ING USA Annuity and Life Insurance Company, et al., 11776-11781 [E9-5980]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 52 (Thursday, March 19, 2009)]
[Notices]
[Pages 11776-11781]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-5980]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-28646; File No. 812-13600]


ING USA Annuity and Life Insurance Company, et al.

March 13, 2009.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an Order Pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``Act'').

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Applicants: ING USA Annuity and Life Insurance Company (ING USA) (the 
``Life Company''), Separate Account B of ING USA Annuity and Life 
Insurance Company (the ``Account''), and Directed Services LLC (DSL) 
(collectively, the ``Applicants'').

Summary of the Application: The Applicants hereby request the 
Commission to issue an order pursuant to Section 6(c) of the Act to 
exempt them from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of 
the Act and Rule 22c-1 thereunder to the extent necessary to permit 
recapture of certain bonuses applied to purchase payments with respect 
to (1) the deferred variable annuity contracts, including data pages, 
riders and endorsements, described herein that the Life Company intends 
to issue (the ``Current Contracts''), (2) the deferred variable annuity 
contracts, including data pages, riders and endorsements, substantially 
similar to the Current Contracts that the Life Company may issue in the 
future (the ``Future Contracts'') (Current Contracts and Future 
Contracts referred to collectively as the ``Contracts''), (3) any other 
separate accounts of the Life Company and its successors in interest 
(``Future Accounts'') that support the Contracts, and (4) any Financial 
Industry Regulatory Authority, Inc. (``FINRA'') member broker-dealers 
controlling, controlled by, or under common control with any Applicant, 
whether existing or created in the future, that in the future, may act 
as principle underwriter for the Contracts (``Future Underwriters''). 
The circumstances under which the Contracts would allow the recapture 
of all or a portion of certain bonus credits (previously applied to 
premium payments) are where the bonus credits were applied and (1) the 
contract owner exercises his or her ``free look'' right, (2) in the 
event of the contract owner's death within 12 months of the bonus 
credit being applied and any bonus credit applied after the contract 
owner's death (unless the deceased contract owner's spouse chooses to 
continue the Contract), or (3) upon a surrender or withdrawal where the 
surrender charge is waived due to the contract owner's receipt of 
qualified extended medical care, or the owner is diagnosed with a 
qualifying terminal illness, as defined in the Contract, in which event 
the Life Company will recapture all bonus credits applied during the 12 
months prior to receipt of such care or date of diagnosis, as 
applicable.

Filing Date: The application was originally filed on November 7, 2008; 
amended and restated applications were filed on March 6, 2009, and 
March 11, 2009.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving the Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on April 3, 2009, 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 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. Applicant, c/o John S. (Scott) Kreighbaum, 
Esq.,

[[Page 11777]]

ING, 1475 Dunwoody Drive, West Chester, Pennsylvania 19380.

FOR FURTHER INFORMATION CONTACT: Patrick Scott, Senior Counsel, Office 
of Insurance Products, Division of Investment Management, SEC, at (202) 
551-6763, or Zandra Bailes, Branch Chief, at (202) 551-6975.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The application is available for a fee from the Commission's Public 
Reference Branch, 100 F Street, NE., Washington, DC 20549; (tel. (202) 
551-8090).

