[Federal Register: March 11, 2008 (Volume 73, Number 48)]
[Notices]
[Page 13046-13049]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11mr08-110]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-28180; File No. 812-13437]
Pruco Life Insurance Company, et al.; Notice of Application
March 4, 2008.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an amended order under Section 6(c)
of the Investment Company Act of 1940, as amended (the ``Act'' or
``1940 Act'') granting exemptions from the provisions of Sections
2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder.
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Applicants: Pruco Life Insurance Company (``Pruco Life''), Pruco
Life Insurance Company of New Jersey (``Pruco Life of New Jersey,'' and
collectively with Pruco Life, the ``Insurance Companies''), Pruco Life
Flexible Premium Variable Annuity Account (``Pruco Life Account'');
Pruco Life of New Jersey Flexible Premium Variable Annuity Account
(``Pruco Life of New Jersey Account,'' and collectively with Pruco Life
Account, the ``Accounts''), and Prudential Annuities Distributors, Inc.
(``PAD'', and
[[Page 13047]]
collectively with the Insurance Companies, and the Accounts
``Applicants'').
Summary of Application: Applicants seek an order amending an
existing order under Section 6(c) of the Act, exempting them from
Sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1
thereunder, to permit the recapture of credit amounts that differ from
the credit amounts contemplated by the existing order, under certain
specified circumstances.
Filing Date: The application was filed on October 9, 2007, and
amended on January 7, 2008.
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 should be received by the
Commission by 5:30 p.m. on March 31, 2008, 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.
ADDRESSES: Secretary, SEC, 100 F Street, NE., Washington, DC 20549-
1090. Applicants, c/o C. Christopher Sprague, Esq., The Prudential
Insurance Company of America, 751 Broad Street, Newark, NJ 07102.
FOR FURTHER INFORMATION CONTACT: Sally Samuel, Senior Counsel, or Joyce
M. Pickholz, Branch Chief, Office of Insurance Products, Division of
Investment Management, at (202) 551-6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 100 F Street, NE., Washington, DC
20549 (tel. (202) 551-8090).
Applicants' Representations
1. In Investment Company Act Release Nos. 27389 (June 6, 2006)
(notice) and 27419 (July 7, 2006) (order), the Commission granted an
order (the ``2006 Order'') that permits, under specified circumstances,
the recapture of certain bonus payments under the X Series of the
Prudential Premier variable annuity contract (``X Series Contract'') of
each of Pruco Life and Pruco Life of New Jersey. The current bonus
credit (the ``Credit'') under the X Series Contract varies, depending
on the age of the older of the owner and any joint owner on the date
that the purchase payment is made, but not on the amount of the
purchase payment. Specifically, if the elder owner is 80 or younger
when a purchase payment is made, the Credit equals 5%, regardless of
the purchase payment amount. If the elder owner is between ages 81 and
85 when the purchase payment is made, then the Credit is 3%, regardless
of the amount of the purchase payment.
2. Applicants recapture the Credit if (i) the X Series Contract is
surrendered during the free look period, or (ii) the Credit was applied
within 12 months prior to death or (iii) the Credit was applied within
12 months prior to a request for a Medically-Related Surrender (note
that the medically-related surrender provision is not available under
the Pruco Life of New Jersey contract). No contingent deferred sales
charges (``CDSC'') is applied in connection with any transaction in
which the Credit is recaptured.
3. With respect to X Series Contracts as to which the oldest owner
is 80 or younger on the date the purchase payment is made, Applicants
wish to increase the credit amount from 5% to 6%. Applicants seek an
amended order pursuant to Section 6(c) of the Act exempting them from
Sections 2(a)(32),22(c), and 27(i)(2)(A) of the Act and Rule 22c-1
thereunder to the extent necessary to permit an Insurance Company to
recapture this 6% credit (the ``New Credit'') under exactly the same
scenarios as is allowed under the 2006 Order.
4. Applicants request that the amended order sought herein apply to
any future separate account established by the Insurance Company
(``Future Account'') to support Future Contracts (as defined below) and
to any variable annuity contract offered by the Insurance Companies in
the future that is substantially similar in all material respects to
the X Series Contracts (``Future Contracts'').
5. Applicants also request that the amended order extend to any
FINRA member broker-dealer controlling, controlled by, or under common
control with, the Insurance Companies, whether existing or created in
the future, that serves as a distributor or principal underwriter of
the X Series Contracts offered through the Accounts or any Future
Account (``Broker-Dealers''). Applicants note that the X Series
Contracts will be sold through such Broker-Dealers and also through
broker-dealers that are FINRA-registered and not affiliated with the
Insurance Companies or the Broker-Dealers (the ``Unaffiliated Broker-
Dealers''). Each Unaffiliated Broker-Dealer will have entered into a
dealer agreement with PAD or an affiliate of PAD prior to offering the
X Series Contracts.
6. The X Series Contracts are flexible premium deferred variable
annuity contracts that are registered on Form N-4. The minimum initial
purchase payment is $10,000, and any additional purchase payment must
be at least $100 (except for contract owners who participate in certain
periodic purchase payment programs). The maximum issue age for the X
Series Contract is 75, meaning that, for (i) contracts with one owner,
the owner must be 75 or younger, (ii) contracts that are jointly-owned,
the oldest owner must be 75 or younger, and (iii) for entity-owned
contracts, the annuitant must be 75 or younger.
