[Federal Register Volume 59, Number 51 (Wednesday, March 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6112]
[[Page Unknown]]
[Federal Register: March 16, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20125; No. 812-8766]
Fortis Benefits Insurance Company, et al.
March 9, 1994.
Agency: Securities and Exchange Commission (``Commission'' or ``SEC'').
Action: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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Applicants: Fortis Benefits Insurance Company (``Fortis''), Variable
Account D of Fortis Benefits Insurance Company (``Account D''), First
Fortis Life Insurance Company (``First Fortis''), Variable Account A of
First Fortis Life Insurance Company (``Account A''), any other Separate
Accounts established by Fortis or First Fortis in the future to support
certain variable annuity contracts issued by Fortis or First Fortis
(``Other Accounts''), and Fortis Investors, Inc. (collectively,
``Applicants'').
Relevant 1940 Act Sections: Order requested under Section 6(c) of the
Investment Company Act of 1940 (``1940 Act'') granting exemptions from
the provisions of sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act.
Summary of Application: Applicants seek an order permitting the
deduction from the assets of Account A, Account D and the Other
Accounts of mortality and expense risk charges in connection with the
offer and sale of certain flexible premium deferred combination fixed
and variable annuity contracts.
Filing Date: The application was filed on January 11, 1994.
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 Commission's Secretary
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 April 4, 1994, 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 writer's
interest, the reason for the request, and the issues contested. Persons
may request notification of a hearing by writing to the Commission's
Secretary.
Addresses: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Fortis, Account D, and Other Accounts of Fortis, and Fortis Investors:
c/o David A. Peterson, Esq., Fortis Benefits Insurance Company, 500
Bielenberg Drive, Woodbury, Minnesota 55125. First Fortis, Account A
and Other Accounts of First Fortis: 220 Salina Meadows Parkway, suite
255, Syracuse, New York 13220.
For Further Information Contact: Yvonne Hunold, Senior Counsel (202)
272-2676, or Michael Wible, Special Counsel (202) 272-2060, Office of
Insurance Products (Division of Investment Management).
Supplementary Information: Following is a summary of the application;
the complete application is available for a fee from the Commission's
Public Reference Branch.
Applicants' Representations
1. Fortis and First Fortis (together, the ``Companies'') are stock
life insurance companies that are affiliated by reason of being under
common control through their direct and indirect parent companies.
Fortis is wholly-owned by Time Insurance Company, a wholly-owned
subsidiary of Fortis, Inc. Fortis, Inc. is a wholly-owned subsidiary of
Fortis International, Inc., a wholly-owned subsidiary of AMEV/VSB 1990
N.V., which is, in turn, 50% owned by NV AMEV and 50% owned, through
certain subsidiaries, by Group AG. First Fortis is wholly-owned by N.V.
AMEV.
2. Fortis and First Fortis are the depositors, respectively, of
Account D and Account A. Accounts D and A are segregated investment
accounts registered as unit investment trusts under the 1940 Act. The
Companies each may establish one or more Other Accounts in the future
(Account D, Account A and Other Accounts collectively known as the
``Accounts'').
3. Account A has six investment subaccounts which invest solely in
six corresponding portfolios of the Fortis Series Funds, Inc. (``Fortis
Fund''). Account D is subdivided into ten subaccounts, seven of which
initially will be available under the Contracts (``Available
Subaccounts'') The seven Available Subaccounts will invest solely in
shares of: (a) three corresponding portfolios of the Fortis Fund, (b)
three corresponding portfolios of Norwest Select Funds (``Norwest
Fund''), and (c) one corresponding Portfolio of the Scudder Variable
Life Investment Fund (``Scudder Fund'').
4. The Fortis Fund and the Scudder Fund are open-end management
investment companies registered under the Securities Act of 1933
(``1933 Act''). Fortis Advisers, Inc., an affiliate of the Companies,
is the investment manager for each Fortis Fund portfolio. Scudder,
Stevens & Clark, Inc., which is not an affiliate of the Companies, is
the investment adviser for the Scudder portfolios.
5. The Norwest Fund will file with the Commission a notice of
registration on Form N-8A and a registration statement on Form N-1A.
Norwest Bank Minnesota, N.A., which is not an affiliate of the
Companies, will be the investment adviser for each of the three Norwest
portfolios.
