[Federal Register Volume 59, Number 151 (Monday, August 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19250]
[[Page Unknown]]
[Federal Register: August 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20437; No. 812-8990]
American United Life Insurance Company, et al.
August 2, 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: American United Life Insurance Company (``AUL''), AUL
American Individual Unit Trust (``Variable Account'') and any other
investment accounts (``Other Accounts'') established by AUL in the
future to support certain individual variable annuity contracts
(``Contracts'') as described herein, or that may in the future be
issued by AUL that are substantially similar to the Contracts but are
issued through other separate accounts (``Future Contracts)
(collectively, ``Applicants'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act granting exemption 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 the Variable Account of a mortality and
expense risk charge in connection with the offer and sale of the
Contracts or Future Contracts.
FILING DATE: The application was filed on May 13, 1994. An Amended and
Restated Application was filed on July 27, 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 August 29, 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, N.W., Washington, D.C.
20549. Applicants, c/o Richard A. Wacker, Esq., Associate General
Counsel, American United Life Insurance Company, One American Square,
Indianapolis, Indiana 46204.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Senior Counsel, or
Michael V. Wible, Special Counsel, at (202) 942-0670, 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. AUL is a mutual life insurance company principally engaged in
offering life and health insurance and annuities. AUL is licensed to do
business in 45 states and the District of Columbia.
2. The Variable Account was established by AUL as a separate
account to fund variable annuity contracts. The Variable Account will
be registered with the Commission as a unit investment trust under the
1940 Act and the Contracts will be registered as securities under the
Securities Act of 1933 (``1933 Act'').
The Variable Account currently is divided into eleven subaccounts
(``Subaccounts''), each investing in shares of a corresponding
portfolio of the following funds: (a) AUL American Series Fund, Inc.
(``Series Fund''), offering the Equity, Bond, Money Market, and Managed
Portfolios; (b) the Variable Insurance Products Fund (``VIP''),
offering the High Income, Growth, and Overseas Portfolios; (c) the
Variable Insurance Products Fund II (``VIP II''), offering the Asset
Manager and Index 500 Portfolios; and (d) TCI Portfolios, Inc., offer
Growth Investors and TCI International Portfolios (individually,
``Fund'' or collectively, ``Funds''). Each of the Funds is registered
with the Commission as an open-end management investment company.
AUL may, at a later date, determine to divide the Variable Account
into additional subaccounts to invest in other portfolios of the Funds
or in other securities, mutual funds, or investment vehicles. Shares of
each Fund are purchased by AUL for the corresponding Subaccount at the
Fund's net asset value per share. All dividends and capital gain
distributions received from a Fund will be automatically reinvested in
such Fund at net asset value, unless otherwise instructed by AUL.
3. The Series Fund is managed by AUL. Fidelity Management &
Research Company is the investment adviser to VIP and VIP II and
Investors Research Corporation is the investment adviser to TCI
Portfolios, Inc. AUL will be the principal underwriter and distributor
of the Contracts. AUL, Fidelity Management and Investors Research are
registered investment advisers under the Investment Advisers Act of
1940. AUL is a broker-dealer registered under the Securities Exchange
Act of 1934.
4. The Contracts are variable annuity contracts used in connection
with retirement plans (``Plans'') that are either non-tax qualified
Plans or Plans that qualify for favorable tax-deferred treatment under
Sections 401, 403(b) or 408(b) of the Internal Revenue Code of 1986, as
amended. Applicants state that exemptive relief is sought with respect
to two variations of the Contracts--Flexibile Premium Contracts and One
Year Flexible Premium Contracts, as well as for any Future Contracts
that are issued through Other Accounts. These Contracts permit premiums
to vary in amount and frequency but require certain minimum premium
payments and restrict maximum payments and additional payments. These
Contracts further provide for several fixed annuity options under which
payments will be fixed and guaranteed by AUL, and for accumulation of
values on either a variable or a fixed basis, or both. Premiums
allocated to the Fixed Account, a general account of AUL, will earn
interest at a minimum guaranteed effective annual rate of 3 percent.