Applicants' Representations

    1. ING USA is an Iowa stock life insurance company, which was 
originally incorporated in Minnesota on January 2, 1973. ING USA is a 
wholly owned subsidiary of Lion Connecticut Holdings, Inc. (``Lion 
Connecticut'') which in turn is an indirect wholly owned subsidiary of 
ING Groep N.V. (``ING Group''), a global financial services holding 
company based in The Netherlands. ING USA is authorized to sell 
insurance and annuities in all states, except New York, and the 
District of Columbia. For purposes of the Act, ING USA is the depositor 
and sponsor for Account B, as those terms have been interpreted by the 
Commission with respect to variable annuity separate accounts. ING USA 
also serves as depositor for several currently existing Future 
Accounts, one or more of which may support obligations under the 
Contracts. ING USA may establish one or more additional Future Accounts 
for which it will serve as depositor.
    2. ING USA established the Account as a segregated investment 
account under Delaware law on July 14, 1988. The Account is a 
``separate account'' as defined by Rule 0-1(e) under the Act, is 
registered with the Commission as a unit investment trust (File No. 
811-05626), and interests in the Account offered through the Contracts 
are registered on form N-4 (File No. 333-153622).
    3. The Account is divided into a number of subaccounts. Each 
subaccount invests exclusively in shares representing an interest in a 
separate corresponding investment portfolio of one of several series-
type open-end management investment companies. The assets of the 
Account support one or more varieties of variable annuity contracts, 
including the Contracts.
    4. DSL is a wholly owned subsidiary of Lion Connecticut Holdings, 
Inc., which is in turn a wholly owned subsidiary of ING Group. It 
serves as the principal underwriter of a number of ING USA separate 
accounts registered as unit investment trusts under the Act, including 
the Account, and is the distributor of the variable life insurance 
contracts and variable annuity contracts issued through such separate 
accounts, including the Contracts. DSL is registered as a broker-dealer 
under the Securities Exchange Act of 1934 and is a member of FINRA. DSL 
may act as principal underwriter for Future Accounts of the Life 
Company and as distributor for Contracts. Future Underwriters also may 
act as principal underwriter for the Account and as distributor for any 
of the Contracts.
    5. The Contracts are flexible premium deferred combination variable 
and fixed annuity contracts that the Life Company may issue to 
individuals or groups on a ``non-qualified'' basis or in connection 
with employee benefit plans that receive favorable federal income tax 
treatment under the Internal Revenue Code of 1986, as amended. The 
Contracts may only be purchased with a minimum initial premium of 
$25,000. The Contracts make available a number of subaccounts of the 
Accounts to which an owner may allocate net premium payments and 
associated bonus credits (described below) and to which an owner may 
transfer contract value. The Contracts also offer fixed-interest 
allocation options under which the Life Company credits guaranteed 
rates of interest for various periods. A market value adjustment 
applies to the fixed-interest allocation options under the Contracts. 
Subject to certain restrictions, an owner may make transfers of 
contract value at any time among and between the subaccounts, and among 
and between the subaccounts and the fixed-interest allocation options.
    6. The Contracts offer a variety of annuity payment options to an 
owner. The owner may annuitize any time following the first contract 
anniversary. In the event of an owner's (or the annuitant's, if any 
owner is not an individual) death prior to annuitization, the 
beneficiary may elect to receive the death benefit in the form of one 
of the annuity payment options instead of a lump sum. The Contracts 
also offer living benefits that guarantee a minimum income benefit or 
lifetime withdrawals.
    7. The Life Company may deduct a premium tax charge from premium 
payments in certain states, but otherwise deducts a charge for premium 
taxes upon surrender or annuitization of the Contract or upon the 
payment of a death benefit, depending upon the jurisdiction. The 
Contracts provide for an annual administrative charge of $40 that a 
Life Company deducts on each Contract Anniversary, the annuity 
commencement date and upon a full surrender of a Contract. The Life 
Company currently waives this charge and anticipates waving this charge 
for the foreseeable future on contract value or premiums of $100,000 or 
more when it is due to be deducted. A daily mortality and expense risk 
charge is deducted from the assets of the Accounts at a rate depending 
on the death benefit chosen as described below. The range of maximum 
mortality and expense risk charges is 2.65% to 3.20% annually. A daily 
administrative charge is deducted from the assets of the Account at an 
annual rate of 0.15%. The Contracts provide for a charge of $25 for 
each transfer of contract value in excess of twelve transfers per 
contract year. The Life Company currently waives this charge and 
anticipates waiving this charge for the foreseeable future. The 
Contracts have a surrender charge in the form of a contingent deferred 
sales charge as described more fully below. A quarterly charge is 
assessed depending on the type of optional living benefit chosen, if 
any, as described below.
    8. The contingent deferred sales charge (the ``CDSC'') is equal to 
a percentage of each premium payment surrendered or withdrawn as 
specified in the table below. The CDSC is separately calculated and 
applied to each premium payment at any time that the premium payment 
(or part of the premium payment) is surrendered or withdrawn. The CDSC 
applicable to each premium payment diminishes to zero as the payment 
ages.

