[Federal Register Volume 78, Number 239 (Thursday, December 12, 2013)]
[Notices]
[Pages 75581-75585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29625]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-30821; File No. 812-14158]
Minnesota Life Insurance Company, et al.; Notice of Application
December 6, 2013.
AGENCY: The Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940, as amended (the ``1940 Act'' or
``Act''), granting exemptions from the provisions of Sections 2(a)(32)
and 27(i)(2)(A) of the Act and rule 22c-1 under the Act.
Applicants: Minnesota Life Insurance Company (``Minnesota Life'' or
``Insurance Company''), Variable Annuity Account (``Separate
Account''), and Securian Financial Services, Inc. (``SFS'')
(collectively, ``Applicants'').
SUMMARY: Summary of Application: Applicants seek an order amending an
existing order pursuant to Section 6(c) of the 1940 Act, exempting them
from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the 1940
Act and rule 22c-1 under the Act to the extent necessary to permit
Applicants, under specified circumstances, to recapture certain bonuses
(``Credit Enhancements'') applied to cumulative net purchase payments
under certain deferred variable annuity contracts issued by the
Insurance Company.
DATES: Filing Date: The application was filed on May 23, 2013, and an
amended and restated application was filed on August 9, 2013.
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 should be received by the
Commission by 5:30 p.m. on December 27, 2013, and should be accompanied
by proof of service on the 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
[[Page 75582]]
notified of a hearing may request notification by writing to the
Secretary of the Commission.
ADDRESSES: Secretary, SEC, 100 F Street NE., Washington, D.C. 20549-
1090. Applicants, c/o Daniel P. Preiner, Counsel, Minnesota Life
Insurance Company, 400 Robert Street North, St. Paul, Minnesota 55101.
FOR FURTHER INFORMATION CONTACT: Alberto H. Zapata, Senior Counsel, or
Joyce M. Pickholz, Branch Chief, Insured Investments Office, Division
of Investment Management, at (202) 551-6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.
Applicants' Representations
1. Applicants seek the exemptions needed to recapture Credit
Enhancements applied to cumulative net purchase payments that reach
certain aggregate amounts in accordance with the formula described
below made under: (i) New series (e.g., B Series and L Series) of new
deferred variable annuity contracts, including data pages, riders and
endorsements as described below (the ``New Contracts'') and (ii) any
deferred variable annuity contracts, including data pages, riders and
endorsements, substantially similar in all material respects to the New
Contracts that Minnesota Life may issue in the future (``Future
Contracts'') (New Contracts and Future Contracts referred to
collectively as the ``Contracts''). Applicants request that the relief
under the order extend to any other separate accounts of Minnesota Life
and their successors in interest that support the Contracts (``Future
Accounts'') and any Financial Industry Regulatory Authority (``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 principal underwriter for the Contracts
(``Future Underwriters'').
2. In 2007 and 2008, the Commission issued orders granting
exemptions that permit, under certain circumstances, the recapture of
certain Credit Enhancements (collectively, the ``Existing Orders'').\1\
Applicants wish to leave the Existing Orders intact, thus allowing them
to continue to recapture Credit Enhancements under the contracts
described in those orders (collectively, the ``Prior Contracts'').
---------------------------------------------------------------------------
\1\ See Investment Company Act Release Nos. 27960 (Aug. 30,
2007) (notice) and 27979 (Sept. 25, 2007) (order); Investment
Company Act Release Nos. 28321 (Jun. 26, 2008) (notice) and 28334
(Jul. 22, 2008) (order) (the ``2008 Order'').
---------------------------------------------------------------------------
3. The Existing Orders encompassed relief for future contracts
substantially similar in all material respects to the Prior Contracts.
Applicants state that the New Contracts differ from the Prior Contracts
in the following respects: (1) The contract charges are slightly higher
in some series and slightly lower in other series in the New Contracts;
(2) the schedule of deferred sales charge is shorter in the L Series of
the New Contracts; (3) the New Contracts offer different optional death
benefit riders; (4) the New Contracts offer different optional
guaranteed lifetime withdrawal benefit riders; and (5) the New
Contracts do not offer the same fixed-interest allocation options.
