ING USA Annuity and Life Insurance Company, et al.; Notice of Application, 35466-35471 [E6-9607]

Download as PDF 35466 Federal Register / Vol. 71, No. 118 / Tuesday, June 20, 2006 / Notices Effective date: As of the date of issuance and shall be implemented within 60 days. Amendment Nos.: 247/246. Renewed Facility Operating License Nos. DPR–32 and DPR–37: Amendments change the Technical Specifications. Date of initial notice in Federal Register: January 3, 2006 (71 FR 155). The Commission’s related evaluation of the amendments is contained in a Safety Evaluation dated May 31, 2006. No significant hazards consideration comments received: No. Dated at Rockville, Maryland, this June 12, 2006. For the Nuclear Regulatory Commission. Catherine Haney, Director, Division of Operating Reactor Licensing, Office of Nuclear Reactor Regulation. [FR Doc. E6–9434 Filed 6–19–06; 8:45 am] BILLING CODE 7590–01–P SECURITIES AND EXCHANGE COMMISSION [Rel. No. IC–27393; File No. 812–13263] ING USA Annuity and Life Insurance Company, et al.; Notice of Application June 13, 2006. 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 (the ‘‘Act’’) granting exemptions from the provisions of Sections 2(a)(32), and 27(i)(2)(A) of the Act and Rule 22c–1 thereunder. AGENCY: ING USA Annuity and Life Insurance Company (‘‘ING USA’’), Separate Account B of ING USA Annuity and Life Insurance Company (‘‘Account B’’), ReliaStar Life Insurance Company of New York (‘‘RLNY’’) (ING USA and RLNY collectively, the ‘‘Life Companies’’), Separate Account NY–B of ReliaStar Life Insurance Company of New York (‘‘Account NY–B’’) (Account B and Account NY–B collectively, the ‘‘Accounts’’), and Directed Services, Inc. (‘‘DSI’’). SUMMARY OF THE APPLICATION: The Applicants request an order pursuant to Section 6(c) of the Act exempting them from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c– 1 thereunder to the extent necessary to permit recapture of certain bonuses applied to purchase payments with respect to: (1) The deferred variable annuity contracts and certificates described herein that the Life Companies intend to issue (the ‘‘Current rwilkins on PROD1PC63 with NOTICES APPLICANTS: VerDate Aug<31>2005 17:31 Jun 19, 2006 Jkt 208001 Contracts’’); (2) deferred variable annuity contracts and certificates, substantially similar to the Current Contracts that the Life Companies may issue in the future (the ‘‘Future Contracts’’) (Current Contracts and Future Contracts collectively, the ‘‘Contracts’’); (3) any other separate accounts of the Life Companies and their successors in interest (‘‘Future Accounts’’) that support the Contracts; and (4) 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 principle underwriter for the Contracts (‘‘Future Underwriters’’). The circumstances under which the Contracts would allow the recapture of all or a portion of certain bonus credits (previously applied to premium payments) are where the bonus credits were applied and: (1) The contract owner exercises his or her ‘‘free look’’ right; (2) the contract owner dies within twelve months of the bonus credit being applied (unless the Contract is continued under the spousal benefit continuation option); or (3) the contract owner takes a partial withdrawal or surrenders the contract in the first seven or four contract years, as applicable, pursuant to the bonus credit recapture schedule set forth below. FILING DATE: The application was filed on February 28, 2006 and amended and restated on May 3, 2006. 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 the Applicants with a copy of the request, personally or by mail. Hearing requests must be received by the Commission by 5:30 p.m. on July 7, 2006, and should be accompanied by proof of service on the 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 Nicole J. Starr, Counsel, ING USA Annuity and Life Insurance Company, 1475 Dunwoody Drive, West Chester, Pennsylvania 19380. FOR FURTHER INFORMATION CONTACT: Alison White, Senior Counsel, or Joyce M. Pickholz, Branch Chief, Office of PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 Insurance Products, Division of Investment Management, at (202) 551– 6795. The following is a summary of the Application. The complete Application is available for a fee from the Public Reference Branch of the Commission, 100 F Street, NE., Room 1580, Washington, DC 20549. SUPPLEMENTARY INFORMATION: Applicants’ Representations 1. ING USA is an Iowa stock life insurance company, which was originally incorporated in Minnesota on January 2, 1973. ING USA is a wholly owned subsidiary of Lion Connecticut Holdings, Inc. (‘‘Lion Connecticut’’) which in turn is an indirect wholly owned subsidiary of ING Groep N.V. (‘‘ING Group’’), a global financial services holding company based in The Netherlands. ING USA is authorized to sell insurance and annuities in all states, except New York, and the District of Columbia. ING USA is the depositor and sponsor for Account B. ING USA also serves as depositor for several currently existing Future Accounts, one or more of which may support obligations under the Contracts. ING USA may establish one or more additional Future Accounts for which it will serve as depositor. 2. ING USA established Account B as a segregated investment account under Delaware law on July 14, 1988. Account B is registered with the Commission as a unit investment trust (File No. 811– 5626), and interests in Account B offered through the Contracts will be registered under the Securities Act of 1933 on form N–4. 3. RLNY is a New York stock life insurance company originally incorporated on June 11, 1917 under the name, The Morris Plan Insurance Society. RLNY is an indirect wholly owned subsidiary of ING Group. RLNY is authorized to transact business in all states, the District of Columbia, the Dominican Republic, and the Cayman Islands and is principally engaged in the business of providing individual life insurance and annuities, employee benefit products and services, retirement plans, and life and health reinsurance. RLNY is the depositor and sponsor for Account NY–B. RLNY also serves as depositor for several currently existing Future Accounts, one or more of which may support obligations under the Contracts. RLNY may establish one or more additional Future Accounts for which it will serve as depositor. 4. Account NY–B was established as a separate account of First Golden American Life Insurance Company of E:\FR\FM\20JNN1.SGM 20JNN1 rwilkins on PROD1PC63 with NOTICES Federal Register / Vol. 71, No. 118 / Tuesday, June 20, 2006 / Notices New York (‘‘First Golden’’) on June 13, 1996. It became a separate account of RLNY as a result of the merger of First Golden into RLNY effective April 1, 2002. Account NY–B is registered with the Commission as a unit investment trust (File No. 811–7935). 5. The Accounts currently are divided into a number of subaccounts. Each subaccount 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 Accounts support one or more varieties of variable annuity contracts, including the Contracts. 6. DSI is a wholly owned subsidiary of Lion Connecticut Holdings, Inc., which is in turn a wholly owned subsidiary of ING Group. It serves as the principal underwriter of a number of RLNY and ING USA separate accounts registered as unit investment trusts under the Act, including the Accounts, and is the distributor of the variable life insurance contracts and variable annuity contracts issued through such separate accounts, including the Contracts. DSI is registered as a brokerdealer under the Securities Exchange Act of 1934 and is a member of the NASD. DSI may act as principal underwriter for Future Accounts of the Life Companies and as distributor for Contracts. Future Underwriters also may act as principal underwriter for the Accounts and as distributor for any of the Contracts. 7. The Contracts are deferred combination variable and fixed annuity contracts that a Life Company may issue to individuals or groups on a ‘‘nonqualified’’ basis or in connection with employee benefit plans that receive favorable Federal income tax treatment under the Internal Revenue Code of 1986, as amended. The Contracts make available a number of subaccounts of the Accounts to which an owner may allocate net premium payments and associated bonus credits (described below) and to which an owner may transfer contract value. There are categories of subaccounts for purposes of determining benefits under living benefits and death benefits. The Contracts also offer fixed-interest allocation options under which a Life Company credits guaranteed rates of interest for various periods. A market value adjustment applies to the fixedinterest allocation options under the Contracts. An owner may make transfers of contract value among and between the subaccounts and, subject to certain restrictions, among and between the subaccounts and the fixed-interest allocation options at any time. VerDate Aug<31>2005 17:31 Jun 19, 2006 Jkt 208001 8. The Contracts offer a variety of annuity payment options to an owner. The owner may annuitize any time following the fifth contract anniversary. If a contingent deferred sales charge remains at the time of annuitization, the annuity payment option must include at least a 10 year fixed period. 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 the annuity payment options instead of a lump sum. The Contracts generally may only be purchased with a minimum initial premium of $10,000 ($1,500 for certain employee benefit plans). 