7. There are various insurance features under the X Series Contract
and charges associated with those features. There is a 1.55% annual
insurance charge that is deducted daily from the unit value of each
subaccount, consisting of 1.40% for mortality and expense risks and
0.15% for administrative expenses. For X Series Contracts valued less
than $100,000, there is a maintenance fee equal to the lesser of $35
($30 in New York) or 2% of unadjusted account value, which is assessed
annually on the X Series Contract's anniversary date or upon surrender.
The maintenance fee is deducted pro rata from both the variable
investment options and the fixed option under the X Series Contract.
The Insurance Companies impose no fee with respect to the first 20
transfers in an annuity year, but after the 20th such transfer,
currently impose a fee of $10 per transfer. There is a CDSC under the X
Series Contract, the amount of which is based on the ``age'' of each
purchase payment being withdrawn. During the first year after a
purchase payment is made, the CDSC is equal to 9%. In subsequent years,
the CDSC is as follows: 8.5% in year 2, 8% in year 3, 7% in year 4, 6%
in year 5, 5% in year 6, 4% in year 7, 3% in year 8, and 2% in year 9.
After nine years have elapsed from the date on which the purchase
payment was made, no CDSC is imposed with respect to that purchase
payment. In addition, no CDSC is imposed on the portion of a withdrawal
that can be taken as part of the free withdrawal feature of the X
Series Contract. The free withdrawal amount available in each annuity
year is equal to 10% of the sum of all purchase payments made during
the year and prior to the beginning of that year,
[[Page 13048]]
except that (i) only purchase payments that would be subject to a CDSC
are included in that calculation and (ii) a free withdrawal amount that
is not used in a given year cannot be carried over to future years. For
purposes of calculating the CDSC, partial withdrawals are deemed to be
taken first from any free withdrawal amount and thereafter from
purchase payments (on a first-in, first-out basis). Earnings are not
subject to any CDSC, and thus are not considered part of the free
withdrawal.
8. An X Series Contract owner may select one or more of several
optional benefits. The Guaranteed Minimum Income Benefit is subject to
a charge of 0.50% per year of the protected income value during each
year, and the charge is deducted annually in arrears each annuity year.
The Lifetime Five Income Benefit (which allows the owner to withdraw a
specified protected value through periodic withdrawals or a series of
payments for life) is subject to a charge of 0.60% annually of the
average daily net assets in the subaccounts. The X Series Contract also
offers a variant of the Lifetime Five benefit (called Spousal Lifetime
Five) which, for a charge of 0.75% annually, guarantees income until
the second-to-die of two individuals married to each other. There is
yet another variant called Highest Daily Lifetime Five, which bears a
charge of 0.60% annually. The Highest Daily Value death benefit (which
provides a death benefit equal to the higher of the basic death benefit
or the ``highest daily value'') is subject to a charge of 0.50%
annually of the average daily net assets of the subaccounts. Finally,
the combination 5% roll-up/HAV death benefit (which refers to a death
benefit equal to the greater of (i) the ``highest anniversary value''
or (ii) purchase payments plus credits, adjusted for withdrawals,
appreciated at 5% annually) is subject to a charge of 0.50% annually of
the average daily net assets of the subaccounts. (For New York
contracts, the only optional death benefit will be the Highest
Anniversary Value Death Benefit.)
9. In addition to the optional insurance features, the X Series
Contract offers several optional administrative features at no
additional cost (e.g., auto rebalancing, systematic withdrawals).
10. The X Series Contract offers both variable investment options
and a one-year fixed rate option. The X Series Contract also may offer
an enhanced, dollar cost averaging fixed interest rate option. At
present, only portfolios of Advanced Series Trusts are available as
variable investment options. Under the X Series Contract, applicants
reserve the right to add new underlying funds and series, and to
substitute new portfolios for existing portfolios (subject to
Commission approval).
11. An owner choosing to annuitize under the X Series Contract will
have only fixed annuity options available. Those fixed annuity options
include annuities based on a single measuring life or joint lives,
based on a single measuring life or joint lives with a period certain
(e.g., 5 years, 10 years, or 15 years), or based on a period certain
only. If the owner fails to choose an annuity option, the default is to
a life annuity with 10 years certain.
12. If the elder owner is 80 or younger when a purchase payment is
made, the New Credit will equal 6%, regardless of the purchase payment
amount. Applicants will recapture the New Credit if (i) the X Series
Contract is surrendered during the free look period, or (ii) the New
Credit was applied within 12 months prior to death or (iii) the New
Credit was applied within 12 months prior to the surrender of the
contract under the medically-related surrender provision of the X
Series Contract (e.g., if the owner is diagnosed with a ``fatal
illness'' and chooses to invoke this contract provision on that basis).
(The medically-related surrender provision is not available in New
York.) Applicants seek an amended order pursuant to Section 6(c) from
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1
thereunder to the extent necessary to permit an Insurance Company to
recapture the New Credit described herein in the instances described in
the preceding sentence. No CDSC will be assessed in connection with any
transaction in which the New Credit is recaptured.
