Merrill Lynch Life Insurance Company, et al; Notice of Application, 52177-52183 [E6-14538]
Download as PDF
<![CDATA[
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
are no significant environmental
impacts from the proposed action of
terminating HMI’s license and releasing
for unrestricted use the NRC-licensed
areas of the Heritage site, and has
determined not to prepare an
environmental impact statement.
IV. Further Information
Documents related to this action,
including the application for
amendment and supporting
documentation, are available
electronically at the NRC’s Electronic
Reading Room at https://www.nrc.gov/
reading-rm/adams.html. From this site,
you can access the NRC’s Agencywide
Document Access and Management
System (ADAMS), which provides text
and image files of NRC’s public
documents. The ADAMS accession
numbers for the documents related to
this notice are:
ADAMS
Accession No.
Summarized document description
1 ......
2 ......
3 ......
4 ......
5 ......
6 ......
7 ......
8 ......
9 ......
10 ....
11 ....
12 ....
13 ....
14 ....
15 ....
16 ....
17 ....
Environmental Assessment for the Proposed Termination of U.S. Nuclear Regulatory Commission Materials License
No. SMB–1541, Issued to Heritage Minerals, Inc. in Manchester Township, New Jersey, and Release for Unrestricted Use.
‘‘Five Options for NRC Approval of Disposal or Onsite Storage of Thorium or Uranium Wastes From Past Nuclear
Operations,’’ dated 10/23/81.
FC 83–23 ‘‘Termination of Byproduct, Source, and Special Nuclear Materials Licenses,’’ dated 11/4/83 .....................
Letter terminating Heritage plant activities, dated 8/23/90 ..............................................................................................
Additional Information for License Application, dated 7/25/90 ........................................................................................
Environmental Assessment and Finding of No Significant Impact for HMI DP, dated 10/19/99 ....................................
HMI Final Status Survey, dated 11/25/01 ........................................................................................................................
NRC Confirmatory Survey Report, dated 4/10/02 ...........................................................................................................
HMI proposed additional remediation activities, dated 3/10/03 .......................................................................................
HMI amendment to proposed additional remediation activities, dated 5/6/03 ................................................................
NRC Confirmatory Survey Phase 2, dated 12/31/03 .......................................................................................................
HMI proposed final remediation activities, dated 6/30/04 ................................................................................................
NRC letter accepting proposed final remediation activities, dated 11/17/04 ...................................................................
HMI Termination Request, dated 3/04/05 ........................................................................................................................
Soil Sample Results from HMI, dated 2/14/05 ................................................................................................................
NJDEP comments on draft HMI EA, dated 7/12/05 ........................................................................................................
Dose Assessment for Unrestricted Future Use Scenarios of the HMI site, dated 8/25/05 .............................................
If you do not have access to ADAMS
or if there are problems in accessing the
documents located in ADAMS, contact
the NRC Public Document Room (PDR)
Reference staff at 1–800–397–4209, 301–
415–4737, or by e-mail to pdr@nrc.gov.
These documents may also be viewed
electronically on the public computers
located at the NRC’s PDR, O 1 F21, One
White Flint North, 11555 Rockville
Pike, Rockville, MD 20852. The PDR
reproduction contractor will copy
documents for a fee.
Dated at King of Prussia, Pennsylvania this
23rd day of August, 2006.
For the Nuclear Regulatory Commission.
Marie Miller,
Chief Decommissioning Branch, Division of
Nuclear Materials Safety, Region I.
[FR Doc. E6–14519 Filed 8–31–06; 8:45 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Rel. No. IC–27468; File No.812–13273]
sroberts on PROD1PC70 with NOTICES
Merrill Lynch Life Insurance Company,
et al; Notice of Application
August 28, 2006.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of application for an
amended order pursuant to Section 6(c)
of the Investment Company Act of 1940
AGENCY:
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
(‘‘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: Merrill Lynch Life
Insurance Company (‘‘MLLIC’’), Merrill
Lynch Life Variable Annuity Separate
Account A, Merrill Lynch Life Variable
Annuity Separate Account C, Merrill
Lynch Life Variable Annuity Separate
Account D, ML Life Insurance Company
of New York (‘‘MLNY’’), ML of New
York Variable Annuity Separate
Account A, ML of New York Variable
Annuity Separate Account C, ML of
New York Variable Annuity Separate
Account D, and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
(‘‘MLPF&S’’) (except for MLLIC, MLNY,
and MLPF&S, each a ‘‘separate account’’
and collectively the ‘‘Separate
Accounts’’).
Summary of Application: The
Applicants request an order amending
an existing order to permit the recapture
of amounts applied to purchase
payments made under certain variable
annuity contracts. Applicants also
request that the relief under the order
extend to any current or future separate
accounts of Merrill Lynch and their
successors in interest, which may offer
or support contracts that are
substantially similar in all material
respects to the contracts described in
the application and to any other NASD
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
52177
ML062350098
ML033630718
ML003745523
ML030370350
ML030370324
ML003721778
ML021150357
ML021060589
ML030830547
ML031320537
ML040250070
ML041910222
ML043240049
ML050960109
ML050960038
ML052000408
ML052410061
registered broker/dealers under common
control with Merrill Lynch, that serves
as distributor or principal underwriter
for the contracts.
Filing Date: The application was filed
on February 15, 2006, and amended and
restated on August 24, 2006.
Hearing or Notification of Hearing: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested person may request a
hearing by writing to the Secretary of
the Commission and serving Applicants
with a copy of the request, personally or
by mail. Hearing requests should be
received by the Commission by 5:30
p.m. on September 25, 2006, and should
be accompanied by proof of service on
Applicants, in the form of an affidavit
or, for lawyers, a certificate of service.
Hearing requests should state the nature
of the writer’s interest, the reason for the
request, and the issues contested.
Persons may request notification of a
hearing by writing to the Secretary of
the Commission.
ADDRESSES: Secretary, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–1090.
Applicants, c/o Kirsty Lieberman, Esq.,
Merrill Lynch Insurance Group, Inc.,
1300 Merrill Lynch Drive, 2nd Floor,
Pennington, New Jersey 08534.
FOR FURTHER INFORMATION CONTACT:
Robert Lamont, Senior Counsel or Joyce
M. Pickholz, Branch Chief, Office of
E:\FR\FM\01SEN1.SGM
01SEN1
52178
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
Insurance Products, Division of
Investment Management, at (202) 551–
6795.
The
following is a summary of the
application; the complete application
may be obtained for a fee from the
Public Reference Branch of the
Commission, 100 F Street, NE.,
Washington, DC 20549 (tel. (202) 551–
8090).
SUPPLEMENTARY INFORMATION:
sroberts on PROD1PC70 with NOTICES
Applicants’ Representations
1. The Existing Order (Merrill Lynch
Life Insurance Company, et al.,
Investment Company Act Release Nos.
26712 (Dec. 20, 2004) (Notice) (FR Dec.
28, 2004) and 26726 (Jan. 21, 2005)
(Order)), exempts the Applicants with
respect to certain variable annuity
contracts described herein (‘‘Contracts’’)
and other variable annuity contracts that
are substantially similar in all material
respects to the Contracts, that MLLIC
and/or MLNY (together, the
‘‘Companies’’) may issue in the future
(‘‘Future Contracts’’), and any other
separate accounts of the Companies and
their successors in interest (‘‘Future
Accounts’’) that support Future
Contracts, and certain NASD member
broker-dealers which in the future, may
act as principal underwriter of such
contracts (‘‘Future Underwriters’’), from
the provisions of Sections 2(a)(32) and
27(i)(2)(A) of the Act and Rule 22c–1
thereunder, pursuant to Section 6(c) of
the Act, to the extent necessary to
permit the recapture of all or a portion
of the bonus amounts (previously
attributable to premium payments under
the bonus class of the Contracts (‘‘XC
Class’’)) where the bonus amounts were
applied and a contract owner (‘‘Owner’’)
(1) returns the Contract during the ‘‘Ten
Day Right to Review’’ period (the ‘‘Free
Look Period’’); (2) dies within six
months of receipt and acceptance by
MLLIC or MLNY of a premium payment
(unless the Contract is continued under
the spousal benefit continuation
option); or (3) surrenders the Contract
(in full or in part) or the surrender value
is paid to the Owner within three years
of receipt and acceptance by MLLIC or
MLNY of a premium payment (pursuant
to a bonus recapture schedule).
2. Applicants now seek to amend the
Existing Order by changing the current
bonus structure. The Applicants
propose to increase the maximum bonus
amount percentage during certain
promotional periods. However, the
Applicants would continue to recapture
bonus amounts only at the lower
maximum percentage allowed by the
Existing Order when an Owner
surrenders the Contract (in full or in
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
part) or the surrender value is paid to
the Owner within three years of receipt
and acceptance by MLLIC or MLNY of
a premium payment (pursuant to a
bonus recapture schedule). The change
in the bonus structure may provide an
Owner with an additional bonus
amount that is not subject to recapture.
However, when an Owner returns the
Contract during the Free Look Period or
dies within six months of receipt and
acceptance by MLLIC or MLNY of a
premium payment, then the Applicants
propose to recapture the entire bonus
amount.
3. The Contracts are individual
flexible premium deferred variable
annuity contracts issued by the
Companies through the Separate
Accounts. The Contracts provide for the
accumulation of values on a variable
basis during the accumulation period,
and provide for a variety of annuity
settlement options. Certain Contracts
may be purchased on a non-qualified
tax basis. Certain Contracts also may be
purchased and used in connection with
plans qualifying for favorable federal
income tax treatment. The Contracts
currently offer four different charge
structures, each referred to as a ‘‘Class.’’
