CUNA Mutual Insurance Society, et al; Notice of Application, 13052-13057 [E8-4686]
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13052
Federal Register / Vol. 73, No. 48 / Tuesday, March 11, 2008 / Notices
For the Commission, by the Division of
Investment Management, under delegated
authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–4684 Filed 3–10–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–28184; 811–4193]
RSI Retirement Trust; Notice of
Application
March 5, 2008.
Securities and Exchange
Commission (‘‘SEC’’).
ACTION: Notice of application for
deregistration under section 8(f) of the
Investment Company Act of 1940 (the
‘‘Act’’).
AGENCY:
Summary of Application: Applicant
requests an order declaring that it has
ceased to be an investment company.
Filing Date: The application was filed
on March 4, 2008.
Hearing or Notification of Hearing: An
order granting the application will be
issued unless the SEC orders a hearing.
Interested persons may request a
hearing by writing to the SEC’s
Secretary and serving applicant with a
copy of the request, personally or by
mail. Hearing requests should be
received by the SEC by 5:30 p.m. on
March 25, 2008, and should be
accompanied by proof of service on the
applicant, in the form of an affidavit or,
for lawyers, a certificate of service.
Hearing request 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 SEC’s
Secretary.
Secretary, U.S. Securities
and Exchange Commission, 100 F St.,
NE., Washington, DC 20549–1090.
Applicant, 150 East 42nd St., New York,
NY 10017.
FOR FURTHER INFORMATION CONTACT:
Diane L. Titus, Paralegal Specialist, at
(202)551–6810, or Mary Kay Frech,
Branch Chief, at (202)551–6821
(Division of Investment Management,
Office of Investment Company
Regulation).
ADDRESSES:
The
following is a summary of the
application. The complete application
may be obtained for a fee at the SEC’s
Public Reference Desk, 100 F Street,
NE., Washington, DC 20549–1520 (tel.
202–551–5850).
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SUPPLEMENTARY INFORMATION:
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Applicant’s Representations and Legal
Analysis
Applicant is registered under the Act
as an open-end management investment
company. On December 27, 2007,
applicant’s securityholders voted to
approve a mandatory redemption of
certain of applicant’s securityholders
and deregistration under the Act.
Applicant’s securities are currently
owned by 45 persons. Applicant states
that its outstanding securities are not
currently and will not be beneficially
owned by more than 100 persons and it
is not now making and does not propose
to make a public offering of its
securities. Applicant states that it will
continue to operate as a company
excepted from the definition of
investment company pursuant to
section 3(c)(1) of the Act. Applicant
requests an order under section 8(f) of
the Act declaring that it has ceased to
be an investment company.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–4750 Filed 3–10–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–28181; File No. 812–13423]
CUNA Mutual Insurance Society, et al;
Notice of Application
March 4, 2008.
Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’).
ACTION: Notice of application for an
order under Section 6(c) of the
Investment Company Act of 1940, as
amended (the ‘‘Act’’ or ‘‘1940 Act’’)
granting exemptions from the provisions
of Sections 2(a)(32) and 27(i)(2)(A) of
the Act and Rule 22c–1 thereunder.
AGENCY:
Applicants: CUNA Mutual Insurance
Society (‘‘Company’’), CUNA Mutual
Variable Annuity Account (‘‘Variable
Account’’) and CUNA Brokerage
Services, Inc. (‘‘CUNA Brokerage’’).
Summary of Application: Applicants
seek an order under Section 6(c) of the
Act, exempting them from Sections
2(a)(32) and 27(i)(2)(A) of the Act and
Rule 22c–1 thereunder, to permit, the
recapture of credits previously applied
to purchase payments of certain flexible
premium deferred variable annuity
contracts issued by the Company (the
‘‘Contracts’’) under the following
circumstances: (1) If the Contract owner
(‘‘Owner’’) returns the Contract during
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the right to examine period; or (2)
within twelve (12) months of the
annuitant’s death when the Company
pays a death benefit. Applicants further
request that the exemptive relief extend
to: (1) any other variable annuity
contracts that the Company may issue in
the future (‘‘Future Contracts’’) that are
substantially similar in all material
respects to the Contracts, and are
funded through the Variable Account or
through other separate accounts of the
Company (‘‘Future Accounts’’); and (2)
any other broker-dealer, which is a
member of the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
and which in the future may act as
distributor of and/or principal
underwriter for, the Contracts or Future
Contracts offered through the Variable
Account or Future Accounts (‘‘Future
Underwriters’’).
Filing Date: The application was filed
on September 7, 2007 and amended and
restated on February 5, 2008.
Hearing or Notification of Hearing: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the Secretary of
the Commission and serving Applicants
with a copy of the request, personally or
by mail. Hearing requests should be
received by the Commission by 5:30
p.m. on March 31, 2008, and should be
accompanied by proof of service on
Applicants in the form of an affidavit or,
for lawyers, a certificate of service.
Hearing requests should state the nature
of the requester’s interest, the reason for
the request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Secretary of the
Commission.
ADDRESSES: Secretary, SEC, 100 F Street,
NE., Washington, DC 20549–1090.
Applicants, c/o Pamela M. Krill, Esq.,
CUNA Mutual Insurance Society, 5910
Mineral Point Road, Madison,
Wisconsin 53705.
FOR FURTHER INFORMATION CONTACT:
Sally Samuel, Senior Counsel, or Joyce
M. Pickholz, Branch Chief, Office of
Insurance Products, Division of
Investment Management at 202–551–
6795.
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained for a fee from the SEC’s
Public Reference Branch, 100 F Street,
NE., Washington, DC 20549 (tel. (202)
551–8090).
Applicants’ Representations
1. The Company is a mutual life
insurance company originally organized
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under the laws of Wisconsin in 1935.
Effective May 3, 2007, the Company was
redomesticated in Iowa.
2. Effective January 1, 2008, CUNA
Mutual Life Insurance Company merged
into the Company. Upon consummation
of the merger, CUNA Mutual Life
Insurance Company’s separate corporate
existence ceased by operation of law,
and the Company assumed legal
ownership of all of the assets of CUNA
Mutual Life Insurance Company,
including the Variable Account and its
assets.
3. The Variable Account was
established by CUNA Mutual Life
Insurance Company as a separate
account on December 14, 1993. The
Variable Account is registered with the
Commission as a unit investment trust
under the 1940 Act. The Variable
Account is domiciled in the State of
Iowa and is a separate account under
Iowa law.
4. The Variable Account is divided
into 15 subdivisions (the
‘‘Subaccounts’’), each of which invests
only in shares of a designated portfolio
of certain management investment
companies (the ‘‘Funds’’) that serve as
variable investment options under the
Contracts.
5. CUNA Brokerage is an affiliate of
the Company. CUNA Brokerage is
registered as a broker-dealer with the
Commission under the Securities
Exchange Act of 1934, as well as with
the securities commissions in the states
in which it operates. It is a member of
FINRA. CUNA Brokerage serves as
distributor and principal underwriter
for the Contracts.
6. The Contracts are flexible premium
deferred variable annuity contracts,
issued by the Company and funded
through the Variable Account, that have
been registered with the Commission
under the Securities Act of 1933, as
amended, (File No. 333–148426). The
Contracts may be sold to or in
connection with retirement plans that
do not qualify for special tax treatment,
as well as retirement plans that qualify
for special tax treatment under the
Internal Revenue Code of 1986, as
amended (the ‘‘Code’’). During the
accumulation period of a Contract,
Owners may allocate funds to one or
more of the Subaccounts and/or to the
fixed account. During the payout period,
the Contracts provide for a variety of
fixed and variable income payout
options.