------------------------------------------------------------------------
     Number of full years since payment of each premium       Charge (%)
------------------------------------------------------------------------
0..........................................................          9.0
1..........................................................          9.0
2..........................................................          9.0
3..........................................................          8.0
4..........................................................          7.0
5..........................................................          6.0
6..........................................................          5.0
7..........................................................          4.0
8..........................................................          2.0
9+.........................................................            0
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    9. The CDSC does not apply when a death benefit is payable under 
the Contracts. Also, no CDSC applies to contract value representing an 
annual free withdrawal amount or to contract value in excess of 
aggregate premium payments (less prior withdrawals of premium payments) 
(``earnings''). The CDSC is calculated using the assumption that 
premium payments are withdrawn on a first-in, first-out basis. The CDSC 
also is calculated using the assumption that contract value is 
withdrawn in the following order: (1) The annual free withdrawal amount 
for

[[Page 11778]]

that contract year, (2) premium payments, and (3) earnings. The annual 
free withdrawal amount is 10% of contract value, measured at the time 
of withdrawal, less any prior withdrawals made in that contract year.
    10. An owner may purchase one of the optional living benefit riders 
described below, subject to availability in a given state and/or 
broker/dealer approval. The Applicants may add other optional living 
benefit riders to the Contract in the future. The minimum guaranteed 
income benefit rider (the ``MGIB Rider'') guarantees that a minimum 
amount of annuity income will be available to the owner, regardless of 
fluctuating market conditions, if the owner annuitizes on or after the 
rider's exercise date. The minimum guaranteed amount of annuity income 
will depend on: The amount of premiums paid and credits received during 
the specified number of contract years after the owner purchases the 
MGIB Rider; how the owner allocates the contract value among the 
subaccounts and fixed-interest allocations; and any withdrawals and 
transfers the owner makes while the MGIB Rider is in effect. The Life 
Company will deduct a maximum annual charge of 1.50% (currently, 0.75%) 
quarterly of the MGIB Charge Base (as defined in the MGIB Rider).
    11. The minimum guaranteed withdrawal benefit rider (the ``MGWB 
Rider'') guarantees a minimum amount may be withdrawn annually from the 
Contract for the lifetime of the annuitant, regardless of market 
performance and even if these withdrawals reduce the contract value to 
zero. The Life Company has a version of the MGWB Rider that guarantees 
the annual withdrawal amount for a second designated life as well. The 
Life Company will deduct a maximum annual charge of 1.30% (currently, 
0.75%), or 1.50% (currently 0.95%), quarterly of the charge base (as 
set forth in the MGWB Rider) for the single life or joint life MGWB 
rider, respectively.
    12. If an owner dies before the annuity start date, the Contracts 
provide for a death benefit payable to a beneficiary, computed as of 
the date a Life Company receives written notice and due proof of death. 
The death benefit payable to the beneficiary depends on the death 
benefit option selected by the owner: (1) Standard death benefit, (2) 
ratchet death benefit, or (3) combination (ratchet and rollup) death 
benefit. In addition to the death benefit options, the owner may select 
the earnings multiplier benefit, which provides a benefit equal to a 
percentage of any earnings on the Contract to be added to the death 
benefit payable. The Applicants may add other death benefit options to 
the Contract in the future.
    13. The standard death benefit equals the greater of the (1), (2) 
or (3), where: (1) Is the contract value less bonus credits applied 
since or within 12 months prior to death; (2) is the standard death 
benefit, which is the sum of the standard death benefit base for 
covered funds and the contract value allocated to excluded funds--less 
the bonus credits applied since or within 12 months prior to death; and 
