[Federal Register: December 30, 2002 (Volume 67, Number 250)]
[Notices]
[Page 79664-79668]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de02-122]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-25875; File No. 812-12914]
ReliaStar Life Insurance Company of New York, et al.
December 23, 2002.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940 (the ``Act'') granting exemption
from Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1
thereunder.
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Applicants: ReliaStar Life Insurance Company of New York (``RLNY''),
Separate Account NY-B of ReliaStar Life Insurance Company of New York
(the ``Account'') and Directed Services, Inc. (``DSI'') (together, the
``Applicants'').
Summary of the Application: Applicants seek an order of the Commission,
pursuant to Section 6(c) of the Act, exempting them from Sections
2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the
extent necessary to permit the recapture of certain credits applied to
premium payments made in consideration of certain deferred variable
annuity contracts, described herein, that RLNY plans to issue (the
``Contracts''). Applicants also hereby apply for an order of the
Commission, pursuant to Section 6(c) of the Act, exempting (1) variable
annuity separate accounts that RLNY or its successors in interest may
establish in the Future (``Future Accounts''), and (2) principal
underwriters for such Future Accounts under common control with RLNY or
its successors in interest now or in the future (``Future
Underwriters''), from Sections 2(a)(32) and 27(i)(2)(A) of the Act and
Rule 22c-1 thereunder, to the extent necessary to permit the recapture
of certain credits applied to premium payments made in consideration of
variable annuity contracts issued in the Future by RLNY or its
successors in interest through a Future Account that are substantially
similar in all material respects to the Contracts (``Future
Contracts'').
[[Page 79665]]
Filing Date: The Application was filed on December 20, 2002.
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 must be received by the
Commission by 5:30 p.m. on January 20, 2003, and should be accompanied
by proof of service on the Applicant 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 Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, DC 20549-0609. Applicant, c/o Linda Senker,
Esq., Golden American Life Insurance Company, 1475 Dunwoody Drive, West
Chester, Pennsylvania 19380.
FOR FURTHER INFORMATION CONTACT: Curtis A. Young, Esq., Senior Counsel,
or Lorna J. MacLeod, Branch Chief, Office of Insurance Products,
Division of Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the Application.
The Application is available for a fee from the Commission's Public
Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102
(tel. (202) 942-8090).
Applicants' Representations
1. RLNY is a stock life insurance company originally incorporated
under the laws of New York (originally incorporated under the name
Morris Plan Insurance Society) on June 11, 1917. RLNY is engaged in the
business of writing life insurance and annuities, both individual and
group, and is authorized to do business in all 50 states. RLNY is a
wholly-owned subsidiary of Security-Connecticut Life Insurance Company,
which is a wholly-owned subsidiary of ReliaStar Life Insurance Company.
RLNY is ultimately controlled by ING Groep N.V., a global financial
services holding company with approximately $624 billion in assets as
of December 31, 2001. As of December 31, 2001, RLNY had assets of
approximately $83.1 million. For purposes of the Act, RLNY is the
depositor and sponsor of the Account as those terms have been
interpreted by the Commission with respect to variable annuity separate
accounts.
2. First Golden American Life Insurance Company of New York
(``First Golden'') established the Account as a segregated investment
account under New York law on June 13, 1996. Effective April 1, 2002,
First Golden was merged into RLNY, an affiliated company of First
Golden, and Separate Account NY-B became a separate account of RLNY as
a result of the merger. Under New York law, the assets of the Account
attributable to the Contracts and any other variable annuity contracts
through which interests in the Account are issued are owned by the
Account's depositor but are held separately from all other assets of
the depositor, for the benefit of the owners of, and the persons
entitled to payment under, Contracts issued through the Account.
Consequently, such assets are not chargeable with liabilities arising
out of any other business that the Account's depositor may conduct.
Income, gains and losses, realized or unrealized, from each subaccount
of the Account, are credited to or charged against that subaccount
without regard to any other income, gains or losses of the Account's
depositor. The Account is a ``separate account'' as defined by Rule 0-
1(e) under the Act, and is registered with the Commission as a unit
investment trust.
3. The Account currently is divided into a number of subaccounts.
Each subaccount 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
Account support one or more varieties of variable annuity contacts,
including the Contracts. The Account is registered with the Commission
as a unit investment trust, and interests in the Account to be offered
through the Contracts have been registered under the 1933 Act on Form
N-4.
4. DSI is a wholly owned subsidiary of Equitable of Iowa. It serves
as the principal underwriter of a number of RLNY and Golden American
Life Insurance Company separate accounts registered as unit investment
trusts under the Act, including the Account, and is the distributor of
variable annuity contracts issued through such separate accounts,
including the Contracts. DSI is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. (the ``NASD'').
5. The Contracts are deferred combination variable and fixed
annuity contracts that RLNY may issue to individuals or groups on a
``non-qualified'' basis or in connection with employee benefit plans
that receive favorable federal income tax treatment under Sections 401,
403(b), 408, 408A or 457 of the Internal Revenue Code of 1986, as
amended (the ``Code'').
