[Federal Register Volume 67, Number 110 (Friday, June 7, 2002)]
[Notices]
[Pages 39447-39452]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14135]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-25598; File No. 812-12830]
American Skandia Life Assurance Corporation, et al.; Notice of
Application
May 30, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under Section 6(c) of the
Investment Company Act of 1940 (the ``1940 Act'' or ``Act'') to amend a
prior order of the Commission under Section 6(c) of the 1940 Act which
granted exemptions from the provisions of Sections 2(a)(32) and
27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to permit the
recapture of credits applied to purchase payments made under certain
deferred variable annuity contracts.
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Applicants: American Skandia Life Assurance Corporation
(``ASLAC''), American Skandia Life Assurance Corporation Variable
Account B (Class 1 Sub-Accounts), American Skandia Life Assurance
Corporation Variable Account B (Class 9 Sub-Accounts) (the ``Account''
or ``Accounts''), and American Skandia Marketing, Incorporated
(``ASM''), referred to collectively herein as ``Applicants''.
Summary of Application: Applicants seek an order under Section 6(c)
of the 1940 Act to amend a prior order under Section 6(c) of the 1940
Act (``Prior Order'')\1\ that, to the extent necessary, permits, under
specified circumstances, the recapture of certain additional credits
offered on a promotional basis (``Promotional Credits'') applied to
purchase payments made under certain deferred variable annuity
contracts and certificates described in the application (the
``Contracts''), as well as other contracts that ASLAC may issue in the
future through the Accounts or any other separate account established
in the future by ASLAC to support certain deferred variable annuity
contracts issued by ASLAC (``Future Account'') and that are
substantially similar in all material respects to the Contracts (the
``Future Contract(s)''). Any future Promotional Credits (``Future
Promotional Credits'') will be substantially similar in all material
respects to the Promotional Credits described in the application. The
Prior Order extends the relief to any other National Association of
Securities Dealers, Inc. (``NASD'') member broker-dealer controlling or
controlled by, or under common control with ASLAC, whether existing or
created in the future, that serves as a distributor or principal
underwriter for the Contracts or Future Contracts offered through the
Accounts or any Future Account. The application seeks to amend the
Prior Order to permit the recapture of Promotional Credits on purchase
payments applied to the Contracts or Future Contracts, under the
circumstances described in the application and in detail in the
application for the Prior Order (``Prior Application'').
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\1\ American Skandia Life Assurance Corporation, Investment
Company Act Release No. 25423 (File No. 812-12698).
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Filing Date: The application was filed on March 1, 2002 and amended
and restated on May 24, 2002.
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 Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on June 24,
2002, and should be accompanied by proof of service on Applicants, in
the form of an affidavit or, for lawyers, a certificate of service.
[[Page 39448]]
Hearing requests should state the nature of the writer'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 SEC.
ADDRESSES: Secretary, SEC, 450 5th Street NW., Washington, DC, 20549-
0609. Applicants, c/o American Skandia Life Assurance Corporation, One
Corporate Drive, Shelton, Connecticut 06484, Attn: Scott K. Richardson,
Esq.
FOR FURTHER INFORMATION CONTACT: Patrick Scott, Attorney, or Lorna
MacLeod, Branch Chief, Office of Insurance Products, Division of
Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549-0102 ((202) 942-8090).
Applicants' Representations
1. ASLAC is a stock life insurance company incorporated under the
laws of Connecticut, all of whose issued and outstanding shares of
capital stock are directly owned by American Skandia, Inc. (``ASI''),
which in turn is ultimately wholly owned by Skandia Insurance Company
Ltd., a Swedish corporation. ASLAC is licensed to do business in the
District of Columbia and all of the United States.
2. American Skandia Life Assurance Corporation Variable Account B
was created pursuant to the laws of the State of Connecticut on
November 25, 1987. American Skandia Life Assurance Corporation Variable
Account B (Class 1 Sub-Accounts) filed a Form N-8A Notification of
Registration (File No. 811-5438) under the 1940 Act on December 30,
1987. American Skandia Life Assurance Corporation Variable Account B
(Class 9 Sub-Accounts) filed a Form N-8A Notification of Registration
(File No. 811-09989) on June 22, 2000.