Premiums allocated to the Variable Account will be credited with the
investment experience of the selected Subaccount; these amounts are not
guaranteed. Prior to the Annuity Date and during the Contract Owner's
lifetime all or a portion of the Contract Value may be surrendered,
subject to certain minimums and constraints on withdrawals or full
surrenders under Contracts issued in connection with certain retirement
programs.
5. The Contracts also will provide for a death benefit equal to the
Contract Value if the Contract Owner dies at or after age 76. If the
Contract Owner dies prior to age 76, the death benefit is equal to the
greater of: (a) the Contract Value at the end of the applicable
Valuation Period, or (b) the value of net premiums less any amounts
withdrawn (including withdrawal charges) prior to death, less annual
fees assessed prior to death, plus interest earned on net premiums
(less amounts withdrawn and annual fees described above) credited at an
annual effective rate of 4 % until the date of death.
6. Various fees and expenses are deducted under the Contracts and
the Variable Account. An administrative fee equal to the lesser of 2%
of Contract Value or $30 per year will be deducted proportionately from
Contract Value allocated among the Subaccounts and the Fixed Account.
This fee will be deducted annually during the Accumulation Period and
may be deducted on a pro-rata basis if the Contract is surrendered or
annuitized on a date other than a Contract Anniversary. The
administrative fee, which may be waived under certain circumstances, is
to compensate AUL for the expenses associated with administration of
the Contracts and operation of the Variable Account. AUL may increase
the administrative fee, but only to the extent necessary to recover the
expenses associated with administration of the Contracts and operations
of the Variable Account.
7. AUL will assess a charge to reimburse itself for premium taxes
that it incurs on behalf of a particular Contract, usually when an
annuity is effected. Premium taxes currently range from 0% to 3.5%,
subject to change. No charges currently are made for federal, state or
local income taxes. No charges currently are imposed for transfers
among the Subaccounts or to or from the Fixed Account; however, AUL
reserves the right to assess transfer charges at a future date. Each
subaccount of the Variable Account purchases shares of the
corresponding Fund at net asset value, which reflects the investment
advisory fee and other expenses deducted from Fund assets.
8. No sales charges are deducted from premium payments under the
Contracts. A contingent deferred sales charge (``CDSC''), described
below, is assessed for cash withdrawals and surrenders. The amount of
the CDSC that applies to both variations of the Contracts, based on the
number of years that the Contract has been in existence (and the number
of years that a premium has been creditd to Contract Value), is as
follows:
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1 2 3 4 5 6 7 8 9 10 11+
Contract year ------------------------------------------------------------------------------------------------------------------------
(Percent) (Percent) (Percent) (Percent) (Percent) (Percent) (Percent) (Percent) (Percent) (Percent) (Percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Flexible premium............... 10 9 8 7 6 5 4 3 2 1 0
Single premium................. 7 6 5 4 3 2 1 0 0 0 0
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No CDSC will be assessed: (a) on up to 12% of Contract Value at the
time of the first withdrawal in any Contract Year in which the
withdrawal is being made; any transfer for Contract Value from the
Fixed Account to the Variable Account will reduce the free withdrawal
amount by the amount transferred; (b) premiums paid more than 10 years
ago for Flexible Premium Contracts and 8 years ago for Single Premium
Contracts; (c) on or after the Annuity Date; or (d) upon payment of a
death benefit. In no event will the CDSC, when added to any withdrawal
charges previously assessed against any amount withdrawn from a
Contract, exceed 8.5% or 8%, respectively, of total premiums paid under
a Flexible Premium Contract or a One Year Flexible Premium Contract.
The CDSC will compensate AUL for certain expenses related to the sale
of the Contracts. AUL reserves the right to increase or decrease the
withdrawal charge for any Contracts established on or after the
effective date of the change.
