[Federal Register Volume 67, Number 62 (Monday, April 1, 2002)]
[Notices]
[Pages 15430-15434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7778]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-25500; File No. 812-12630]
Northbrook Life Insurance Company, et al.; Notice of Application
March 26, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an amended order pursuant to section
11(a) of the Investment Company Act of 1940, as amended (the ``Act'')
approving the proposed offer of a new Longevity Reward Rider (``new
LRR''), as set forth below.
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Applicants: Northbrook Life Insurance Company (``Northbrook''),
Northbrook Variable Annuity Account II (``Account II''), Allstate Life
Insurance Company of New York (``Allstate New York''), Allstate Life of
New York Variable Annuity Account II (``ALNY Account II'') and Morgan
Stanley DW Inc. (formerly known as Dean Witter Reynolds Inc.) (``Morgan
Stanley'') (collectively, the ``Applicants'').
Summary of Application: Applicants seek an order to amend an
Existing Order (described below) approving the offer by the Applicants
of the new LRR upon the terms and subject to the conditions described
herein and in the Prior Application (described below).
Filing Date: The application was filed on September 4, 2001,
amended on January 23, 2002, and amended and restated on March 19,
2002.
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 must be received by the
Commission by 5:30 p.m. on April 22, 2002, 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.
[[Page 15431]]
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549-0609. Applicants, Charles Smith, Esq.,
Assistant Counsel, Allstate Life Insurance Company, 3100 Sanders Road,
Northbrook, Illinois 60062; with a copy to Richard T. Choi, Esq., Foley
& Lardner, 3000 K Street, NW, Suite 500, Washington, DC 20007.
FOR FURTHER INFORMATION CONTACT: Alison Toledo, Senior Counsel, 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
Public Reference Branch of the Commission, 450 Fifth Street, NW,
Washington, DC 20549-0102, (202) 942-8090.
Applicant's Representations
1. Northbrook is a wholly-owned subsidiary of Allstate Life
Insurance Company (''Allstate Life''). Allstate Life is an indirect
subsidiary of The Allstate Corporation, a publicly-traded insurance
holding company. Northbrook is Account II's depositor within the
meaning of the Act.
2. Morgan Stanley is a wholly-owned subsidiary of Morgan Stanley
Dean Witter & Co., a publicly-traded financial services company. Morgan
Stanley is the principal underwriter of Account II. Morgan Stanley is
registered as a broker-dealer under the Securities Exchange Act of 1934
(File No. 8-14172).
3. Account II is registered under the Act as a unit investment
trust (File No. 811-6116). Account II funds the Morgan Stanley Dean
Witter Variable Annuity II Contracts (the ``VA II Contracts'') that
Northbrook and Morgan Stanley have offered and sold for a number of
years.
4. The VA II Contracts, which are registered under the Securities
Act of 1933 (File No. 033-35412), are deferred annuity contracts under
which Contract owners may make one or more purchase payments over a
period of time (called the ``accumulation phase''). During the
accumulation phase, the Contract owner's purchase payments, after
deduction of certain charges, earn (at the owner's election) a
``variable'' return based on the investment performance of one or more
of Account II's subaccounts and/or a fixed rate of return that
Northbrook declares from time to time.
5. At the end of the accumulation phase, the Contract owner elects
whether to receive a ``lump sum'' payment of the VA II Contract's
accumulated value, or to receive that value under one of several
payment options. Payment options are available on a variable and/or
fixed basis. The VA II Contracts incorporate many other features,
including ``death benefit'' options, partial withdrawal rights, full
surrender rights, transfer privileges and other optional rider
benefits.
6. The VA II Contracts currently impose a withdrawal charge of up
to 6% of any amount by which purchase payments withdrawn in any year
exceed 15% of the cumulative purchase payments that had been made as of
the beginning of that year (the ``annual free withdrawal amount''). The
withdrawal charge associated with each purchase payment declines 1%
each year until it is 0% beginning in the seventh year after the
payment was made. Unused portions of the annual free withdrawal amount
do not carry over to future years.