3. Applicants state that the assets of the Accounts are owned by
ASLAC, but are held separately from the other assets of ASLAC and are
not chargeable with liabilities incurred in any other business
operation of ASLAC (except to the extent that assets in the Accounts
exceed the reserves and other liabilities of the Accounts). The income,
capital gains and capital losses incurred on the assets of the Accounts
are credited to or charged against the assets of the Accounts without
regard to the income, capital gains or capital losses arising out of
any other business ASLAC may conduct.
4. Applicants represent that the Accounts and all Future Accounts
will invest in shares of one or more of the investment portfolios (the
``Portfolios'') of American Skandia Trust (``AST''), which is
registered with the Commission as an open-end, diversified management
investment company, and/or any other fund or funds which are registered
with the Commission as open-end, diversified or non-diversified
management investment companies as may be made available by ASLAC and
the Accounts or Future Accounts (which funds, including AST, are
referred to as the ``Funds''). The Accounts or Future Accounts are
divided into separate divisions or ``Sub-accounts'', each of which
invests in a separate Portfolio of a Fund.
5. ASM serves as the distributor and principal underwriter of the
Contracts. ASM is a wholly-owned subsidiary of ASI. ASM is registered
under the Securities Exchange Act of 1934 and with the NASD as a
broker-dealer in securities. The Contracts will be offered through
unaffiliated, registered broker-dealers, and other entities that are
exempt from registration as broker-dealers, that have entered into
sales agreements with ASM and ASLAC. In addition, ASM may offer
Contracts directly to potential purchasers. The broker-dealers or sales
representatives will be licensed by state insurance departments where
required by law or regulation to represent ASLAC. The registered
representatives that will solicit sale of the Contracts will be
licensed insurance agents appointed by ASLAC.
6. Applicant represents that among the products ASLAC issues are
individual and group flexible premium tax deferred variable annuity
contracts, such as the Contracts contemplated in the Application,
American Skandia XTra Credit\SM\ FOUR (``XT FOUR'') offered through
American Skandia Life Assurance Corporation Variable Account B (Class 1
Sub-Accounts) and American Skandia XTra Credit\SM\ SIX (``XT SIX'')
offered through American Skandia Life Assurance Corporation Variable
Account B (Class 9 Sub-Accounts).
Applicants state further that the Contracts are to be used in
connection with retirement plans that qualify for favorable federal
income tax treatment under the Internal Revenue Code Section 403 as a
tax sheltered annuity, or Section 408 as an individual retirement plan
(``Qualified Plan''), or the Contracts may be purchased on a non-tax
qualified basis (``Non-Qualified Plan''). The Contracts may also be
used for other purposes in the future, or offered only in connection
with Qualified or Non-Qualified Plans.
7. On February 20, 2002, the Commission issued the Prior Order
exempting certain transactions of Applicants from the provisions of
Sections 2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1
thereunder. The Prior Order specifically permits the recapture, under
specified circumstances, of an additional amount (a ``Credit'') of up
to 6.0% of purchase payments applied to the Contracts or Future
Contracts.
ASLAC now desires to be permitted to recapture Promotional Credits
and Future Promotional Credits offered on a promotional basis on
purchase payments applied to the Contracts or Future Contracts.
8. Applicants state that ASLAC may add an additional Promotional
Credit to account value in conjunction with each qualifying purchase
payment made during distinct promotional periods equal to 1.0% of
purchase payments. ASLAC will disclose the conditions under which
Promotional Credits will be granted upon the commencement of each
promotional period. Promotional Credits will be applied in addition to
the Credit that would otherwise have applied to the purchase payment
when made.
9. Under the Prior Order, ASLAC may add a Credit to the account
value in conjunction with each purchase payment applied to XT FOUR, and
in conjunction with purchase payments made during the first six (6)
annuity years applied to XT SIX. Credits are paid for from ASLAC's own
general account assets.
In the case of XT FOUR, when total purchase payments are between
and $1,000 and $10,000, the Credits equal 1.5% of purchase payments.
When total purchase payments are at least $10,000 but less than
$5,000,000, the Credits equal 4.0% of purchase payments. When total
purchase payments are greater than $5,000,000, the Credits equal 5.0%
of purchase payments.
In the case of XT SIX, ASLAC may add a Credit to the account value
in conjunction with each purchase payment during the first six (6)
annuity years. The amount of the Credit depends on the annuity year in
which the purchase payment(s) is made, according to the following
schedule: In annuity year one (1) the Credit is 6.00%, in annuity year
two (2) the Credit is 5.00%, in annuity year three (3) the Credit is
4.00%, in annuity year four (4) the Credit is 3.00%, in annuity year
five (5)
[[Page 39449]]
the Credit is 2.00%, and in annuity year six (6) the Credit is 1.00%.
