ING USA Annuity and Life Insurance Company, et al.; Notice of Application, 35466-35471 [E6-9607]
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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
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APPLICANTS:
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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
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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
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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.
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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
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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
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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.
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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
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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:
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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)
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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
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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,
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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
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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
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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
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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
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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
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18:14 Jun 19, 2006
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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
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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 (https://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