(3) is the Contract's cash surrender value. The maximum daily mortality 
and risk charge for the standard death benefit is the annual rate of 
2.65% (currently 1.60%).
    14. The ratchet death benefit equals the greater of (1), (2), (3) 
or (4), where: (1) Is the contract value less bonus credits applied 
since or within 12 months prior to death; (2) is the standard death 
benefit; (3) is the ratchet death benefit, which is the sum of the 
ratchet death benefit base for covered funds and the contract value 
allocated to excluded funds--less bonus credits applied since or within 
12 months prior to death; and (4) is the Contract's cash surrender 
value. The maximum daily mortality and risk charge for the ratchet 
death benefit is the annual rate of 2.95% (currently 1.90%).
    15. The combination (ratchet and rollup) death benefit equals the 
greater of (1), (2), (3), (4) or (5), where: (1) Is the contract value 
less bonus credits applied since or within 12 months prior to death; 
(2) is the standard death benefit; (3) is the ratchet death benefit; 
and (4) is the lesser of (a) or (b) less bonus credits applied since or 
within 12 months prior to death, where (a) is the rollup death benefit, 
which equals the sum of the rollup death benefit base for each of 
covered funds and special funds, and the contract value allocated to 
excluded funds, and (b) is the maximum rollup death benefit, which is 
equal to (i) multiplied by (ii) minus (iii), where (i) is the sum of 
all premiums paid and credits received, (ii) is the maximum rollup 
death benefit multiplier, currently 2.5, and (iii) is any adjustments 
for withdrawals; and (5) is the Contract's cash surrender value. The 
maximum daily mortality and risk charge for the roll-up death benefit 
is the annual rate of 3.20% (currently 2.15%).
    16. Each death benefit base (standard, ratchet or rollup) for 
covered funds or special funds starts out equaling premiums paid and 
credits received, adjusted for any withdrawals or transfers. 
Withdrawals and transfers reduce, on a pro-rata basis, each death 
benefit base. The ratchet death benefit bases are recalculated on each 
contract anniversary. The rollup death benefit bases are recalculated 
daily.
    17. Funds designated as covered funds participate fully in the 
guarantees in calculating the death benefit. Special funds may 
participate at less than the full rate, and excluded funds do not 
participate in the guarantees in calculating the death benefit due to 
their potential volatility; however, no funds are currently designated 
as excluded funds. These fund designations are disclosed in the 
prospectus. The Life Company may, at any time, designate any new and/or 
existing subaccount as a special fund with 30 days prior notice to 
contract owners.
    18. The earnings multiplier death benefit rider provides a benefit 
equal to a percentage of any earnings on the Contract, up to a maximum 
amount, to be added to the death benefit payable. This rider provides 
additional funds to the beneficiary that be used to help pay the taxes 
on the death benefit. Upon the owner's death, this amount is payable as 
part of the death benefit payable. The maximum charge is 0.70% 
(currently 0.30%).
    19. The Life Company intends to offer a bonus credit provision 
under the Contracts, pursuant to which the Life Company credits the 
contract value with a bonus credit amount that is a percentage of each 
premium payment made. The Life Company allocates the bonus credit for 
the applicable premium payment among the subaccounts and fixed-interest 
allocations the owner selects in proportion to the premium payment 
allocated to each investment option. The bonus credit varies based on 
the sum of all premiums paid: 5% on premiums up to $499,999.99; 6% on 
premiums between $500,000 and $999,999.99; and 7% on premiums of 
$1,000,000 or more. Additional premiums paid within 90 days of contract 
issuance will be included in determining the applicable bonus 
percentage.
    20. The Life Company recaptures or retains the bonus credits in 
several circumstances. First, the Life Company recaptures the bonus 
credits in the event that the contract owner exercises his or her 
``free look'' right. Second, the Life Company recaptures the bonus 
credits applied since or months prior to the contract owner's death and 
any bonus credits applied after the contract owner's death (unless the 
deceased contract owner's spouse chooses to continue the Contract). 
Third, the Life Company also will recapture the bonus credits upon 
surrender or withdrawal of corresponding premium payments