6. The Contracts make available a number of subaccounts of the
Account to which owners may allocate net premium payments and
associated bonus credits (described below) and to which owners may
transfer contract value. The Contracts also offer fixed-interest
allocation options under which RLNY credits guaranteed rates of
interest for various periods. Transfers of contract value among and
between the subaccounts and, subject to certain restrictions, among and
between the subaccounts and the fixed-interest options, may be made at
any time. The Contracts offer a variety of annuity payment options to
owners. In the event of an owner's (or, in certain circumstances, an
annuitant's) death prior to the annuity commencement date,
beneficiaries may elect to receive death benefits in the form of one of
the annuity payment options instead of a lump sum. In general, the
Contracts offer all of the features typically found in variable annuity
contracts today.
7. The Contracts generally may only be purchased with a minimum
initial premium of $15,000 ($1,500 for certain employee benefit plans)
under Option Package I and $5,000 ($1,500 for certain employee benefit
plans) for Option Packages II and III. RLNY may deduct a premium tax
charge from premium payments in certain states, but otherwise deducts a
charge for premium taxes upon surrender or annuitization of the
Contract or upon the payment of a death benefit, depending upon the
jurisdiction. The Contracts provide for an annual administrative charge
of $30 that RLNY deducts on each Contract Anniversary and upon a full
surrender of a Contract, a daily administrative charge deducted from
the assets of the Account at an annual rate of 0.15% of the Account's
average daily net assets and a daily mortality and expense risk charge
deducted from the assets of the Account at annual rates of 0.90% for
Option Package I, 1.10% for Option Package II, and 1.25% for Option
Package III, of the Account's average daily net assets. The Contracts
also provide for a charge of $25 for each transfer of contract value in
excess of 12 transfers per contract year. RLNY currently anticipates
waiving this charge for the foreseeable future. Lastly, the Contracts
have a surrender charge in the form of a contingent deferred sales
charge.
8. The contingent deferred sales charge (``CDSC'') is equal to the
[[Page 79666]]
percentage of each premium payment surrendered or withdrawn. The CDSC
is separately calculated and applied to each premium payment at any
time that the payment (or part of the payment) is surrendered or
withdrawn. The CDSC applicable to each premium payment diminishes as
the payment ages. The schedule is as follows:
------------------------------------------------------------------------
Charge
Number of full years since payment of each premium (percent)
------------------------------------------------------------------------
Less than 1................................................ 6.0
2.......................................................... 6.0
3.......................................................... 6.0
4.......................................................... 5.0
5.......................................................... 4.0
6.......................................................... 3.0
7+......................................................... 0.0
------------------------------------------------------------------------
9. No CDSC applies to contract value representing an annual free
withdrawal amount or to contract value in excess of aggregate premium
payments (less prior withdrawals of premium payments) (``earnings'').
The CDSC is calculated using the assumption that premium payments are
withdrawn on a first-in, first-out basis. The CDSC also is calculated
using the assumption that contract value is withdrawn in the following
order: (1) The annual free withdrawal amount for that contract year,
(2) premium payments, and (3) earnings. The annual free withdrawal
amount is 10% of contract value, measured at the time of withdrawal,
less any prior withdrawals made in that contract year. Under Option
Package III, any unused percentage of the 10% free withdrawal amount
from a contract year may carry forward into successive contract years,
based on the percentage remaining after the last withdrawal in a
contract year. However, under Option Package III, the accumulated free
withdrawal amount may not exceed 30% of contract value.
10. If an owner dies before the annuity start date, the Contracts
provide, under most circumstances, for a death benefit payable to a
beneficiary, computed as of the date RLNY receives written notice and
due proof of death. The death benefit payable to the beneficiary
depends on whether the owner selected Option Package I, II or III. Each
option package provides a death benefit upon the death of the owner
which death benefit is based upon the highest amount payable under the
separate death benefit options available under that option package. The
death benefit options available under the option packages include:
(1) The Standard Death Benefit which equals return of premium, less
credits applied since or within 12 months prior to death, reduced pro
rata for withdrawals;
(2) The contract value on the claim date, less credits applied
since or within 12 months prior to death;
(3) The Annual Ratchet death benefit which equals the maximum
contract value on each contract anniversary occurring on or prior to
attainment of age 90, adjusted for new premiums and credits and reduced
pro rata for withdrawals, less credits applied since or within 12
months prior to death; and
(4) Return of premium.
Under Option Package I, the death benefit payable is the greater of
(1), (2) and (3). Under Option Package II, the death benefit payable is
the greatest of (1), (2), (3) and (4). Under Option Package III, the
death benefit payable is the greatest of (1), (2), (3) and (4).
11. RLNY intends to offer a bonus credit provision under the
Contracts. At the time of application, an owner may elect the bonus
credit provision. Under the bonus credit provision, RLNY credits
contract value in the subaccounts and the fixed-interest allocations
with an amount that is a percentage of the premium payment. The bonus
credit applies upon issuance of the Contract and is based upon premium
payments received within the first contract year (``first year premium
payments''). RLNY allocates the bonus credit among the subaccounts and
fixed-interest allocations the owner selects in proportion to the
premium payment in each investment option. The bonus credit equals 4%
of the first year premium payments. RLNY reserves the right to increase
or decrease the amount of the bonus credit or discontinue the bonus
credit provision in the future. The annual charge assessed for the
premium credit rider (as a percentage of contract value) is 0.50%. The
charge is payable for the first seven contract years. The charge is
deducted from the contract value in the subaccounts and is also
deducted from amounts in fixed interest allocations by crediting a
lower interest rate.