9. A Life Company may deduct a premium tax charge from premium payments in certain states, but otherwise deducts a charge for premium taxes upon surrender or annuitization of the Contract or upon the payment of a death benefit, depending upon the jurisdiction. The Contracts provide for an annual administrative charge of $40 that a Life Company deducts on each Contract Anniversary and upon a full surrender of a Contract. A daily mortality and expense risk charge is deducted from the assets of the Accounts at a rate depending on the death benefit chosen as described below. The range of maximum mortality and expense risk charges is 1.70% to 2.80% annually. A daily administrative charge is deducted from the assets of the Account at an annual rate of 0.15%. The Contracts provide for a charge of $25 for each transfer of contract value in excess of twelve transfers per contract year. The Life Companies currently waive this charge and anticipate waiving this charge for the foreseeable future. The Contracts have a surrender charge in the form of a contingent deferred sales charge as described more fully below. If an owner chooses an optional surrender charge schedule rider that reduces the length of time during which the contingent deferred sales charge is applied, an additional charge will be deducted as described below. A quarterly charge is assessed depending on the type of optional living benefit chosen, if any, as described below. Lastly, if an owner chooses the optional premium credit rider, an additional charge will be deducted as described below. 10. The contingent deferred sales charge (the ‘‘CDSC’’) is equal to a percentage of each premium payment surrendered or withdrawn. The CDSC is separately calculated and applied to each premium payment at any time that the premium payment (or part of the premium payment) is surrendered or PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 35467 withdrawn. The CDSC applicable to each premium payment diminishes to zero as the payment ages. The Contracts offer a standard CDSC schedule as follows: Number of full years since payment of each premium 0 ................................................ 1 ................................................ 2 ................................................ 3 ................................................ 4 ................................................ 5 ................................................ 6 ................................................ 7+ .............................................. Charge (percent) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 0.0 However, the owner may choose a shorter optional CDSC schedule for an extra charge (see below). The optional CDSC schedule is as follows: Number of full years since payment of each premium 0 ................................................ 1 ................................................ 2 ................................................ 3 ................................................ 4+ .............................................. Charge (percent) 8.0 7.0 6.0 5.0 0.0 The charge for the optional CDSC schedule is currently 0.45% of contract value per year, assessed quarterly for four years. The maximum charge for the optional CDSC schedule will be 0.90% of contract value per year, assessed quarterly for four years. 11. The CDSC does not apply when a death benefit is payable under the contracts or to contract value representing an annual free withdrawal amount or to contract value in excess of aggregate premium payments (less prior withdrawals of premium payments) (‘‘earnings’’). The CDSC is calculated using the assumption that premium payments are withdrawn on a first-in, first-out basis. The CDSC also is calculated using the assumption that contract value is withdrawn in the following order: (a) The annual free withdrawal amount for that contract year; (b) premium payments; and (c) earnings. The annual free withdrawal amount is 10% of contract value, measured at the time of withdrawal, less any prior withdrawals made in that contract year. 12. Subject to state availability, an owner may purchase optional living benefit riders. The minimum guaranteed income benefit rider (the ‘‘MGIB Rider’’) guarantees that a minimum amount of annuity income will be available to the owner, regardless of fluctuating market conditions, if the owner annuitizes on or after the rider’s exercise date. The minimum guaranteed amount of annuity income will depend on the amount of E:\FR\FM\20JNN1.SGM 20JNN1 rwilkins on PROD1PC63 with NOTICES 35468 Federal Register / Vol. 71, No. 118 / Tuesday, June 20, 2006 / Notices premiums paid and any credits received, if applicable, during the specified number of contract years after the owner purchases the MGIB Rider, how the owner allocates the contract value among the subaccounts and fixedinterest allocations, and any withdrawals and transfers the owner makes while the MGIB Rider is in effect. A Life Company will deduct a maximum annual charge of 1.50% (currently, 0.75%) quarterly of the MGIB Charge Base (as defined in the MGIB Rider). 13. The minimum guaranteed withdrawal benefit rider (the ‘‘MGWB Rider’’) guarantees that a certain amount may be withdrawn annually regardless of market performance and even if the contract value is reduced to zero. Some Contracts offer the guaranteed withdrawal amount until the MGWB Base (as defined in the MGWB Rider) is completely recovered. Most Contracts offer the guaranteed withdrawal amount for life. The Life Companies expect to extend the guaranteed withdrawal amount for until the death of the second designated life. The MGWB Rider is subject to conditions and limitations. A Life Company will deduct a maximum annual charge of 1.50% (currently, between 0.45% and 0.75%, depending on the rider and Contract) quarterly of the charge basis (as set forth in the MGWB Rider). 14. If an owner dies before the annuity start date, the Contracts provide for a death benefit payable to a beneficiary, computed as of the date a Life Company 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: (a) Standard death benefit; (b) ratchet death benefit; or (c) rollup death benefit. In the future, a Life Company may also offer an optional earnings multiplier benefit rider. 15. The standard death benefit equals the greater of the (a) base death benefit, and (b) premium and bonus credits, adjusted pro-rata for withdrawals and transfers, less total bonus credits applied since or within twelve months prior to death. The base death benefit is the greater of the (1) contract value on the claim date, less bonus credits applied since or within twelve months prior to death, and (2) cash surrender value. The maximum daily mortality and risk charge for the standard death benefit is the annual rate of 1.70% (currently 0.85%). A Life Company may, in the future, offer the base death benefit as a stand alone option for the maximum daily mortality and risk charge of 2.00% annually. VerDate Aug<31>2005 17:31 Jun 19, 2006 Jkt 208001 16. The ratchet death benefit equals the greater of the (a) standard death benefit, and (b) greatest contract value as of any quarterly or annual, as applicable, contract anniversary occurring on or prior to the maximum attained age, adjusted for new premiums and bonus credits, reduced pro rata for withdrawals and transfers, less bonus credits applied since or within twelve months prior to death. The maximum daily mortality and risk charge for the ratchet death benefit is the annual rate of 2.20% (currently 1.10%). 17. The roll-up death benefit equals the greater of (a) the ratchet death benefit, and (b) the lesser of (1) a specified maximum percentage of all premiums plus bonus credits adjusted pro-rata for withdrawals and transfers, or (2) premiums and bonus credits, if applicable, adjusted for withdrawals and transfers accumulated at a specified percentage up to the maximum attained age, less bonus credits applied since or within twelve months prior to death. The maximum daily mortality and risk charge for the roll-up death benefit is the annual rate of 2.80% (currently 1.40%). 18. The earnings multiplier benefit rider provides a separate additional death benefit option. This rider provides additional funds to the beneficiary that be used to help pay the taxes on the death benefit. Upon the owner’s death, the beneficiary receives an amount equal to a percentage of the Contract’s earnings, if any, up to a maximum amount. The maximum charge is 0.50% (currently 0.25%). 19. The Life Companies intend to offer an optional bonus credit rider under the Contracts, which the owner may elect at the time of application. Under the bonus credit rider, a Life Company credits the contract value in the subaccounts and the fixed-interest allocations with a bonus credit amount that is a percentage of each premium payment made. The bonus credit applies upon issuance of the Contract and is based upon premium payments received within the first contract year. A Life Company allocates the bonus credit for the applicable premium payment among the subaccounts and fixedinterest allocations the owner selects in proportion to the premium payment allocated to each investment option. If the owner has elected to retain the standard CDSC schedule, the bonus credit equals 4% of each premium payment made in the first contract year. If the owner has elected to have the optional CDSC schedule rider, the bonus credit equals 2% of each premium payment made in the first contract year. A Life Company reserves PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 the right to increase or decrease the amount of the bonus credit or discontinue the bonus credit rider in the future. 