Each Class imposes different surrender
charges and asset-based insurance
charges.
4. The Owner determines at the time
of application for a Contract how
premium payments will be allocated
among the subaccounts of the applicable
Separate Account (‘‘Subaccounts’’). The
Owner generally may allocate premium
payments to up to 20 of any of the
available Subaccounts. The Contract
Value, which is the total value of an
Owner’s interest in the Contract as of
the end of the valuation period, will
vary with the investment performance
of the Subaccounts selected, and the
Owner bears the entire risk for amounts
allocated to the Subaccounts.
5. During the Free Look Period, an
Owner has the right to return his or her
Contract within ten days (or longer if
required by state law). In those states
that require the return of premium
payments in the event of Contract
cancellation, the Companies will refund
the greater of all premium payments
paid into the Contract (less any
withdrawals) or the Account Value (less
any bonus amounts) as of the date the
Owner returns the Contract. The
Companies will place premium
payments into a predetermined or
designated money market Subaccount
for the first fourteen days following the
Contract Date. After fourteen days, the
greater of premium payments or
Account Value initially required to be
maintained in the money market
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
Subaccount will be reallocated to the
Subaccounts the Owner selected.
However, if the Owner elected the Asset
Allocation Program at the time he/she
purchased the Contract, then the
premium payments initially required to
be maintained in the money market
Subaccount will be reallocated
according to the asset allocation model
the Owner selected. If the Owner has
not made any withdrawals and the
Companies have placed premium
payments in a money market
Subaccount for the first fourteen days,
the Companies guarantee they will
allocate at least the Owner’s premium
payments to the Subaccounts selected
by the Owner after the fourteen day
period, regardless of charges or
investment performance. The
Companies reserve the right to
discontinue providing this guarantee for
Contracts issued after a specified date.
6. In states that permit the return of
Account Value in the event of Contract
cancellation, the Companies will refund
the Account Value (less any bonus
amounts) as of the date the Owner
returns the Contract. For Contracts
issued in California, for Owners who are
60 years of age or older, the Companies
will put all premium payments in a
money market Subaccount for the first
35 days following the Contract Date,
unless the contract owner directs the
Companies to invest the premiums
immediately in other Subaccounts. The
Companies also will not provide the
guarantee to Contracts issued in
California for Owners who are 60 years
of age or older, whose premium
payments are invested in a money
market Subaccount. The Companies will
invest premium payments immediately
in the Subaccounts the Owner selected
or according to the composition of the
asset allocation model the Owner
selected. The Companies will not
provide the guarantee discussed above
to Owners, in states where the
Companies return Account Value, who
elect to put their premium payments
into a money market Subaccount. The
Companies will not assess surrender
charges against a Contract returned
during the Free Look Period. The
Companies will generally pay the
refund within seven days after they
receive the returned Contract. The
Contract will then be considered void.
The Companies recapture bonus
amounts added to the Account Value if
the Owner returns the Contract during
the Free Look Period.
7. During the accumulation period, an
Owner may transfer Account Value
among the Subaccounts up to twelve
times per Contract year without charge.
An Owner may make additional
E:\FR\FM\01SEN1.SGM
01SEN1
52179
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
transfers, but the Companies currently
charge a $25 transfer fee per transfer
(guaranteed not to exceed $30) after the
first twelve transfers in a Contract year.
Currently, the minimum transfer
amount is $100 or the total value of the
Subaccount if less than $100. The
Account Value remaining in a
Subaccount after a transfer must be at
least $100 or MLLIC or MLNY will
transfer the total value of that
Subaccount.
8. The Owner may surrender the
Contract or make a partial withdrawal
from Account Value during the
accumulation period. The minimum
amount that may be withdrawn is $100,
and at least $5,000 surrender value must
remain in the Contract after a partial
withdrawal (and any associated
surrender charge) is made (except if the
Guaranteed Minimum Withdrawal
Benefit is elected in which case the
minimum surrender value after a partial
withdrawal requirement is waived.) If
an Owner surrenders a Contract or takes
a partial withdrawal, the Companies
may deduct a surrender charge to
compensate them for expenses relating
to the sale of the Contracts, such as
commissions, preparation of sales
literature, and other promotional
activity. Upon partial withdrawal, the
Companies also may deduct any
applicable premium taxes. Upon
surrender, the Companies also will
deduct any applicable contract fee,
accrued but uncollected rider charges,
and applicable premium taxes. The
surrender charge will be reduced using
the ‘‘free withdrawal amount’’ provided
for in the Contract. The free withdrawal
amount is the portion of any partial
withdrawal or surrender that is not
subject to a surrender charge. The free
withdrawal amount is the greater of: (a)
10% of the amount of each premium
subject to a surrender charge (not to
exceed the amount of each premium
that had not been previously withdrawn
as of the beginning of the Contract year),
less any prior withdrawals during that
Contract year; and (b) the ‘‘gain’’ in the
Contract plus premiums remaining in
the Contract that are no longer subject
sroberts on PROD1PC70 with NOTICES
Tier
1
2
3
4
5
......
......
......
......
......
to a surrender charge. Any amount
previously withdrawn from the Contract
during that Contract year will be taken
into account in determining the ‘‘free
withdrawal amount’’ available as of the
date of the withdrawal request. For the
purpose of calculating the surrender
charge, the Companies make
withdrawals as if gain is withdrawn
first, followed by premiums. Premium
payments are assumed to be withdrawn
on a first-in, first-out (‘‘FIFO’’) basis.
The surrender charge equals a
percentage of each premium withdrawn.
With regard to the XC Class offered
under the Contracts, each premium is
subject to the charge for the applicable
period specified below from the date it
is received and accepted by MLLIC or
MLNY, as follows:
Complete years elapsed since
payment of premium
0
1
2
3
4
5
6
7
8
9
Surrender
charge
percentage (as a
percentage of the
premium
payment)
years ........................................
year ..........................................
years ........................................
years ........................................
years ........................................
years ........................................
years ........................................
years ........................................
years ........................................
years ........................................
8.0
8.0
7.0
7.0
6.0
6.0
5.0
4.0
3.0
0
The Companies recapture all or a
portion of the bonus amounts added to
the Account Value if the Owner
surrenders the Contract or makes a
partial withdrawal within three years of
MLLIC’s or MLNY’s receipt and
acceptance of a premium payment.
9. Under certain circumstances, the
Contract may be terminated due to
inactivity. If no premiums have been
received during the prior 24 months (36
months in New York), the total of all
premiums paid (less any partial
withdrawals) is less than $2,000 ($5,000
in New York), and the Account Value is
less than $2,000 ($5,000 in New York),
then the Contract may be terminated. No
Contract will be terminated solely due
to negative investment performance.
Termination for inactivity is treated as
a surrender for purposes of bonus
recapture (not applicable if the
Guaranteed Minimum Withdrawal
Benefit is elected). Also, partial
annuitizations would be considered to
be partial withdrawals for purposes of
calculations under the Contract,
including bonus recaptures.
10. A Surrender charge will not be
deducted from payments made under
any of the death benefits. Upon payment
of the death benefit, the Companies may
deduct any applicable premium taxes.
The Companies will also recapture any
bonus amounts added to the Account
Value if the Owner (the first Owner to
die, if there are Co-Owners, or the first
Annuitant, if any Owner is not a natural
person) dies within six months of
MLLIC’s or MLNY’s receipt and
acceptance of the corresponding
premium payment. However, if an
Owner dies and the Contract is
continued under the spousal benefit
continuation option, any bonus amounts
not previously recaptured will no longer
be subject to recapture as of the spousal
continuation date.
11. If an Owner elects the XC Class
under the Contracts, then the
Companies will add a bonus amount to
the Account Value each time the Owner
makes a premium payment. With regard
to an initial premium payment, the
Companies will apply the
corresponding bonus amount to an
Owner’s Account Value on the Contract
Date. With regard to each additional
premium payment, the Companies will
apply a corresponding bonus amount to
an Owner’s Account Value at the end of
the valuation period during which that
premium payment is received and
accepted at MLLIC’s or MLNY’s Service
Center.
12. Under the Existing Order, to
calculate each bonus amount, the
Companies allocate the corresponding
premium payment to one or more bonus
tiers based on the amount of cumulative
premium payments made under the
Contract, as follows:
Then maximum bonus
amount percentage is:
If cumulative premium payments are:
Then current bonus
amount percentage is:
Then minimum guarantee bonus
amount percentage is:
5.0
5.5
5.5
6.0
7.0
4.5
4.5
4.5
5.5
5.5
3.0
3.0
3.5
4.0
4.5
Less than or equal to $25,000 ...................................................................................................
Greater than $25,000 but less than or equal to $125,000 ........................................................
Greater than $125,000 but less than or equal to $500,000 ......................................................
Greater than $500,000 but less than or equal to $1,000,000 ...................................................
Greater than $1,000,000 ............................................................................................................
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
E:\FR\FM\01SEN1.SGM
01SEN1
52180
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
Under the application, the
Applicant’s propose to change the
bonus structure as follows:
Tier
sroberts on PROD1PC70 with NOTICES
1
2
3
4
5
......
......
......
......
......
Then maximum bonus
amount percentage is:
If cumulative premium payments are:
Then maximum recapture amount
percentage
for withdrawals and
surrenders
is:
Then current bonus
amount percentage is:
Then minimum guarantee bonus
amount percentage is:
7.0
7.0
7.0
7.0
7.0
5.0
5.5
5.5
6.0
7.0
4.5
4.5
4.5
5.5
5.5
3.0
3.0
3.5
4.0
4.5
Less than or equal to $25,000 ...........................................................................