[[Page 11779]]

where the surrender charge is waived due to the owner's receipt of 
qualified extended medical care, or the owner is diagnosed with a 
qualifying terminal illness, as defined in the Contract, in which event 
the Life Company will recapture all bonus credits applied during the 12 
months prior to receipt of such care or date of diagnosis, as 
applicable.
    21. Because of the recapture provisions discussed above, the value 
of a bonus credit only vests or belongs irrevocably to the owner after 
the recapture period for the bonus credit expires. As to bonus credits 
resulting from premiums paid before the free look period ends, no part 
of the bonus credit vests for the owner until the expiration of the 
free look period. After the expiration of the free look period, all 
bonus credits vest in full for the owner 12 months after the Life 
Company applies them to an owner's contract value. Under the bonus 
credit provisions, the Life Company applies the bonus credit to an 
owner's contract value either by ``purchasing'' accumulation units of 
an appropriate subaccount or by adding to the owner's fixed interest 
allocation option values. Bonus credits are allocated according to the 
contract owner's premium allocation instructions.
    22. With regard to variable contract value, several consequences 
flow from the foregoing. First, increases in the value of accumulation 
units representing bonus credits accrue to the owner immediately, but 
the initial value of such units only belongs to the owner when, or to 
the extent that, each vests. Second, decreases in the value of 
accumulation units representing bonus credits do not diminish the 
dollar amount of contract value subject to recapture. Therefore, 
additional accumulation units must become subject to recapture as their 
value decreases. Stated differently, the proportionate share of any 
owner's variable contract value (or the owner's interest in the 
Account) that a Life Company can ``recapture'' increases as variable 
contract value (or the owner's interest in the Account) decreases. This 
dilutes somewhat the owner's interest in the Account vis-[agrave]-vis a 
Life Company and other owners, and in his or her variable contract 
value vis-[agrave]-vis a Life Company. Lastly, because it is not 
administratively feasible to track the unvested value of bonus credits 
in the Account, a Life Company deducts the daily mortality and expense 
risk charge and the daily administrative charge from the entire net 
asset value of the Account. As a result, the daily mortality and 
expense risk charge, the daily administrative charge, and the daily 
bonus credit rider paid by any owner is greater than that which he or 
she would pay without the bonus credit.
    23. Applicants previously have received an order for exemptive 
relief to permit the recapture of certain bonus credits on the prior 
contracts in similar circumstances to those described above. That order 
encompassed relief for future contracts substantially similar to the 
prior contracts. Applicants assert that the Contracts described in the 
application differ from the prior contracts in the following respects. 
The range of maximum mortality and expense risk charges is higher, 
between 2.65% and 3.20% annually. The mortality and expense risk charge 
depends on the death benefit option chosen, each having a maximum 
charge that is guaranteed within the range. The range for the prior 
contracts was from 1.30% to 1.75% annually. The contingent deferred 
sales charge is slightly higher, by 1% more in years 0-2, 7 and 8. The 
bonus credit is also higher, up to 7% of each premium payment, and is 
based on aggregate premiums instead of age: 5% on premiums up to 
$499,999.99; 6% on premiums between $500,000 and $999,999.99; and 7% on 
premiums of $1,000,000 or more. However, the circumstances under which 
the Life Company would recapture the bonus credits remain the same. 
Because the Applicants believe the Commission may view these 
differences as material, Applicants are seeking an additional order as 
set forth in the application.

