[Federal Register Volume 61, Number 47 (Friday, March 8, 1996)]
[Notices]
[Pages 9513-9515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5552]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21800; File No. 812-9922]


Zurich Life Insurance Company of America, et al.; Notice of 
Application

March 4, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: Zurich Life Insurance Company of America (``Zurich Life''), 
Kemper Investors Life Insurance Company (``KILICO''), Federal Kemper 
Life Assurance Company (``FKLA''), Zurich Life Variable Annuity 
Separate Account (the ``Account''), and Investors Brokerage Services, 
Inc. (``IBS'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants request an order permitting Zurich 
Life, KILICO and FKLA to deduct mortality and expense risk charges from 
the assets of certain separate accounts that fund certain individual 
deferred variable annuity contracts.

FILING DATE: The application was filed on December 28, 1995.

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 SEC 
and serving Applicants with a copy of the request, personally or by 
mail. Hearing requests must be received by the SEC by 5:30 p.m. on 
March 29, 1996, 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 reasons for the request, and the issues contested. 
Persons may request notification of a hearing by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, Frank J. Julian, Esq., Kemper Investors Life Insurance 
Company, KLIC Legal T-1, 1 Kemper Drive, Long Grove, Illinois, 60049.

FOR FURTHER INFORMATION CONTACT: Joseph G. Mari, Senior Special 
Counsel, or Patrice M. Pitts, Special Counsel, Office of Insurance 
Products, Division of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the Public 
Reference Branch of the Commission.

Applicants' Representations

    1. Zurich Life, KILICO, and FKLA (collectively referred to as the 
``Companies'') are stock life insurance companies organized under the 
laws of Illinois. Zurich Life is a wholly-owned subsidiary of Zurich 
Insurance Company; KILICO is wholly-owned subsidiary of Kemper 
Financial Corporation (``Kemper''); and FKLA is a wholly-owned 
subsidiary of Kemper. Zurich Life entered into a definitive agreement 
to become the majority owner of Kemper, including Kemper's direct and 
indirect subsidiaries, KILICO and FKLA. Zurich Life is the depositor of 
the Account.
    2. The Account, established by Zurich Life under Illinois law as an 
insurance company separate account to fund certain variable annuity 
contracts (the ``Account Contracts''), is registered under the 1940 Act 
as a unit investment trust. Applicants request that the relief sought 
herein extend to variable annuity contracts that are materially similar 
to the Account Contracts (``Future Contracts'') (the Account Contracts 
and the Future Contracts collectively referred to as the ``Contracts'') 
and that are offered by the Account.
    3. The Companies may establish one or more separate accounts in the 
future (``Other Accounts'') (Other Accounts and the Account are 
referred to collectively as the ``Separate Accounts'') to support 
Future Contracts that are offered through any other broker-dealer that 
(i) may serve in the future as principal underwriter in respect of 
certain variable annuity contracts offered by the Companies, (ii) is 
registered under the Securities Exchange Act of 1934 as a broker-dealer 
and which is or will be a member of the National Association of 
Securities Dealers, Inc. (the ``NASD''), and (iii) is controlling, 
controlled by, or under common control with Zurich Life or any other 
affiliated insurance company (Other Principal Underwriters''). 
Applicants request that the relief sought herein extend to the Other 
Accounts.
    4. The Account is comprised of 14 sub-accounts each of which 
invests in the corresponding portfolio or series of a management 
investment company registered under the 1940 Act. Zurich Life may 
create new sub-accounts of the Account.
    5. IBS, a registered broker-dealer and a member of the NASD, is the 
principal underwriter of the Account Contracts.
    6. The Account Contracts provide retirement payments or other long-
term benefits for individuals who qualify for federal income tax 
advantages available under Sections 401, 403(b), 408 and 457 of the 
Internal Revenue Code of 1986, as amended (``qualified Account 
Contracts''), and for individuals desiring such benefits who do not 
qualify for such tax advantages (``non-qualified Account Contracts''). 
The Account Contracts will be offered on a flexible payment basis.
    7. Applicants state that the minimum initial purchase payment is 
$50 for a qualified Account Contract and $2,500 for a non-qualified 
Account Contract. The minimum additional purchase payment for a non-
qualified Account Contract is $500. However, when purchase payments are 
made through a systematic investing program and the annual contribution 
is not less than $600, the minimum payment is $50.
    8. Certain charges and fees are assessed under the Account 
Contracts. Where applicable, the dollar amount of state premium taxes 
previously paid or payable upon annuitization by Zurich 