7. Owners can select one of several
different charge structures, each referred
to as a ‘‘Class.’’ Each Class imposes
different levels of surrender charges,
and mortality and expense risk charges,
as described more fully below. The
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Class must be selected before a Contract
is issued; once the Contract is issued,
the Class cannot be changed.
8. The Owner determines at the time
of application for a Contract how
purchase payments will be allocated
among the Subaccounts and/or the fixed
account. An allocation to a Subaccount
must be for at least 1% of a purchase
payment and be in whole percentages.
An allocation to the fixed account must
be for at least $1,000. The ‘‘Contract
Value,’’ which is the sum of the
amounts of contract value in the fixed
account and in the Variable Account as
of the end of the valuation period, will
vary with the investment performance
of the Subaccounts selected. The Owner
bears the entire risk for amounts
allocated to the Subaccounts.
9. For each net purchase payment of
at least $500,000, the Company will
enhance the Owner’s Contract Value by
an amount that varies by the
Owner’scumulative net purchase
payment level (‘‘Contract Value Increase
Enhancement’’). The enhancement
equals cumulative net purchase
payments, multiplied by the applicable
increase percentage (0.5% for
cumulative net purchase payments
between $500,000 and $999,999.99, and
0.7% for cumulative net purchase
payments in excess of $1,000,000),
minus any prior increases to Contract
Value as a result of the Contract Value
Increase Enhancement. The Company
will allocate the amount of the Contract
Value Increase Enhancement according
to the Owner’s current purchase
payment allocation instructions. The
Company funds the Contract Value
Increase Enhancement from its general
account, and does not charge Owners
for the Contract Value Increase
Enhancement. The Company treats the
Contract Value Increase Enhancement as
Contract earnings. The Contract Value
Increase Enhancement is not subject to
any applicable surrender charge and
will not be recouped if the Owner
returns a Contract during the right to
examine period. Nor will the Company
recoup a Contract Value Increase
Enhancement when the Company pays
a death benefit. Accordingly, the
Company is not seeking to recapture
Contract Value Increase Enhancements.
10. If an Owner elects the Purchase
Payment Credit endorsement to the
Contract, the Company will enhance an
Owner’s Contract Value by 4% (for
cumulative net purchase payments of
up to $250,000) or 5% (for cumulative
net purchase payments of at least
$250,000) each time the Owner makes a
purchase payment. The amount of
increase in Contract Value will equal
cumulative net purchase payments,
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multiplied by the applicable credit
percentage, minus any prior credits to
Contract Value as a result of the
endorsement (‘‘Purchase Payment
Credits’’). The Company will allocate
the amount of the Purchase Payment
Credits according to the Owner’s current
allocation instructions for purchase
payments. The Contract’s mortality and
expense risk charges and surrender
charges are higher if an Owner elects to
receive Purchase Payment Credits. The
Company will treat Purchase Payment
Credits as Contract earnings for
purposes of assessing surrender charges
and taxes under the Contract. If an
Owner elects the Purchase Payment
Credit endorsement, he or she will not
receive the Contract Value Increase
Enhancement. The Purchase Payment
Credit endorsement is not available if an
Owner elects L-Share Class or the
Earnings Enhanced Death Benefit Rider.
11. During the right to examine
period, an Owner has the right to return
the Contract within 10 days after
receiving it (or longer if required by
state law). If an Owner returns a
Contract during the right to examine
period to which the Purchase Payment
Credits endorsement applies, then the
Company proposes to recapture any
Purchase Payment Credits applied, but
not to recapture any gains or to bear any
losses attributable to such Purchase
Payment Credits.
12. The Company will not assess
surrender charges against a Contract
returned during the right to examine
period nor would it assess any market
value adjustments.
13. During the accumulation period if:
(a) An Owner dies, then no death
benefit will be paid and any surviving
Owner becomes the sole Owner; (b) the
sole Owner (who is not also the
annuitant) dies, then no death benefit
will be paid and the annuitant becomes
the new Owner; (c) the sole Owner (who
is also an annuitant) dies—and if the
deceased Owner is the sole annuitant,
then the death benefit proceeds will be
paid to the person to whom proceeds
are payable on the death of the
annuitant (‘‘Beneficiary’’), or if the
deceased Owner was one of two joint
annuitants, then no death benefit will be
paid and the Contract will continue
with the surviving annuitant as the
Owner; or (d) the sole annuitant dies
before the date the Owner elects to
begin receiving income payments
(‘‘Payout Date’’), the Company will pay
the death benefit proceeds to the
Beneficiary named by the Owner in a
lump sum or under an income payout
option (provided certain conditions are
met), as elected by the Beneficiary; if the
Beneficiary is the deceased annuitant’s
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surviving spouse, then the Beneficiary
may elect to continue the Contract.
(Owners and Beneficiaries also may
name successor Beneficiaries.) If there is
no surviving Beneficiary, the Company
will pay the death benefit to the Owner
or the Owner’s estate.
14. An Owner may elect a standard
death benefit or an enhanced death
benefit. The death benefit will be
reduced by any outstanding loan
amount and any applicable premium
expense charges not previously
deducted; no surrender charge will
apply. The Company proposes to
recapture any Purchase Payment Credits
applied to the Contract Value within 12
months of the annuitant’s death when
the Company pays a death benefit.
However, the Company will not
recapture any investment gains
attributable to such Purchase Payment
Credits—these gains stay with the
Owner.
15. During the accumulation period,
an Owner may transfer Contract Value
among the Subaccounts or to or from the
fixed account. Although no fee is
currently charged for transfers, the
Company reserves the right to charge
$10 for each transfer. Additional
restrictions apply to the frequency and
amounts of transfers to and from the
fixed account, and the Company may
impose limitations on transfers in an
attempt to detect, deter, and prevent
frequent, large, or short-term transfer
activity among the Subaccounts that
may adversely affect Owners and other
Fund shareholders.
16. At any time on or before the date
income payments begin (the ‘‘Payout
Date’’), the Owner may surrender the
Contract and receive its surrender value.
The surrender value will be paid in a
lump sum unless the Owner requests
payment under an income payout
option. At any time on or before the
Payout Date, an Owner may make
withdrawals of the surrender value.
There is no minimum amount for
withdrawals, but the maximum amount
is that which would leave the remaining
surrender value equal to $2,000. A
partial withdrawal request that would
reduce the surrender value to less than
$2,000 is treated as a request for a full
surrender of the Contract.
17. If an Owner surrenders a Contract
or makes a partial withdrawal, the
Company will withdraw the amount
requested and may deduct a surrender
charge from the remaining Contract
Value. The Company deducts such a
surrender charge to compensate it for
expenses related to the sale of the
Contracts. Upon partial withdrawal
(including periodic partial withdrawals
made under the systematic withdrawal
plan available under the Contract), the
Company also may apply a market value
adjustment. Upon surrender, the
Company will deduct any applicable
Contract fee, accrued but uncollected
rider charges, applicable premium
expense charges, a market value
adjustment, and any applicable
adjustment or deduction provided for by
an endorsement to the Contract.
18. The amount of the surrender
charge, and the length of time a
surrender charge may be assessed
depends on the share Class the Owner
elects and whether the Purchase
Payment Credits endorsement is elected.
The surrender charge is calculated by
multiplying the applicable charge
percentage (as shown in the table below)
by the amount of each purchase
payment in excess of the free
withdrawal amount that is surrendered.