Although Credit Enhancement and recapture in the New Contracts will be
administered in a manner that is substantially similar in all material
respects to that of the Prior Contracts contemplated by the 2008 Order.
4. Minnesota Life is a stock life insurance company organized under
the laws of Minnesota. Minnesota Life is authorized to sell insurance
and annuities in all states (except New York), and the District of
Columbia. Minnesota Life is the depositor and sponsor for the Separate
Account, as those terms have been interpreted by the Commission with
respect to variable annuity separate accounts. Minnesota Life may
establish one or more additional Future Accounts for which it will
serve as depositor.
5. The Separate Account is a segregated investment account under
Minnesota law. The Separate Account is a ``separate account'' as
defined by Section 2(a)(37) of the 1940 Act and is registered with the
Commission as a unit investment trust (File No. 811-4294). A
registration statement for interests in the Separate Account offered
through the New Contracts has been filed with the Commission under the
Securities Act of 1933, as amended, on Form N-4, File No. 333-189593.
6. The Separate Account is divided into a number of sub-accounts.
Each sub-account 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 Separate Account support one or more varieties of variable annuity
contracts, including the Prior Contracts and the New Contracts, among
others. Minnesota Life may issue Future Contracts through the Separate
Account. Minnesota Life also may issue Contracts through Future
Accounts.
7. Securian Financial Services, Inc. (``SFS'') is registered as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
of FINRA. SFS serves as the principal underwriter of the Separate
Account and may act as principal underwriter for Future Accounts for
Minnesota Life and distributor for Future Contracts. Future
Underwriters also may act as principal underwriter for Future Accounts
and as distributor for any of the Contracts.
8. The New Contracts are deferred combination variable and fixed
annuity contracts that Minnesota Life may issue to individuals on a
``non-qualified'' basis or in connection with certain types of
retirement plans that receive favorable federal income tax treatment
under the Internal Revenue Code of 1986, as amended. The New Contracts
also make available a number of sub-accounts of the Separate Account to
which a contract owner may allocate net purchase payments and
associated Credit Enhancement(s), as described below.
9. A contract owner's initial purchase payment must be at least
$10,000 (unless a lower qualified plan limitation applies). Thereafter,
a contract owner may choose the amount and frequency of purchase
payments, except that the minimum subsequent purchase payment is $500
($100 for automatic payment plans). A contract owner may make transfers
of contract value among and between the sub-account options at any
time. Applicants have reserved the right to impose a $10 charge for
each transfer when transfer requests exceed 12 in a single contract
year, but are not currently imposing the charge.
10. The New Contracts offer a contract owner a variety of annuity
payment options. The contract owner may annuitize at any time. If a
deferred sales charge (``DSC'') would otherwise apply to New Contract
withdrawals at the time of annuitization, the DSC will be waived for
amounts applied to provide annuity payments.
11. The New Contracts provide for an annual administrative charge
of $50 that Minnesota Life deducts from the New Contract's accumulation
value on each contract anniversary and upon a full surrender of a New
Contract if the greater of: (a) Contract value or (b) purchase payments
less withdrawals, is less than $50,000. For the B Series of the New
Contracts, a daily mortality and expense risk charge for the base New
[[Page 75583]]
Contract is deducted from the assets of the Separate Account at an
annual rate equal to 1.15% of average account value, which is lower
than the Prior Contracts contemplated by the 2008 Order. For the L
Series of the New Contracts, a daily mortality and expense risk charge
for the base New Contract is deducted from the assets of the Separate
Account at an annual rate equal to 1.55% of average account value,
which is higher than the Prior Contracts contemplated by the 2008
Order. For each series of the New Contracts, a daily administrative
charge for the base New Contract is deducted from the assets of the
Separate Account at an annual rate equal to 0.15% of average account
value. The New Contracts have a DSC which is applicable on surrender
and withdrawal of accumulation values. Credit Enhancements are not
recaptured upon surrender or withdrawal. A charge may also be assessed
depending on the type of optional benefit elected, if any.