Greater than $25,000 but less than or equal to $125,000 .................................
Greater than $125,000 but less than or equal to $500,000 ...............................
Greater than $500,000 but less than or equal to $1,000,000 ............................
Greater than $1,000,000 ....................................................................................
As is the case under the Existing
Order, under this proposed structure,
the Companies may apply different
bonus percentages to each premium
payment (unless cumulative premium
payments are less than or equal to
$25,000) by breaking out the payment
according to the ranges in the above
table and multiplying the portion of the
payment allocated to each tier by that
tier’s current bonus amount percentage.
However, a premium payment will only
be allocated to the first tier if
cumulative premium payments are less
than or equal to $25,000. If the initial
premium payment exceeds $25,000, the
first tier will not apply and the second
tier will apply to all cumulative
premiums less than or equal to
$125,000. For example, an initial
premium payment of $20,000 would
receive a current bonus amount of $900
($20,000 × 0.045 (tier 1)). If the initial
premium payment is $100,000, the
current bonus amount would be $4,500
($100,000 × 0.045 (tier 2)). However, an
initial premium payment of $700,000
would receive a current bonus amount
of $33,500 ($125,000 × 0.045 (tier 2) +
$375,000 × 0.045 (tier 3) + $200,000 ×
0.055 (tier 4)). No bonus amount will be
based on a percentage that exceeds the
maximum bonus amount percentages
shown in the above table. In addition,
no subsequent recapture of bonus
amounts will exceed the maximum
recapture amount percentages shown in
the above table (except when an Owner
dies within six months of a premium
payment and under the Free Look
Period). When calculating each bonus
amount, ‘‘cumulative premium
payments’’ do not include bonus
amounts previously added to Account
Value. The bonus amount is allocated
among the Subaccounts in the same
manner as the corresponding premium
payment. The Companies may change
the current bonus amount percentage,
but it will never be less than the
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
minimum guaranteed bonus amount
percentage listed in the table.
13. The Companies may offer
promotional programs with promotional
rates for XC Class Contracts issued
within specified periods of time (each,
a ‘‘Promotional Period’’). Such
promotional programs may apply to
initial and/or subsequent premium
payments received during the
Promotional Period. Initial and/or
subsequent premium payments received
after the Promotional Period will receive
the current bonus amount percentage in
effect at that time. No bonus amount
applied pursuant to a promotional
program will be based on a percentage
that exceeds the maximum bonus
amount percentages shown in the above
table. In addition, no subsequent
recapture of bonus amounts will exceed
the maximum recapture amount
percentages shown in the above table
(except when an Owner dies within six
months of a premium payment or under
the Free Look Period). The Companies
may terminate any promotional
programs or offer other promotional
programs at any time in their sole
discretion.
14. If the Owner returns the Contract
during the Free Look Period, then the
Owner will not receive any portion of
the bonus amounts (i.e., the Companies
will ‘‘recapture’’ the full amount of each
bonus). In the event of the death of the
Owner (or upon the death of the first
Owner to die if there are Co-Owners, or
upon the death of the first Annuitant if
any Owner is not a natural person), the
Companies will recapture all remaining
bonus amounts corresponding to
premium payments received and
accepted within the previous six
months of death. Thus, under the XC
Class, if an optional guaranteed
minimum death benefit (‘‘GMDB’’) is
not chosen, the death benefit equals the
Account Value less any bonus amounts
credited in the prior six months and less
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
uncollected charges. If a GMDB is
chosen, the death benefit equals the
greater of the Account Value less any
bonus amounts credited in the prior six
months and less uncollected charges or
the GMDB Base. However, in the event
the Contract is continued under the
spousal beneficiary continuation option,
any bonus amounts not previously
recaptured will no longer be subject to
recapture as of the spousal continuation
date. In the event of partial withdrawal
or surrender within three years of
MLLIC’s or MLNY’s receipt and
acceptance of a premium payment, the
Companies may recapture all or a
portion of the corresponding bonus
amount based on the bonus recapture
percentages presented in the following
schedule:
Completed years since receipt and acceptance of premium payment
Bonus recapture percentage for surrenders and partial withdrawals up to
the maximum
recapture
amount percentage
0 ............................................
1 ............................................
2 ............................................
3+ ..........................................
100
65
30
0
In the event of partial withdrawal or
surrender within three years of MLLIC’s
or MLNY’s receipt and acceptance of a
premium payment, the Companies will
never exceed the maximum recapture
amount of the bonus. For example, if an
Owner makes an initial $10,000
premium payment, the Companies will
add a $700 bonus amount to the
Account Value (assuming the maximum
7.0% bonus amount percentage). In the
event of partial withdrawal or
surrender, if it has been two years since
the receipt and acceptance of this
premium payment, then the maximum
E:\FR\FM\01SEN1.SGM
01SEN1
sroberts on PROD1PC70 with NOTICES
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
bonus amount that the Companies will
recapture is $150 ($10,000 × .050 × .30).
15. The Companies will recapture any
bonus amounts subject to recapture
from the Owner’s Account Value at the
end of the valuation period during
which the transaction request is
received and accepted at MLLIC’s or
MLNY’s Service Center. For each
premium payment, the maximum bonus
amount subject to recapture is equal to
the applicable bonus recapture
percentage for surrenders and partial
withdrawals multiplied by (a) minus (b)
where: (a) is the premium applied
multiplied by the maximum recapture
amount percentage; and (b) is the sum
of each previously recaptured bonus
amount attributable to that premium
payment divided by the bonus recapture
percentage on the date such amount was
recaptured.
16. The Companies will deduct bonus
amounts subject to recapture based on
the associated premiums withdrawn
from the Contract, which are
determined on a ‘‘first-in, first out’’ (or
‘‘FIFO’’) basis. Currently, the Companies
do not recapture any bonus amounts on
withdrawals that are within the ‘‘free
withdrawal amount.’’ The Companies
reserve the right to recapture bonus
amounts on withdrawals that are within
the ‘‘free withdrawal amount’’ in the
future. The amount actually recaptured
is based on the bonus amount subject to
recapture multiplied by the ratio of: (i)
The associated premium payment
withdrawn that was subject to a
surrender charge to (ii) The total amount
of that premium payment remaining in
the Contract immediately prior to the
withdrawal that was subject to a
surrender charge. The Companies will
deduct any recaptured bonus amounts
on a pro rata basis from among the
Subaccounts the Owner is invested in,
based on the ratio of the Owner’s
Subaccount value to his or her total
Subaccount value before the partial
withdrawal.
17. If the Companies recapture a
bonus amount, they will take back the
bonus amount as if it had never been
applied. However, the accumulated gain
or loss on bonus amounts is not subject
to recapture. Thus, an Owner bears any
investment loss and retains any
investment gain attributable to bonus
amounts. The Companies will not recredit any charges, including assetbased insurance charges, imposed on
bonus amounts subsequently
recaptured. The Applicants propose to
amend the Existing Order by increasing
the maximum bonus amount percentage
during certain promotional periods.
However, the Applicants would
continue to recapture bonus amounts
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
only at the lower maximum percentage
allowed by the Existing Order when an
Owner surrenders the Contract (in full
or in part) or the surrender value is paid
to the Owner within three years of
receipt and acceptance by MLLIC or
MLNY of a premium payment (pursuant
to a bonus recapture schedule). Thus,
when an Owner surrenders the Contract,
the change in the bonus structure would
provide an Owner with an additional
bonus amount that is not subject to
recapture. However, when an Owner
returns the Contract during the Free
Look Period or dies within six months
of receipt and acceptance by MLLIC or
MLNY of a premium payment, then the
Applicants propose to recapture the
entire bonus amount. Thus, under the
application, even though the Companies
would increase the maximum bonus
amount percentage up to 7.0%, the
bonus amount recaptured would remain
the same as it is under the Existing
Order with the exception of the Free
Look Period and when an Owner dies
within six months of a premium
payment. For example, under the
Existing Order, if the Owner makes a
premium payment of $10,000, which is
allocated to Tier 2, he would receive a
maximum bonus of $550. If the Owner
surrenders the Contract within one year
of the Companies’ receipt and
acceptance of that premium payment,
the Companies recapture $550, the
entire bonus amount. Under the
application, if the bonus amount
percentage is 7% and the Owner makes
a premium payment of $10,000 and is
in Tier 2, he would receive a maximum
bonus of $700. If the Owner surrenders
the Contract within one year of the
Companies’ receipt and acceptance of
that premium payment, the maximum
amount the Companies would be
permitted to recapture would still be
$550 (the amount of premium paid
multiplied by the maximum recapture
amount percentage allocated to Tier 2).
Thus, under the application, $150 of the
bonus would not be subject to recapture
(except during the Free Look Period and
when an Owner dies within six months
of a premium payment as described
above). If the Owner withdrew the
premium payment, the recapture would
still be based on the bonus recapture
schedule in the Existing Order (which
recaptures 100% of the maximum
recapture amount percentage in the first
year, 65% in the second year, and 30%
in the last year).
Applicants’ Legal Analysis
1. The Applicants request that the
Commission amend the Existing Order
and, pursuant to Section 6(c) of the Act,
grant the exemptions to permit the
PO 00000
Frm 00130
Fmt 4703
Sfmt 4703
52181
Applicants (1) to recapture all bonus
amounts attributable to premium
payments under the Contract’s XC Class
when an Owner returns the Contract
during the Free Look Period; (2) to
recapture all bonus amounts attributable
to premium payments under the
Contract’s XC Class when an Owner
dies within six months of receipt and
acceptance by MLLIC or MLNY of a
premium payment (unless the Contract
is continued under the spousal benefit
continuation option); or (3) to recapture
all or a portion of bonus amounts
attributable to premium payments under
the Contract’s XC Class when an Owner
surrenders the Contract (in full or in
part) or the surrender value is paid to
the Owner (because the Contract has
been terminated for inactivity) within
three years of receipt and acceptance by
MLLIC or MLNY of a premium payment
(pursuant to a bonus recapture
schedule).