10. Currently, ASLAC is offering Promotional Credits only on the XT
SIX Contract. The promotional period is February 4, 2002 through August
2, 2002 (``Promotional Period''). Applicants state that during the
Promotional Period, ASLAC will apply a Promotional Credit to XT SIX
Contracts with a purchase payment of $75,000 or more. The Promotional
Credit will be applied in addition to the Credit that would otherwise
apply to the purchase payment made. If the initial purchase payment is
$75,000 or more, ASLAC will apply the additional Promotional Credit to
the initial purchase payment and any additional purchase payments made
during the Promotional Period. If the initial purchase payment is less
than $75,000 but cumulative purchase payments are made during the
Promotional Period of $75,000 or more, ASLAC will apply a Promotional
Credit to each additional purchase payment made during the Promotional
Period once cumulative purchase payments exceed $75,000.
11. Applicants submit that the Promotional Credits are vested when
applied, and will be subject to recapture under the identical
circumstances as applied to the Credits under the Prior Order, namely
(a) an amount equal to any Promotional Credit will be recovered by
ASLAC if the Contract owner exercises the right to cancel provision in
accordance with applicable state law; (b) the amount available under
the medically-related surrender provision of the Contract will not
include the amount of any Promotional Credits applied to purchase
payments made within 12 months prior to the date the annuitant first
became eligible for the medically-related surrender; and (c) any
Promotional Credits applied to the account value on purchase payments
made within 12 months prior to the date of death will be recovered by
ASLAC upon payment of the death benefit, subject to the limitation that
Applicants will not exercise their right to recover the Credit to the
extent that the death benefit payable is equal to purchase payments
minus proportional withdrawals or when the death benefit is equal to
the account value but after the recovery of all or a portion of the
Credits, the death benefit would be equal to less than purchase
payments minus proportional withdrawals.
12. Under the Prior Order, ASLAC was granted exemptive relief
allowing it to apply additional Credits on Contracts owned by a member
of a Designated Class.\2\
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\2\ The designated class of Contract owners includes: (a) Any
parent company, affiliate or subsidiary of ASLAC; (b) an officer,
director, employee, retiree, sales representative, or in the case of
an affiliated broker-dealer, registered representative of such
company; (c) a director, officer or trustee of any underlying mutual
fund; (d) a director, officer or employee of any investment manager,
sub-advisor, transfer agent, custodian, auditing, legal or
administrative services provider that is providing investment
management, advisory, transfer agency, custodianship, auditing,
legal and/or administrative services to an underlying mutual fund or
any affiliate of such firm; (e) a director, officer, employee or
registered representative of a broker-dealer or insurance agency
that has a then current selling agreement with ASLAC and/or with
ASM; (f) a director, officer, employee or authorized representative
of any firm providing us or our affiliates with regular legal,
actuarial, auditing, underwriting, claims, administrative, computer
support, marketing, office or other services; (g) the then current
spouse of any such person noted in (b) through (f), above; (h) the
parents of any such person noted in (b) through (g), above; (i) the
child(ren) or other legal dependent under the age of 21 of any such
person noted in (b) through (h); and (j) the siblings of any such
persons noted in (b) through (h) above. All other terms and
conditions of the Contract apply to owners in the designated class.
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13. In the case of XT FOUR, ASLAC applies Credits of 8.5% to any
purchase payment made by a member of a Designated Class. In the case of
XT SIX, ASLAC applies Credits on purchase payment made by a member of a
Designated Class at the following percentage rates in annuity years 1,
2, 3, 4, 5, and 6, respectively: 9%, 9%, 8.5%, 8%, 7%, 6%. During
annuity years 7, 8, 9 and 10, respectively, in the case of XT SIX,
ASLAC may apply Credits on purchase payments made by a member of a
Designated Class at the following percentage rates: 5%, 4%, 3% and 2%.
Whereas, under XT SIX generally, subsequent to annuity year six, ASLAC
would not apply Credits to any purchase payments.
ASLAC will not offer Promotional Credits on XT SIX Contracts owned
by a member of the Designated Class. ASLAC may offer Promotional
Credits on XT FOUR Contracts owned by a member of the Designated Class.