9. A daily charge equal to an annual rate of 1.25% of the average
daily net assets of each Subaccount will be imposed to compensate AUL
for bearing certain mortality and expense risks it assumes in offering
and administering the Contracts and in operating the Variable Account.
Of this amount, .80% is attributable to mortality risks, and .40% is
attributable to expense risks. The proportion of these charges may
change but the aggregate charge is guaranteed by AUL not to increase.
The charge may be a source of profit for AUL which will be added to its
surplus and may be used for, among other things, the payment of
distribution expenses not covered by the CDSC.
10. The mortality risk arises from AUL's contractual obligation to
make Annuity Payments (determined in accordance with AUL's actuarial
tables) regardless of how long all Annuitants as a group may live, or
that an individual Contract Owner or Annuitant may die before the end
of the CDSC period, in which case the CDSC will not be assessed on
payment of death benefit proceeds and AUL may not recover its
distribution expenses. A mortality risk also is assumed in connection
with payment of the death benefit because it could exceed the Account
Value.
11. The expense risk assumed by AUL is that its actual expenses in
issuing and administering the Contracts and operating the Variable
Account will exceed the amount recovered through 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 state that the Commission has taken the position that
Sections 27(c)(2) and 26(a)(2)(C) of the 1940 Act, in effect, preclude
assessing a mortality and expense risk charge against the Variable
Account in the absence of exemptive relief. Consequently, Applicants
request exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940
Act to the extent necessary to permit the deduction from the assets of
the Variable Account of a maximum charge of 1.25% for the assumption of
mortality and expense risks. Applicants believe that the requested
exemptions 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.
4. Applicants submit that AUL is entitled to reasonable
compensation for its assumption of mortality and expense risks. The
mortality and expense risk charge is a reasonable charge to compensate
AUL for the risks that: (a) Annuitants under the Contract will live
longer individually or as a group than has been anticipated in setting
the annuity rates guaranteed in the Contracts; (b) the Account Value
will be less than the Death Benefit; and (c) administrative expenses
will be greater than amounts derived from the administrative charges.
Applicants represent that the mortality and expense risk charge under
the Contracts is within the range of industry practicer for comparable
annuity products. This representation is based upon Applicants'
analysis of publicly available information about similar industry
products, taking into consideration such factors as annuity purchase
rate guarantees, death benefit guarantees, other contract charge, the
frequency of charges, the administrative services performed by the
companies with respect to the contracts, distribution methods, the
market for the contracts, and the tax status of the contracts.
Applicants represent that they will maintain at their Home Office,
available to the Commission, a memorandum setting forth in detail the
products analyzed in the course of, and the methodology and result of,
Applicants' comparative review.
5. Applicants acknowledge that, if a profit is realized from the
mortality and expense risk charge, all or a portion of such profit may
be available to pay distribution expenses not reimbursed by the CDSC.
Applicants have concluded that there is a reasonable likelihood that
the proposed distribution financing arrangements will benefit the
Variable Account and the Contract Owners. The basis for that conclusion
is set forth in a memorandum which will be maintained by Banner Life at
its administered offices and will be available to the Commission.
6. AUL also represents that the Variable Account will invest only
in open-end management investment companies that 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'' of the company, formulate and approve
any such plan.
7. Applicants believe that the terms of the relief requested with
respect to any Future Contracts funded by Other Accounts are consistent
with the standards of Section 6(c) of the 1940 Act. Applicants assert
that, without the requested relief, AUL would have to request and
obtain exemptive relief for each new Other Account it establishes to
fund any Future Contract. Applicants submit that such additional
requests for exemptive relief would present no issues under the 1940
Act that have not already been addressed in this Application.
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.
Accordingly, Applicants request relief from Sections 26(a)(2)(C) and
27(c)(2) to the extent necessary to permit the assessment and deduction
of the mortality and expense risk charge with respect to the Contracts
and any Future Contracts.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19250 Filed 8-5-94; 8:45 am]
BILLING CODE 8010-01-M