2. Because the provisions may be
inconsistent with a recapture of bonus
amounts, the Applicants request
exemptions for the Contracts described
herein, and for Future Contracts, from
Sections 2(a)(32) and 27(i)(2)(A) of the
Act, and Rule 22c-1 thereunder,
pursuant to Section 6(c), to the extent
necessary to recapture the bonus
amounts. The Applicants seek
exemptions in order to avoid any
questions concerning the Contracts’
compliance with the Act and rules
thereunder. The exemptions requested
herein are necessary or appropriate in
the public interest and consistent with
the protection of investors and purposes
fairly intended by the policy and
provisions of the Act.
3. To the extent that the bonus
amount recapture might be seen as a
discount from the net asset value, or
might be viewed as resulting in the
payment to an Owner of less than the
proportionate share of the issuer’s net
assets, the bonus amount recapture
would trigger the need for relief absent
some exemption from the Act. Rule 6c8 provides, in relevant part, that a
registered separate account, and any
depositor of such account, shall be
exempt from Sections 2(a)(32), 22(c),
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 load on any variable
annuity contract participating in such
account. However, the bonus amount
recapture is not a sales load, but a
recapture of bonus amounts MLLIC or
MLNY previously attributed to an
Owner’s premium payments. The
Companies provide the bonus amounts
from their general accounts on a
guaranteed basis. The Contracts are
E:\FR\FM\01SEN1.SGM
01SEN1
sroberts on PROD1PC70 with NOTICES
52182
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
designed to be long-term investment
vehicles. In undertaking this financial
obligation, the Companies contemplate
that an Owner will retain a Contract
over an extended period, consistent
with the long-term nature of the
Contracts. The Companies designed the
product so that they would recover their
costs (including the bonus amounts)
over an anticipated duration while a
Contract is in force. If an Owner
withdraws his money during the Free
Look Period, or a death benefit is paid,
or a withdrawal or surrender is made,
before this anticipated period, the
Companies must recapture the bonus
amounts subject to recapture in order to
avoid a loss. However, if a withdrawal
or surrender is made, the Companies
will absorb the loss for the bonus
amount that exceeds the maximum
recapture amount percentage.
4. Applicants submit that the
recapture of bonus amounts does not
violate Section 2(a)(32) of the Act. The
bonus amount recapture provision
pursuant to the Contract’s XC Class does
not deprive the Owner of his or her
proportionate share of the issuer’s
current net assets. In the case of death
of the Owner, an Owner will have the
full right to any bonus amounts not
previously recaptured six months
following MLLIC’s or MLNY’s receipt
and acceptance of the corresponding
premium payment. In the case of partial
or full surrender, an Owner’s right to a
portion of a bonus amount not
previously recaptured will begin one
year following MLLIC’s or MLNY’s
receipt and acceptance of the
corresponding premium payment, and
an Owner will have the full right to any
such remaining bonus amount three
years following MLLIC’s or MLNY’s
receipt and acceptance of the
corresponding premium payment. Until
that time, the Companies generally
retain the right and interest in the dollar
amount of any bonus amounts subject to
recapture. Thus, when the Companies
recapture all or a portion of a bonus
amount, they are only retrieving their
own assets, and because an Owner does
not have an interest in the bonus
amount, such Owner would not be
deprived of a proportionate share of the
applicable Separate Account’s assets
(the issuer’s current net assets) in
violation of Section 2(a)(32). Therefore,
such recapture does not reduce the
amount of the applicable Separate
Account’s current net assets an Owner
would otherwise be entitled to receive.
However, to avoid uncertainty as to full
compliance with the Act, the Applicants
request an exemption from the
provisions of Sections (2)(a)(32) and
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
27(i)(2)(A) to the extent deemed
necessary to permit them to recapture
all or a portion of the bonus amounts
under the Contracts and Future
Contracts.
5. As a result of the bonus amounts
available under the Contract’s XC Class,
an Owner who made an initial premium
payment of $10,000 in the first Contract
year could be viewed as having an
Account Value of $10,450 before any
earnings accrued. The Companies’
addition of bonus amounts might
arguably be viewed as resulting in an
Owner purchasing a redeemable
security for a price below the current
net asset value. Further, by recapturing
the bonus amounts, the Companies
might arguably be redeeming a
redeemable security for a price other
than one based on the current net asset
value of the applicable Separate
Account.
6. Applicants argue that an Owner’s
interest in his or her Account Value
would always be offered at a price based
on the net asset value next calculated
after receipt of the order. The granting
of bonus amounts does not reflect a
reduction of that price. Instead, the
Companies will purchase with their
own general account assets an interest
in the applicable Separate Account
equal to the bonus amounts. Because the
bonus amounts will be paid out of
MLLIC’s or MLNY’s assets, not the
applicable Separate Account’s assets, no
dilution will occur as a result of the
bonus amounts.
7. Applicants submit that the
recapture of bonus amounts does not
involve either of the two harms that the
Commission intended to eliminate or
reduce with Rule 22c-1. The
Commission’s stated purposes in
adopting Rule 22c-1 were to avoid or
minimize: (1) Dilution of the interests of
other security holders; and (2)
speculative trading practices that are
unfair to such holders. These two
concerns were 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 allowed investors to
take advantage of increases or decreases
in net asset value that were not yet
reflected in the price, and thereby the
values of outstanding mutual fund
shares were diluted.
8. According to Applicants, the
proposed recapture of bonus amounts
under the Contracts does not pose such
threat of dilution. The bonus amount
recapture will not alter an Owner’s net
asset value. The Companies will
determine an Owner’s surrender value
(an amount equal to the Account Value
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
reduced by any charges (including the
surrender charge) and increased by any
credits applied upon surrender) under a
Contract in accordance with Rule 22c–
1 on a basis next computed after receipt
of an Owner’s request for surrender
(likewise, the calculation of death
benefits and annuity payment amounts
will be in full compliance with the
forward pricing requirement of Rule
22c–1). The amount recaptured will
equal all or a portion of bonus amounts
that MLLIC or MLNY paid out of its
general account assets. It is not
administratively feasible to track the
bonus amount in the Separate Accounts
after the Companies apply the bonus. As
a result, the asset-based charges
applicable to the Separate Accounts will
be assessed against the entire amount
held in the Separate Accounts,
including the bonus amount, during the
time the bonus amount is subject to
recapture. During this time, the
aggregate asset-based charges assessed
against an Owner’s Account Value will
be higher than those that would be
charged if the Owner’s Account Value
did not include the bonus amount, but
the increment will obviously be only a
small percentage of the bonus amount.
On the other hand, an Owner will retain
any investment benefit from the bonus
amount. Although an Owner will retain
any investment gain attributable to the
bonus amounts, the Companies will
determine the amount of such gain on
the basis of the current net asset value
of the Subaccount. Thus, no dilution
will occur upon the recapture of bonus
amounts.
9. Further, the other harm that Rule
22c–1 was designed to address
(speculative trading practices calculated
to take advantage of backward pricing)
will not occur as a result of MLLIC’s or
MLNY’s recapture of a bonus amount.
Variable annuities are designed for longterm 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 recapture simply
does not create the opportunity for
speculative trading.
10. Applicants assert that rule 22c–1
should have no application to a bonus
amount, as neither of the harms that
Rule 22c–1 was designed to address are
present in the recapture of bonus
amounts. However, to avoid uncertainty
as to full compliance with the Act, the
Applicants request an exemption from
the provisions of Rule 22c–1 to the
extent deemed necessary to permit them
to recapture bonus amounts available
through the XC Class under the
Contracts and Future Contracts.
E:\FR\FM\01SEN1.SGM
01SEN1
sroberts on PROD1PC70 with NOTICES
Federal Register / Vol. 71, No. 170 / Friday, September 1, 2006 / Notices
11. Applicants submit that the bonus
amount provisions are generally
beneficial to Owners. The recapture
provisions temper this benefit
somewhat, but only if an Owner
redeems his or her money under the
circumstances described herein. While
there would be a small downside in a
declining market where an Owner
would bear any losses attributable to the
bonus amounts up to the maximum
recapture amount percentage, it is the
converse of the benefits an Owner
would receive on the bonus amounts in
a rising market. As any earnings on
bonus amounts applied would not be
subject to recapture and thus would be
immediately available to an Owner,
likewise any losses on bonus amounts
would also not be subject to recapture
and thus would be immediately
available to an Owner. The bonus
amount recapture provision does not
diminish the overall value of the bonus
amounts.
12. MLLIC’s or MLNY’s recapture of
bonus amounts is designed to prevent
anti-selection against it. The risk of antiselection would be that an Owner could
make significant premium payments
into the Contract solely in order to
receive a quick profit from the bonus
amounts. By recapturing the bonus
amounts, the Companies protect
themselves against the risk that an
Owner will make such large premium
payments, receive the bonus amounts,
and then withdraw his or her money
from the Contract. The Companies
generally protect themselves from this
kind of anti-selection, and recover their
costs in situations where an Owner
withdraws his or her money early in the
life of a Contract, by imposing a
surrender charge. However, where an
Owner withdraws his money during the
Free Look Period or a death benefit is
paid, the Companies do not apply this
charge.