Charge as a percentage of purchase payment—B-share class
Charge as a percentage of purchase payment—purchase payment credits elected
Charge as a percentage of purchase payment—L-share class
0
1
2
3
4
5
6
7+
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Number of full years between date
of purchase payment and date of
surrender
8
7
6
5
4
3
2
0
9
8
7
6
5
4
3
0
8
7
6
5
0
0
0
0
19. The surrender charge is generally
calculated using the assumption that
earnings are surrendered before any
purchase payments and that purchase
payments are surrendered on a first-infirst-out (‘‘FIFO’’) basis. If the Owner
elects to receive Purchase Payment
Credits, however, the Company will
assume that Contract Value is
withdrawn as follows: (a) Purchase
payments no longer subject to surrender
charges (‘‘old purchase payments’’); (b)
the free withdrawal amount (i.e., old
purchase payments plus 10% of
purchase payments subject to surrender
charges at the time of the withdrawal—
the ‘‘annual free withdrawal amount’’);
(c) purchase payments subject to
surrender charges (‘‘new purchase
payments’’) on a FIFO basis; and (d)
earnings and Purchase Payment Credits.
20. Other available Contract benefits
described in the Application are
available for an addditonal charge. They
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include the: Guaranteed Minimum
Withdrawal Benefit Rider, Guaranteed
Minimum Accumulation Benefit Rider,
Income Payment Increase Endorsement,
Loan Account Endorsement, Change of
Annuitant Endorsement, Spousal
Continuation Endorsement, Fixed
Account Endorsement, Additional
Income Option Endorsement, and
Waiver of Surrender Charge
Endorsement.
21. Certain other charges are made in
connection with the Contracts. Among
these charges are: a current annual
Contract fee of $30 (currently waived if
the Contract Value is $50,000 or more);
a mortality and expense risk charge that
is computed and deducted on a daily
basis and varies by share Class and
whether the Owner elected to receive
Purchase Payment Credits; a daily
administrative charge (annual rate of
0.15% of the average daily net assets of
the Variable Account); and Fund fees
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and expenses. The mortality and
expense risk charge is deducted at an
annual rate of 1.15% of average daily
net assets of the Variable Account for BShare Class Contracts, 1.6% of the
average daily net assets of the Variable
Account if an Owner elects to receive
Purchase Payment Credits, and 1.65% of
the average daily net assets of the
Variable Account for L-Share Class
Contracts.
Applicants’ Legal Analysis
1. Section 6(c) of the 1940 Act
authorizes the Commission, by order
upon application, to conditionally or
unconditionally grant an exemption
from any provision, rule, or regulation
under the 1940 Act to the extent that the
exemption is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the 1940 Act.
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2. Applicants request that the
Commission issue an order pursuant to
Section 6(c) of the 1940 Act, granting
exemptions from Sections 2(a)(32) and
27(i)(2)(A) of the 1940 Act, and Rule
22c–1 thereunder to the extent
necessary to permit the recapture of
Purchase Payment Credits added to a
Contract: (a) When an Owner returns a
Contract during the right to examine
period, or (b) within 12 months of the
annuitant’s death when a death benefit
is paid.
3. Section 27(i)(2)(A) of the 1940 Act,
in pertinent part, makes it unlawful for
any registered separate account funding
variable insurance contracts, or for the
sponsoring insurance company of such
account, to sell any such contract unless
such contract is a redeemable security.
Section 2(a)(32) of the 1940 Act defines
‘‘redeemable security’’ as any security
under the terms of which the holder,
upon its presentation to the issuer, is
entitled to receive approximately his or
her proportionate share of the issuer’s
current net assets, or the cash equivalent
thereof. To the extent that the recapture
of the Purchase Payment Credits might
be seen as a discount from the net asset
value, or might be viewed as resulting
in the payment to an Owner of less than
the approximately proportionate share
of the issuer’s current net assets, the
recapture of Purchase Payment Credits
would trigger the need for relief absent
some exemption from the 1940 Act.
4. Applicants submit that the
Contracts are ‘‘redeemable securities’’
consistent with Section 2(a)(32) of the
1940 Act. The Contracts provide for
withdrawals and surrenders of Contract
Value. The contingent nature of
Purchase Payment Credit recapture will
be disclosed in the prospectuses for the
Contracts. Accordingly, there are no
restrictions on, or impediments to,
withdrawals or surrenders that should
cause the Contracts to be considered
anything other than redeemable
securities within the meaning of the
1940 Act.
5. Applicants further submit that the
recapture of the Purchase Payment
Credits does not deprive an Owner of
his or her approximately proportionate
share of the current net assets of the
Variable Account. Applicants submit
that the Owner’s interest in the
Purchase Payment Credits does not vest
until the expiration of the right to
examine period and of the 12-month
period following the application of a
Purchase Payment Credit to the Owner’s
Contract: until such time, the Company
generally retains the right to and interest
in each Owner’s Contract Value
representing the dollar amount of any
unvested bonus amounts. Therefore,
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when the Company recaptures the
unvested Purchase Payment Credits, the
Company is only retrieving its own
assets. The Company grants Purchase
Payment Credits out of its general
account assets, and the amount of such
Purchase Payment Credits remains
assets of the Company until such bonus
amounts vest with the Owner. Arguably,
then, an Owner is not deprived of his or
her proportionate share of the Variable
Account’s interests when the Company
grants and recaptures unvested
Purchase Payment Credits in connection
with variable Contract Value.
Accordingly, the recapture of Purchase
Payment Credits could be viewed as a
legitimate ‘‘charge’’ for a benefit under
the Contracts, and not as a means of
reducing the amount of the Variable
Account assets that an Owner otherwise
would be entitled to receive.
6. It is the nature of the Purchase
Payment Credits applied to variable
Contract Value that an Owner obtains a
benefit from Purchase Payment Credits
in a rising market because any earnings
on the bonus amount vest with him or
her immediately. Over time this would,
of course, increase the Owner’s share of
Contract Value in the Variable Account
more than it would have increased
without the Purchase Payment Credits.
Conversely, in a falling market an
Owner would suffer a detriment from
Purchase Payment Credits because
losses on the bonus amount would also
‘‘vest’’ with him or her immediately.
Over time this would decrease the
Owner’s share of Contract Value in the
Variable Account by more than it would
have decreased had the Purchase
Payment Credits never been applied.
7. Applicants submit that the
operation of the Purchase Payment
Credits endorsement and the proposed
method of recapturing Purchase
Payment Credits do not violate Section
2(a)(32) or 27(i)(2)(A) of the 1940 Act.
Taken together, these two sections of the
1940 Act do not require that the holder
receive the exact proportionate share
that his or her security represented at a
prior time. Under these circumstances,
the fact that the application of Purchase
Payment Credits has a dynamic element
that may cause the relative ownership
positions of the Company and an Owner
to shift as a result of Variable Account
performance and the vesting schedule of
such Purchase Payment Credits does not
cause the proposed operation of the
Purchase Payment Credit endorsement
and the proposed method of recapturing
Purchase Payment Credits to conflict
with Section 2(a)(32) or 27(i)(2)(A) of
the 1940 Act. Nonetheless, to avoid any
uncertainty as to full compliance with
the 1940 Act, Applicants seek
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exemptions from the provisions of
Sections (2)(a)(32) and 27(i)(2)(A) of the
1940 Act to the extent deemed
necessary to permit them to recapture
the Purchase Payment Credits.
8. Rule 22c–1, promulgated under
Section 22(c) of the 1940 Act, in
pertinent part, prohibits a registered
investment company issuing a
redeemable security (and a person
designated as authorized to consummate
transactions in such security, and a
principal underwriter of, or dealer in,
any such security) from selling,
redeeming, or repurchasing any such
security, except at a price based on the
current net asset value of such security
which is next computed after receipt of
a tender of such security for
redemption, or of an order to purchase
or sell such security. As a result of the
Purchase Payment Credits available
under the Contract, an Owner who
made an initial purchase payment of
$10,000 in the first Contract year, for
example, could be viewed as having a
Contract Value of $10,400 before any
earnings accrued. The Company’s
addition of a Purchase Payment Credit
might arguably be viewed as resulting in
an Owner purchasing a redeemable
security for a price below the current
net asset value. Further, by recapturing
the Purchase Payment Credits, the
Company might arguably be redeeming
a ‘‘redeemable security’’ for a price
other than one based on the current net
asset value of interests in the Variable
Account. Applicants contend that these
interpretations and applications of the
relevant statutory and regulatory
provisions are incorrect, and that the
Purchase Payment Credit provisions do
not conflict with Section 22(c) and Rule
22c–1.