7. The VA II Contracts also impose an annual Contract maintenance
charge of $ 30, a $ 25 charge applicable to certain transfers in excess
of twelve during a one-year period (which is currently being waived), a
daily administrative charge at an annual rate of 0.10% of the
Contract's value in Account II, a mortality and expense risk charge at
an annual rate of 1.25% of the Contract's value in Account II (or
higher if certain optional rider benefits are selected), and a charge
corresponding to any applicable state premium taxes.
8. Allstate New York is a stock life insurance company organized in
New York in 1967. Like Northbrook, Allstate New York is a wholly-owned
subsidiary of Allstate Life.
9. ALNY Account II funds the Allstate New York Variable Annuity II
Contracts (``ALNY Contracts''). The ALNY Contracts are substantially
similar to the VA II Contracts (together with the ALNY Contracts, the
``Contracts'') covered by the Existing Order, and have the same
withdrawal charge schedule, base mortality and expense charge, contract
maintenance charge, and administrative expense charge. However, due to
limitations imposed by the New York Insurance Department, the ALNY
Contracts do not offer the following income and death benefit riders
that are offered by the VA II Contracts: Death Benefit Combination
Option, Income Benefit Combination Option 2, Income and Death Benefit
Combination Option 2 and Enhanced Earnings Death Benefit Option. Other
than the optional riders, there are no material differences between the
ALNY Contracts and the VA II Contracts.
10. By order dated June 8, 2000 (the ``Existing Order''),\1\ the
Commission approved, pursuant to Section 11 of the Act, the offer by
Northbrook, Account II, and Morgan Stanley of a Longevity Reward Rider
to owners of certain variable products as described in the application
for the Existing Order (``Prior Application'').\2\ Applicants are
seeking to amend the Existing Order to approve the offer by Applicants
of the new LRR. The new LLR is identical to the LRR currently offered
through the VA II Contracts (``existing LRR''), with the modifications
described below. Both the ALNY Contracts and the VA II Contracts are
distributed exclusively by Morgan Stanley.
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\1\ Northbrook Life Insurance Company, Investment Company Act
Release No. 24493 (June 8, 2000) (File No. 812-12092).
\2\ Northbrook Life Insurance Company, Investment Company Act
Release No. 24456 (May 16, 2000) (File No. 812-12092).
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11. The existing LRR provides the following benefits: (a) An option
whereby a deceased owner's surviving spouse may continue the Contract
using the then-current death benefit value as the new Contract value,
if higher, rather than the current Contract value; (b) a reduced
mortality and expense risk charge (i.e., at an annual rate that is .07%
less than the rate that otherwise would apply); (c) a permanent waiver
of the $30 annual Contract maintenance charge if the Contract's value
exceeds $40,000 at any time; and (d) a reduction in the withdrawal
charge that will apply to the withdrawal of any purchase payments that
are made after the existing LRR is added to the Contract.
12. Contract owners who elect the existing LRR have a new three-
year withdrawal charge schedule that applies to withdrawals made after
the rider's issue date (the ``Rider Date''). The new schedule applies
to any amount of such a subsequent withdrawal of purchase payments that
exceeds the 15% annual free withdrawal amount, regardless of whether
such withdrawn purchase payments were made before or after the Rider
Date.
13. The withdrawal charge under the new withdrawal charge schedule
begins at 3% and declines by 1% per year over three years to 0% by the
end of the third year. For purchase payments made prior to the Rider
Date, the three-year period runs from the Rider Date. For any purchase
payment made subsequent to the Rider Date, the three-year period runs
from the date of that payment.
14. The same exceptions to imposing the existing LRR withdrawal
charge apply as apply to the Contract's basic withdrawal charge.
Specifically, no existing LRR withdrawal charge is
[[Page 15432]]
imposed at the time a payment option commences, upon the death of a
Contract owner or annuitant, upon amounts withdrawn to satisfy any
applicable minimum distribution requirements under the Internal Revenue
Code, or upon amounts withdrawn that are within the 15% annual free
withdrawal amount. These are the same exceptions as would apply to the
Contracts without the existing LRR.