20. The maximum annual charge assessed for the bonus credit rider (as a percentage of contract value) is 0.57% (currently, 0.55%) for the first seven contract years if the owner retains the standard CDSC schedule and 0.50% (currently, 0.45%) for the first four contract years if the owner selects the optional CDSC schedule rider. The charge is deducted from the contract value in the subaccounts and from amounts in fixed interest allocations by crediting a lower interest rate. 21. Under the bonus credit rider, a Life Company recaptures or retains the bonus credits in several circumstances. First, a Life Company recaptures or retains 100% of the bonus credits in the event that the owner exercises his or her cancellation right during the ‘‘free look’’ period. Second, a Life Company recaptures the bonus credits applied to premium payments made since or within twelve months of the date as of which a death benefit is computed (unless the Contract is continued under the spousal benefit continuation option). Third, a Life Company also will recapture part or all of the applicable bonus credit upon surrender or withdrawal of corresponding premium payments. 22. In the event of a surrender or withdrawal, the amount of the bonus credit a Life Company will recapture is based on the percentage of the corresponding premium payment withdrawn and the contract year of surrender or withdrawal. For each premium payment, the portion of the bonus credit subject to recapture is the total bonus credit amount attributable to that premium payment multiplied by the percentage of the corresponding premium payment withdrawn. The dollar amount of the bonus credit recaptured is the portion of the bonus credit subject to recapture multiplied by the applicable recapture percentage. The recapture percentage applicable to each bonus credit depends on which CDSC is in effect and when the premium payment associated with such bonus credit was withdrawn. If the standard CDSC schedule is chosen, the recapture percentage applicable to each bonus credit is level for the first two contract years and diminishes to zero after the seventh contract year. The schedule is as follows: E:\FR\FM\20JNN1.SGM 20JNN1 Federal Register / Vol. 71, No. 118 / Tuesday, June 20, 2006 / Notices Contract year of surrender or withdrawal Bonus credit recapture percentage (percent) Years 1–2 ................................. Years 3–4 ................................. Years 5–6 ................................. Year 7 ....................................... Years 8+ ................................... 100 75 50 25 0 If the optional CDSC schedule rider is chosen, the recapture percentage applicable to each bonus credit diminishes to zero after the fourth contract year. The schedule is as follows: Contract year of surrender or withdrawal Bonus credit recapture percentage (percent) rwilkins on PROD1PC63 with NOTICES Year 1 ....................................... Year 2 ....................................... Year 3 ....................................... Year 4 ....................................... Years 5+ ................................... 100 75 50 25 0 A Life Company will not recapture bonus credits attributable to premium payments withdrawn representing the annual free withdrawal amount or to contract value representing earnings. 23. Because of the recapture provisions discussed above, the value of a bonus credit only fully vests or belongs irrevocably to the owner when the recapture period for the bonus credit expires. All bonus credits vest over the 4-year period or 7-year period, as applicable, after a Life Company grants them. Under the bonus credit rider, a Life Company applies the bonus credit to an owner’s contract value either by ‘‘purchasing’’ accumulation units of an appropriate subaccount or adding to the owner’s fixed interest allocation option values. 24. With regard to variable contract value, several consequences flow from the foregoing. First, increases in the value of accumulation units representing bonus credits accrue to the owner immediately, but the initial value of such units only belongs to the owner when, or to the extent that, each vests. Second, decreases in the value of accumulation units representing bonus credits 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 Account) that a Life Company can ‘‘recapture’’ increases as variable contract value (or the owner’s interest in the Account) decreases. This VerDate Aug<31>2005 17:31 Jun 19, 2006 Jkt 208001 dilutes somewhat the owner’s interest in ` the Account vis-a-vis a Life Company and other owners, and in his or her ` variable contract value vis-a-vis a Life Company. Lastly, because it is not administratively feasible to track the unvested value of bonus credits in the Account, a Life Company deducts the daily mortality and expense risk charge and the daily administrative charge from the entire net asset value of the Account. As a result, the daily mortality and expense risk charge, the daily administrative charge, and the daily bonus credit rider paid by any owner is greater than that which he or she would pay without the bonus credit. 25. Applicants previously have received an order for exemptive relief to permit the recapture of certain bonus credits on the prior contracts in similar circumstances to those described above. That order encompassed relief for future contracts substantially similar in all material respects to the prior contracts. Applicants assert that the Contracts described in the application differ from the prior contracts in several respects. Charges are slightly higher. The Contracts also offer living benefits and death benefit options not available with the prior contracts. Because the Applicants believe the Commission may view these differences as material, Applicants are seeking an additional order as set forth in the application. Legal Analysis 1. The Applicants hereby request that the Commission issue an order pursuant to Section 6(c) of the Act to exempt the Applicants with respect to: (a) The Contracts; (b) Future Accounts that support the Contracts; and (c) Future Underwriters from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c–1 thereunder, to the extent necessary to permit the recapture of all or a portion of the bonus credits (previously applied to premium payments) in the circumstances described above. 2. 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. 3. Subsection (i) of Section 27 provides that Section 27 does not apply to any registered separate account supporting variable annuity contracts, PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 35469 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. 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. Specifically, Rule 22c–1, in pertinent part, prohibits a registered investment company issuing any redeemable security, a person designated in such issuer’s prospectus as authorized to consummate transactions in any such security, and a principal underwriter of, or dealer in, such security from selling, redeeming or repurchasing any such security, except at a price based on the current net asset value of such security which is next computed after receipt of a tender of such security for redemption, or of an order to purchase or sell such security. 6. To the extent that the recapture of the bonus credits 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 Act, the bonus credit recapture would trigger the need for relief absent some exemption from the Act. Rule 6c–8 provides, in relevant part, that a registered separate account, and any depositor of such account, shall be exempt from Sections 2(a)(32), 27(c)(1), 27(c)(2) and 27(d) of the Act and Rule 22c–1 thereunder to the extent necessary to permit them to impose a deferred sales loan on any variable annuity contract participating in such account. However, the bonus credit recapture is not a sales load. Rather, it is a recapture of a bonus credit previously applied to an owner’s premium payments. A Life Company provides the bonus credit from its general account on a guaranteed basis. The Contracts are designed to be longterm investment vehicles. In undertaking this financial obligation, a E:\FR\FM\20JNN1.SGM 20JNN1 rwilkins on PROD1PC63 with NOTICES 35470 Federal Register / Vol. 71, No. 118 / Tuesday, June 20, 2006 / Notices Life Company contemplates that an owner will retain a Contract over an extended period, consistent with the long-term nature of the Contracts. A Life Company designed the product so that it would recover its costs (including the bonus credits) 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, a Life Company must recapture the bonus credits subject to recapture in order to avoid a loss. 7. Applicants submit that the proposed bonus credit rider would not violate Sections 2(a)(32) or 27(i)(2)(A) of the Act. A Life Company would grant bonus credits out of its general account assets and the amount of the bonus credits (although not the earnings on such amounts) would remain the Life Company’s until such amounts vest with the owner. Until the appropriate recapture period expires, a Life Company retains the right to and interest in each owner’s contract value representing the dollar amount of any unvested bonus credits. Therefore, if a Life Company recaptures any bonus credit or part of a bonus credit in the circumstances described above, it would merely be retrieving its own assets. To the extent that a Life Company may grant and recapture bonus credits in connection with variable contract value, it would not, at either time, deprive any owner of his or her then proportionate share of the Account’s assets. 8. Applicants further submit that the dynamics of the proposed bonus credit rider would not violate Sections 2(a)(32) or 27(i)(2)(A) of the Act because the recapture of bonus credits would not, at any time, deprive an owner of his or her proportionate share of the current net assets of an 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.’’ Taken together, these two sections of the Act do not require that the holder receive the exact proportionate share that his or her security represented at a prior time. Therefore, the fact that the proposed bonus credit provisions have a dynamic element that may cause the relative ownership positions of a Life Company and a Contract owner to shift due to Account performance and the vesting schedule of such credits, 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 VerDate Aug<31>2005 17:31 Jun 19, 2006 Jkt 208001 the Act, Applicants seek exemptions from these two sections. 9. A Life Company’s granting of bonus credits 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 Account at a price below the current net asset value. Similarly, a Life Company’s recapture of any bonus credit 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 bonus credit rider 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 bonus credits do not violate Rule 22c–1. 10. Rule 22c–1 was intended to eliminate or reduce, as far as was reasonably practicable, (a) 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 (b) other unfair results, including speculative trading practices. Applicants submit that the evils 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. The bonus credit rider does not give rise to either of the two evils that Rule 22c–1 was designed to address. First, the proposed bonus credit rider poses no such threat of dilution. An owner’s interest in his or her contract value or in the 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 bonus credit does not reflect a reduction of that price. Instead, a Life Company would purchase with its general account assets, on behalf of the owner, an interest in the Account equal to the bonus credit. Because the bonus credit will be paid out of the general account assets, not the Account assets, no dilution will occur as a result of the bonus credit. Recaptures of bonus credits result in a redemption of a Life Company’s interest in an owner’s contract value or in the Account at a price determined based on the Account’s current net asset value and PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 not at an inflated price. Moreover, the amount recaptured will always equal the amount that a Life Company paid from its general account for the bonus credits. Similarly, although an owner is entitled to retain any investment gains attributable to the bonus credits, 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 a Life Company’s recapture of the bonus credit. Variable annuities are designed for long-term investment, and by their nature, do not lend themselves to the kind of speculative short-term trading that Rule 22c–1 was designed to prevent. More to the point, the bonus credit recapture simply does not create the opportunity for speculative trading. 13. Rule 22c–1 should have no application to the bonus credit available, as neither of the harms that Rule 22c–1 was intended to address arise in connection with the proposed bonus credit rider. Nonetheless, in order to avoid any uncertainty as to full compliance with the Act, Applicants request an exemption from the provisions of Rule 22c–1. 14. The Applicants submit that the Commission should grant the exemptions requested in the application even if the bonus credit rider arguably conflicts with Sections 2(a)(32), or 27(i)(2)(A) of the Act or Rule 22c–1 thereunder. The bonus credit is generally beneficial to an owner. The recapture tempers this benefit somewhat, but unless the owner dies, the owner retains the ability to avoid the bonus credit recapture in the circumstances described herein. While there would be a small downside in a declining market where losses on the bonus credit amount would vest with him or her immediately, it is the converse of the benefits an owner would receive on the bonus amounts in a rising market because earnings on the bonus credit amount vest with him or her immediately. As any earnings on bonus credits applied would not be subject to recapture and thus would be immediately available to an owner, likewise any losses on bonus credits would also not be subject to recapture and thus would be immediately available to an owner. The bonus credit recapture does not diminish the overall value of the bonus credits. 15. The bonus credit recapture provision is necessary for a Life Company to offer the bonus credits and avoid anti-selection against it. It would be unfair to a Life Company to permit E:\FR\FM\20JNN1.SGM 20JNN1 rwilkins on PROD1PC63 with NOTICES Federal Register / Vol. 71, No. 118 / Tuesday, June 20, 2006 / Notices an owner to keep his or her bonus credits upon his or her exercise of the Contract’s ‘‘free look’’ provision. Because no CDSC applies to the exercise of the ‘‘free look’’ provision, the owner could obtain a quick profit in the amount of the bonus credit at a Life Company’s expense by exercising that right. Similarly, the owner could take advantage of the bonus credit by taking withdrawals within the recapture period, because the cost of providing the bonus credit is recouped through charges imposed over a period of years. Likewise, because no additional CDSC applies upon death of an owner (or annuitant), a death shortly after the award of bonus credits would afford an owner or a beneficiary a similar profit at a Life Company’s expense. 16. In the event of such profits to an owner or beneficiary, a Life Company could not recover the cost of granting the bonus credits. This is because a Life Company intends to recoup the costs of providing the bonus credits through the charges under the bonus credit rider and the Contract, particularly the daily mortality and expense risk charge and the daily administrative charge. 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 of bonus credits that a Life Company must provide. Therefore, the recapture provisions are a price of offering the bonus credits. A Life Company simply cannot offer the proposed bonus credits without the ability to recapture those credits in the limited circumstances described herein. 17. Applicants state that the Commission’s authority under Section 6(c) of the Act to grant exemptions from various provisions of the 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, the Life Companies’ successors in interest, Future Accounts and Future Underwriters from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the 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 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 VerDate Aug<31>2005 18:14 Jun 19, 2006 Jkt 208001 extend to persons that in all material respects are the same as the Applicants. 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 credits under variable annuity contracts. 18. Applicants represent that any contracts in the future will be substantially similar in all material respects to the Contracts, but particularly with respect to the bonus credits and recapture of bonus credits, and that each factual statement and representation about the bonus credit rider will be equally true of any Contracts in the future. Applicants also represent that each material representation made by them about the Account and DSI will be equally true of Future Accounts and Future Underwriters, to the extent that such representations relate to the issues discussed in this 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. For the reasons above, Applicants submit that the bonus credit rider involves none of the abuses to which provision of the Act and rules thereunder are directed. The owner will always retain the investment experience attributable to the bonus credit and will retain the principal amount in all cases except under the circumstances described herein. Further, a Life Company should be able to recapture such bonus credits to limit potential losses associated with such bonus credits. Conclusion 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 Act, and consistent with and supported by Commission precedent. Applicants also submit, based on the analysis listed above, that the provisions for recapture of any bonus credit under the Contracts does not violate Section 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c–1 thereunder. The Applicants hereby request that the Commission issue an order pursuant to Section 6(c) of the Act to exempt the Applicants with respect to: (a) The Contracts; (b) Future Accounts that support the Contracts; and (c) Future Underwriters from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c– 1 thereunder, to the extent necessary to PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 35471 permit the recapture of all or a portion of the bonus credits (previously applied to premium payments) in the circumstances described above. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Nancy M. Morris, Secretary. [FR Doc. E6–9607 Filed 6–19–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–53975; File No. SR–CBOE– 2006–51] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Regarding Market-Maker Appointments June 12, 2006. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 19, 2006, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change CBOE proposes to amend CBOE Rule 8.3 relating to Market-Maker appointments. The text of the proposed rule change is available on the CBOE’s Web site (http://www.cboe.com), at the Office of the Secretary, CBOE, and at the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of 1 15 2 17 E:\FR\FM\20JNN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 20JNN1