9. Applicants submit that the
recapture of Purchase Payment Credits
would not trigger either of the two
harms that the Commission intended to
eliminate with Rule 22c–1: (a) Dilution
of the interests of other security holders;
and (b) speculative trading practices
that are unfair to such holders. The
proposed recapture of Purchase
Payment Credits under the Contracts
does not pose such threat of dilution.
The recapture will not alter an Owner’s
interest in his or her Contract Value or
in the Variable Account. An Owner’s
interest in his or her Contract Value or
in the Variable Account would always
be offered under the Contracts at a price
determined on the basis of net asset
value. The granting of a bonus amount
(here, a Purchase Payment Credit) does
not reflect a reduction of that price.
Instead, the Company will purchase
with its own money and on behalf of an
Owner an interest in the Variable
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Account equal to the amount of the
Purchase Payment Credits. Because the
Company funds Purchase Payment
Credits with its own general account
assets and not with Variable Account
assets, no dilution will occur from the
awarding of Purchase Payment Credits
under the Contracts. The amount
recaptured will equal the amount that
the Company paid out of its general
account assets for Purchase Payment
Credits. (Applicants represent that it is
not administratively feasible to track the
bonus amount in the Variable Account
after the Company applies a Purchase
Payment Credit. As a result, the assetbased charges applicable to the Variable
Account will be assessed against the
entire amount held in the Variable
Account, including the bonus amount,
during the time the Purchase Payment
Credit is subject to recapture. During
this time, the aggregate asset-based
charges assessed against an Owner’s
Contract Value will be higher than those
that would be charged if the Owner’s
Contract Value did not include the
bonus amount, but the increment will
be only a small percentage of the bonus
amount.) An Owner will retain any
investment gains and bear any
investment losses attributable to
recaptured Purchase Payment Credits.
The Company will determine the
amount of any gain or loss attributable
to Purchase Payment Credits on the
basis of the current net asset value of
Subaccount units. Thus, no dilution
will occur under the proposed method
for recapture of Purchase Payment
Credits.
10. Applicants further submit that the
other harm that Rule 22c–1 was
designed to address (speculative trading
practices calculated to take advantage of
backward pricing) will not occur as a
result of the Company’s recapture of the
Purchase Payment Credits. Variable
annuities are designed for long-term
investment and, by their nature, do not
lend themselves to the kind of
speculative short-term trading that Rule
22c–1 was designed to prevent. Even if
they could be so used, the recapture of
Purchase Payment Credits would
discourage, rather than encourage, any
such trading.
11. For the reasons set forth above,
Applicants submit that Rule 22c–1
should have no application to the
Purchase Payment Credits because
neither of the harms that Rule 22c–1
was designed to address arise in
connection with the proposed recapture
of Purchase Payment Credits. However,
to avoid uncertainty as to full
compliance with the 1940 Act,
Applicants request an exemption from
the provisions of Rule 22c–1 to the
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extent deemed necessary to permit them
to recapture the Purchase Payment
Credits available under the Contracts
under the circumstances noted above.
12. Applicants submit that the
Commission should grant the
exemptions requested in this
Application, even if the bonus amounts
described herein arguably conflict with
Section 2(a)(32) or 27(i)(2)(A) of the
1940 Act, or Rule 22c–1 thereunder. The
application of Purchase Payment Credits
under the Contracts is generally very
favorable and very beneficial to Owners.
Owners who elect the Purchase
Payment Credits endorsement invest not
only their net purchase payments but
also any Purchase Payment Credits, and
receive any positive investment
experience from these bonus amounts.
The Company’s proposed method of
recapturing Purchase Payment Credits
tempers this benefit somewhat, but only
if an Owner cancels his or her Contract
during the right to examine period, or
ifthe Company pays Purchase Payment
Credits and a death benefit during the
same 12-month period. Although in a
declining market, the Owner bears the
downside risk of incurring losses
attributable to the Purchase Payment
Credits, in a rising market, the Owner
receives any gains attributable to any
Purchase Payment Credits applied.
Applicants submit that, on balance, the
Company’s proposed method of
recapturing Purchase Payment Credits
does not diminish the overall value of
the Purchase Payment Credits.
13. The Company’s recapture of
Purchase Payment Credits is designed to
prevent anti-selection—the risk that an
Owner would make significant purchase
payments into the Contract solely to
receive a quick profit from the Purchase
Payment Credits and then withdraw his
or her money. By recapturing the
Purchase Payment Credits, the Company
protects itself against such behavior.
Likewise, if a Beneficiary were to
receive death benefit proceeds under the
Contract before the 12-month period
after a Purchase Payment Credit had
been applied without the Company’s
recapture of those Purchase Payment
Credits, that Beneficiary, too, would
profit at the Company’s expense. The
Company typically protects itself from
this kind of anti-selection by imposing
a surrender charge to recover its costs,
but the Company does not apply a
surrender charge when an Owner
withdraws his or her money during the
right to examine period or when a death
benefit is paid.
14. Applicants established the charge
structure for the Contracts so that the
Company could recover its costs of
offering the Contract over the life of the
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Contract. If the Company were unable to
recapture the Purchase Payment Credits
and instead raised other Contract
charges to cover the costs of offering
Purchase Payment Credits, then the
Company would be charging long-term
Owners for costs actually attributable to
Owners who surrender their Contracts
quickly. Applicants submit, therefore,
that the Purchase Payment Credits
recapture should be viewed as the price
of offering Purchase Payment Credits.
15. Applicants submit that the
application of the Purchase Payment
Credits and their recapture involve none
of the abuses to which the provisions of
the 1940 Act, and the rules thereunder
(cited above) are directed. An Owner
will always retain any investment
experience attributable to Purchase
Payment Credits and, except in the
limited circumstances described herein,
will also retain the principal amount of
any Purchase Payment Credits applied.
Further, the Company should be able to
recapture all of its Purchase Payment
Credits, paid out of its general account
assets, to limit potential losses
associated with offering such bonus
amounts as benefits to Owners.
16. Applicants seek relief requested
herein not only for themselves with
respect to the Contracts, but also with
respect to Future Accounts or Future
Contracts described herein.
17. In addition, Applicants seek relief
herein with respect to Future
Underwriters (i.e., a class consisting of
FINRA-member broker-dealers that may
also act as distributor and/or principal
underwriter of the Contracts and Future
Contracts).
18. Applicants state that, without the
requested class relief, exemptive relief
for any Future Account, Future
Contract, or Future Underwriter would
have to be requested and obtained
separately. Applicants assert that these
additional requests for exemptive relief
would present no issues under the 1940
Act not already addressed herein.
Applicants state that if they were to
repeatedly seek exemptive relief with
respect to the same issues addressed
herein, investors would not receive
additional protection or benefit, and
investors and the Applicants could be
disadvantaged by increased costs from
preparing such additional requests for
relief. Applicants contend that the
requested class relief is appropriate in
the public interest because the relief
will promote competitiveness in the
variable annuity market by eliminating
the need for the Company to file
redundant exemptive applications,
thereby reducing administrative
expenses and maximizing efficient use
of resources. Elimination of the delay
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and the expense of repeatedly seeking
exemptive relief would, Applicants
opine, enhance their ability to
effectively take advantage of business
opportunities as such opportunities
arise.