[[Page 9514]]
Life may be charged against Contract Value (the amount that the Account 
Contract provides for investment at any time) if not previously 
assessed, when and if the Account Contract is annuitized. Premium taxes 
range up to 3.5%.
    9. No front-end sales charge is imposed when purchase payments are 
applied under the Account Contracts. However, a contingent deferred 
sales charge (``CDSC'') will be used to cover expenses relating to the 
sale of the Account Contracts. The maximum CDSC is 6% of the amount 
withdrawn during the first Contract year. The percentage scales 
downward by one percent each year, so that there is no charge against 
accumulation units withdrawn or annuitized in the seventh and later 
contribution years. Contract owners will be permitted to withdraw up to 
10% of the Contract Value determined at the time the withdrawal is 
requested in any Contract year without the assessment of any sales 
charge. If the Contract owner withdraws an amount in excess of the 10% 
amount, the excess withdrawn is subject to a CDSC. In no event, will 
the CDSC under the Account Contracts be greater than 7.25% of purchase 
payments.
    10. Applicants submit that proceeds from the CDSC may not cover the 
expected cost of distributing the Account Contracts and that any 
shortfall will be recovered from Zurich Life's general assets, which 
may include revenue from the mortality and expense risk charge deducted 
from the Account.
    11. The administrative charges to be assessed with respect to the 
Account Contracts will be (i) an annual records maintenance charge of 
$36 per Contract year, which is deducted from the Contract Value upon 
surrender of the Account Contract, and which is not assessed during the 
annuity period, and (ii) an asset-related administration charge at an 
annual rate of .10%. These charges may be reduced by Zurich Life but 
may not be increased for outstanding Account Contracts.
    12. Zurich Life and the Account represent that they do not expect 
that the total revenues from the administrative cost portion of the 
asset-based charge will be greater than the expected administrative 
expenses, in conformity with the requirements of Rule 26a-1(b) under 
the 1940 Act. Applicants represents that they are relying on Rules 26a-
1 and 6c-8 under the 1940 Act in connection with the imposition of the 
records maintenance charge under the Account Contract.
    13. Applicants propose to deduct a daily charge for mortality and 
expense risks from the assets of the Account. With respect to the 
Account Contracts, Zurich Life will assess the Account with a daily 
charge for mortality and expense risks at an aggregate annual rate of 
1.20%. Approximately .85% of the annual charge is allocated to the 
mortality risks and .35% is allocated to the expense risks.
    14. Applicants represent that Zurich Life will assume a mortality 
risk by its contractual obligation to pay a death benefit to the 
beneficiary if the owner, as defined in the Account Contract, dies 
prior to the annuity date. Applicants assert that the Account Contracts 
provide a guaranteed death benefit that is the greater of: (a) the 
Contract Value at the time of death; or (b) the total net amount of 
purchase payments, reduced by any withdrawals.
    15. Applicants also represent that Zurich Life assumes a mortality 
risk by its contractual obligation to continue to make annuity payments 
for the life of the annuitant, as defined in the Account Contract, 
under annuity options involving 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 an Account Contract. This relieves the 
annuitant from the risk of outliving the amounts accumulated for 
retirement. At the same time, Applicants represent that Zurich Life 
assumes the risk that annuitants as a group will live a longer time 
than Zurich Life predicts, which would require Zurich Life to pay out 
more in annuity income than planned.
    16. In addition to mortality risks, Applicants assert that Zurich 
Life assumes an expense risk under the Account Contracts because the 
administrative charges under the Contracts may be insufficient to cover 
actual administrative expenses.
    17. Applicants represent that if the mortality and expense risk 
charges assessed against Account assets are insufficient to cover the 
expenses and costs assumed, the loss will be borne by Zurich Life. If 
the amount deducted for mortality and expense risk charges proves more 
than sufficient, the excess will be profit to Zurich Life. Zurich Life 
anticipates earning a profit from the mortality and expense risk 
charge.