Legal Analysis

    1. Subsection (i) of Section 27 provides that Section 27 does not 
apply to any registered separate account supporting variable annuity 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of 
subsection (i). Paragraph (2) provides that it shall be unlawful for a 
registered separate account or sponsoring insurance company to sell a 
variable annuity contract supported by the separate account unless the 
``* * * contract is a redeemable security; and* * * [t]he insurance 
company complies with Section 26(f)* * *''.
    2. Section 2(a)(32) defines a ``redeemable security'' as any 
security, other than short-term, paper, under the terms of which the 
holder, upon presentation to the issuer, is entitled to receive 
approximately his proportionate share of the issuer's current net 
assets, or the cash equivalent thereof.
    3. Rule 22c-l imposes requirements with respect to both the amount 
payable on redemption of a redeemable security and the time as of which 
such amount is calculated. Specifically, Rule 22c-l, in pertinent part, 
prohibits a registered investment company issuing any redeemable 
security, a person designated in such issuer's prospectus as authorized 
to consummate transactions in any such security, and a principal 
underwriter of, or dealer in, such security from selling, redeeming or 
repurchasing any such security, except at a price based on the current 
net asset value of such security which is next computed after receipt 
of a tender of such security for redemption, or of an order to purchase 
or sell such security.
    4. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from the provisions of the Act and the rules 
promulgated thereunder, if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act.
    5. Applicants submit that the requested exemptions are appropriate 
in the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act. Because the provisions described above may be inconsistent with 
recapture of a bonus credit, Applicants request exemptions from the 
Contracts described herein, and for future contracts that are 
substantially similar to the Contracts described herein, from Sections 
27(i)(2)(A) and 2(a)(32) of the Act, and Rule 22c-1 thereunder, 
pursuant to Section 6(c), to the extent necessary to recapture the 
bonus credit applied to a premium payment in the instances described 
above. Applicants seek exemptions therefrom out of an abundance of 
caution in order to avoid any question concerning the Contracts' 
compliance with the Act and rules thereunder.
    6. To the extent that the recapture of the bonus credits arguably 
could be seen as a discount from the net asset value, or arguably could 
be viewed as resulting in the payment to an owner of less than the 
proportional share of the issuer's net assets, in violation of Sections 
2(a)(32) or 27(i)(2)(A) of the Act, the bonus credit recapture would 
trigger the need for relief absent some exemption from the Act. Rule 
6c-8 provides, in relevant part, that a registered separate account, 
and any depositor of such account, shall

[[Page 11780]]