6. The Companies may create additional subaccounts of the Accounts
to invest in any additional portfolios of the Fortis Fund, the Norwest
Fund, the Scudder Fund, or any other fund that may now or in the future
be available. Similarly, subaccounts and/or portfolios may be
eliminated from time-to-time.
7. Accounts D and A are used to fund flexible premium deferred
combination fixed and variable annuity contracts (``Contracts'') to be
issued by the Companies on a group or individual basis. The Contracts
will be offered in connection with certain retirement plans that
receive special federal income tax treatment and to persons that do not
qualify for such tax treatment. The Contracts require certain minimum
initial payments and permit certain additional payments. A registration
statement on Form N-4 has been filed with the Commission under the 1933
Act in connection with the Contracts.
8. Fortis Investors, an affiliate of the Companies, will distribute
the Contracts. Fortis Investors is wholly-owned by Fortis Advisers,
Inc., a wholly-owned subsidiary of Fortis, Inc. Fortis Investors is a
broker-dealer registered under the Securities Exchange Act of 1934 and
a member of the National Association of Securities Dealers, Inc.
9. Various fees and expenses are deducted from each Contract. A
deduction for state premium taxes, if assessed, in the amount of up to
3.5% of purchase payments or the amount annuitized will be made from
the Contracts account value either at the time of annuitization,
surrender, or payment of a death benefit. Applicable rates are subject
to change by legislation, administrative interpretation or judicial
acts.
10. Currently, there is no charge for transfers among the
subaccounts or the general accounts. The Companies, however, reserve
the right to charge up to $25 per transfer out of a subaccount prior to
annuitization. The charge will be designed to recover not more than the
average administrative expenses of effecting such transfers. Not more
than four such transfers per year may be made after annuitization. An
annual Administrative Charge of $30 will be assessed against each
Contract, subject to certain exceptions and waivers. The Administrative
Charge will be deducted from each subaccount and from the fixed account
in the same proportion as the then-current Contract values in each
subaccount or fixed account. The Administrative Charge will reimburse
the Companies for expenses incurred in maintaining records relating to
the Contracts. This charge currently does not apply during the
accumulation period if the Contract value at the end of the Contract
Year is $25,000 or more. The charge also is being waived during the
annuity period, subject to the Companies' right to reinstate the charge
at any time. Additionally, a daily asset charge at an effective rate of
0.15% per annum will be assessed both before and after annuitization
under all Contracts for administrative expenses.
None of the administrative charges may be raised during the life of
the Contracts, except as specified. Total revenues from all
administrative charges under the Contracts are not expected to exceed
the Companies' expected costs of administering the Contracts, on
average, excluding distribution expenses.
11. No sales charges are deducted from premium payments under the
Contracts. A contingent deferred sales charge (``CDSC'') in the amount
of 5% is deducted from purchase payments for certain surrenders which
occur within five years from the date such payments were credited under
the Contract. The CDSC will be used to pay certain Contract
distribution expenses. No CDSC is assessed for: (a) withdrawals of any
earnings that have not been previously surrendered; (b) purchase
payments that have not been previously surrendered and were received at
least five years prior to the surrender date; and (c) payment of the
death benefit. Additionally, up to 10% of purchase payments will not be
subject to the CDSC. The Companies' current administrative policy is to
waive the CDSC for full surrenders of Contracts that have been in force
for at least 10 years, subject to certain conditions, although this
policy may be changed or terminated at any time.
12. Each subaccount will be assessed, both before and after
annuitization, an annual charge of 1.25% of their assets for mortality
and expense risks assumed by the Companies. Of the 1.25% amount,
approximately .80% is for mortality risks and .45% for expense risks.
The 1.25% rate is guaranteed not to increase for the duration of the
Contracts. The charge may be a source of profit for the Companies which
will be added to their respective surplus and may be used for, among
other things, the payment of distribution, sales and other expenses.
The Companies currently anticipate a profit from this charge.
13. The Companies will assume certain mortality and expense risks
under the Contracts. The Companies will assume a mortality risk by
their contractual obligation to pay a death benefit in a lump sum
(which may also be taken in the form of an annuity option) upon the
death of an annuitant or Contractowner prior to the annuity
commencement date. The lump sum death benefit payable will be the
greater of (1) the sum of all net purchase payments made, less all
prior surrenders, and less all previously-imposed surrender charges,
(2) a Contract's account value, or (3) a Contract's account value as of
the Contract's 5-year anniversary immediately preceding the date that
the annuitant or owner dies or reaches his or her 75th birthday, less
the amount of any subsequent surrenders and surrender charges.