19. Any entity that intends to rely on
the requested exemptive order currently
is named as an Applicant. Any entity
that relies upon the requested order in
the future will comply with the terms
and conditions contained in this
Application.
March 3, 2008, the Exchange filed
Amendment No. 1 to the proposal.3
CBOE has designated this proposal as
one establishing or changing a due, fee,
or other charge imposed by the
Exchange under Section 19(b)(3)(A),4
and Rule 19b–4(f)(2) thereunder,5 which
renders the proposal effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as modified by Amendment No.
1, from interested persons.
Conclusion
For the reasons summarized above,
Applicants represent that: (a) The
requested exemptions are necessary and
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the 1940 Act; and
(b) their request for class exemptions
is necessary or appropriate in the public
interest and consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the 1940 Act.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CBOE proposes to amend its Fees
Schedule to extend until March 1, 2009,
the dividend, merger, and short stock
interest strategies fee cap program.
Thetext of the proposed rule change is
available at the Exchange, the
Commission’s Public Reference Room,
and https://www.cboe.org/legal.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–4686 Filed 3–10–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57424; File No. SR–CBOE–
2008–22]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change, as Modified by
Amendment No. 1 Thereto, Extending
the Dividend, Merger, and Short Stock
Interest Strategies Fee Cap Pilot
Program
yshivers on PROD1PC62 with NOTICES
March 4, 2008.
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
29, 2008, Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
substantially prepared by CBOE. On
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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15:44 Mar 10, 2008
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CBOE included statements concerning
the purpose of, and basis for, the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. CBOE has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange currently caps marketmaker, firm, and broker-dealer
transaction fees associated with
dividend, merger, and short stock
interest strategies, as described in
Footnote 13 of the CBOE Fees Schedule
(‘‘Strategy Fee Cap’’). The Strategy Fee
Cap is in effect as a pilot program that
expired on March 1, 2008.
The Exchange proposes to extend the
Strategy Fee Cap pilot program until
March 1, 2009. No other changes are
proposed. The Exchange believes that
extension of the Strategy Fee Cap pilot
program would enable the Exchange to
remain competitive for these types of
strategies by keeping fees low.
3 Amendment No. 1 made clarifying changes to
the statutory basis section of the original filing.
4 15 U.S.C. 78s(b)(3)(A).
5 17 CFR 240.19b–4(f)(2).
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13057
2. Statutory Basis
The proposed rule change is
consistent with Section 6(b) of the Act,6
in general, and furthers the objectives of
Section 6(b)(4),7 in particular, in that it
is designed to provide for the equitable
allocation of reasonable dues, fees, and
other charges among CBOE members
and other persons using its facilities.
The Exchange believes that the
proposed extension of the Strategy Fee
Cap pilot program will continue to
benefit market participants who trade
these strategies by lowering their fees.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act 8 and
subparagraph (f)(2) of Rule 19b–4
thereunder,9 because it establishes or
changes a due, fee or other charge
imposed by the Exchange. At any time
within 60 days of the filing of the
proposed rule change, the Commission
may summarily abrogate such rule
change if it appears to the Commission
that such action is necessary or
appropriate in the public interest, for
the protection of investors, or otherwise
in furtherance of the purposes of the
Act.10
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
6 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
8 15 U.S.C. 78s(b)(3)(A)(ii).
9 17 CFR 240.19b–4(f)(2).
10 For purposes of calculating the 60-day period
within which the Commission may summarily
abrogate the proposed rule change under Section
19(b)(3)(C) of the Act, the Commission considers
the period to commence on March 3, 2008, the date
on which CBOE filed Amendment No. 1. See 15
U.S.C. 78s(b)(3)(C).
7 15
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]]>Agencies
[Federal Register Volume 73, Number 48 (Tuesday, March 11, 2008)]
[Notices]
[Pages 13052-13057]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-4686]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-28181; File No. 812-13423]
CUNA Mutual Insurance Society, et al; Notice of Application
March 4, 2008.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under Section 6(c) of the
Investment Company Act of 1940, as amended (the ``Act'' or ``1940
Act'') granting exemptions from the provisions of Sections 2(a)(32) and
27(i)(2)(A) of the Act and Rule 22c-1 thereunder.
-----------------------------------------------------------------------
Applicants: CUNA Mutual Insurance Society (``Company''), CUNA
Mutual Variable Annuity Account (``Variable Account'') and CUNA
Brokerage Services, Inc. (``CUNA Brokerage'').
Summary of Application: Applicants seek an order under Section
6(c) of the Act, exempting them from Sections 2(a)(32) and 27(i)(2)(A)
of the Act and Rule 22c-1 thereunder, to permit, the recapture of
credits previously applied to purchase payments of certain flexible
premium deferred variable annuity contracts issued by the Company (the
``Contracts'') under the following circumstances: (1) If the Contract
owner (``Owner'') returns the Contract during the right to examine
period; or (2) within twelve (12) months of the annuitant's death when
the Company pays a death benefit. Applicants further request that the
exemptive relief extend to: (1) any other variable annuity contracts
that the Company may issue in the future (``Future Contracts'') that
are substantially similar in all material respects to the Contracts,
and are funded through the Variable Account or through other separate
accounts of the Company (``Future Accounts''); and (2) any other
broker-dealer, which is a member of the Financial Industry Regulatory
Authority, Inc. (``FINRA'') and which in the future may act as
distributor of and/or principal underwriter for, the Contracts or
Future Contracts offered through the Variable Account or Future
Accounts (``Future Underwriters'').
Filing Date: The application was filed on September 7, 2007 and
amended and restated on February 5, 2008.
Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Secretary of
the Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on March 31, 2008, and should be accompanied by
proof of service on Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the requester's interest, the reason for the request, and the
issues contested. Persons who wish to be notified of a hearing may
request notification by writing to the Secretary of the Commission.
ADDRESSES: Secretary, SEC, 100 F Street, NE., Washington, DC 20549-
1090. Applicants, c/o Pamela M. Krill, Esq., CUNA Mutual Insurance
Society, 5910 Mineral Point Road, Madison, Wisconsin 53705.
FOR FURTHER INFORMATION CONTACT: Sally Samuel, Senior Counsel, or Joyce
M. Pickholz, Branch Chief, Office of Insurance Products, Division of
Investment Management at 202-551-6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 100 F Street, NE., Washington, DC
20549 (tel. (202) 551-8090).
Applicants' Representations
1. The Company is a mutual life insurance company originally
organized
[[Page 13053]]
under the laws of Wisconsin in 1935. Effective May 3, 2007, the Company
was redomesticated in Iowa.
2. Effective January 1, 2008, CUNA Mutual Life Insurance Company
merged into the Company. Upon consummation of the merger, CUNA Mutual
Life Insurance Company's separate corporate existence ceased by
operation of law, and the Company assumed legal ownership of all of the
assets of CUNA Mutual Life Insurance Company, including the Variable
Account and its assets.
3. The Variable Account was established by CUNA Mutual Life
Insurance Company as a separate account on December 14, 1993. The
Variable Account is registered with the Commission as a unit investment
trust under the 1940 Act. The Variable Account is domiciled in the
State of Iowa and is a separate account under Iowa law.
4. The Variable Account is divided into 15 subdivisions (the
``Subaccounts''), each of which invests only in shares of a designated
portfolio of certain management investment companies (the ``Funds'')
that serve as variable investment options under the Contracts.
5. CUNA Brokerage is an affiliate of the Company. CUNA Brokerage is
registered as a broker-dealer with the Commission under the Securities
Exchange Act of 1934, as well as with the securities commissions in the
states in which it operates. It is a member of FINRA. CUNA Brokerage
serves as distributor and principal underwriter for the Contracts.