be exempt from Sections 2(a)(32) 27(c)(1), 27(c)(2) and 27(d) of the 
Act and Rule 22c-1 thereunder to the extent necessary to permit them to 
impose a deferred sales loan on any variable annuity contract 
participating in such account. However, the bonus credit recapture is 
not a sales load. Rather, it is a recapture of a bonus credit 
previously applied to an owner's premium payments. The Life Company 
provides the bonus credit from its general account on a guaranteed 
basis. The Contracts are designed to be long-term investment vehicles. 
In undertaking this financial obligation, the Life Company contemplates 
that an owner will retain a Contract over an extended period, 
consistent with the long-term nature of the Contracts. The Life Company 
designed the product so that it would recover its costs (including the 
bonus credits) over an anticipated duration while a Contract is in 
force. If an owner withdraws his or her money during the free look 
period, a death benefit is paid, or a withdrawal or surrender is made 
before this anticipated period, a Life Company must recapture the bonus 
credits subject to recapture in order to avoid a loss.
    7. Applicants submit that the proposed bonus credit rider would not 
violate Section 2(a)(32) or 27(i)(2)(A) of the Act. The Life Company 
would grant bonus credits out of its general account assets and the 
amount of the bonus credits (although not the earnings on such amounts) 
would remain the Life Company's until such amounts vest with the owner. 
Until the appropriate recapture period expires, a Life Company retains 
the right to and interest in each owner's contract value representing 
the dollar amount of any unvested bonus credits. Therefore, if the Life 
Company recaptures any bonus credit in the circumstances described 
above, it would merely be retrieving its own assets. To the extent that 
the Life Company may grant and recapture bonus credits in connection 
with variable contract value, it would not, at either time, deprive any 
owner of his or her then proportionate share of the Account's assets.
    8. Applicants further submit that the dynamics of the proposed 
bonus credit provisions would not violate Section 2(a)(32) or 
27(i)(2)(A) of the Act because the recapture of bonus credits would 
not, at any time, deprive an owner of his or her proportionate share of 
the current net assets of the Account. Section 2(a)(32) defines a 
redeemable security as one ``under the terms of which the holder, upon 
presentation to the issuer, is entitled to receive approximately his 
proportionate share of the issuer's current net asset value.'' Taken 
together, these two sections of the Act do not require that the holder 
receive the exact proportionate share that his or her security 
represented at a prior time. Therefore, the fact that the proposed 
bonus credit provisions have a dynamic element that may cause the 
relative ownership positions of a Life Company and a Contract owner to 
shift due to Account performance and the vesting of such credits, would 
not cause the provisions to conflict with Section 2(a)(32) or 
27(i)(2)(A). Nonetheless, in order to avoid any uncertainty as to full 
compliance with the Act, Applicants seek exemptions from these two 
sections.
    9. The Life Company's granting of bonus credits would have the 
result of increasing an owner's contract value in a way that arguably 
could be viewed as the purchase of an interest in the Account at a 
price below the current net asset value. Similarly, a Life Company's 
recapture of any bonus credit arguably could be viewed as the 
redemption of such an interest at a price above the current net asset 
value. If such is the case, then the bonus credits arguably could be 
viewed as conflicting with Rule 22c-1. Applicants contend that these 
are not correct interpretations or applications of these statutory and 
regulatory provisions. Applicants also contend that the bonus credits 
do not violate Rule 22c-1.
    10. Rule 22c-1 was intended to eliminate or reduce, as far as was 
reasonably practicable, (1) the dilution of the value of outstanding 
redeemable securities of registered investment companies through their 
sale at a price below net asset value or their redemption at a price 
above net asset value, or (2) other unfair results, including 
speculative trading practices. Applicants submit that the evils 
prompting the adoption of Rule 22c-1 were primarily the result of 
backward pricing, the practice of basing the price of a mutual fund 
share on the net asset value per share determined as of the close of 
the market on the previous day. Backward pricing permitted certain 
investors to take advantage of increases or decreases in net asset 
value that were not yet reflected in the price, thereby diluting the 
values of outstanding shares.
    11. The bonus credit provisions do not give rise to either of the 
two evils that Rule 22c-1 was designed to address. First, the bonus 
credit provisions pose no such threat of dilution. An owner's interest 
in his or her contract value or in the Account would always be offered 
at a price based on the net asset value next calculated after receipt 
of the order. The granting of a bonus credit does not reflect a 
reduction of that price. Instead, the Life Company will purchase with 
its general account assets, on behalf of the owner, an interest in the 
Account equal to the bonus credit. Because the bonus credit will be 
paid out of the general account assets, not the Account assets, no 
dilution will occur as a result of the bonus credit. Recaptures of 
bonus credits result in a redemption of the Life Company's interest in 
an owner's contract value or in the Account at a price determined based 
on the Account's current net asset value and not at an inflated price. 
Moreover, the amount recaptured will always equal the amount that the 
Life Company paid from its general account for the bonus credits. 
Similarly, although an owner is entitled to retain any investment gains 
attributable to the bonus credits, the amount of such gains would 
always be computed at a price determined based on net asset value.
    12. Second, Applicants submit that speculative trading practices 
calculated to take advantage of backward pricing will not occur as a 
result of the Life Company's recapture of the bonus credit. Variable 
annuities are designed for long-term investment, and by their nature, 
do not lend themselves to the kind of speculative short-term trading 
that Rule 22c-1 was designed to prevent. More to the point, the bonus 
credit recapture simply does not create the opportunity for speculative 
trading.
    13. Rule 22c-1 should have no application to the bonus credit 
available, as neither of the harms that Rule 22c-1 was intended to 
address arise in connection with the proposed bonus credit. 
Nonetheless, in order to avoid any uncertainty as to full compliance 
with the Act, Applicants request an exemption from the provisions of 
Rule 22c-1.
    14. Applicants submit that the Commission should grant the 
exemptions requested in the application even if the bonus credit 
provisions arguably conflict with Section 2(a)(32) or 27(i)(2)(A) of 
the Act or Rule 22c-1 thereunder. The bonus credit provisions are 
generally beneficial to an owner. The recapture provisions of the 
Contract temper this benefit somewhat, but unless the owner dies, the 
owner retains the ability to avoid the bonus credit recapture in the 
circumstances described herein. While there would be downside in a 
declining market in that the owner would bear any losses attributable 
to the bonus credit, it is the converse of the benefits an owner would 
receive on the bonus amounts in a rising market because earnings on the 
bonus