12. The New Contracts offer a standard DSC schedule as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 5-6 6-7 7-8
Contract years since payment (percent) (percent) (percent) (percent) (percent) (percent) (percent) (percent) 8+
--------------------------------------------------------------------------------------------------------------------------------------------------------
B Series Deferred Sales Charge........................ 8.0 8.0 7.0 6.0 6.0 5.0 4.0 3.0 0
L Series Deferred Sales Charge........................ 8.0 8.0 7.0 6.0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
The DSC does not apply in any circumstances under which Credit
Enhancements will be recaptured.
13. Subject to state availability, a contract owner may elect to
purchase an optional living benefit rider. There are currently eight
different Guaranteed Lifetime Withdrawal Benefit optional riders
available (the ``GLWB Riders''), however, a contract owner may only
elect a single living benefit on a New Contract. In the future,
Minnesota Life may offer other living benefit riders as options under
the Contracts.
14. Minnesota Life will deduct a maximum annual charge ranging from
0.25% to 2.25% (current charges range from 0.45% to 1.50%) of the
greater of the contract value or benefit base (as described in the
applicable GLWB Rider) depending on which GLWB Rider is elected. One
quarter of the GLWB Rider charge will be taken three months after the
GLWB Rider effective date and at the end of every three months
thereafter. The charge does not apply after annuitization.
15. If a contract owner dies before the annuity start date, the New
Contract provides for a death benefit payable to a beneficiary computed
as described in the Application. In the future, Minnesota Life may
offer other optional death benefit riders as options under the
Contracts.
16. For the Highest Anniversary Value II Death Benefit, the Premier
II Death Benefit, and the MyPath Highest Anniversary Death Benefit,
Minnesota Life will deduct a maximum annual charge ranging from 0.30%
to 1.00% of the death benefit amount, depending on which optional death
benefit option is elected, if any. For the Estate Enhancement Benefit
II, Minnesota Life will deduct a daily charge from the assets of the
Separate Account at a maximum annual charge ranging from 0.25% to 0.40%
of average account value.
17. The Contract provides three standard annuity options: a life
annuity, a life annuity with a period certain, or a joint and last
survivor annuity. Minnesota Life may make other options available on
request.
18. Minnesota Life will credit the contract value allocated to the
sub-accounts and the fixed-interest accounts with a Credit Enhancement
when total cumulative net purchase payments reach the aggregate levels
set forth in the following table:
------------------------------------------------------------------------
Credit
Cumulative net purchase payments enhancement
percentage
------------------------------------------------------------------------
$250,000-$499,999.99....................................... 0.25%
$500,000-$749,999.99....................................... 0.50%
$750,000-$999,999.99....................................... 0.75%
$1,000,000 or more......................................... 1.00%
------------------------------------------------------------------------
19. The term ``cumulative net purchase payments'' means the total
of all purchase payments applied to the contract less any amounts
previously withdrawn from contract value. Similar to the Prior
Contracts contemplated by the 2008 Order, the amount of the Credit
Enhancement to be credited will be calculated as follows: (a)
Cumulative net purchase payments; multiplied by (b) the applicable
Credit Enhancement percentage from the table above; minus (c) any
Credit Enhancements previously applied to contract value.
20. Minnesota Life will allocate the Credit Enhancement for the
applicable purchase payment among the sub-accounts and fixed interest
accounts the contract owner selects in accordance with a contract
owner's current purchase payment allocation instructions. As disclosed
in the prospectus for the New Contracts, Minnesota Life reserves the
right to increase or decrease the amount of the Credit Enhancement or
discontinue the Credit Enhancement in the future. In such case,
Minnesota Life would seek any additional exemptive relief to the extent
required.