Applicants' Legal Analysis

    1. Applicants request that the Commission, pursuant to Section 6(c) 
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and 
27(c)(2) thereof to the extent necessary to permit the deduction of a 
mortality and expense risk charge from the assets of the Separate 
Accounts which fund the Contracts.
    2. Section 6(c) of the 1940 Act, in relevant part, provides that 
the Commission may issue an order exempting any person, security or 
transaction, or any class or classes of persons, securities or 
transactions, from any provision or provisions of the 1940 Act as may 
be 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. Sections 26(a)(C) and 27(c)(2) of the 1940 Act prohibit a 
registered unit investment trust and any depositor thereof or principal 
underwriter therefore, from selling periodic payment plan certificates 
unless the proceeds of all payments (other than sales load) are 
deposited with a qualified trustee or custodian and held under an 
agreement that provides that no payment to the depositor or principal 
underwriter shall be allowed except as a fee, not exceeding such 
reasonable amount as the Commission may prescribe, for bookkeeping and 
other administrative services.
    4. Applicants assert that the requested exemptions meet the 
standards of Section 6(c) of the 1940 Act, and that the terms of the 
relief requested with respect to the Account Contracts or Future 
Contracts funded by a Separate Account and distributed by IBS or any 
Other Principal Underwriter are consistent with the standards set forth 
in Section 76(c) of the 1940 Act. Applicants state that without the 
requested future relief, they would have to request and obtain 
exemptive relief in connection with Account Contracts or Future 
Contracts to the extent required. Applicants submit that any such 
additional requests for exemption would present no issues under the 
1940 Act that have not already been addressed in this application.
    5. Applicants submit that the requested exemptive relief is 
appropriate in the public interest because it would promote 
competitiveness in the variable annuity contract market by eliminating 
the need for Zurich Life and its appropriate affiliates to file 
redundant exemptive applications, thereby reducing administrative 
expenses and maximizing the efficient use of resources. The delay and 
expense involved in having to seek exemptive relief repeatedly would 
impair the ability of Zurich Life and its appropriate affiliates to 
take advantage of business opportunities as they arise. If Zurich Life 
and its appropriate affiliates were required to seek exemptive relief 

[[Page 9515]]
repeatedly with respect to the issues addressed in this Application, 
investors would not receive any benefit or additional protection 
thereby. Indeed, they might be disadvantaged as a result of increased 
overhead expenses incurred by Zurich Life and its appropriate 
affiliates. Applicants further submit that, for the same reasons, the 
requested relief is consistent with the purposes of the 1940 Act and 
the protection of investors.
    6. Applicants represent that the mortality and expense risk charge 
of 1.20% is and will be within the range of industry practice for 
comparable annuity products. Applicants state that this determination 
is, and for Future Contracts will be, based on their analysis of 
publicly available information about similar industry practices, taking 
into consideration such factors as current charge levels and benefits 
provided, the existence of expense charge guarantees, and guaranteed 
annuity rates. Zurich Life, KILICO and FKLA undertake to maintain at 
their home offices, and make available to the Commission upon request, 
memoranda setting forth in appropriate detail the products analyzed, 
the methodology, and the results of the analysis relied upon, in making 
the foregoing determination.
    7. The CDSC may be insufficient to cover all costs relating to the 
distribution of the Account Contracts. In that event, 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 CDSC. Notwithstanding the foregoing, Applicants have concluded that 
there is a reasonable likelihood that the proposed distribution 
financing arrangements will benefit the Separate Accounts and Contract 
owners. Zurich Life, KILICO and FKLA undertake to maintain at their 
principal offices, and make available upon request to the Commission 
and its staff, memoranda setting forth the basis for such conclusion.
    8. Zurich Life, KILICO and FKLA also represent that the Separate 
Accounts will invest only in an underlying fund that undertakes, in the 
event it should adopt any plan pursuant to Rule 12b-1 of the 1940 Act 
to finance distribution expenses, to have such plan formulated and 
approved by a board of directors, a majority of the members of which 
are not ``interested persons'' of such fund within the meaning of 
Section 2(a)(19) of the 1940 Act.

Conclusion

    Applicants submit, for the reasons stated herein, that the 
requested exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 
Act--to permit the deduction of a mortality and expense risk charge 
from Separate Account assets funding the Contracts--meet the standards 
set out in Section 6(c) of the 1940 Act. Accordingly, Applicants assert 
that the requested exemptions 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 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5552 Filed 3-7-96; 8:45 am]
BILLING CODE 8010-01-M