6. The Contracts are flexible premium deferred variable annuity
contracts, issued by the Company and funded through the Variable
Account, that have been registered with the Commission under the
Securities Act of 1933, as amended, (File No. 333-148426). The
Contracts may be sold to or in connection with retirement plans that do
not qualify for special tax treatment, as well as retirement plans that
qualify for special tax treatment under the Internal Revenue Code of
1986, as amended (the ``Code''). During the accumulation period of a
Contract, Owners may allocate funds to one or more of the Subaccounts
and/or to the fixed account. During the payout period, the Contracts
provide for a variety of fixed and variable income payout options.
7. Owners can select one of several different charge structures,
each referred to as a ``Class.'' Each Class imposes different levels of
surrender charges, and mortality and expense risk charges, as described
more fully below. The Class must be selected before a Contract is
issued; once the Contract is issued, the Class cannot be changed.
8. The Owner determines at the time of application for a Contract
how purchase payments will be allocated among the Subaccounts and/or
the fixed account. An allocation to a Subaccount must be for at least
1% of a purchase payment and be in whole percentages. An allocation to
the fixed account must be for at least $1,000. The ``Contract Value,''
which is the sum of the amounts of contract value in the fixed account
and in the Variable Account as of the end of the valuation period, will
vary with the investment performance of the Subaccounts selected. The
Owner bears the entire risk for amounts allocated to the Subaccounts.
9. For each net purchase payment of at least $500,000, the Company
will enhance the Owner's Contract Value by an amount that varies by the
Owner'scumulative net purchase payment level (``Contract Value Increase
Enhancement''). The enhancement equals cumulative net purchase
payments, multiplied by the applicable increase percentage (0.5% for
cumulative net purchase payments between $500,000 and $999,999.99, and
0.7% for cumulative net purchase payments in excess of $1,000,000),
minus any prior increases to Contract Value as a result of the Contract
Value Increase Enhancement. The Company will allocate the amount of the
Contract Value Increase Enhancement according to the Owner's current
purchase payment allocation instructions. The Company funds the
Contract Value Increase Enhancement from its general account, and does
not charge Owners for the Contract Value Increase Enhancement. The
Company treats the Contract Value Increase Enhancement as Contract
earnings. The Contract Value Increase Enhancement is not subject to any
applicable surrender charge and will not be recouped if the Owner
returns a Contract during the right to examine period. Nor will the
Company recoup a Contract Value Increase Enhancement when the Company
pays a death benefit. Accordingly, the Company is not seeking to
recapture Contract Value Increase Enhancements.
10. If an Owner elects the Purchase Payment Credit endorsement to
the Contract, the Company will enhance an Owner's Contract Value by 4%
(for cumulative net purchase payments of up to $250,000) or 5% (for
cumulative net purchase payments of at least $250,000) each time the
Owner makes a purchase payment. The amount of increase in Contract
Value will equal cumulative net purchase payments, multiplied by the
applicable credit percentage, minus any prior credits to Contract Value
as a result of the endorsement (``Purchase Payment Credits''). The
Company will allocate the amount of the Purchase Payment Credits
according to the Owner's current allocation instructions for purchase
payments. The Contract's mortality and expense risk charges and
surrender charges are higher if an Owner elects to receive Purchase
Payment Credits. The Company will treat Purchase Payment Credits as
Contract earnings for purposes of assessing surrender charges and taxes
under the Contract. If an Owner elects the Purchase Payment Credit
endorsement, he or she will not receive the Contract Value Increase
Enhancement. The Purchase Payment Credit endorsement is not available
if an Owner elects L-Share Class or the Earnings Enhanced Death Benefit
Rider.
11. During the right to examine period, an Owner has the right to
return the Contract within 10 days after receiving it (or longer if
required by state law). If an Owner returns a Contract during the right
to examine period to which the Purchase Payment Credits endorsement
applies, then the Company proposes to recapture any Purchase Payment
Credits applied, but not to recapture any gains or to bear any losses
attributable to such Purchase Payment Credits.
12. The Company will not assess surrender charges against a
Contract returned during the right to examine period nor would it
assess any market value adjustments.
13. During the accumulation period if: (a) An Owner dies, then no
death benefit will be paid and any surviving Owner becomes the sole
Owner; (b) the sole Owner (who is not also the annuitant) dies, then no
death benefit will be paid and the annuitant becomes the new Owner; (c)
the sole Owner (who is also an annuitant) dies--and if the deceased
Owner is the sole annuitant, then the death benefit proceeds will be
paid to the person to whom proceeds are payable on the death of the
annuitant (``Beneficiary''), or if the deceased Owner was one of two
joint annuitants, then no death benefit will be paid and the Contract
will continue with the surviving annuitant as the Owner; or (d) the
sole annuitant dies before the date the Owner elects to begin receiving
income payments (``Payout Date''), the Company will pay the death
benefit proceeds to the Beneficiary named by the Owner in a lump sum or
under an income payout option (provided certain conditions are met), as
elected by the Beneficiary; if the Beneficiary is the deceased
annuitant's
[[Page 13054]]
surviving spouse, then the Beneficiary may elect to continue the
Contract. (Owners and Beneficiaries also may name successor
Beneficiaries.) If there is no surviving Beneficiary, the Company will
pay the death benefit to the Owner or the Owner's estate.
14. An Owner may elect a standard death benefit or an enhanced
death benefit. The death benefit will be reduced by any outstanding
loan amount and any applicable premium expense charges not previously
deducted; no surrender charge will apply. The Company proposes to
recapture any Purchase Payment Credits applied to the Contract Value
within 12 months of the annuitant's death when the Company pays a death
benefit. However, the Company will not recapture any investment gains
attributable to such Purchase Payment Credits--these gains stay with
the Owner.
15. During the accumulation period, an Owner may transfer Contract
Value among the Subaccounts or to or from the fixed account. Although
no fee is currently charged for transfers, the Company reserves the
right to charge $10 for each transfer. Additional restrictions apply to
the frequency and amounts of transfers to and from the fixed account,
and the Company may impose limitations on transfers in an attempt to
detect, deter, and prevent frequent, large, or short-term transfer
activity among the Subaccounts that may adversely affect Owners and
other Fund shareholders.
16. At any time on or before the date income payments begin (the
``Payout Date''), the Owner may surrender the Contract and receive its
surrender value. The surrender value will be paid in a lump sum unless
the Owner requests payment under an income payout option. At any time
on or before the Payout Date, an Owner may make withdrawals of the
surrender value. There is no minimum amount for withdrawals, but the
maximum amount is that which would leave the remaining surrender value
equal to $2,000. A partial withdrawal request that would reduce the
surrender value to less than $2,000 is treated as a request for a full
surrender of the Contract.
17. If an Owner surrenders a Contract or makes a partial
withdrawal, the Company will withdraw the amount requested and may
deduct a surrender charge from the remaining Contract Value. The
Company deducts such a surrender charge to compensate it for expenses
related to the sale of the Contracts. Upon partial withdrawal
(including periodic partial withdrawals made under the systematic
withdrawal plan available under the Contract), the Company also may
apply a market value adjustment. Upon surrender, the Company will
deduct any applicable Contract fee, accrued but uncollected rider
charges, applicable premium expense charges, a market value adjustment,
and any applicable adjustment or deduction provided for by an
endorsement to the Contract.
18. The amount of the surrender charge, and the length of time a
surrender charge may be assessed depends on the share Class the Owner
elects and whether the Purchase Payment Credits endorsement is elected.
The surrender charge is calculated by multiplying the applicable charge
percentage (as shown in the table below) by the amount of each purchase
payment in excess of the free withdrawal amount that is surrendered.