13. The Applicants seek relief herein
not only for themselves with respect to
the support of the Contracts, but also
with respect to Future Accounts or
Future Contracts described herein. The
Applicants represent that the terms of
the relief requested with respect to any
Contracts or Future Contracts funded by
the Separate Accounts or Future
Accounts are consistent with the
standards set forth in Section 6(c) of the
Act and Commission precedent. The
Commission has previously granted
class relief (from certain specified
provisions of the Act for separate
accounts that support variable annuity
contracts) that is materially similar to
the relief described in the application.
14. In addition, the Applicants seek
relief herein with respect to Future
VerDate Aug<31>2005
16:21 Aug 31, 2006
Jkt 208001
Underwriters (i.e., a class consisting of
NASD member broker-dealers that may
also act as principal underwriter of the
Contracts and Future Contracts). The
Commission has regularly granted relief
to ‘‘future underwriters’’ that are not
named, and are not affiliates of the
applicants. The Applicants represent
that the terms of the relief requested
with respect to any Future Underwriters
are consistent with the standards set
forth in Section 6(c) of the Act and
Commission precedent.
15. Applicants argue that without the
requested class relief, exemptive relief
for any Future Account, Future
Contract, or Future Underwriter would
have to be requested and obtained
separately. These additional requests for
exemptive relief would present no
issues under the Act not already
addressed herein. If the Applicants were
to repeatedly seek exemptive relief with
respect to the same issues addressed
herein, investors would not receive
additional protection or benefit, and
investors and the Applicants could be
disadvantaged by increased costs from
preparing such additional requests for
relief. The requested class relief is
appropriate in the public interest
because the relief will promote
competitiveness in the variable annuity
market by eliminating the need for the
Companies to file redundant exemptive
applications, thereby reducing
administrative expenses and
maximizing efficient use of resources.
Elimination of the delay and the
expense of repeatedly seeking
exemptive relief would, the Applicants
opine, enhance the Applicants’ ability
to effectively take advantage of business
opportunities as such opportunities
arise. The Applicants’ request for class
exemptions is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act, and that an
order of the Commission including such
class relief, should, therefore, be
granted. Any entity that currently
intends to rely on the requested
exemptive order is named as an
Applicant. Any entity that relies upon
the requested order in the future will
comply with the terms and conditions
contained in the application.
Conclusion
Applicants submit that their request
for an amended order meets the
standards set out in Section 6(c) of the
Act and that an order amending the
Existing Order should, therefore, be
granted.
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
52183
For the Commission, by the Division of
Investment Management, under delegated
authority.
Nancy M. Morris,
Secretary.
[FR Doc. E6–14538 Filed 8–31–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 54374; File No. SR–BSE–2005–
09]
Self-Regulatory Organizations; Boston
Stock Exchange, Inc.; Notice of Filing
of Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto
Relating to Its Minor Rule Violation
Plan
August 28, 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 February
7, 2005, the Boston Stock Exchange, Inc.
(‘‘BSE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which items have been
prepared by the Exchange. The
Exchange filed Amendment No. 1 to the
proposed rule change on July 7, 2006,
and Amendment No. 2 on August 18,
2006.3 The Commission is publishing
this notice to solicit comments on the
proposed rule change, as amended, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange seeks to amend and
make additions to its minor rule
violation plan (‘‘MRVP’’). The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.bostonstock.com/legal/
index.html), at the Exchange’s principal
office, and at the Commission’s Public
Reference Room.
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 proposal, and discussed any
comments it received on the proposed
rule change. The text of these statements
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 replaced and superseded the
original filing, and Amendment No. 2 superseded
and replaced Amendment No. 1.
2 17
E:\FR\FM\01SEN1.SGM
01SEN1
]]>Agencies
[Federal Register Volume 71, Number 170 (Friday, September 1, 2006)]
[Notices]
[Pages 52177-52183]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-14538]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-27468; File No.812-13273]
Merrill Lynch Life Insurance Company, et al; Notice of
Application
August 28, 2006.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an amended order pursuant to Section
6(c) of the Investment Company Act of 1940 (``Act'') granting
exemptions from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of
the Act and Rule 22c-1 thereunder.
-----------------------------------------------------------------------
Applicants: Merrill Lynch Life Insurance Company (``MLLIC''),
Merrill Lynch Life Variable Annuity Separate Account A, Merrill Lynch
Life Variable Annuity Separate Account C, Merrill Lynch Life Variable
Annuity Separate Account D, ML Life Insurance Company of New York
(``MLNY''), ML of New York Variable Annuity Separate Account A, ML of
New York Variable Annuity Separate Account C, ML of New York Variable
Annuity Separate Account D, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (``MLPF&S'') (except for MLLIC, MLNY, and MLPF&S, each a
``separate account'' and collectively the ``Separate Accounts'').
Summary of Application: The Applicants request an order amending an
existing order to permit the recapture of amounts applied to purchase
payments made under certain variable annuity contracts. Applicants also
request that the relief under the order extend to any current or future
separate accounts of Merrill Lynch and their successors in interest,
which may offer or support contracts that are substantially similar in
all material respects to the contracts described in the application and
to any other NASD registered broker/dealers under common control with
Merrill Lynch, that serves as distributor or principal underwriter for
the contracts.
Filing Date: The application was filed on February 15, 2006, and
amended and restated on August 24, 2006.
Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested person may request a hearing by writing to the Secretary of
the Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on September 25, 2006, and should be
accompanied by proof of service on Applicants, in the form of an
affidavit or, for lawyers, a certificate of service. Hearing requests
should state the nature of the writer's interest, the reason for the
request, and the issues contested. Persons may request notification of
a hearing by writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090. Applicants, c/o Kirsty Lieberman, Esq.,
Merrill Lynch Insurance Group, Inc., 1300 Merrill Lynch Drive, 2nd
Floor, Pennington, New Jersey 08534.
FOR FURTHER INFORMATION CONTACT: Robert Lamont, Senior Counsel or Joyce
M. Pickholz, Branch Chief, Office of
[[Page 52178]]
Insurance Products, Division of Investment Management, at (202) 551-
6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application may be obtained for a fee from
the Public Reference Branch of the Commission, 100 F Street, NE.,
Washington, DC 20549 (tel. (202) 551-8090).
Applicants' Representations
1. The Existing Order (Merrill Lynch Life Insurance Company, et
al., Investment Company Act Release Nos. 26712 (Dec. 20, 2004) (Notice)
(FR Dec. 28, 2004) and 26726 (Jan. 21, 2005) (Order)), exempts the
Applicants with respect to certain variable annuity contracts described
herein (``Contracts'') and other variable annuity contracts that are
substantially similar in all material respects to the Contracts, that
MLLIC and/or MLNY (together, the ``Companies'') may issue in the future
(``Future Contracts''), and any other separate accounts of the
Companies and their successors in interest (``Future Accounts'') that
support Future Contracts, and certain NASD member broker-dealers which
in the future, may act as principal underwriter of such contracts
(``Future Underwriters''), from the provisions of Sections 2(a)(32) and
27(i)(2)(A) of the Act and Rule 22c-1 thereunder, pursuant to Section
6(c) of the Act, to the extent necessary to permit the recapture of all
or a portion of the bonus amounts (previously attributable to premium
payments under the bonus class of the Contracts (``XC Class'')) where
the bonus amounts were applied and a contract owner (``Owner'') (1)
returns the Contract during the ``Ten Day Right to Review'' period (the
``Free Look Period''); (2) dies within six months of receipt and
acceptance by MLLIC or MLNY of a premium payment (unless the Contract
is continued under the spousal benefit continuation option); or (3)
surrenders the Contract (in full or in part) or the surrender value is
paid to the Owner within three years of receipt and acceptance by MLLIC
or MLNY of a premium payment (pursuant to a bonus recapture schedule).
2. Applicants now seek to amend the Existing Order by changing the
current bonus structure. The Applicants propose to increase the maximum
bonus amount percentage during certain promotional periods. However,
the Applicants would continue to recapture bonus amounts only at the
lower maximum percentage allowed by the Existing Order when an Owner
surrenders the Contract (in full or in part) or the surrender value is
paid to the Owner within three years of receipt and acceptance by MLLIC
or MLNY of a premium payment (pursuant to a bonus recapture schedule).
The change in the bonus structure may provide an Owner with an
additional bonus amount that is not subject to recapture. However, when
an Owner returns the Contract during the Free Look Period or dies
within six months of receipt and acceptance by MLLIC or MLNY of a
premium payment, then the Applicants propose to recapture the entire
bonus amount.
3. The Contracts are individual flexible premium deferred variable
annuity contracts issued by the Companies through the Separate
Accounts. The Contracts provide for the accumulation of values on a
variable basis during the accumulation period, and provide for a
variety of annuity settlement options. Certain Contracts may be
purchased on a non-qualified tax basis. Certain Contracts also may be
purchased and used in connection with plans qualifying for favorable
federal income tax treatment. The Contracts currently offer four
different charge structures, each referred to as a ``Class.'' Each
Class imposes different surrender charges and asset-based insurance
charges.
4. The Owner determines at the time of application for a Contract
how premium payments will be allocated among the subaccounts of the
applicable Separate Account (``Subaccounts''). The Owner generally may
allocate premium payments to up to 20 of any of the available
Subaccounts. The Contract Value, which is the total value of an Owner's
interest in the Contract as of the end of the valuation period, will
vary with the investment performance of the Subaccounts selected, and
the Owner bears the entire risk for amounts allocated to the
Subaccounts.