14. Applicants state that, as of the date of the Application, the
Funds in which the Sub-accounts may invest are AST, Montgomery Variable
Series, Wells Fargo Variable Trust, INVESCO Variable Investment Funds,
Inc., Evergreen Variable Annuity Trust, ProFunds VP, First Defined
Portfolio Fund LLC and The Prudential Series Fund, Inc. The assets of
each Portfolio are held separately from the others and each Portfolio
has its own investment objective and policies. The investment
performance of one Portfolio has no affect on the investment
performance of any other Portfolio. The investment objectives and
policies of each Portfolio are described in the registration statements
for the Funds. Each Fund may establish additional Portfolios, or cease
offering any Portfolios, existing or as may be established in the
future. In addition, the Account may add Sub-accounts, and may add or
cease to offer Sub-accounts, which in turn are dedicated to owning
shares of a particular Portfolio of a particular Fund.
15. Applicants state that prior to the annuity date, a Contract
owner may surrender the Contract in its entirety for the surrender
value or withdraw a portion of the surrender value. Applicants do not
seek to recover Promotional Credits applied to purchase payments upon
surrender or withdrawal of a Contract, other than as described in this
paragraph, in the case of a medically-related surrender. Where
permitted by law, a Contract owner may request to surrender the
Contract prior to the annuity date without application of any
contingent deferred sales charge (``CDSC'') upon occurrence of a
``Contingency Event''.\3\ If a Contingency Event occurs, the amount
available for surrender is the account value less an amount equal to
any Credit and Promotional Credit applied to purchase payments within
twelve months prior to Contingency Event, less the amount of any
Credits and Promotional Credits added in conjunction with any purchase
payments received after ASLAC's receipt of the Contract owner's request
for a medically-related surrender. Applicants do not assess a CDSC on a
medically-related surrender that would otherwise apply to a full or
partial surrender of the Contract.
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\3\ A ``Contingency Event'' occurs if the annuitant is first
confined in a specified medical care facility while the Contract is
in force and remains confined for at least 90 days in a row, or is
first diagnosed as having a fatal illness while the Contract is in
force. Specific definitions in relation to this benefit are provided
in the Contract's policy form and may differ in certain
jurisdictions.
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16. During the accumulation phase, a death benefit is payable upon
the death of the first Contract owner to die (if the Contract is owned
by one or more natural persons) or upon the death of the annuitant (if
the Contract is owned by an entity and there is no contingent
annuitant). The amount of the death benefit is determined when ASLAC
obtains satisfactory proof in writing of the applicable death, all
representations required or which are mandated by applicable law or
regulation to the death claim and the payment of death proceeds, and
any applicable election of the mode of payment of the death benefit if
not previously elected by the Contract owner.
[[Page 39450]]
The basic Death Benefit is the greater of (1) the sum of all
purchase payments less the sum of all proportional withdrawals, or (2)
the sum of the account value in the variable investment options and the
interim value in the fixed allocations (without application of any
market value adjustment), less an amount equal to all Credits and
Promotional Credits applied within 12 months prior to the date of
death. ASLAC does not recover the amount equal to the Credits and
Promotional Credits applied to purchase payments when the death benefit
payable under the Contract is equal to purchase payments minus
proportional withdrawals or when the death benefit is equal to the
account value but after the recovery of all or a portion of the Credits
and Promotional Credits, the death benefit would be equal to less than
purchase payments minus proportional withdrawals.
17. Applicants state that each of the Contracts may offer optional
benefits, including optional death benefits, for which the Contract
owner may be charged an additional asset-based charge.
18. Applicants represent that, prior to the annuity date and upon
surrender, ASLAC will deduct the annual maintenance fee equaling the
smaller of 2% of account value or $35 per annuity year from the Sub-
account holdings attributable to any particular Contract in the same
proportion as each such Sub-account holding bears to the account value
of such Contract. No charges are assessed if no account value is
maintained in the Sub-accounts. The annual maintenance fee can be
increased only for Contracts issued subsequent to the effective date of
any such change. The annual maintenance fee may be waived under certain
circumstances as described in the then effective registration
statements for the Contracts.