------------------------------------------------------------------------
Charge as a
Number of full Charge as a percentage of Charge as a
years between percentage of purchase payment-- percentage of
date of purchase purchase purchase payment purchase
payment and date payment--B-share credits elected payment--L-share
of surrender class class
------------------------------------------------------------------------
0 8 9 8
1 7 8 7
2 6 7 6
3 5 6 5
4 4 5 0
5 3 4 0
6 2 3 0
7 + 0 0 0
------------------------------------------------------------------------
19. The surrender charge is generally calculated using the
assumption that earnings are surrendered before any purchase payments
and that purchase payments are surrendered on a first-in-first-out
(``FIFO'') basis. If the Owner elects to receive Purchase Payment
Credits, however, the Company will assume that Contract Value is
withdrawn as follows: (a) Purchase payments no longer subject to
surrender charges (``old purchase payments''); (b) the free withdrawal
amount (i.e., old purchase payments plus 10% of purchase payments
subject to surrender charges at the time of the withdrawal--the
``annual free withdrawal amount''); (c) purchase payments subject to
surrender charges (``new purchase payments'') on a FIFO basis; and (d)
earnings and Purchase Payment Credits.
20. Other available Contract benefits described in the Application
are available for an addditonal charge. They include the: Guaranteed
Minimum Withdrawal Benefit Rider, Guaranteed Minimum Accumulation
Benefit Rider, Income Payment Increase Endorsement, Loan Account
Endorsement, Change of Annuitant Endorsement, Spousal Continuation
Endorsement, Fixed Account Endorsement, Additional Income Option
Endorsement, and Waiver of Surrender Charge Endorsement.
21. Certain other charges are made in connection with the
Contracts. Among these charges are: a current annual Contract fee of
$30 (currently waived if the Contract Value is $50,000 or more); a
mortality and expense risk charge that is computed and deducted on a
daily basis and varies by share Class and whether the Owner elected to
receive Purchase Payment Credits; a daily administrative charge (annual
rate of 0.15% of the average daily net assets of the Variable Account);
and Fund fees and expenses. The mortality and expense risk charge is
deducted at an annual rate of 1.15% of average daily net assets of the
Variable Account for B-Share Class Contracts, 1.6% of the average daily
net assets of the Variable Account if an Owner elects to receive
Purchase Payment Credits, and 1.65% of the average daily net assets of
the Variable Account for L-Share Class Contracts.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule, or regulation under the 1940 Act to
the extent that the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
[[Page 13055]]
2. Applicants request that the Commission issue an order pursuant
to Section 6(c) of the 1940 Act, granting exemptions from Sections
2(a)(32) and 27(i)(2)(A) of the 1940 Act, and Rule 22c-1 thereunder to
the extent necessary to permit the recapture of Purchase Payment
Credits added to a Contract: (a) When an Owner returns a Contract
during the right to examine period, or (b) within 12 months of the
annuitant's death when a death benefit is paid.
3. Section 27(i)(2)(A) of the 1940 Act, in pertinent part, makes it
unlawful for any registered separate account funding variable insurance
contracts, or for the sponsoring insurance company of such account, to
sell any such contract unless such contract is a redeemable security.
Section 2(a)(32) of the 1940 Act defines ``redeemable security'' as any
security under the terms of which the holder, upon its presentation to
the issuer, is entitled to receive approximately his or her
proportionate share of the issuer's current net assets, or the cash
equivalent thereof. To the extent that the recapture of the Purchase
Payment Credits might be seen as a discount from the net asset value,
or might be viewed as resulting in the payment to an Owner of less than
the approximately proportionate share of the issuer's current net
assets, the recapture of Purchase Payment Credits would trigger the
need for relief absent some exemption from the 1940 Act.
4. Applicants submit that the Contracts are ``redeemable
securities'' consistent with Section 2(a)(32) of the 1940 Act. The
Contracts provide for withdrawals and surrenders of Contract Value. The
contingent nature of Purchase Payment Credit recapture will be
disclosed in the prospectuses for the Contracts. Accordingly, there are
no restrictions on, or impediments to, withdrawals or surrenders that
should cause the Contracts to be considered anything other than
redeemable securities within the meaning of the 1940 Act.
5. Applicants further submit that the recapture of the Purchase
Payment Credits does not deprive an Owner of his or her approximately
proportionate share of the current net assets of the Variable Account.
Applicants submit that the Owner's interest in the Purchase Payment
Credits does not vest until the expiration of the right to examine
period and of the 12-month period following the application of a
Purchase Payment Credit to the Owner's Contract: until such time, the
Company generally retains the right to and interest in each Owner's
Contract Value representing the dollar amount of any unvested bonus
amounts. Therefore, when the Company recaptures the unvested Purchase
Payment Credits, the Company is only retrieving its own assets. The
Company grants Purchase Payment Credits out of its general account
assets, and the amount of such Purchase Payment Credits remains assets
of the Company until such bonus amounts vest with the Owner. Arguably,
then, an Owner is not deprived of his or her proportionate share of the
Variable Account's interests when the Company grants and recaptures
unvested Purchase Payment Credits in connection with variable Contract
Value. Accordingly, the recapture of Purchase Payment Credits could be
viewed as a legitimate ``charge'' for a benefit under the Contracts,
and not as a means of reducing the amount of the Variable Account
assets that an Owner otherwise would be entitled to receive.
6. It is the nature of the Purchase Payment Credits applied to
variable Contract Value that an Owner obtains a benefit from Purchase
Payment Credits in a rising market because any earnings on the bonus
amount vest with him or her immediately. Over time this would, of
course, increase the Owner's share of Contract Value in the Variable
Account more than it would have increased without the Purchase Payment
Credits. Conversely, in a falling market an Owner would suffer a
detriment from Purchase Payment Credits because losses on the bonus
amount would also ``vest'' with him or her immediately. Over time this
would decrease the Owner's share of Contract Value in the Variable
Account by more than it would have decreased had the Purchase Payment
Credits never been applied.
7. Applicants submit that the operation of the Purchase Payment
Credits endorsement and the proposed method of recapturing Purchase
Payment Credits do not violate Section 2(a)(32) or 27(i)(2)(A) of the
1940 Act. Taken together, these two sections of the 1940 Act do not
require that the holder receive the exact proportionate share that his
or her security represented at a prior time. Under these circumstances,
the fact that the application of Purchase Payment Credits has a dynamic
element that may cause the relative ownership positions of the Company
and an Owner to shift as a result of Variable Account performance and
the vesting schedule of such Purchase Payment Credits does not cause
the proposed operation of the Purchase Payment Credit endorsement and
the proposed method of recapturing Purchase Payment Credits to conflict
with Section 2(a)(32) or 27(i)(2)(A) of the 1940 Act. Nonetheless, to
avoid any uncertainty as to full compliance with the 1940 Act,
Applicants seek exemptions from the provisions of Sections (2)(a)(32)
and 27(i)(2)(A) of the 1940 Act to the extent deemed necessary to
permit them to recapture the Purchase Payment Credits.
8. Rule 22c-1, promulgated under Section 22(c) of the 1940 Act, in
pertinent part, prohibits a registered investment company issuing a
redeemable security (and a person designated as authorized to
consummate transactions in such security, and a principal underwriter
of, or dealer in, any such security) from selling, redeeming, or
repurchasing any such security, except at a price based on the current
net asset value of such security which is next computed after receipt
of a tender of such security for redemption, or of an order to purchase
or sell such security. As a result of the Purchase Payment Credits
available under the Contract, an Owner who made an initial purchase
payment of $10,000 in the first Contract year, for example, could be
viewed as having a Contract Value of $10,400 before any earnings
accrued. The Company's addition of a Purchase Payment Credit might
arguably be viewed as resulting in an Owner purchasing a redeemable
security for a price below the current net asset value. Further, by
recapturing the Purchase Payment Credits, the Company might arguably be
redeeming a ``redeemable security'' for a price other than one based on
the current net asset value of interests in the Variable Account.