15. Contract owners are not permitted to elect for the existing LRR
to apply to part of a contract and not to the rest. Any election of the
existing LRR must apply to the whole contract.
16. The new LRR is identical to the existing LRR, except that the
new LRR will be available to an expanded class of eligible Contract
owners. The existing LRR is available only to Contract owners whose
entire Contract value is no longer subject to a withdrawal charge. By
contrast, the new LRR would be available to any Contract owner if on
the date of application for the new LRR (``Application Date''):
the Contract owner's initial purchase payment is no
longer subject to a withdrawal charge; and
the Contract owner's additional purchase payments, if
any, would be subject to total withdrawal charges (assuming a
current surrender of the Contract) equal to an amount not greater
than 0.25% of the current Contract value.
The following example illustrates the operation of the new
eligibility criteria: In 1990, an individual purchases a Contract
with an initial purchase payment of $150,000. On January 1, 1997,
the Contract owner makes an additional purchase payment of $20,000.
In 2001, the Contract owner applies to add the new LRR. At that
time, the Contract value is $200,000, and the additional purchase
payment is subject to the Year 4 surrender charge of 2%:
(A) Contract value = $200,000
(B) Hypothetical withdrawal charge (assuming full surrender) =
$20,000 x .02 = $400
(C) Eligibility Calculation ( .25%) = (B) / (A) = 400 / 200,000
= 0.20%
Because the withdrawal charge upon surrender on the Application
Date is less than .25% of the Contract value, the Contract owner is
eligible to add the LRR.
17. The principal purpose of the new LRR is the same as that of the
existing LRR, namely, to reward eligible Contract owners for their
persistency. However, the broader eligibility criteria for the new LRR
is intended to meet the demands of Contract owners for such additional
flexibility. Specifically, many Contract owners have expressed the
desire that additional purchase payments, especially where small
compared to the initial purchase payment, should not defeat eligibility
for the LRR. In addition, the new LRR, like the existing LRR, will
better allow Northbrook and Allstate New York to maintain the Contracts
on a competitive footing with other newer variable annuity contracts in
the marketplace that offer the same or similar benefits.
Applicants' Legal Analysis
1. Section 11(a) of the Act makes it unlawful for any registered
open-end company, or any principal underwriter for such a company, to
make or cause to be made an offer to the holder of a security of such
company, or of any other open-end investment company, to exchange that
security for a security in the same or another such company on any
basis other than the relative net asset values of the respective
securities, unless the terms of the offer have first been submitted to
and approved by the Commission.
2. Section 11(c) of the Act, in pertinent part, requires, in
effect, that any offer of exchange of the securities of a registered
unit investment trust for the securities of any other investment
company be approved by the Commission regardless of the basis of the
exchange.
3. Standing alone, Section 11(a) by its terms applies only to
exchanges of securities issued by ``open-end'' investment companies,
which, under section 5(a)(1) of the Act, includes only management-type
investment companies. ALNY Account II and Account II are unit
investment trust-type (rather than a management-type) investment
companies under section 4(2) of the Act. It would appear, therefore,
that Section 11 could require Commission approval for Applicants' offer
of the new LRR only if that offer falls within the ambit of Section
11(c).
4. Applicants do not concede that their offer of the new LRR to
existing Contract owners necessarily constitutes an offer of securities
of a registered unit investment trust in exchange for securities of any
other investment company within the purview of Section 11(c). Nor do
Applicants concede that, for purposes of Section 11, a Contract with
the new LRR is a different security than a Contract without the new
LRR. Nevertheless, Applicants request an exemption pursuant to Section
11(a) of the Act to the extent deemed necessary to permit the offer of
the new LRR as described herein.