19. An insurance charge (``Insurance Charge'') is deducted daily
against the average assets allocated to the Account. The Insurance
Charge for XT FOUR is the combination of the Mortality & Expense Risk
Charge (1.25%) and the Administration Charge (0.15%); the total charge
is equal to 1.40% on an annual basis. The Insurance Charge for XT SIX
is the combination of the Mortality & Expense Risk Charge (0.50%) and
the Administration Charge (0.15%); the total charge is equal to 0.65%
on an annual basis. The Insurance Charge is intended to compensate
ASLAC for providing the insurance benefits under the Contract,
including the Contract's basic death benefit that provides guaranteed
benefits to the Contract owner's beneficiaries even if the market
declines and the risk that persons ASLAC guarantees annuity payments to
will live longer than ASLAC's assumptions. The charge also covers
administrative costs associated with providing the Contract benefits,
including preparation of the contract, confirmation statements, annual
account statements and annual reports, legal and accounting fees as
well as various related expenses. Finally, the charge covers the risk
that ASLAC's assumptions about the mortality risks and expenses under
the Contract are incorrect and that ASLAC has agreed not to increase
these charges over time despite actual costs. ASLAC may increase the
portion of the total Insurance Charge that is deducted as an
Administration Charge, if permission is received from the appropriate
regulatory authorities. However, any increase will only apply to
Contracts issued after the date of the increase.
20. Applicants state that a distribution charge (``Distribution
Charge'') is deducted daily against the average assets allocated to the
Sub-accounts under XT SIX. The Distribution Charge is equal to 1.00% on
an annual basis in annuity years 1 through 10. After the end of the
first ten annuity years, the 1.00% charge for distribution will no
longer be assessed. The Distribution Charge is intended to compensate
ASLAC for a portion of its sales expenses under the Contract, including
promotion and distribution of the Contract. At the end of the 10th
annuity year, ASLAC will process a transaction to convert the Contract
owner's account value to units of the Sub-accounts that reflect only
the Insurance Charge. Because units that only reflect the Insurance
Charge are less expensive, the number of units attributed to a Contract
is decreased and the unit value of each unit of the Sub-accounts in
which the Contract owner was invested is increased. The Contract
owner's account value is unchanged by the conversion of the account
value to the number of units, and unit values will not affect the
Contract owner's account value. Beginning on that date, the Contract
owner's account value will fluctuate based on the change in the value
of the units that only reflect the Insurance Charge.
21. Applicants represent that no deduction or charge will be made
from purchase payments for sales or distribution expenses. However, a
CDSC may be assessed on surrender or partial withdrawal from the
Contract. The CDSC will be used to compensate ASLAC for sales
commissions and other promotional or distribution expenses incurred by
ASLAC which are associated with the marketing of the Contracts. ASLAC
does not anticipate that the CDSC will be sufficient to permit it to
recoup all its sales and distribution expenses.
22. Applicants state that XT FOUR offers a free withdrawal
privilege. This privilege permits a Contract owner to withdraw account
value without any CDSC being imposed at the time of withdrawal. The
maximum amount available as a free withdrawal during annuity year one
through eight is 10% of all purchase payments. The 10% free withdrawal
is not cumulative. After annuity year eight, the maximum free
withdrawal amount is the sum of (a) 10% of any purchase payments
applied to the Contract after the initial purchase payment, (b) 100% of
the initial purchase payment and (c) 100% of any growth in the
Contract, which equals the current account value minus all purchase
payments that have not been previously withdrawn. The Credit and
Promotional Credit amounts, which are applied to the purchase payments
when applicable, are not considered growth and are not available as a
free withdrawal. Amounts withdrawn under the free withdrawal provision
do not reduce the CDSC that may apply to a subsequent surrender. XT SIX
offers a free withdrawal privilege as well. This privilege permits a
Contract owner to withdraw account value without any CDSC being imposed
at the time of withdrawal. The maximum amount available as a free
withdrawal during annuity year one through ten is 10% of all purchase
payments. The 10% free withdrawal is not cumulative. After annuity year
ten, the maximum free withdrawal amount is 100% of the account value,
including any Credits and Promotional Credits.
23. Applicants represent that on full or partial surrenders under
XT FOUR, the CDSC on any purchase payments surrendered in excess of the
free withdrawal privilege is based on a schedule of 8.5% in year one to
0.0% in year nine and beyond. The amount of the CDSC applicable to each
purchase payment decreases over time, measured from the date each
purchase payment is applied.
Applicants further represent that on full or partial surrenders
under the XT SIX, the CDSC on any purchase payments surrendered in
excess of the free withdrawal privilege is based on a schedule of 9.0%
in year one to 0.0% in year eleven and beyond. The CDSC is measured
from the issue date, not from the date that each purchase payment is
applied.