Agencies

[Federal Register Volume 71, Number 118 (Tuesday, June 20, 2006)]
[Notices]
[Pages 35466-35471]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-9607]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-27393; File No. 812-13263]


ING USA Annuity and Life Insurance Company, et al.; Notice of 
Application

June 13, 2006.
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 (the ``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: ING USA Annuity and Life Insurance Company (``ING USA''), 
Separate Account B of ING USA Annuity and Life Insurance Company 
(``Account B''), ReliaStar Life Insurance Company of New York 
(``RLNY'') (ING USA and RLNY collectively, the ``Life Companies''), 
Separate Account NY-B of ReliaStar Life Insurance Company of New York 
(``Account NY-B'') (Account B and Account NY-B collectively, the 
``Accounts''), and Directed Services, Inc. (``DSI'').

Summary of the Application: The Applicants request an order pursuant to 
Section 6(c) of the Act exempting them from the provisions of Sections 
2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder to the 
extent necessary to permit recapture of certain bonuses applied to 
purchase payments with respect to: (1) The deferred variable annuity 
contracts and certificates described herein that the Life Companies 
intend to issue (the ``Current Contracts''); (2) deferred variable 
annuity contracts and certificates, substantially similar to the 
Current Contracts that the Life Companies may issue in the future (the 
``Future Contracts'') (Current Contracts and Future Contracts 
collectively, the ``Contracts''); (3) any other separate accounts of 
the Life Companies and their successors in interest (``Future 
Accounts'') that support the Contracts; and (4) 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 principle underwriter for the Contracts (``Future 
Underwriters''). The circumstances under which the Contracts would 
allow the recapture of all or a portion of certain bonus credits 
(previously applied to premium payments) are where the bonus credits 
were applied and: (1) The contract owner exercises his or her ``free 
look'' right; (2) the contract owner dies within twelve months of the 
bonus credit being applied (unless the Contract is continued under the 
spousal benefit continuation option); or (3) the contract owner takes a 
partial withdrawal or surrenders the contract in the first seven or 
four contract years, as applicable, pursuant to the bonus credit 
recapture schedule set forth below.

Filing Date: The application was filed on February 28, 2006 and amended 
and restated on May 3, 2006.

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 the Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on July 7, 2006, and should be accompanied by 
proof of service on the 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 Nicole J. Starr, 
Counsel, ING USA Annuity and Life Insurance Company, 1475 Dunwoody 
Drive, West Chester, Pennsylvania 19380.

FOR FURTHER INFORMATION CONTACT: Alison White, 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 is available for a fee from the 
Public Reference Branch of the Commission, 100 F Street, NE., Room 
1580, Washington, DC 20549.

Applicants' Representations

    1. ING USA is an Iowa stock life insurance company, which was 
originally incorporated in Minnesota on January 2, 1973. ING USA is a 
wholly owned subsidiary of Lion Connecticut Holdings, Inc. (``Lion 
Connecticut'') which in turn is an indirect wholly owned subsidiary of 
ING Groep N.V. (``ING Group''), a global financial services holding 
company based in The Netherlands. ING USA is authorized to sell 
insurance and annuities in all states, except New York, and the 
District of Columbia. ING USA is the depositor and sponsor for Account 
B. ING USA also serves as depositor for several currently existing 
Future Accounts, one or more of which may support obligations under the 
Contracts. ING USA may establish one or more additional Future Accounts 
for which it will serve as depositor.
    2. ING USA established Account B as a segregated investment account 
under Delaware law on July 14, 1988. Account B is registered with the 
Commission as a unit investment trust (File No. 811-5626), and 
interests in Account B offered through the Contracts will be registered 
under the Securities Act of 1933 on form N-4.
    3. RLNY is a New York stock life insurance company originally 
incorporated on June 11, 1917 under the name, The Morris Plan Insurance 
Society. RLNY is an indirect wholly owned subsidiary of ING Group. RLNY 
is authorized to transact business in all states, the District of 
Columbia, the Dominican Republic, and the Cayman Islands and is 
principally engaged in the business of providing individual life 
insurance and annuities, employee benefit products and services, 
retirement plans, and life and health reinsurance. RLNY is the 
depositor and sponsor for Account NY-B. RLNY also serves as depositor 
for several currently existing Future Accounts, one or more of which 
may support obligations under the Contracts. RLNY may establish one or 
more additional Future Accounts for which it will serve as depositor.
    4. Account NY-B was established as a separate account of First 
Golden American Life Insurance Company of

[[Page 35467]]

New York (``First Golden'') on June 13, 1996. It became a separate 
account of RLNY as a result of the merger of First Golden into RLNY 
effective April 1, 2002. Account NY-B is registered with the Commission 
as a unit investment trust (File No. 811-7935).
    5. The Accounts currently are divided into a number of subaccounts. 
Each subaccount 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 
Accounts support one or more varieties of variable annuity contracts, 
including the Contracts.
    6. DSI is a wholly owned subsidiary of Lion Connecticut Holdings, 
Inc., which is in turn a wholly owned subsidiary of ING Group. It 
serves as the principal underwriter of a number of RLNY and ING USA 
separate accounts registered as unit investment trusts under the Act, 
including the Accounts, and is the distributor of the variable life 
insurance contracts and variable annuity contracts issued through such 
separate accounts, including the Contracts. DSI is registered as a 
broker-dealer under the Securities Exchange Act of 1934 and is a member 
of the NASD. DSI may act as principal underwriter for Future Accounts 
of the Life Companies and as distributor for Contracts. Future 
Underwriters also may act as principal underwriter for the Accounts and 
as distributor for any of the Contracts.
    7. The Contracts are deferred combination variable and fixed 
annuity contracts that a Life Company may issue to individuals or 
groups on a ``non-qualified'' basis or in connection with employee 
benefit plans that receive favorable Federal income tax treatment under 
the Internal Revenue Code of 1986, as amended. The Contracts make 
available a number of subaccounts of the Accounts to which an owner may 
allocate net premium payments and associated bonus credits (described 
below) and to which an owner may transfer contract value. There are 
categories of subaccounts for purposes of determining benefits under 
living benefits and death benefits. The Contracts also offer fixed-
interest allocation options under which a Life Company credits 
guaranteed rates of interest for various periods. A market value 
adjustment applies to the fixed-interest allocation options under the 
Contracts. An owner may make transfers of contract value among and 
between the subaccounts and, subject to certain restrictions, among and 
between the subaccounts and the fixed-interest allocation options at 
any time.
    8. The Contracts offer a variety of annuity payment options to an 
owner. The owner may annuitize any time following the fifth contract 
anniversary. If a contingent deferred sales charge remains at the time 
of annuitization, the annuity payment option must include at least a 10 
year fixed period. 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 the annuity payment options instead of a lump sum. The Contracts 
generally may only be purchased with a minimum initial premium of 
$10,000 ($1,500 for certain employee benefit plans).
    9. A Life Company may deduct a premium tax charge from premium 
payments in certain states, but otherwise deducts a charge for premium 
taxes upon surrender or annuitization of the Contract or upon the 
payment of a death benefit, depending upon the jurisdiction. The 
Contracts provide for an annual administrative charge of $40 that a 
Life Company deducts on each Contract Anniversary and upon a full 
surrender of a Contract. A daily mortality and expense risk charge is 
deducted from the assets of the Accounts at a rate depending on the 
death benefit chosen as described below. The range of maximum mortality 
and expense risk charges is 1.70% to 2.80% annually. A daily 
administrative charge is deducted from the assets of the Account at an 
annual rate of 0.15%. The Contracts provide for a charge of $25 for 
each transfer of contract value in excess of twelve transfers per 
contract year. The Life Companies currently waive this charge and 
anticipate waiving this charge for the foreseeable future. The 
Contracts have a surrender charge in the form of a contingent deferred 
sales charge as described more fully below. If an owner chooses an 
optional surrender charge schedule rider that reduces the length of 
time during which the contingent deferred sales charge is applied, an 
additional charge will be deducted as described below. A quarterly 
charge is assessed depending on the type of optional living benefit 
chosen, if any, as described below. Lastly, if an owner chooses the 
optional premium credit rider, an additional charge will be deducted as 
described below.
    10. The contingent deferred sales charge (the ``CDSC'') is equal to 
a percentage of each premium payment surrendered or withdrawn. The CDSC 
is separately calculated and applied to each premium payment at any 
time that the premium payment (or part of the premium payment) is 
surrendered or withdrawn. The CDSC applicable to each premium payment 
diminishes to zero as the payment ages. The Contracts offer a standard 
CDSC schedule as follows:

------------------------------------------------------------------------
                                                                Charge
     Number of full years since payment of each premium       (percent)
------------------------------------------------------------------------
0..........................................................          8.0
1..........................................................          7.0
2..........................................................          6.0
3..........................................................          5.0
4..........................................................          4.0
5..........................................................          3.0
6..........................................................          2.0
7+.........................................................          0.0
------------------------------------------------------------------------

However, the owner may choose a shorter optional CDSC schedule for an 
extra charge (see below). The optional CDSC schedule is as follows:

------------------------------------------------------------------------
                                                                Charge
     Number of full years since payment of each premium       (percent)
------------------------------------------------------------------------
0..........................................................          8.0
1..........................................................          7.0
2..........................................................          6.0
3..........................................................          5.0
4+.........................................................          0.0
------------------------------------------------------------------------

    The charge for the optional CDSC schedule is currently 0.45% of 
contract value per year, assessed quarterly for four years. The maximum 
charge for the optional CDSC schedule will be 0.90% of contract value 
per year, assessed quarterly for four years.

    11. The CDSC does not apply when a death benefit is payable under 
the contracts or to contract value representing an annual free 
withdrawal amount or to contract value in excess of aggregate premium 
payments (less prior withdrawals of premium payments) (``earnings''). 
The CDSC is calculated using the assumption that premium payments are 
withdrawn on a first-in, first-out basis. The CDSC also is calculated 
using the assumption that contract value is withdrawn in the following 
order: (a) The annual free withdrawal amount for that contract year; 
(b) premium payments; and (c) earnings. The annual free withdrawal 
amount is 10% of contract value, measured at the time of withdrawal, 
less any prior withdrawals made in that contract year.
    12. Subject to state availability, an owner may purchase optional 
living benefit riders. The minimum guaranteed income benefit rider (the 
``MGIB Rider'') guarantees that a minimum amount of annuity income will 
be available to the owner, regardless of fluctuating market conditions, 
if the owner annuitizes on or after the rider's exercise date. The 
minimum guaranteed amount of annuity income will depend on the amount 
of

[[Page 35468]]

premiums paid and any credits received, if applicable, during the 
specified number of contract years after the owner purchases the MGIB 
Rider, how the owner allocates the contract value among the subaccounts 
and fixed-interest allocations, and any withdrawals and transfers the 
owner makes while the MGIB Rider is in effect. A Life Company will 
deduct a maximum annual charge of 1.50% (currently, 0.75%) quarterly of 
the MGIB Charge Base (as defined in the MGIB Rider).
    13. The minimum guaranteed withdrawal benefit rider (the ``MGWB 
Rider'') guarantees that a certain amount may be withdrawn annually 
regardless of market performance and even if the contract value is 
reduced to zero. Some Contracts offer the guaranteed withdrawal amount 
until the MGWB Base (as defined in the MGWB Rider) is completely 
recovered. Most Contracts offer the guaranteed withdrawal amount for 
life. The Life Companies expect to extend the guaranteed withdrawal 
amount for until the death of the second designated life. The MGWB 
Rider is subject to conditions and limitations. A Life Company will 
deduct a maximum annual charge of 1.50% (currently, between 0.45% and 
0.75%, depending on the rider and Contract) quarterly of the charge 
basis (as set forth in the MGWB Rider).
    14. If an owner dies before the annuity start date, the Contracts 
provide for a death benefit payable to a beneficiary, computed as of 
the date a Life Company 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: (a) Standard death benefit; (b) 
ratchet death benefit; or (c) rollup death benefit. In the future, a 
Life Company may also offer an optional earnings multiplier benefit 
rider.
    15. The standard death benefit equals the greater of the (a) base 
death benefit, and (b) premium and bonus credits, adjusted pro-rata for 
withdrawals and transfers, less total bonus credits applied since or 
within twelve months prior to death. The base death benefit is the 
greater of the (1) contract value on the claim date, less bonus credits 
applied since or within twelve months prior to death, and (2) cash 
surrender value. The maximum daily mortality and risk charge for the 
standard death benefit is the annual rate of 1.70% (currently 0.85%). A 
Life Company may, in the future, offer the base death benefit as a 
stand alone option for the maximum daily mortality and risk charge of 
2.00% annually.
    16. The ratchet death benefit equals the greater of the (a) 
standard death benefit, and (b) greatest contract value as of any 
quarterly or annual, as applicable, contract anniversary occurring on 
or prior to the maximum attained age, adjusted for new premiums and 
bonus credits, reduced pro rata for withdrawals and transfers, less 
bonus credits applied since or within twelve months prior to death. The 
maximum daily mortality and risk charge for the ratchet death benefit 
is the annual rate of 2.20% (currently 1.10%).
    17. The roll-up death benefit equals the greater of (a) the ratchet 
death benefit, and (b) the lesser of (1) a specified maximum percentage 
of all premiums plus bonus credits adjusted pro-rata for withdrawals 
and transfers, or (2) premiums and bonus credits, if applicable, 
adjusted for withdrawals and transfers accumulated at a specified 
percentage up to the maximum attained age, less bonus credits applied 
since or within twelve months prior to death. The maximum daily 
mortality and risk charge for the roll-up death benefit is the annual 
rate of 2.80% (currently 1.40%).
    18. The earnings multiplier benefit rider provides a separate 
additional death benefit option. This rider provides additional funds 
to the beneficiary that be used to help pay the taxes on the death 
benefit. Upon the owner's death, the beneficiary receives an amount 
equal to a percentage of the Contract's earnings, if any, up to a 
maximum amount. The maximum charge is 0.50% (currently 0.25%).
    19. The Life Companies intend to offer an optional bonus credit 
rider under the Contracts, which the owner may elect at the time of 
application. Under the bonus credit rider, a Life Company credits the 
contract value in the subaccounts and the fixed-interest allocations 
with a bonus credit amount that is a percentage of each premium payment 
made. The bonus credit applies upon issuance of the Contract and is 
based upon premium payments received within the first contract year. A 
Life Company allocates the bonus credit for the applicable premium 
payment among the subaccounts and fixed-interest allocations the owner 
selects in proportion to the premium payment allocated to each 
investment option. If the owner has elected to retain the standard CDSC 
schedule, the bonus credit equals 4% of each premium payment made in 
the first contract year. If the owner has elected to have the optional 
CDSC schedule rider, the bonus credit equals 2% of each premium payment 
made in the first contract year. A Life Company reserves the right to 
increase or decrease the amount of the bonus credit or discontinue the 
bonus credit rider in the future.
    20. The maximum annual charge assessed for the bonus credit rider 
(as a percentage of contract value) is 0.57% (currently, 0.55%) for the 
first seven contract years if the owner retains the standard CDSC 
schedule and 0.50% (currently, 0.45%) for the first four contract years 
if the owner selects the optional CDSC schedule rider. The charge is 
deducted from the contract value in the subaccounts and from amounts in 
fixed interest allocations by crediting a lower interest rate.
    21. Under the bonus credit rider, a Life Company recaptures or 
retains the bonus credits in several circumstances. First, a Life 
Company recaptures or retains 100% of the bonus credits in the event 
that the owner exercises his or her cancellation right during the 
``free look'' period. Second, a Life Company recaptures the bonus 
credits applied to premium payments made since or within twelve months 
of the date as of which a death benefit is computed (unless the 
Contract is continued under the spousal benefit continuation option). 
Third, a Life Company also will recapture part or all of the applicable 
bonus credit upon surrender or withdrawal of corresponding premium 
payments.
    22. In the event of a surrender or withdrawal, the amount of the 
bonus credit a Life Company will recapture is based on the percentage 
of the corresponding premium payment withdrawn and the contract year of 
surrender or withdrawal. For each premium payment, the portion of the 
bonus credit subject to recapture is the total bonus credit amount 
attributable to that premium payment multiplied by the percentage of 
the corresponding premium payment withdrawn. The dollar amount of the 
bonus credit recaptured is the portion of the bonus credit subject to 
recapture multiplied by the applicable recapture percentage. The 
recapture percentage applicable to each bonus credit depends on which 
CDSC is in effect and when the premium payment associated with such 
bonus credit was withdrawn. If the standard CDSC schedule is chosen, 
the recapture percentage applicable to each bonus credit is level for 
the first two contract years and diminishes to zero after the seventh 
contract year. The schedule is as follows:

[[Page 35469]]



------------------------------------------------------------------------
                                                                Bonus
                                                                credit
          Contract year of surrender or withdrawal            recapture
                                                              percentage
                                                              (percent)
------------------------------------------------------------------------
Years 1-2..................................................          100
Years 3-4..................................................           75
Years 5-6..................................................           50
Year 7.....................................................           25
Years 8+...................................................            0
------------------------------------------------------------------------

If the optional CDSC schedule rider is chosen, the recapture percentage 
applicable to each bonus credit diminishes to zero after the fourth 
contract year. The schedule is as follows:

------------------------------------------------------------------------
                                                                Bonus
                                                                credit
          Contract year of surrender or withdrawal            recapture
                                                              percentage
                                                              (percent)
------------------------------------------------------------------------
Year 1.....................................................          100
Year 2.....................................................           75
Year 3.....................................................           50
Year 4.....................................................           25
Years 5+...................................................            0
------------------------------------------------------------------------

A Life Company will not recapture bonus credits attributable to premium 
payments withdrawn representing the annual free withdrawal amount or to 
contract value representing earnings.

    23. Because of the recapture provisions discussed above, the value 
of a bonus credit only fully vests or belongs irrevocably to the owner 
when the recapture period for the bonus credit expires. All bonus 
credits vest over the 4-year period or 7-year period, as applicable, 
after a Life Company grants them. Under the bonus credit rider, a Life 
Company applies the bonus credit to an owner's contract value either by 
``purchasing'' accumulation units of an appropriate subaccount or 
adding to the owner's fixed interest allocation option values.
    24. With regard to variable contract value, several consequences 
flow from the foregoing. First, increases in the value of accumulation 
units representing bonus credits accrue to the owner immediately, but 
the initial value of such units only belongs to the owner when, or to 
the extent that, each vests. Second, decreases in the value of 
accumulation units representing bonus credits 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 
Account) that a Life Company can ``recapture'' increases as variable 
contract value (or the owner's interest in the Account) decreases. This 
dilutes somewhat the owner's interest in the Account vis-[agrave]-vis a 
Life Company and other owners, and in his or her variable contract 
value vis-[agrave]-vis a Life Company. Lastly, because it is not 
administratively feasible to track the unvested value of bonus credits 
in the Account, a Life Company deducts the daily mortality and expense 
risk charge and the daily administrative charge from the entire net 
asset value of the Account. As a result, the daily mortality and 
expense risk charge, the daily administrative charge, and the daily 
bonus credit rider paid by any owner is greater than that which he or 
she would pay without the bonus credit.
    25. Applicants previously have received an order for exemptive 
relief to permit the recapture of certain bonus credits on the prior 
contracts in similar circumstances to those described above. That order 
encompassed relief for future contracts substantially similar in all 
material respects to the prior contracts. Applicants assert that the 
Contracts described in the application differ from the prior contracts 
in several respects. Charges are slightly higher. The Contracts also 
offer living benefits and death benefit options not available with the 
prior contracts. Because the Applicants believe the Commission may view 
these differences as material, Applicants are seeking an additional 
order as set forth in the application.

Legal Analysis

    1. The Applicants hereby request that the Commission issue an order 
pursuant to Section 6(c) of the Act to exempt the Applicants with 
respect to: (a) The Contracts; (b) Future Accounts that support the 
Contracts; and (c) Future Underwriters from the provisions of Sections 
2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the 
extent necessary to permit the recapture of all or a portion of the 
bonus credits (previously applied to premium payments) in the 
circumstances described above.
    2. 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.
    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.
    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. Specifically, Rule 22c-1, in pertinent part, 
prohibits a registered investment company issuing any redeemable 
security, a person designated in such issuer's prospectus as authorized 
to consummate transactions in any such security, and a principal 
underwriter of, or dealer in, such security from selling, redeeming or 
repurchasing any such security, except at a price based on the current 
net asset value of such security which is next computed after receipt 
of a tender of such security for redemption, or of an order to purchase 
or sell such security.
    6. To the extent that the recapture of the bonus credits 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 Act, the bonus credit recapture would 
trigger the need for relief absent some exemption from the Act. Rule 
6c-8 provides, in relevant part, that a registered separate account, 
and any depositor of such account, shall be exempt from Sections 
2(a)(32), 27(c)(1), 27(c)(2) and 27(d) of the Act and Rule 22c-1 
thereunder to the extent necessary to permit them to impose a deferred 
sales loan on any variable annuity contract participating in such 
account. However, the bonus credit recapture is not a sales load. 
Rather, it is a recapture of a bonus credit previously applied to an 
owner's premium payments. A Life Company provides the bonus credit from 
its general account on a guaranteed basis. The Contracts are designed 
to be long-term investment vehicles. In undertaking this financial 
obligation, a

[[Page 35470]]