5. During the Free Look Period, an Owner has the right to return
his or her Contract within ten days (or longer if required by state
law). In those states that require the return of premium payments in
the event of Contract cancellation, the Companies will refund the
greater of all premium payments paid into the Contract (less any
withdrawals) or the Account Value (less any bonus amounts) as of the
date the Owner returns the Contract. The Companies will place premium
payments into a predetermined or designated money market Subaccount for
the first fourteen days following the Contract Date. After fourteen
days, the greater of premium payments or Account Value initially
required to be maintained in the money market Subaccount will be
reallocated to the Subaccounts the Owner selected. However, if the
Owner elected the Asset Allocation Program at the time he/she purchased
the Contract, then the premium payments initially required to be
maintained in the money market Subaccount will be reallocated according
to the asset allocation model the Owner selected. If the Owner has not
made any withdrawals and the Companies have placed premium payments in
a money market Subaccount for the first fourteen days, the Companies
guarantee they will allocate at least the Owner's premium payments to
the Subaccounts selected by the Owner after the fourteen day period,
regardless of charges or investment performance. The Companies reserve
the right to discontinue providing this guarantee for Contracts issued
after a specified date.
6. In states that permit the return of Account Value in the event
of Contract cancellation, the Companies will refund the Account Value
(less any bonus amounts) as of the date the Owner returns the Contract.
For Contracts issued in California, for Owners who are 60 years of age
or older, the Companies will put all premium payments in a money market
Subaccount for the first 35 days following the Contract Date, unless
the contract owner directs the Companies to invest the premiums
immediately in other Subaccounts. The Companies also will not provide
the guarantee to Contracts issued in California for Owners who are 60
years of age or older, whose premium payments are invested in a money
market Subaccount. The Companies will invest premium payments
immediately in the Subaccounts the Owner selected or according to the
composition of the asset allocation model the Owner selected. The
Companies will not provide the guarantee discussed above to Owners, in
states where the Companies return Account Value, who elect to put their
premium payments into a money market Subaccount. The Companies will not
assess surrender charges against a Contract returned during the Free
Look Period. The Companies will generally pay the refund within seven
days after they receive the returned Contract. The Contract will then
be considered void. The Companies recapture bonus amounts added to the
Account Value if the Owner returns the Contract during the Free Look
Period.
7. During the accumulation period, an Owner may transfer Account
Value among the Subaccounts up to twelve times per Contract year
without charge. An Owner may make additional
[[Page 52179]]
transfers, but the Companies currently charge a $25 transfer fee per
transfer (guaranteed not to exceed $30) after the first twelve
transfers in a Contract year. Currently, the minimum transfer amount is
$100 or the total value of the Subaccount if less than $100. The
Account Value remaining in a Subaccount after a transfer must be at
least $100 or MLLIC or MLNY will transfer the total value of that
Subaccount.
8. The Owner may surrender the Contract or make a partial
withdrawal from Account Value during the accumulation period. The
minimum amount that may be withdrawn is $100, and at least $5,000
surrender value must remain in the Contract after a partial withdrawal
(and any associated surrender charge) is made (except if the Guaranteed
Minimum Withdrawal Benefit is elected in which case the minimum
surrender value after a partial withdrawal requirement is waived.) If
an Owner surrenders a Contract or takes a partial withdrawal, the
Companies may deduct a surrender charge to compensate them for expenses
relating to the sale of the Contracts, such as commissions, preparation
of sales literature, and other promotional activity. Upon partial
withdrawal, the Companies also may deduct any applicable premium taxes.
Upon surrender, the Companies also will deduct any applicable contract
fee, accrued but uncollected rider charges, and applicable premium
taxes. The surrender charge will be reduced using the ``free withdrawal
amount'' provided for in the Contract. The free withdrawal amount is
the portion of any partial withdrawal or surrender that is not subject
to a surrender charge. The free withdrawal amount is the greater of:
(a) 10% of the amount of each premium subject to a surrender charge
(not to exceed the amount of each premium that had not been previously
withdrawn as of the beginning of the Contract year), less any prior
withdrawals during that Contract year; and (b) the ``gain'' in the
Contract plus premiums remaining in the Contract that are no longer
subject to a surrender charge. Any amount previously withdrawn from the
Contract during that Contract year will be taken into account in
determining the ``free withdrawal amount'' available as of the date of
the withdrawal request. For the purpose of calculating the surrender
charge, the Companies make withdrawals as if gain is withdrawn first,
followed by premiums. Premium payments are assumed to be withdrawn on a
first-in, first-out (``FIFO'') basis. The surrender charge equals a
percentage of each premium withdrawn. With regard to the XC Class
offered under the Contracts, each premium is subject to the charge for
the applicable period specified below from the date it is received and
accepted by MLLIC or MLNY, as follows:
------------------------------------------------------------------------
Surrender charge percentage (as
Complete years elapsed since payment a percentage of the premium
of premium payment)
------------------------------------------------------------------------
0 years............................... 8.0
1 year................................ 8.0
2 years............................... 7.0
3 years............................... 7.0
4 years............................... 6.0
5 years............................... 6.0
6 years............................... 5.0
7 years............................... 4.0
8 years............................... 3.0
9 years............................... 0
------------------------------------------------------------------------
The Companies recapture all or a portion of the bonus amounts added
to the Account Value if the Owner surrenders the Contract or makes a
partial withdrawal within three years of MLLIC's or MLNY's receipt and
acceptance of a premium payment.
9. Under certain circumstances, the Contract may be terminated due
to inactivity. If no premiums have been received during the prior 24
months (36 months in New York), the total of all premiums paid (less
any partial withdrawals) is less than $2,000 ($5,000 in New York), and
the Account Value is less than $2,000 ($5,000 in New York), then the
Contract may be terminated. No Contract will be terminated solely due
to negative investment performance. Termination for inactivity is
treated as a surrender for purposes of bonus recapture (not applicable
if the Guaranteed Minimum Withdrawal Benefit is elected). Also, partial
annuitizations would be considered to be partial withdrawals for
purposes of calculations under the Contract, including bonus
recaptures.
10. A Surrender charge will not be deducted from payments made
under any of the death benefits. Upon payment of the death benefit, the
Companies may deduct any applicable premium taxes. The Companies will
also recapture any bonus amounts added to the Account Value if the
Owner (the first Owner to die, if there are Co-Owners, or the first
Annuitant, if any Owner is not a natural person) dies within six months
of MLLIC's or MLNY's receipt and acceptance of the corresponding
premium payment. However, if an Owner dies and the Contract is
continued under the spousal benefit continuation option, any bonus
amounts not previously recaptured will no longer be subject to
recapture as of the spousal continuation date.
11. If an Owner elects the XC Class under the Contracts, then the
Companies will add a bonus amount to the Account Value each time the
Owner makes a premium payment. With regard to an initial premium
payment, the Companies will apply the corresponding bonus amount to an
Owner's Account Value on the Contract Date. With regard to each
additional premium payment, the Companies will apply a corresponding
bonus amount to an Owner's Account Value at the end of the valuation
period during which that premium payment is received and accepted at
MLLIC's or MLNY's Service Center.
12. Under the Existing Order, to calculate each bonus amount, the
Companies allocate the corresponding premium payment to one or more
bonus tiers based on the amount of cumulative premium payments made
under the Contract, as follows:
------------------------------------------------------------------------
Then
Then Then minimum
If cumulative maximum current guarantee
Tier premium payments bonus bonus bonus
are: amount amount amount
percentage percentage percentage
is: is: is:
------------------------------------------------------------------------
1.......... Less than or equal 5.0 4.5 3.0
to $25,000.
2.......... Greater than $25,000 5.5 4.5 3.0
but less than or
equal to $125,000.
3.......... Greater than 5.5 4.5 3.5
$125,000 but less
than or equal to
$500,000.
4.......... Greater than 6.0 5.5 4.0
$500,000 but less
than or equal to
$1,000,000.
5.......... Greater than 7.0 5.5 4.5
$1,000,000.
------------------------------------------------------------------------
[[Page 52180]]
Under the application, the Applicant's propose to change the bonus
structure as follows:
----------------------------------------------------------------------------------------------------------------
Then
maximum
Then recapture Then Then
maximum amount current minimum
If cumulative premium payments bonus percentage bonus guarantee
Tier are: amount for amount bonus
percentage withdrawals percentage amount
is: and is: percentage
surrenders is:
is:
----------------------------------------------------------------------------------------------------------------
1........................ Less than or equal to $25,000.... 7.0 5.0 4.5 3.0
2........................ Greater than $25,000 but less 7.0 5.5 4.5 3.0
than or equal to $125,000.
3........................ Greater than $125,000 but less 7.0 5.5 4.5 3.5
than or equal to $500,000.
4........................ Greater than $500,000 but less 7.0 6.0 5.5 4.0
than or equal to $1,000,000.
5........................ Greater than $1,000,000.......... 7.0 7.0 5.5 4.5
----------------------------------------------------------------------------------------------------------------
As is the case under the Existing Order, under this proposed
structure, the Companies may apply different bonus percentages to each
premium payment (unless cumulative premium payments are less than or
equal to $25,000) by breaking out the payment according to the ranges
in the above table and multiplying the portion of the payment allocated
to each tier by that tier's current bonus amount percentage. However, a
premium payment will only be allocated to the first tier if cumulative
premium payments are less than or equal to $25,000. If the initial
premium payment exceeds $25,000, the first tier will not apply and the
second tier will apply to all cumulative premiums less than or equal to
$125,000. For example, an initial premium payment of $20,000 would
receive a current bonus amount of $900 ($20,000 x 0.045 (tier 1)). If
the initial premium payment is $100,000, the current bonus amount would
be $4,500 ($100,000 x 0.045 (tier 2)). However, an initial premium
payment of $700,000 would receive a current bonus amount of $33,500
($125,000 x 0.045 (tier 2) + $375,000 x 0.045 (tier 3) + $200,000 x
0.055 (tier 4)). No bonus amount will be based on a percentage that
exceeds the maximum bonus amount percentages shown in the above table.