[[Page 39451]]
Applicants state that for purposes of calculating the CDSC,
withdrawals will be considered to come first from any amount available
as a free withdrawal, then, to the extent the amount withdrawn exceeds
the free withdrawal, from purchase payments that have not previously
been withdrawn subject to a CDSC. If there are multiple new purchase
payments, the one received earliest is liquidated first, then the one
received next, so that the lowest CDSC percentage will apply to the
amount withdrawn.
Applicants Legal Analysis
1. 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. Applicants request that the Commission amend
the Prior Order to permit Applicants to rely on the exemption provided
thereby from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the
Act, and Rule 22c-1 thereunder, to recapture, under the same
circumstances described in the Prior Application, Promotional Credits
and Future Promotional Credits for all Contracts and Future Contracts.
2. Applicants submit that the relief requested hereby is identical
to the relief granted in the Prior Order, except that it covers
Promotional Credits.
3. Applicants request that the Commission, pursuant to Section 6(c)
of the Act, grant the exemptions requested below with respect to the
Contracts, and any Future Contracts funded by the Accounts or Future
Accounts, that are issued by ASLAC and underwritten or distributed by
ASM. Applicants undertake that Future Contracts funded by the Account
or any Future Account will be substantially similar in all material
respects to the Contracts. Likewise, any Future Promotional Credits
will be substantially similar in all material respects to the
Promotional Credits described herein. Applicants believe 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.
4. Applicants represent that it is not administratively feasible to
track the actual Promotional Credit amount in one or the other of the
Accounts after the Promotional Credit is applied to purchase payments
in the Contract. Accordingly, the asset-based charges applicable to the
Accounts will be assessed against the entire account value held in the
respective Accounts, including the Promotional Credit amount, during
the right to cancel period, for a medically-related surrender and when
purchase payments are made within 12 months prior to the date of death.
As a result, the aggregate asset-based charges assessed against a
Contract owner's account value will be higher than that which would be
charged if the Contract owner's account value did not include the
Credit and the Promotional Credit. ASLAC has agreed to provide such
disclosure in the prospectus.
5. Subsection (i) of Section 27 provides that Section 27 does not
apply to any registered separate account funding variable insurance
contracts, or to the sponsoring insurance company and principal
underwriter of such account, except as provided in paragraph (2) of the
subsection. Paragraph (2) of the subsection provides that it shall be
unlawful for such a separate account or sponsoring insurance company to
sell a contract funded by the registered separate account unless ``(A)
such contract is a redeemable security.'' Section 2(a)(32) defines
``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.
6. Applicants submit that the Promotional Credit recapture
provisions, like the Credit recapture provisions, would not deprive a
Contract owner of his or her proportionate share of the issuer's
current net assets. A Contract owner's interest in the amount of the
Promotional Credit allocated to his or her annuity account value is not
vested until the applicable right to cancel period has expired without
return of the Contract. Similarly, a Contract owner's interest in the
amount of the Promotional Credit allocated to his or her annuity
account value will vest, unless ASLAC receives purchase payments within
the first 12 months of the date the annuitant first became eligible for
the medically-related surrender. And lastly, a Contract owner's
interest in the amount of the Promotional Credit allocated to his or
her annuity account value will not vest if the Promotional Credits
applied to the account value are on purchase payments made within 12
months prior to the date of death.
7. Applicants state that the recapture of any Promotional Credit,
like the recapture of Credits, is intended only to protect ASLAC
against anti-selection under certain specified contingencies. ``Anti-
selection'' can generally be described as a risk that persons obtain
coverage based on knowledge that the contingency that triggers payment
of an insurance benefit is likely to occur, or is to occur shortly. In
the case of the Contracts, Promotional Credits and Credits are provided
on a guaranteed issue basis. The protection against anti-selection by
persons who are ill is the reduction of the death benefit or the amount
available as a medically-related surrender by the amount of a Credit
and a Promotional Credit applied to purchase payments made within 12
months prior to the applicable Contingency Event. With respect to
Credits and Promotional Credits allocated prior to the end of the
Contract's right to cancel provision, the amount payable when such
provision is exercised must be reduced by an amount equal to the
Credits and Promotional Credits allocated. Otherwise, purchasers would
apply for annuities for the sole purpose of making a quick profit and
then exercise the right to cancel provision.