13. Finally, the X Series Contract will offer a ``longevity
credit'' that will be paid on the 10th annuity anniversary and each
annuity anniversary thereafter. The longevity credit will equal 0.40%
of the sum of all purchase payments (less withdrawals) that are more
than 9 years old. Applicants are not seeking an exemption to recapture
the longevity credit.
Applicants' Legal Analysis
1. Section 6(c) of the 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 Act and the
rules promulgated thereunder 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 Act.
2. Applicants request that the Commission, pursuant to Section 6(c)
of the Act, amend the 2006 Order to the extent necessary to permit the
recapture of the New Credit under the circumstances described above.
Applicants believe that the requested exemptions are appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
3. Applicants submit that the recapture of the New Credit will not
raise concerns under Sections 2(a)(32), 22(c) and 27(i)(2)(A) of the
1940 Act, and Rule 22c-1 thereunder for the same reasons given in
support of the 2006 Order. The New Credit will be recaptured only if
the owner (i) exercises his/her free look right, (ii) dies within 12
months after receiving a New Credit or (iii) makes a medically-related
surrender within 12 months after receiving a New Credit. The amounts
recaptured equal the New Credits provided by each Insurance Company
from its own general account assets.
4. When the Insurance Companies recapture the New Credit, they are
merely retrieving their own assets, and the owner has not been deprived
of a proportionate share of the applicable Account's assets, because
his or her interest in the New Credit amount has not vested. With
respect to New Credit recaptures upon the exercise of the free look
privilege, it would be unfair to allow an owner exercising that
privilege to retain a New Credit amount under an X Series Contract that
has been returned for a refund after a period of only a few days. If
the Insurance Companies could not recapture the New Credit during the
free look period, individuals could purchase a contract with no
intention of retaining it, and simply return it for a quick profit.
Applicants also note that the contract owner is entitled to retain any
investment gain attributable to the New Credit, even if the New Credit
is ultimately recaptured. Furthermore, the recapture of New Credits if
death or a medically-related surrender occurs within 12 months after
the receipt of a New Credit is designed to provide the Insurance
Companies with a measure of protection against ``anti-selection.'' The
risk here is that an owner, with full knowledge of impending death or
serious illness, will make very large payments and thereby leave the
Insurance Companies less time to recover the cost of the New Credit, to
their financial detriment.
5. The recapture of the New Credit could be viewed as involving the
redemption of redeemable securities for a price other than one based on
the
[[Page 13049]]
current net asset value of the Account. The recapture of the New Credit
does not involve either of the evils that Rule 22c-1 was intended to
address, namely: (i) The dilution of the value of outstanding
redeemable securities of registered investment companies through their
sale at a price below net asset value or redemption or repurchase at a
price above it, and (ii) other unfair results, including speculative
trading practices.
6. Applicants also assert that the proposed recapture of the New
Credit does not pose a threat of dilution. To effect a recapture of a
New Credit, interests in an owner's account will be redeemed at a price
determined on the basis of the current net asset value. The amount
recaptured will equal the amount of the New Credit that the Insurance
Companies paid out of their general account assets. Although the owner
will be entitled to retain any investment gain attributable to the New
Credit, the amount of that gain will be determined on the basis of
current net asset value. Therefore, no dilution will occur upon the
recapture of the New Credit.
7. Applicants also submit that the second harm that Rule 22c-1 was
designed to address, namely speculative trading practices calculated to
take advantage of backward pricing, will not occur as a result of the
recapture of the New Credit. Applicants submit that the provisions for
recapture of the New Credit under the X Series Contract do not, and any
such Future Contract provisions will not, violate Sections 2(a)(32) and
27(i)(2)(A) of the Act, and Rule 22c-1 thereunder, and that the relief
requested is consistent with the exemptive relief provided under the
2006 Order and other Commission precedent.
8. Applicants submit that their request for an amended order that
applies to any Account or any Future Account established by an
Insurance Company in connection with the issuance of the X Series
Contract and Future Contracts, and underwritten or distributed by PAD
or other broker-dealers, is appropriate in the public interest. Such an
order would promote competitiveness in the variable annuity market by
eliminating the need to file redundant exemptive applications, thereby
reducing administrative expenses and maximizing the efficient use of
Applicants' resources. Investors would not receive any benefit or
additional protection by requiring Applicants to repeatedly seek
exemptive relief that would present no issue under the Act that has not
already been addressed in this application. Having Applicants file
additional applications would impair Applicants' ability effectively to
take advantage of business opportunities as they arise.
9. Applicants undertake that Future Contracts funded by the
Accounts or by Future Accounts that seek to rely on the order issued
pursuant to the application will be substantially similar to the X
Series Contract in all material respects.
Conclusion
Applicants submit that their request for an amended order meets the
standards set out in Section 6(c) of the 1940 Act and that an amended
order should, therefore, be granted. For the Commission, by the
Division of Investment Management, under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4685 Filed 3-10-08; 8:45 am]
BILLING CODE 8011-01-P