21. Minnesota Life intends to recapture or retain the Credit
Enhancements only in the following circumstances. First, Minnesota Life
recaptures or retains 100% of the Credit Enhancements in the event that
the contract owner exercises his or her cancellation right during the
``free look'' period. Second, Minnesota Life recaptures all of the
Credit Enhancements added to the Contract within 12 months prior to the
date any amounts are paid out as a death benefit. Any Credit
Enhancement added to the Contract more than 12 months prior to the date
any amount is paid out as a death benefit would not be recaptured.
Third, Minnesota Life will recapture all of the Credit Enhancements
added to the Contract within 12 months prior to the annuitization date
of the Contract. Any Credit Enhancement added to the Contract more than
12 months prior to the date of annuitization would not be recaptured.
(If only a partial annuitization were elected, a pro rata portion of
the Credit Enhancements added to the Contract within 12 months of the
annuitization date would be recaptured.)
22. Investment gains attributable to the Credit Enhancement will
not be recaptured. Since Minnesota Life does not recapture the
investment gain/loss attributable to the Credit Enhancement, only the
dollar amount of the Credit Enhancement added to the Contract is
recaptured in the circumstances described in the application.
23. Finally, because it is not administratively feasible to track
the Credit Enhancements in the Separate Account which may still be
subject to recapture, Minnesota Life deducts the daily mortality and
expense risk charge from the entire net asset value of the Separate
Account. As a result, the daily mortality and expense risk charge, and
any optional benefit charges paid by any
[[Page 75584]]
contract owner may be greater than that which he or she would pay
without the Credit Enhancement.
Applicants' Legal Analysis
1. Applicants request that the Commission, pursuant to Section 6(c)
of the 1940 Act, grant the exemptions set forth below to permit
Applicants to recapture Credit Enhancements previously applied to
purchase payments under the New Contracts: (1) In the event a contract
owner exercises his or her right to cancellation/``free look'' under
the New Contract; (2) if the Credit Enhancements were added to the
Contract within 12 months prior to the date any amounts are paid out as
a death benefit; and (3) if the Credit Enhancements were added to the
Contract within 12 months prior to the date of annuitization or partial
annuitization of the Contract.
2. Section 6(c) of the 1940 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 1940
Act and the rules promulgated under the Act, 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 1940 Act.
3. Appellants submit that the Credit Enhancement recapture is not a
sales load. Rather, it is a recapture of a Credit Enhancement
previously applied to a contract owner's purchase payments. Minnesota
Life provides the Credit Enhancement from its general account on a
guaranteed basis. The Contracts are designed to be long-term investment
vehicles. If a contract owner withdraws his or her money during the
free look period, if a death benefit is owed shortly after Credit
Enhancements are applied, or if the Contract is annuitized before this
anticipated period, Minnesota Life must recapture the Credit
Enhancement subject to recapture in order to avoid a loss.
4. Applicants submit that the proposed recapture of the Credit
Enhancement would not violate Section 2(a)(32) or 27(i)(2)(A) of the
1940 Act or rule 22c-1 under the Act. Minnesota Life would grant Credit
Enhancements out of its general account assets. Applicants submit if
Minnesota Life recaptures any Credit Enhancements or part of a Credit
Enhancement in the circumstances described above, it would merely be
retrieving its own assets.
5. Applicants further submit that the operation of the proposed
Credit Enhancements would not violate Section 2(a)(32) or 27(i)(2)(A)
of the 1940 Act because the recapture of Credit Enhancements would not,
at any time, deprive a contract owner of his or her proportionate share
of the current net assets of the Separate Account.
6. Applicant's assert that 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 industry and regulatory concerns 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.
Applicants submit that the Credit Enhancements do not give rise to
either of the two concerns that rule 22c-1 was designed to address.
First, Applicants contend that the proposed Credit Enhancements pose no
such threat of dilution. A contract owner's interest in his or her
contract value or in the Separate Account would always be offered at a
price based on net asset value next calculated after receipt of the
request. Second, Applicants submit that speculative trading practices
calculated to take advantage of backward pricing will not occur as a
result of Minnesota Life's recapture of the Credit Enhancement.
