 
any such trading.
    11. For the reasons set forth above, Applicants submit that Rule 
22c-1 should have no application to the Purchase Payment Credits 
because neither of the harms that Rule 22c-1 was designed to address 
arise in connection with the proposed recapture of Purchase Payment 
Credits. However, to avoid uncertainty as to full compliance with the 
1940 Act, Applicants request an exemption from the provisions of Rule 
22c-1 to the extent deemed necessary to permit them to recapture the 
Purchase Payment Credits available under the Contracts under the 
circumstances noted above.
    12. Applicants submit that the Commission should grant the 
exemptions requested in this Application, even if the bonus amounts 
described herein arguably conflict with Section 2(a)(32) or 27(i)(2)(A) 
of the 1940 Act, or Rule 22c-1 thereunder. The application of Purchase 
Payment Credits under the Contracts is generally very favorable and 
very beneficial to Owners. Owners who elect the Purchase Payment 
Credits endorsement invest not only their net purchase payments but 
also any Purchase Payment Credits, and receive any positive investment 
experience from these bonus amounts. The Company's proposed method of 
recapturing Purchase Payment Credits tempers this benefit somewhat, but 
only if an Owner cancels his or her Contract during the right to 
examine period, or ifthe Company pays Purchase Payment Credits and a 
death benefit during the same 12-month period. Although in a declining 
market, the Owner bears the downside risk of incurring losses 
attributable to the Purchase Payment Credits, in a rising market, the 
Owner receives any gains attributable to any Purchase Payment Credits 
applied. Applicants submit that, on balance, the Company's proposed 
method of recapturing Purchase Payment Credits does not diminish the 
overall value of the Purchase Payment Credits.
    13. The Company's recapture of Purchase Payment Credits is designed 
to prevent anti-selection--the risk that an Owner would make 
significant purchase payments into the Contract solely to receive a 
quick profit from the Purchase Payment Credits and then withdraw his or 
her money. By recapturing the Purchase Payment Credits, the Company 
protects itself against such behavior. Likewise, if a Beneficiary were 
to receive death benefit proceeds under the Contract before the 12-
month period after a Purchase Payment Credit had been applied without 
the Company's recapture of those Purchase Payment Credits, that 
Beneficiary, too, would profit at the Company's expense. The Company 
typically protects itself from this kind of anti-selection by imposing 
a surrender charge to recover its costs, but the Company does not apply 
a surrender charge when an Owner withdraws his or her money during the 
right to examine period or when a death benefit is paid.
    14. Applicants established the charge structure for the Contracts 
so that the Company could recover its costs of offering the Contract 
over the life of the Contract. If the Company were unable to recapture 
the Purchase Payment Credits and instead raised other Contract charges 
to cover the costs of offering Purchase Payment Credits, then the 
Company would be charging long-term Owners for costs actually 
attributable to Owners who surrender their Contracts quickly. 
Applicants submit, therefore, that the Purchase Payment Credits 
recapture should be viewed as the price of offering Purchase Payment 
Credits.
    15. Applicants submit that the application of the Purchase Payment 
Credits and their recapture involve none of the abuses to which the 
provisions of the 1940 Act, and the rules thereunder (cited above) are 
directed. An Owner will always retain any investment experience 
attributable to Purchase Payment Credits and, except in the limited 
circumstances described herein, will also retain the principal amount 
of any Purchase Payment Credits applied. Further, the Company should be 
able to recapture all of its Purchase Payment Credits, paid out of its 
general account assets, to limit potential losses associated with 
offering such bonus amounts as benefits to Owners.
    16. Applicants seek relief requested herein not only for themselves 
with respect to the Contracts, but also with respect to Future Accounts 
or Future Contracts described herein.
    17. In addition, Applicants seek relief herein with respect to 
Future Underwriters (i.e., a class consisting of FINRA-member broker-
dealers that may also act as distributor and/or principal underwriter 
of the Contracts and Future Contracts).
    18. Applicants state that, without the requested class relief, 
exemptive relief for any Future Account, Future Contract, or Future 
Underwriter would have to be requested and obtained separately. 
Applicants assert that these additional requests for exemptive relief 
would present no issues under the 1940 Act not already addressed 
herein. Applicants state that if they 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. Applicants contend that 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 Company to file redundant exemptive 
applications, thereby reducing administrative expenses and maximizing 
efficient use of resources. Elimination of the delay

[[Page 13057]]

and the expense of repeatedly seeking exemptive relief would, 
Applicants opine, enhance their ability to effectively take advantage 
of business opportunities as such opportunities arise.
    19. Any entity that intends to rely on the requested exemptive 
order currently 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.

Conclusion

    For the reasons summarized above, Applicants represent that: (a) 
The requested exemptions are necessary and 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; 
and
    (b) their 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 
1940 Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4686 Filed 3-10-08; 8:45 am]
BILLING CODE 8011-01-P