No contingent deferred sales charge will be imposed upon the
payment of the death benefit, which will place a further mortality risk
on the Companies.
The Companies will assume an additional mortality risk by their
contractual obligation to continue to make annuity payments for the
entire life of the annuitant under annuity options which involve life
contingencies. This assures each annuitant that neither the annuitant's
own longevity nor an improvement in life expectancy generally will have
an adverse effect on the annuity payments received under the Contract.
This relieves the annuitant from the risk of ``outliving'' the amounts
accumulated for retirement. The payment option tables contained in the
Contracts will be based on the annuity mortality 1983 Tables. These
Tables are guaranteed for the life of the Contracts.
14. The expense risk assumed by the Companies is that the actual
expenses involved in administering the Contracts and the Accounts in
connection with the Contracts will exceed the amounts recovered from
the administrative charges.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule or regulation of the 1940 Act to the
extent that the exemption is ``necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940
Act.''
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant
part, prohibit a registered unit investment trust, its depositor or
principal underwriter, from selling periodic payment plan certificates
unless the proceeds of all payments, other than sales loads, are
deposited with a qualified bank and held under arrangements which
prohibit any payment to the depositor or principal underwriter except a
reasonable fee, as the Commission may prescribe, for performing
bookkeeping and other administrative duties normally performed by the
bank itself.
3. Applicants request exemptions from Sections 26(a)(2) and
27(c)(2) of the 1940 Act to the extent necessary to permit the
deduction from the assets of the Accounts of the 1.25% charge for the
assumption of mortality and expense risks. Applicants believe that the
terms of the relief requested with respect to any Other Contracts that
may in the future be funded by Account A, Account D or the Other
Accounts are consistent with the standards enumerated in Section 6(c)
of the 1940 Act. Without the requested relief, Applicants would have to
request and obtain exemptive relief in connection with Other Contracts
to the extent required. Any such additional request for exemption would
present no issues under the 1940 Act that have not already been
addressed in this application.
Applicants submit that the requested relief is appropriate in the
public interest, because it would promote competitiveness in the
variable annuity contract market by eliminating the need for Applicants
to file redundant exemptive applications, thereby reducing their
administrative expenses and maximizing the efficient use of their
resources. The delay and expense involved in having repeatedly to seek
exemptive relief would reduce Applicant's ability effectively to take
advantage of business opportunities as they arise.
Applicants further submit that the requested relief is consistent
with the purposes of the 1940 Act and the protection of investors for
the same reasons. If Applicants were required repeatedly to seek
exemptive relief with respect to the same issues addressed in this
application, investors would not receive any benefit or additional
protection thereby. Investors might be disadvantaged as a result of
Applicants' increased overhead expenses.
Applicants thus believe that the requested exemption 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.
4. Applicants represents that the 1.25% per annum mortality and
expense risk charge is within the range of industry practice for
comparable annuity contracts. This representation is based upon an
analysis of publicly available information about similar industry
products, taking into consideration such factors as, among others, the
current charge levels, death benefit guarantees, guaranteed annuity
rates, and other contract charges and options. The Applicants will
maintain at their respective principal offices, available to the
Commission, a memorandum setting forth in detail the products analyzed
in the course of, and the methodology and results of, the Companies'
comparative review.
5. Applicants acknowledge that the surrender charge is not expected
to cover all costs relating to the distribution of the Contracts and
that, if a profit is realized from the mortality and expense risk
charge, all or a portion of such profit may be offset by distribution
expenses not reimbursed by the contingent deferred sales charge. In
such circumstances, a portion of the mortality and expense risk charge
might be viewed as providing for a portion of the costs relating to
distribution of the Contracts. The Companies have concluded that there
is a reasonable likelihood that the proposed distribution financing
arrangements will benefit the Accounts and the Contractowners. The
basis for that conclusion will be set forth in a memorandum which will
be maintained by the Companies at their respective administrative
offices and made available to the Commission upon request.
6. The Accounts will only invest in underlying funds which
undertake, in the event they should adopt a plan under Rule 12b-1 to
finance distribution expenses, to have a board of directors or
trustees, a majority of whom are not ``interested persons,'' formulate
and approve any such plan.
Conclusion
For the reasons set forth above, Applicants represent that the
exemptions requested are necessary and appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-6112 Filed 3-15-94; 8:45 am]
BILLING CODE 8010-01-M