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 importantly, the
Credit Enhancement recapture simply does not create the opportunity for
speculative trading.
7. Applicants assert that the Credit Enhancement is generally
beneficial to a contract owner. The recapture tempers this benefit
somewhat, but unless: (1) The contract owner exercises his or her right
to cancel the contract during the ``free look'' period, or (2)
Minnesota Life applies Credit Enhancements and pays a death benefit
during the same 12-month period, or (3) Minnesota Life applies Credit
Enhancements and a contract owner annuitizes during the same 12-month
period, the contract owner retains the ability to avoid the Credit
Enhancement recapture. Applicants submit that as any earnings on Credit
Enhancements applied would not be subject to recapture and thus would
be immediately available to a contract owner. Applicants submit that
the Credit Enhancement recapture does not diminish the overall value of
the Credit Enhancement.
8. Applicants assert that recapture provision is necessary for
Minnesota Life to offer the Credit Enhancement and prevent anti-
selection--the risk that a contract owner would make significant
purchase payments into the Contract solely to receive a quick profit
from the Credit Enhancements and then withdraw his or her money.
Applicants submit it would be unfair to Minnesota Life to permit a
contract owner to keep his or her Credit Enhancement upon his or her
exercise of the Contract's ``free look'' provision. Applicants submit
it would also be unfair to Minnesota Life to permit a contract owner to
keep his or her Credit Enhancements paid shortly before death benefits
are paid or the contract is annuitized. Applicants further submit that
because no additional DSC applies upon payment of a death benefit, a
death shortly after the award of Credit Enhancements would afford a
contract owner or a beneficiary a similar profit at Minnesota Life's
expense. Finally, because no additional DSC applies on annuitization,
if a contract owner annuitizes his or her contract shortly after the
award of the Credit Enhancement, such event would afford a contract
owner a similar profit at Minnesota Life's expense.
9. Applicants state that the Commission's authority under Section
6(c) of the 1940 Act to grant exemptions from various provisions of the
1940 Act and rules under that Act 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, Minnesota
Life's successors in interest, Future Accounts and Future Underwriters
from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the 1940
Act and rule 22c-1 under the Act with respect to the Contracts.
Applicants submit that 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 1940 Act because all of the potential members of the
class could obtain the foregoing exemptions for themselves on the same
basis as Applicants, but only at a cost to each of them that is not
justified by any public policy purpose. As discussed in the
application, the requested exemptions would only extend to persons that
in all material respects are the same as Applicants.
10. Applicants represent that any Future Contracts will be
substantially
[[Page 75585]]
similar in all material respects to the New Contracts, but particularly
with respect to the Credit Enhancements and recapture of Credit
Enhancements and that each factual statement and representation about
the Credit Enhancement feature will be equally true of any Future
Contracts. Applicants also represent that each material representation
made by them about the Separate Account and SFS will be equally true of
Future Accounts and Future Underwriters, to the extent that such
representations relate to the issues discussed in this Application. In
particular, each Future Underwriter will be registered as a broker-
dealer under the Securities Exchange Act of 1934 and be a member of
FINRA.
11. Based upon the foregoing, Applicants submit that recapture of
the proposed Credit Enhancement involves none of the abuses to which
provisions of the 1940 Act and rules thereunder are directed. The
contract owner will always retain the investment experience
attributable to the Credit Enhancement and will retain the principal
amount in all cases except under the circumstances described in the
Application. Further, Applicants assert that Minnesota Life should be
able to recapture such Credit Enhancement to limit potential losses
associated with such Credit Enhancements.
Conclusions
For the reasons set forth in the Application, the Applicants assert
that the provisions for recapture of Credit Enhancements under the
Contracts do not violate Section 2(a)(32) and 27(i)(2)(A) of the Act
and rule 22c-1 under the Act and that the requested relief is
consistent with the standards set forth in Section 6(c) of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-29625 Filed 12-11-13; 8:45 am]
BILLING CODE 8011-01-P