In addition, no subsequent recapture of bonus amounts will exceed the
maximum recapture amount percentages shown in the above table (except
when an Owner dies within six months of a premium payment and under the
Free Look Period). When calculating each bonus amount, ``cumulative
premium payments'' do not include bonus amounts previously added to
Account Value. The bonus amount is allocated among the Subaccounts in
the same manner as the corresponding premium payment. The Companies may
change the current bonus amount percentage, but it will never be less
than the minimum guaranteed bonus amount percentage listed in the
table.
13. The Companies may offer promotional programs with promotional
rates for XC Class Contracts issued within specified periods of time
(each, a ``Promotional Period''). Such promotional programs may apply
to initial and/or subsequent premium payments received during the
Promotional Period. Initial and/or subsequent premium payments received
after the Promotional Period will receive the current bonus amount
percentage in effect at that time. No bonus amount applied pursuant to
a promotional program will be based on a percentage that exceeds the
maximum bonus amount percentages shown in the above table. In addition,
no subsequent recapture of bonus amounts will exceed the maximum
recapture amount percentages shown in the above table (except when an
Owner dies within six months of a premium payment or under the Free
Look Period). The Companies may terminate any promotional programs or
offer other promotional programs at any time in their sole discretion.
14. If the Owner returns the Contract during the Free Look Period,
then the Owner will not receive any portion of the bonus amounts (i.e.,
the Companies will ``recapture'' the full amount of each bonus). In the
event of the death of the Owner (or upon the death of the first Owner
to die if there are Co-Owners, or upon the death of the first Annuitant
if any Owner is not a natural person), the Companies will recapture all
remaining bonus amounts corresponding to premium payments received and
accepted within the previous six months of death. Thus, under the XC
Class, if an optional guaranteed minimum death benefit (``GMDB'') is
not chosen, the death benefit equals the Account Value less any bonus
amounts credited in the prior six months and less uncollected charges.
If a GMDB is chosen, the death benefit equals the greater of the
Account Value less any bonus amounts credited in the prior six months
and less uncollected charges or the GMDB Base. However, in the event
the Contract is continued under the spousal beneficiary continuation
option, any bonus amounts not previously recaptured will no longer be
subject to recapture as of the spousal continuation date. In the event
of partial withdrawal or surrender within three years of MLLIC's or
MLNY's receipt and acceptance of a premium payment, the Companies may
recapture all or a portion of the corresponding bonus amount based on
the bonus recapture percentages presented in the following schedule:
------------------------------------------------------------------------
Bonus
recapture
percentage for
surrenders and
Completed years since receipt and acceptance of premium partial
payment withdrawals up
to the maximum
recapture
amount
percentage
------------------------------------------------------------------------
0....................................................... 100
1....................................................... 65
2....................................................... 30
3+...................................................... 0
------------------------------------------------------------------------
In the event of partial withdrawal or surrender within three years
of MLLIC's or MLNY's receipt and acceptance of a premium payment, the
Companies will never exceed the maximum recapture amount of the bonus.
For example, if an Owner makes an initial $10,000 premium payment, the
Companies will add a $700 bonus amount to the Account Value (assuming
the maximum 7.0% bonus amount percentage). In the event of partial
withdrawal or surrender, if it has been two years since the receipt and
acceptance of this premium payment, then the maximum
[[Page 52181]]
bonus amount that the Companies will recapture is $150 ($10,000 x .050
x .30).
15. The Companies will recapture any bonus amounts subject to
recapture from the Owner's Account Value at the end of the valuation
period during which the transaction request is received and accepted at
MLLIC's or MLNY's Service Center. For each premium payment, the maximum
bonus amount subject to recapture is equal to the applicable bonus
recapture percentage for surrenders and partial withdrawals multiplied
by (a) minus (b) where: (a) is the premium applied multiplied by the
maximum recapture amount percentage; and (b) is the sum of each
previously recaptured bonus amount attributable to that premium payment
divided by the bonus recapture percentage on the date such amount was
recaptured.
16. The Companies will deduct bonus amounts subject to recapture
based on the associated premiums withdrawn from the Contract, which are
determined on a ``first-in, first out'' (or ``FIFO'') basis. Currently,
the Companies do not recapture any bonus amounts on withdrawals that
are within the ``free withdrawal amount.'' The Companies reserve the
right to recapture bonus amounts on withdrawals that are within the
``free withdrawal amount'' in the future. The amount actually
recaptured is based on the bonus amount subject to recapture multiplied
by the ratio of: (i) The associated premium payment withdrawn that was
subject to a surrender charge to (ii) The total amount of that premium
payment remaining in the Contract immediately prior to the withdrawal
that was subject to a surrender charge. The Companies will deduct any
recaptured bonus amounts on a pro rata basis from among the Subaccounts
the Owner is invested in, based on the ratio of the Owner's Subaccount
value to his or her total Subaccount value before the partial
withdrawal.
17. If the Companies recapture a bonus amount, they will take back
the bonus amount as if it had never been applied. However, the
accumulated gain or loss on bonus amounts is not subject to recapture.
Thus, an Owner bears any investment loss and retains any investment
gain attributable to bonus amounts. The Companies will not re-credit
any charges, including asset-based insurance charges, imposed on bonus
amounts subsequently recaptured. The Applicants propose to amend the
Existing Order by increasing the maximum bonus amount percentage during
certain promotional periods. However, the Applicants would continue to
recapture bonus amounts only at the lower maximum percentage allowed by
the Existing Order when an Owner surrenders the Contract (in full or in
part) or the surrender value is paid to the Owner within three years of
receipt and acceptance by MLLIC or MLNY of a premium payment (pursuant
to a bonus recapture schedule). Thus, when an Owner surrenders the
Contract, the change in the bonus structure would provide an Owner with
an additional bonus amount that is not subject to recapture. However,
when an Owner returns the Contract during the Free Look Period or dies
within six months of receipt and acceptance by MLLIC or MLNY of a
premium payment, then the Applicants propose to recapture the entire
bonus amount. Thus, under the application, even though the Companies
would increase the maximum bonus amount percentage up to 7.0%, the
bonus amount recaptured would remain the same as it is under the
Existing Order with the exception of the Free Look Period and when an
Owner dies within six months of a premium payment. For example, under
the Existing Order, if the Owner makes a premium payment of $10,000,
which is allocated to Tier 2, he would receive a maximum bonus of $550.
If the Owner surrenders the Contract within one year of the Companies'
receipt and acceptance of that premium payment, the Companies recapture
$550, the entire bonus amount. Under the application, if the bonus
amount percentage is 7% and the Owner makes a premium payment of
$10,000 and is in Tier 2, he would receive a maximum bonus of $700. If
the Owner surrenders the Contract within one year of the Companies'
receipt and acceptance of that premium payment, the maximum amount the
Companies would be permitted to recapture would still be $550 (the
amount of premium paid multiplied by the maximum recapture amount
percentage allocated to Tier 2). Thus, under the application, $150 of
the bonus would not be subject to recapture (except during the Free
Look Period and when an Owner dies within six months of a premium
payment as described above). If the Owner withdrew the premium payment,
the recapture would still be based on the bonus recapture schedule in
the Existing Order (which recaptures 100% of the maximum recapture
amount percentage in the first year, 65% in the second year, and 30% in
the last year).
Applicants' Legal Analysis
1. The Applicants request that the Commission amend the Existing
Order and, pursuant to Section 6(c) of the Act, grant the exemptions to
permit the Applicants (1) to recapture all bonus amounts attributable
to premium payments under the Contract's XC Class when an Owner returns
the Contract during the Free Look Period; (2) to recapture all bonus
amounts attributable to premium payments under the Contract's XC Class
when an Owner dies within six months of receipt and acceptance by MLLIC
or MLNY of a premium payment (unless the Contract is continued under
the spousal benefit continuation option); or (3) to recapture all or a
portion of bonus amounts attributable to premium payments under the
Contract's XC Class when an Owner surrenders the Contract (in full or
in part) or the surrender value is paid to the Owner (because the
Contract has been terminated for inactivity) within three years of
receipt and acceptance by MLLIC or MLNY of a premium payment (pursuant
to a bonus recapture schedule).
2. Because the provisions may be inconsistent with a recapture of
bonus amounts, the Applicants request exemptions for the Contracts
described herein, and for Future Contracts, from Sections 2(a)(32) and
27(i)(2)(A) of the Act, and Rule 22c-1 thereunder, pursuant to Section
6(c), to the extent necessary to recapture the bonus amounts. The
Applicants seek exemptions in order to avoid any questions concerning
the Contracts' compliance with the Act and rules thereunder. The
exemptions requested herein are necessary or appropriate in the public
interest and consistent with the protection of investors and purposes
fairly intended by the policy and provisions of the Act.