8. Applicants represent that, until or unless the amount of any
Promotional Credit is vested, ASLAC retains the right to, and interest
in, the Promotional Credit amount, although not in the earnings
attributable to that amount. Thus, when ASLAC recaptures any
Promotional Credit it is simply retrieving its own assets, and because
a Contract owner's interest in the Promotional Credit is not vested the
Contract owner has not been deprived of a proportionate share of the
applicable Account's assets, i.e., a share of the applicable Account's
assets proportionate to the Contract owner's account value (including
the Promotional Credit).
9. For the foregoing reasons, Applicants state, the provisions for
recapture of any Promotional Credit or Future Promotional Credit under
the Contracts do not, and any such Future Contract provisions will not,
violate Section 2(a)(32) and 27(i)(2)(A) of the Act. Indeed, a contrary
conclusion would be inconsistent with a stated purpose of NSMIA, which
is ``to amend the [Act] to * * * provide more effective and less
burdensome regulation.'' Sections 26(e) (now renumbered as Section
26(f)) and 27(i) were added to the Act pursuant to Section 205 of NSMIA
to implement the
[[Page 39452]]
purposes of NSMIA and the Congressional intent. Thus, as with the
application of a Credit, the application of a Promotional Credit to
contributions made under the Contracts should not raise any questions
as to ASLAC's compliance with the provisions of Section 27(i).
Nevertheless, to avoid any uncertainties, Applicants request an
exemption from Sections 2(a)(32) and 27(i)(2)(A), to the extent deemed
necessary, to permit the recapture of any Promotional Credit under the
circumstances described herein with respect to Contracts and any Future
Contracts, without the loss of the relief from Section 27 provided by
Section 27(i).
10. Section 22(c) of the Act authorizes the Commission to make
rules and regulations applicable to registered investment companies and
to principal underwriters of, and dealers in, the redeemable securities
of any registered investment company to accomplish the same purposes as
contemplated by Section 22(a). Rule 22c-l thereunder 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.
11. ASLAC's recapture of the Promotional Credit arguably might be
viewed as resulting in the redemption of redeemable securities for a
price other than one based on the current net asset value of the Sub-
accounts. The recapture of the Promotional Credit is not violative of
Rule 22c-1. The recapture of the Promotional Credit does not involve
either of the evils that Rule 22c-1 was intended to eliminate or reduce
as far as reasonably practicable, namely: (i) 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
or repurchase at a price above it, and (ii) other unfair results,
including speculative trading practices. These evils were the result of
backward pricing, the practice of basing the price of a mutual fund
share on the net asset value per share determined as of the close of
the market on the previous day. Backward pricing allowed investors to
take advantage of increases or decreases in net asset value that were
not yet reflected in the price, thereby diluting the values of
outstanding mutual fund shares.
12. Applicants state that the proposed recapture of the Promotional
Credit poses no such threat of dilution. To effect a recapture of a
Promotional Credit, ASLAC will redeem interests in a Contract owner's
account at a price determined on the basis of the current net asset
value of the respective Sub-Accounts. The amount recaptured will equal
the amount of the Credit and the Promotional Credit that ASLAC paid out
of its own general account assets. Although Contract owners will be
entitled to retain any investment gain attributable to the Promotional
Credit, the amount of such gain will be determined on the basis of the
current net asset value of the respective Sub-accounts. Thus, no
dilution will occur upon the recapture of the Promotional Credit.
Applicants also submit that the second harm that Rule 22c-1 was
designed to address, namely, speculative trading practices calculated
to take advantage of backward pricing, will not occur as a result of
the recapture of the Promotional Credit.
Because neither of the harms that Rule 22c-1 was meant to address
is found in the recapture of the Promotional Credit, Rule 22c-1 should
have no application to any Promotional Credit. However, to avoid any
uncertainty as to full compliance with the Act, Applicants request an
exemption from the provisions of Rule 22c-1 to the extent deemed
necessary to permit them to recapture the Promotional Credit under the
Contracts and Future Contacts.
In addition, Applicants state that the Commission has previously
granted exemptive relief to permit the recapture of credits under
variable annuity contracts with total credits exceeding the combination
of the Credits described in the Prior Order and any Promotional Credits
described in the Application.
Conclusion
Applicants submit, based on the grounds summarized above, that
their exemptive request meets the standards set out in section 6(c) of
the Act, namely, that the exemptions requested are necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act, and that, therefore, the Commission should grant
the requested order.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14135 Filed 6-6-02; 8:45 am]
BILLING CODE 8010-01-P