Life Company contemplates that an owner will retain a Contract over an 
extended period, consistent with the long-term nature of the Contracts. 
A Life Company designed the product so that it would recover its costs 
(including the bonus credits) 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, a Life Company must recapture 
the bonus credits subject to recapture in order to avoid a loss.
    7. Applicants submit that the proposed bonus credit rider would not 
violate Sections 2(a)(32) or 27(i)(2)(A) of the Act. A Life Company 
would grant bonus credits out of its general account assets and the 
amount of the bonus credits (although not the earnings on such amounts) 
would remain the Life Company's until such amounts vest with the owner. 
Until the appropriate recapture period expires, a Life Company retains 
the right to and interest in each owner's contract value representing 
the dollar amount of any unvested bonus credits. Therefore, if a Life 
Company recaptures any bonus credit or part of a bonus credit in the 
circumstances described above, it would merely be retrieving its own 
assets. To the extent that a Life Company may grant and recapture bonus 
credits in connection with variable contract value, it would not, at 
either time, deprive any owner of his or her then proportionate share 
of the Account's assets.
    8. Applicants further submit that the dynamics of the proposed 
bonus credit rider would not violate Sections 2(a)(32) or 27(i)(2)(A) 
of the Act because the recapture of bonus credits would not, at any 
time, deprive an owner of his or her proportionate share of the current 
net assets of an 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.'' Taken 
together, these two sections of the Act do not require that the holder 
receive the exact proportionate share that his or her security 
represented at a prior time. Therefore, the fact that the proposed 
bonus credit provisions have a dynamic element that may cause the 
relative ownership positions of a Life Company and a Contract owner to 
shift due to Account performance and the vesting schedule of such 
credits, 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 Act, Applicants seek exemptions from 
these two sections.
    9. A Life Company's granting of bonus credits 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 Account at a price below 
the current net asset value. Similarly, a Life Company's recapture of 
any bonus credit 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 bonus credit rider 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 bonus credits 
do not violate Rule 22c-1.
    10. Rule 22c-1 was intended to eliminate or reduce, as far as was 
reasonably practicable, (a) 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 (b) other unfair results, including 
speculative trading practices. Applicants submit that the evils 
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. The bonus credit rider does not give rise to either of the two 
evils that Rule 22c-1 was designed to address. First, the proposed 
bonus credit rider poses no such threat of dilution. An owner's 
interest in his or her contract value or in the 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 bonus credit does not reflect a 
reduction of that price. Instead, a Life Company would purchase with 
its general account assets, on behalf of the owner, an interest in the 
Account equal to the bonus credit. Because the bonus credit will be 
paid out of the general account assets, not the Account assets, no 
dilution will occur as a result of the bonus credit. Recaptures of 
bonus credits result in a redemption of a Life Company's interest in an 
owner's contract value or in the Account at a price determined based on 
the Account's current net asset value and not at an inflated price. 
Moreover, the amount recaptured will always equal the amount that a 
Life Company paid from its general account for the bonus credits. 
Similarly, although an owner is entitled to retain any investment gains 
attributable to the bonus credits, 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 a Life Company's recapture of the bonus credit. Variable 
annuities are designed for long-term investment, and by their nature, 
do not lend themselves to the kind of speculative short-term trading 
that Rule 22c-1 was designed to prevent. More to the point, the bonus 
credit recapture simply does not create the opportunity for speculative 
trading.
    13. Rule 22c-1 should have no application to the bonus credit 
available, as neither of the harms that Rule 22c-1 was intended to 
address arise in connection with the proposed bonus credit rider. 
Nonetheless, in order to avoid any uncertainty as to full compliance 
with the Act, Applicants request an exemption from the provisions of 
Rule 22c-1.
    14. The Applicants submit that the Commission should grant the 
exemptions requested in the application even if the bonus credit rider 
arguably conflicts with Sections 2(a)(32), or 27(i)(2)(A) of the Act or 
Rule 22c-1 thereunder. The bonus credit is generally beneficial to an 
owner. The recapture tempers this benefit somewhat, but unless the 
owner dies, the owner retains the ability to avoid the bonus credit 
recapture in the circumstances described herein. While there would be a 
small downside in a declining market where losses on the bonus credit 
amount would vest with him or her immediately, it is the converse of 
the benefits an owner would receive on the bonus amounts in a rising 
market because earnings on the bonus credit amount vest with him or her 
immediately. As any earnings on bonus credits applied would not be 
subject to recapture and thus would be immediately available to an 
owner, likewise any losses on bonus credits would also not be subject 
to recapture and thus would be immediately available to an owner. The 
bonus credit recapture does not diminish the overall value of the bonus 
credits.
    15. The bonus credit recapture provision is necessary for a Life 
Company to offer the bonus credits and avoid anti-selection against it. 
It would be unfair to a Life Company to permit

[[Page 35471]]

an owner to keep his or her bonus credits upon his or her exercise of 
the Contract's ``free look'' provision. Because no CDSC applies to the 
exercise of the ``free look'' provision, the owner could obtain a quick 
profit in the amount of the bonus credit at a Life Company's expense by 
exercising that right. Similarly, the owner could take advantage of the 
bonus credit by taking withdrawals within the recapture period, because 
the cost of providing the bonus credit is recouped through charges 
imposed over a period of years. Likewise, because no additional CDSC 
applies upon death of an owner (or annuitant), a death shortly after 
the award of bonus credits would afford an owner or a beneficiary a 
similar profit at a Life Company's expense.
    16. In the event of such profits to an owner or beneficiary, a Life 
Company could not recover the cost of granting the bonus credits. This 
is because a Life Company intends to recoup the costs of providing the 
bonus credits through the charges under the bonus credit rider and the 
Contract, particularly the daily mortality and expense risk charge and 
the daily administrative charge. 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 of bonus credits that a Life Company must provide. Therefore, 
the recapture provisions are a price of offering the bonus credits. A 
Life Company simply cannot offer the proposed bonus credits without the 
ability to recapture those credits in the limited circumstances 
described herein.
    17. Applicants state that the Commission's authority under Section 
6(c) of the Act to grant exemptions from various provisions of the 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, the Life Companies' successors 
in interest, Future Accounts and Future Underwriters from the 
provisions of Sections 2(a)(32) and 27(i)(2)(A) of the 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 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. 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 credits 
under variable annuity contracts.
    18. Applicants represent that any contracts in the future will be 
substantially similar in all material respects to the Contracts, but 
particularly with respect to the bonus credits and recapture of bonus 
credits, and that each factual statement and representation about the 
bonus credit rider will be equally true of any Contracts in the future. 
Applicants also represent that each material representation made by 
them about the Account and DSI will be equally true of Future Accounts 
and Future Underwriters, to the extent that such representations relate 
to the issues discussed in this 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. For the reasons above, Applicants submit that the bonus credit 
rider involves none of the abuses to which provision of the Act and 
rules thereunder are directed. The owner will always retain the 
investment experience attributable to the bonus credit and will retain 
the principal amount in all cases except under the circumstances 
described herein. Further, a Life Company should be able to recapture 
such bonus credits to limit potential losses associated with such bonus 
credits.

Conclusion

    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 Act, and consistent with and supported by Commission precedent. 
Applicants also submit, based on the analysis listed above, that the 
provisions for recapture of any bonus credit under the Contracts does 
not violate Section 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder. The Applicants hereby request that the Commission issue an 
order pursuant to Section 6(c) of the Act to exempt the Applicants with 
respect to: (a) The Contracts; (b) Future Accounts that support the 
Contracts; and (c) Future Underwriters from the provisions of Sections 
2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the 
extent necessary to permit the recapture of all or a portion of the 
bonus credits (previously applied to premium payments) in the 
circumstances described above.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E6-9607 Filed 6-19-06; 8:45 am]
BILLING CODE 8010-01-P