3. To the extent that the bonus amount recapture might be seen as a
discount from the net asset value, or might be viewed as resulting in
the payment to an Owner of less than the proportionate share of the
issuer's net assets, the bonus amount 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), 22(c), 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 load on any
variable annuity contract participating in such account. However, the
bonus amount recapture is not a sales load, but a recapture of bonus
amounts MLLIC or MLNY previously attributed to an Owner's premium
payments. The Companies provide the bonus amounts from their general
accounts on a guaranteed basis. The Contracts are
[[Page 52182]]
designed to be long-term investment vehicles. In undertaking this
financial obligation, the Companies contemplate that an Owner will
retain a Contract over an extended period, consistent with the long-
term nature of the Contracts. The Companies designed the product so
that they would recover their costs (including the bonus amounts) over
an anticipated duration while a Contract is in force. If an Owner
withdraws his money during the Free Look Period, or a death benefit is
paid, or a withdrawal or surrender is made, before this anticipated
period, the Companies must recapture the bonus amounts subject to
recapture in order to avoid a loss. However, if a withdrawal or
surrender is made, the Companies will absorb the loss for the bonus
amount that exceeds the maximum recapture amount percentage.
4. Applicants submit that the recapture of bonus amounts does not
violate Section 2(a)(32) of the Act. The bonus amount recapture
provision pursuant to the Contract's XC Class does not deprive the
Owner of his or her proportionate share of the issuer's current net
assets. In the case of death of the Owner, an Owner will have the full
right to any bonus amounts not previously recaptured six months
following MLLIC's or MLNY's receipt and acceptance of the corresponding
premium payment. In the case of partial or full surrender, an Owner's
right to a portion of a bonus amount not previously recaptured will
begin one year following MLLIC's or MLNY's receipt and acceptance of
the corresponding premium payment, and an Owner will have the full
right to any such remaining bonus amount three years following MLLIC's
or MLNY's receipt and acceptance of the corresponding premium payment.
Until that time, the Companies generally retain the right and interest
in the dollar amount of any bonus amounts subject to recapture. Thus,
when the Companies recapture all or a portion of a bonus amount, they
are only retrieving their own assets, and because an Owner does not
have an interest in the bonus amount, such Owner would not be deprived
of a proportionate share of the applicable Separate Account's assets
(the issuer's current net assets) in violation of Section 2(a)(32).
Therefore, such recapture does not reduce the amount of the applicable
Separate Account's current net assets an Owner would otherwise be
entitled to receive. However, to avoid uncertainty as to full
compliance with the Act, the Applicants request an exemption from the
provisions of Sections (2)(a)(32) and 27(i)(2)(A) to the extent deemed
necessary to permit them to recapture all or a portion of the bonus
amounts under the Contracts and Future Contracts.
5. As a result of the bonus amounts available under the Contract's
XC Class, an Owner who made an initial premium payment of $10,000 in
the first Contract year could be viewed as having an Account Value of
$10,450 before any earnings accrued. The Companies' addition of bonus
amounts might arguably be viewed as resulting in an Owner purchasing a
redeemable security for a price below the current net asset value.
Further, by recapturing the bonus amounts, the Companies might arguably
be redeeming a redeemable security for a price other than one based on
the current net asset value of the applicable Separate Account.
6. Applicants argue that an Owner's interest in his or her Account
Value would always be offered at a price based on the net asset value
next calculated after receipt of the order. The granting of bonus
amounts does not reflect a reduction of that price. Instead, the
Companies will purchase with their own general account assets an
interest in the applicable Separate Account equal to the bonus amounts.
Because the bonus amounts will be paid out of MLLIC's or MLNY's assets,
not the applicable Separate Account's assets, no dilution will occur as
a result of the bonus amounts.
7. Applicants submit that the recapture of bonus amounts does not
involve either of the two harms that the Commission intended to
eliminate or reduce with Rule 22c-1. The Commission's stated purposes
in adopting Rule 22c-1 were to avoid or minimize: (1) Dilution of the
interests of other security holders; and (2) speculative trading
practices that are unfair to such holders. These two concerns were 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 allowed
investors to take advantage of increases or decreases in net asset
value that were not yet reflected in the price, and thereby the values
of outstanding mutual fund shares were diluted.
8. According to Applicants, the proposed recapture of bonus amounts
under the Contracts does not pose such threat of dilution. The bonus
amount recapture will not alter an Owner's net asset value. The
Companies will determine an Owner's surrender value (an amount equal to
the Account Value reduced by any charges (including the surrender
charge) and increased by any credits applied upon surrender) under a
Contract in accordance with Rule 22c-1 on a basis next computed after
receipt of an Owner's request for surrender (likewise, the calculation
of death benefits and annuity payment amounts will be in full
compliance with the forward pricing requirement of Rule 22c-1). The
amount recaptured will equal all or a portion of bonus amounts that
MLLIC or MLNY paid out of its general account assets. It is not
administratively feasible to track the bonus amount in the Separate
Accounts after the Companies apply the bonus. As a result, the asset-
based charges applicable to the Separate Accounts will be assessed
against the entire amount held in the Separate Accounts, including the
bonus amount, during the time the bonus amount is subject to recapture.
During this time, the aggregate asset-based charges assessed against an
Owner's Account Value will be higher than those that would be charged
if the Owner's Account Value did not include the bonus amount, but the
increment will obviously be only a small percentage of the bonus
amount. On the other hand, an Owner will retain any investment benefit
from the bonus amount. Although an Owner will retain any investment
gain attributable to the bonus amounts, the Companies will determine
the amount of such gain on the basis of the current net asset value of
the Subaccount. Thus, no dilution will occur upon the recapture of
bonus amounts.
9. Further, the other harm that Rule 22c-1 was designed to address
(speculative trading practices calculated to take advantage of backward
pricing) will not occur as a result of MLLIC's or MLNY's recapture of a
bonus amount. 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 recapture simply does not create the opportunity for
speculative trading.
10. Applicants assert that rule 22c-1 should have no application to
a bonus amount, as neither of the harms that Rule 22c-1 was designed to
address are present in the recapture of bonus amounts. However, to
avoid uncertainty as to full compliance with the Act, the Applicants
request an exemption from the provisions of Rule 22c-1 to the extent
deemed necessary to permit them to recapture bonus amounts available
through the XC Class under the Contracts and Future Contracts.
[[Page 52183]]
11. Applicants submit that the bonus amount provisions are
generally beneficial to Owners. The recapture provisions temper this
benefit somewhat, but only if an Owner redeems his or her money under
the circumstances described herein. While there would be a small
downside in a declining market where an Owner would bear any losses
attributable to the bonus amounts up to the maximum recapture amount
percentage, it is the converse of the benefits an Owner would receive
on the bonus amounts in a rising market. As any earnings on bonus
amounts applied would not be subject to recapture and thus would be
immediately available to an Owner, likewise any losses on bonus amounts
would also not be subject to recapture and thus would be immediately
available to an Owner. The bonus amount recapture provision does not
diminish the overall value of the bonus amounts.
12. MLLIC's or MLNY's recapture of bonus amounts is designed to
prevent anti-selection against it. The risk of anti-selection would be
that an Owner could make significant premium payments into the Contract
solely in order to receive a quick profit from the bonus amounts. By
recapturing the bonus amounts, the Companies protect themselves against
the risk that an Owner will make such large premium payments, receive
the bonus amounts, and then withdraw his or her money from the
Contract. The Companies generally protect themselves from this kind of
anti-selection, and recover their costs in situations where an Owner
withdraws his or her money early in the life of a Contract, by imposing
a surrender charge. However, where an Owner withdraws his money during
the Free Look Period or a death benefit is paid, the Companies do not
apply this charge.
13. The Applicants seek relief herein not only for themselves with
respect to the support of the Contracts, but also with respect to
Future Accounts or Future Contracts described herein. The Applicants
represent that the terms of the relief requested with respect to any
Contracts or Future Contracts funded by the Separate Accounts or Future
Accounts are consistent with the standards set forth in Section 6(c) of
the Act and Commission precedent. The Commission has previously granted
class relief (from certain specified provisions of the Act for separate
accounts that support variable annuity contracts) that is materially
similar to the relief described in the application.
14. In addition, the Applicants seek relief herein with respect to
Future Underwriters (i.e., a class consisting of NASD member broker-
dealers that may also act as principal underwriter of the Contracts and
Future Contracts). The Commission has regularly granted relief to
``future underwriters'' that are not named, and are not affiliates of
the applicants. The Applicants represent that the terms of the relief
requested with respect to any Future Underwriters are consistent with
the standards set forth in Section 6(c) of the Act and Commission
precedent.
15. Applicants argue that without the requested class relief,
exemptive relief for any Future Account, Future Contract, or Future
Underwriter would have to be requested and obtained separately. These
additional requests for exemptive relief would present no issues under
the Act not already addressed herein. If the Applicants were to
repeatedly seek exemptive relief with respect to the same issues
addressed herein, investors would not receive additional protection or
benefit, and investors and the Applicants could be disadvantaged by
increased costs from preparing such additional requests for relief. The
requested class relief is appropriate in the public interest because
the relief will promote competitiveness in the variable annuity market
by eliminating the need for the Companies to file redundant exemptive
applications, thereby reducing administrative expenses and maximizing
efficient use of resources. Elimination of the delay and the expense of
repeatedly seeking exemptive relief would, the Applicants opine,
enhance the Applicants' ability to effectively take advantage of
business opportunities as such opportunities arise. The Applicants'
request for class exemptions is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act, and
that an order of the Commission including such class relief, should,
therefore, be granted. Any entity that currently intends to rely on the
requested exemptive order is named as an Applicant. Any entity that
relies upon the requested order in the future will comply with the
terms and conditions contained in the application.
Conclusion
Applicants submit that their request for an amended order meets the
standards set out in Section 6(c) of the Act and that an order amending
the Existing Order should, therefore, be granted.
For the Commission, by the Division of Investment Management,
under delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E6-14538 Filed 8-31-06; 8:45 am]
BILLING CODE 8010-01-P