[[Page 11781]]

credit amount vest with him or her immediately.
    15. The bonus credit recapture provisions are necessary for the 
Life Company to offer the bonus credits and avoid anti-selection 
against it. It would be unfair to the Life Company to permit an owner 
to keep his or her bonus credits upon his or her exercise of the 
Contract's ``free look'' provision. Because no CDSC applies to the 
exercise of the ``free look'' provision, the owner could obtain a quick 
profit in the amount of the bonus credit at the Life Company's expense 
by exercising that right. Likewise, because no additional CDSC applies 
upon death of an owner (or annuitant) or where the CDSC is waived upon 
a surrender or withdrawal due to the owner's receipt of qualified 
extended medical care or the owner is diagnosed with a qualifying 
terminal illness, a death or this type of surrender or withdrawal 
shortly after the award of bonus credits would afford an owner or a 
beneficiary a similar profit at the Life Company's expense.
    16. In the event of such profits to an owner or beneficiary, the 
Life Company could not recover the cost of granting the bonus credits. 
This is because the Life Company intends to recoup the costs of 
providing the bonus credits through the charges under the Contract, 
particularly the daily mortality and expense risk charge and the daily 
administrative charge. If the profits described above are permitted, an 
owner could take advantage of them, reducing the base from which the 
daily charges are deducted and greatly increasing the amount of bonus 
credits that the Life Company must provide. Therefore, the recapture 
provisions are a price of offering the bonus credits. The Life Company 
simply cannot offer the proposed bonus credits without the ability to 
recapture those credits in the limited circumstances described herein.
    17. Applicants state that the Commission's authority under Section 
6(c) of the Act to grant exemptions from various provisions of the Act 
and rules thereunder is broad enough to permit orders of exemption that 
cover classes of unidentified persons. Applicants request an order of 
the Commission that would exempt them, the Life Company's successors in 
interest, Future Accounts and Future Underwriters from the provisions 
of Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder with respect to the Contracts. The exemption of these 
classes of persons is appropriate in the public interest and consistent 
with the protection of investors and the purposes fairly intended by 
the policy and provisions of the Act because all of the potential 
members of the class could obtain the foregoing exemptions for 
themselves on the same basis as the Applicants, but only at a cost to 
each of them that is not justified by any public policy purpose. As 
discussed below, the requested exemptions would only extend to persons 
that in all material respects are the same as the Applicants. The 
Commission has previously granted exemptions to classes of similarly 
situated persons in various contexts and in a wide variety of 
circumstances, including class exemptions for recapturing bonus credits 
under variable annuity contracts.
    18. Applicants represent that any contracts in the future will be 
substantially similar in all material respects to the Contracts, but 
particularly with respect to the bonus credits and recapture of bonus 
credits, and that each factual statement and representation about the 
bonus credit provisions will be equally true of any Contracts in the 
future. Applicants also represent that each material representation 
made by them about the Account and DSL will be equally true of Future 
Accounts and Future Underwriters, to the extent that such 
representations relate to the issues discussed in the application. In 
particular, each Future Underwriter will be registered as a broker-
dealer under the Securities Exchange Act of 1934 and be a FINRA member.
    19. For the reasons above, Applicants submit that the bonus credit 
provisions involve none of the abuses to which provision of the Act and 
rules thereunder are directed. The owner will always retain the 
investment experience attributable to the bonus credit and will retain 
the principal amount in all cases except under the circumstances 
described herein. Further, the Life Company should be able to recapture 
such bonus credits to limit potential losses associated with such bonus 
credits.

Conclusion

    Applicants submit that the exemptions requested are necessary or 
appropriate in the public interest, consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the Act, and consistent with and supported by Commission precedent. 
Applicants also submit, based on the analysis listed above, that the 
provisions for recapture of any bonus credit under the Contracts does 
not violate Section 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder. The Applicants hereby request that the Commission issue an 
order pursuant to Section 6(c) of the Act to exempt the Applicants with 
respect to (1) the Contracts, (2) Future Accounts that support the 
Contracts, and (3) Future Underwriters from the provisions of Sections 
2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the 
extent necessary to permit the recapture of the bonus credits 
(previously applied to premium payments) in the circumstances described 
above.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-5980 Filed 3-18-09; 8:45 am]
BILLING CODE 8011-01-P