Applicants contend that these interpretations and applications of the
relevant statutory and regulatory provisions are incorrect, and that
the Purchase Payment Credit provisions do not conflict with Section
22(c) and Rule 22c-1.
9. Applicants submit that the recapture of Purchase Payment Credits
would not trigger either of the two harms that the Commission intended
to eliminate with Rule 22c-1: (a) Dilution of the interests of other
security holders; and (b) speculative trading practices that are unfair
to such holders. The proposed recapture of Purchase Payment Credits
under the Contracts does not pose such threat of dilution. The
recapture will not alter an Owner's interest in his or her Contract
Value or in the Variable Account. An Owner's interest in his or her
Contract Value or in the Variable Account would always be offered under
the Contracts at a price determined on the basis of net asset value.
The granting of a bonus amount (here, a Purchase Payment Credit) does
not reflect a reduction of that price. Instead, the Company will
purchase with its own money and on behalf of an Owner an interest in
the Variable
[[Page 13056]]
Account equal to the amount of the Purchase Payment Credits. Because
the Company funds Purchase Payment Credits with its own general account
assets and not with Variable Account assets, no dilution will occur
from the awarding of Purchase Payment Credits under the Contracts. The
amount recaptured will equal the amount that the Company paid out of
its general account assets for Purchase Payment Credits. (Applicants
represent that it is not administratively feasible to track the bonus
amount in the Variable Account after the Company applies a Purchase
Payment Credit. As a result, the asset-based charges applicable to the
Variable Account will be assessed against the entire amount held in the
Variable Account, including the bonus amount, during the time the
Purchase Payment Credit is subject to recapture. During this time, the
aggregate asset-based charges assessed against an Owner's Contract
Value will be higher than those that would be charged if the Owner's
Contract Value did not include the bonus amount, but the increment will
be only a small percentage of the bonus amount.) An Owner will retain
any investment gains and bear any investment losses attributable to
recaptured Purchase Payment Credits. The Company will determine the
amount of any gain or loss attributable to Purchase Payment Credits on
the basis of the current net asset value of Subaccount units. Thus, no
dilution will occur under the proposed method for recapture of Purchase
Payment Credits.
10. Applicants further submit that the other harm that Rule 22c-1
was designed to address (speculative trading practices calculated to
take advantage of backward pricing) will not occur as a result of the
Company's recapture of the Purchase Payment Credits. Variable annuities
are designed for long-term investment and, by their nature, do not lend
themselves to the kind of speculative short-term trading that Rule 22c-
1 was designed to prevent. Even if they could be so used, the recapture
of Purchase Payment Credits would discourage, rather than encourage,
any such trading.
11. For the reasons set forth above, Applicants submit that Rule
22c-1 should have no application to the Purchase Payment Credits
because neither of the harms that Rule 22c-1 was designed to address
arise in connection with the proposed recapture of Purchase Payment
Credits. However, to avoid uncertainty as to full compliance with the
1940 Act, Applicants request an exemption from the provisions of Rule
22c-1 to the extent deemed necessary to permit them to recapture the
Purchase Payment Credits available under the Contracts under the
circumstances noted above.
12. Applicants submit that the Commission should grant the
exemptions requested in this Application, even if the bonus amounts
described herein arguably conflict with Section 2(a)(32) or 27(i)(2)(A)
of the 1940 Act, or Rule 22c-1 thereunder. The application of Purchase
Payment Credits under the Contracts is generally very favorable and
very beneficial to Owners. Owners who elect the Purchase Payment
Credits endorsement invest not only their net purchase payments but
also any Purchase Payment Credits, and receive any positive investment
experience from these bonus amounts. The Company's proposed method of
recapturing Purchase Payment Credits tempers this benefit somewhat, but
only if an Owner cancels his or her Contract during the right to
examine period, or ifthe Company pays Purchase Payment Credits and a
death benefit during the same 12-month period. Although in a declining
market, the Owner bears the downside risk of incurring losses
attributable to the Purchase Payment Credits, in a rising market, the
Owner receives any gains attributable to any Purchase Payment Credits
applied. Applicants submit that, on balance, the Company's proposed
method of recapturing Purchase Payment Credits does not diminish the
overall value of the Purchase Payment Credits.
13. The Company's recapture of Purchase Payment Credits is designed
to prevent anti-selection--the risk that an Owner would make
significant purchase payments into the Contract solely to receive a
quick profit from the Purchase Payment Credits and then withdraw his or
her money. By recapturing the Purchase Payment Credits, the Company
protects itself against such behavior. Likewise, if a Beneficiary were
to receive death benefit proceeds under the Contract before the 12-
month period after a Purchase Payment Credit had been applied without
the Company's recapture of those Purchase Payment Credits, that
Beneficiary, too, would profit at the Company's expense. The Company
typically protects itself from this kind of anti-selection by imposing
a surrender charge to recover its costs, but the Company does not apply
a surrender charge when an Owner withdraws his or her money during the
right to examine period or when a death benefit is paid.
14. Applicants established the charge structure for the Contracts
so that the Company could recover its costs of offering the Contract
over the life of the Contract. If the Company were unable to recapture
the Purchase Payment Credits and instead raised other Contract charges
to cover the costs of offering Purchase Payment Credits, then the
Company would be charging long-term Owners for costs actually
attributable to Owners who surrender their Contracts quickly.
Applicants submit, therefore, that the Purchase Payment Credits
recapture should be viewed as the price of offering Purchase Payment
Credits.
15. Applicants submit that the application of the Purchase Payment
Credits and their recapture involve none of the abuses to which the
provisions of the 1940 Act, and the rules thereunder (cited above) are
directed. An Owner will always retain any investment experience
attributable to Purchase Payment Credits and, except in the limited
circumstances described herein, will also retain the principal amount
of any Purchase Payment Credits applied. Further, the Company should be
able to recapture all of its Purchase Payment Credits, paid out of its
general account assets, to limit potential losses associated with
offering such bonus amounts as benefits to Owners.
16. Applicants seek relief requested herein not only for themselves
with respect to the Contracts, but also with respect to Future Accounts
or Future Contracts described herein.
17. In addition, Applicants seek relief herein with respect to
Future Underwriters (i.e., a class consisting of FINRA-member broker-
dealers that may also act as distributor and/or principal underwriter
of the Contracts and Future Contracts).
18. Applicants state that, without the requested class relief,
exemptive relief for any Future Account, Future Contract, or Future
Underwriter would have to be requested and obtained separately.
Applicants assert that these additional requests for exemptive relief
would present no issues under the 1940 Act not already addressed
herein. Applicants state that if they were to repeatedly seek exemptive
relief with respect to the same issues addressed herein, investors
would not receive additional protection or benefit, and investors and
the Applicants could be disadvantaged by increased costs from preparing
such additional requests for relief. Applicants contend that the
requested class relief is appropriate in the public interest because
the relief will promote competitiveness in the variable annuity market
by eliminating the need for the Company to file redundant exemptive
applications, thereby reducing administrative expenses and maximizing
efficient use of resources. Elimination of the delay
[[Page 13057]]
and the expense of repeatedly seeking exemptive relief would,
Applicants opine, enhance their ability to effectively take advantage
of business opportunities as such opportunities arise.
19. Any entity that intends to rely on the requested exemptive
order currently is named as an Applicant. Any entity that relies upon
the requested order in the future will comply with the terms and
conditions contained in this Application.
Conclusion
For the reasons summarized above, Applicants represent that: (a)
The requested exemptions are necessary and appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act;
and
(b) their request for class exemptions is necessary or appropriate
in the public interest and consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
1940 Act.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4686 Filed 3-10-08; 8:45 am]
BILLING CODE 8011-01-P