5. Applicants have considered whether they could rely on Rule 11a-2
under the Act. Applicants believe and represent that the only provision
in Rule 11a-2 that could prevent such reliance would be the so-called
``tacking'' requirement in Rule 11a-2(d)(1). Applicants state that
since the new LRR withdrawal charge continues for only three years, and
since the new LRR is only available to a Contract owner if on the
Application Date (a) the Contract owner's initial purchase payment was
made at least six years prior to the date the new LRR is added to the
Contract (``Rider Date''); and (b) the Contract owner's additional
purchase payments, if any, would be subject to total withdrawal charges
(assuming a current surrender of the Contract) equal to an amount not
greater than 0.25% of the current Contract value, the tacking
requirement effectively would prohibit the imposition of some or all of
the new LRR's withdrawal charge with respect to purchase payments made
prior to the Rider Date. For that reason, Applicants have concluded
that Rule 11a-2 is unavailable to them.
6. Congress enacted Section 11 to prevent ``switching,'' i.e., the
practice of inducing security holders of one investment company to
exchange their securities for those of a different investment company
solely for the purpose of exacting additional selling charges.
Applicants assert that the new LRR would not involve ``switching.''
Applicants maintain, to the contrary, that the purpose of the new LRR
is to enable Contract owners to enhance their Contracts through the
rider without having to buy a new variable annuity contract. Applicants
represent that because the new LRR provides clear benefits, as
described above, the new LRR's sole purpose is not to exact additional
selling charges (or any other type of charge).
7. Applicants state that the new LRR would not result in any
duplicative charges. Applicants represent that the limited withdrawal
charge provided under the new LRR is reasonable in relation to the
benefits that the rider provides and the costs that Applicants will
incur in providing those benefits. Those costs will include costs of
developing and administering the new LRR, the direct dollar costs of
the charges that will be waived or reduced and the benefits that will
be paid under the new LRR, and the costs of distributing the new LRR to
Contract owners and educating them about it.
8. Applicants represent that any possible withdrawal charge under
the new LRR is modest in amount. For Contract owners with additional
purchase payments subject to withdrawal charges, the new LRR waives all
outstanding withdrawal charges applicable under the Contract's existing
withdrawal schedule and applies instead the withdrawal charge under the
new withdrawal schedule,
[[Page 15433]]
which may result in a lower withdrawal charge. Applicants state that,
if the Contract owner makes no withdrawals during the three years after
the Rider Date, there is no possibility that any withdrawal charge will
ever be deducted that exceeds what would have been deducted absent the
new LRR. Applicants also state that even if purchase payments are
withdrawn during that three-year period, the new LRR withdrawal charge
will apply only if more than the 15% annual free withdrawal amount is
withdrawn in any year.
9. The new LRR will be offered only to Contract owners who already
have demonstrated an inclination to maintain their Contracts for
substantial periods of time. Applicants believe that the income taxes
that are generally payable when earnings are withdrawn from a Contract,
as well as the tax penalties that may apply if those withdrawals are
made prior to the owner's reaching age 59 1/2, serve as additional
motivations that cause most owners to hold their Contracts for a
substantial number of years (and often until retirement).
10. Applicants state that any withdrawal charge will be waived for
withdrawals of any amounts necessary to meet any federal tax law
minimum distribution requirements applicable to a Contract.
11. Under all these circumstances, Applicants believe that, as a
practical matter, few owners that add the new LRR to their Contracts
will ever actually pay any additional withdrawal charges as a result;
and to the extent that the new LRR succeeds in its purpose of
maintaining the Contracts on a competitive footing in the marketplace,
withdrawals should be even further reduced.
12. Applicants state that except for the withdrawal charge as
described above, the new LRR will not result in any increase in or
imposition of any charge. Accordingly, Applicants assert that except
for the potential imposition of the new LRR withdrawal charge on
certain withdrawals that occur within three years after the Rider Date,
every aspect of a Contract will be at least as favorable after the new
LRR is added as it was before. Applicants maintain that adding the new
LRR to a Contract will have no adverse tax consequences to a Contract's
owner.
13. In light of these considerations, Applicants do not believe
there is any public policy or purpose under Section 11 (or otherwise)
that would preclude offering the new LRR on the terms and subject to
the conditions stated herein.
Applicants' Conditions
1. The Offering Document will contain concise, plain English
statements that: (a) the new LRR is suitable only for Contract owners
who expect to hold their Contracts as long term investments; and (b) if
a significant amount of the Contract's value is surrendered or
withdrawn during the first three years after the Rider Date, the new
LRR's benefits may be more than offset by that charge, and a Contract
owner may be worse off than if he or she had rejected the new LRR.
2. The Offering Document will disclose in concise plain English the
only aspect in which adding the new LRR rider could disadvantage a
Contract owner (i.e., through the possible imposition of the new LRR
withdrawal charge).
3. A Contract owner choosing to add the new LRR will complete and
sign the election form, which will prominently restate in concise,
plain English the statements required in Condition No. 1, and will
return it to Northbrook or Allstate New York, as appropriate. If the
election form is more than two pages long, Northbrook or Allstate New
York, as appropriate, will use a separate document to obtain the
Contract owner's acknowledgment of the statements referred to in
Condition No. 1 above.
4. Applicants will maintain and make available the following
separately identifiable records, for the time periods specified below,
for review by the Commission upon request: (a) Northbrook or Allstate
New York, as appropriate, will maintain records showing the level of
new LRR purchases and how it relates to the total number of Contract
owners eligible to acquire the new LRR (at least quarterly as a
percentage of the number eligible); (b)(i) Northbrook or Allstate New
York, as appropriate, will maintain copies of any form of Offering
Document, prospectus disclosure, election form, acknowledgment form, or
offering letter, regarding the offering of the new LRR, including the
dates(s) used, and (ii) Morgan Stanley will maintain copies of any
other written materials or scripts for presentations used by registered
representatives regarding the new LRR, including the dates used; (c)
records showing information about each new LRR purchase that occurs,
including (i) the following information to be maintained by Northbrook
or Allstate New York, as appropriate: the name of the Contract owner;
the Contract number; the election form (and separate acknowledgment
form, if any, used to obtain the Contract owner's acknowledgment of the
statements required in Condition No. 1 above), including the date such
election or acknowledgment form was signed; the date of birth, address
and telephone number of the Contract owner; the issue date of the new
LRR; the amount of the Contract's value on that date; and persistency
information relating to the Contract (date of any subsequent
withdrawals and withdrawal charges paid); and (ii) the following
information to be maintained by Morgan Stanley: the name of the
Contract owner, the Contract number, the registered representative's
name, CRD number, firm affiliation, branch office address and telephone
number; the name of the registered representative's broker-dealer; and
the amount of commissions paid to the registered representative that
relates to the new LRR; and (d) each of Northbrook or Allstate New
York, as appropriate, and Morgan Stanley will maintain logs showing any
Contract owner complaints received by it about the new LRR, state
insurance department inquiries to it about the new LRR, or litigation,
arbitration or other proceedings to which it is a party regarding the
new LRR.
5. Applicants will include the following information on the logs
referred to in Condition No. 4(d) above: date of complaint or
commencement of proceeding; name and address of the person making the
complaint or commencing the proceeding; nature of the complaint or
proceeding; and persons named or involved in the complaint or
proceeding.
6. Applicants will retain (a) the records specified in Condition
Nos. 4(a) and (d) above for six years from creation of the record; (b)
the records specified in Condition No. 4(b) above for six years after
the date of last use; and (c) the records specified in Condition No.
4(c) for five years from the Rider Date. The records referred to in
these conditions will be prepared and retained, for the periods
specified herein, by Northbrook or Allstate New York, as appropriate,
and Morgan Stanley. Nevertheless, upon request of the Commission or its
staff, Northbrook or Allstate New York, as appropriate, and Morgan
Stanley shall coordinate the prompt assembly of such records for review
at a single easily accessible location.
Conclusion
For the reasons discussed above, Applicants submit that the new LRR
offer is necessary or appropriate in the public interest and consistent
with the protection of investors and the purposes fairly intended by
the policies and provisions of the Act. Applicants submit
[[Page 15434]]
that the requested order should therefore be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7778 Filed 3-29-02; 8:45 am]
BILLING CODE 8010-01-P