12. Under the bonus credit provision, RLNY recaptures or retains
the credited amount in the event that the owner exercises his or her
cancellation right during the ``free look'' period. RLNY recaptures
bonus credits applied after or within twelve months of the date as of
which a death benefit is computed. RLNY also will recapture part or all
of the credited amount upon surrender or withdrawal. The portion of the
credit deducted is based on the percentage of first year premium
withdrawn and the contract year of surrender or withdrawal. The amount
recaptured is calculated separately and applied to each premium payment
at any time that the payment (or part of the payment) is surrendered or
withdrawn. The recapture percentage applicable to each premium payment
is level for the first two contract years and diminishes to zero after
the seventh contract year. The schedule is as follows:
------------------------------------------------------------------------
Percentage of
premium credit
forfeited
(based on
Contract year of surrender or withdrawal percentage of
first year
premium
withdrawn)
------------------------------------------------------------------------
Years 1-2............................................... 100
Years 3-4............................................... 75
Years 5-6............................................... 50
Year 7.................................................. 25
Years 8+................................................ 0
------------------------------------------------------------------------
13. No recapture percentage applies to contract value representing
the annual free withdrawal amount or to contract value representing
earnings. Because of the recapture provisions discussed above, the
value of a credit only ``vests'' or belongs irrevocably to the owner as
the recapture period for the credit expires. As to bonus credits
resulting from premiums paid before the ``free look'' period ends, no
part of the credit vests for the owner until the expiration of the
``free look'' period. After the expiration of the ``free look'' period,
all bonus credits vest in full over the 7 year period after RLNY grants
them. Under the bonus credit provision, RLNY credits amounts to an
owner's contract value either by ``purchasing'' accumulation units of
an appropriate subaccount or adding to the owner's fixed interest
allocation option values.
14. With regard to variable contract value, several consequences
flow from the foregoing. First, increases in the value of accumulation
units representing bonus credits accrue to the owner immediately, but
the initial value of such units only belongs to the owner when, or to
the extent that, each vests. Second, decreases in the value of
accumulation units representing bonus credits do not diminish the
dollar amount of contract value subject to recapture. Therefore,
additional accumulation units must become subject to recapture as their
value decreases. Stated differently, the proportionate share of any
owner's variable contract value (or the owner's interest in the
Account) that RLNY can ``recapture'' increases as variable contract
value (or the owner's interest in the Account) decreases. This dilutes
somewhat the owner's interest in the Account vis-a-vis RLNY and other
owners, and in his or her variable
[[Page 79667]]
contract value vis-a-vis RLNY. Lastly, because it is not
administratively feasible to track the unvested value of bonus credits
in the Account, RLNY deducts the daily mortality and expense risk
charge and the daily administrative charge from the entire net asset
value of the Account. As a result, the daily mortality and expense risk
charge and the daily administrative charge paid by any owner is greater
than that which he or she would pay without the bonus credit.
15. Applicants respectfully request that the Commission issue an
order pursuant to Section 6(c) of the Act, exempting them from the
provisions of Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule
22c-1 thereunder, to the extent necessary to permit the recapture of
certain credits applied to premium payments made in consideration of
the Contracts.
Legal Analysis
1. Section 6(c) of the Act authorizes the Commission to exempt any
person, security, or transaction or any class of persons, securities,
or transactions from any provision or provisions of the Act and/or any
rule under it 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. Subsection (i) of Section 27 provides that Section 27 does not
apply to any registered separate account supporting variable annuity
contracts, or to the sponsoring insurance company and principal
underwriter of such account, except as provided in paragraph (2) of
subsection (i). Paragraph (2) provides that it shall be unlawful for a
registered separate account or sponsoring insurance company to sell a
variable annuity contract supported by the separate account unless the
``* * * contract is a redeemable security; and * * * [t]he insurance
company complies with Section 26(e) * * *'' RLNY, of course, complies
with Section 26(e). Section 2(a)(32) defines a ``redeemable security''
as any security, other than short-term, paper, under the terms of which
the holder, upon presentation to the issuer, is entitled to receive
approximately his proportionate share of the issuer's current net
assets, or the cash equivalent thereof.
3. Applicants submit that the recapture of bonus credits would not,
at any time, deprive an owner of his or her proportionate share of the
current net assets of an Account. Until the appropriate recapture
period expires, RLNY retains the right to and interest in each owner's
contract value representing the dollar amount of any unvested bonus
credits. Therefore, if RLNY recaptures any bonus credit or part of a
bonus credit in the circumstances described above, it would merely be
retrieving its own assets. RLNY would grant bonus credits out of its
general account assets and the amount of the credits (although not the
earnings on such amounts) would remain RLNY's until such amounts vest
with the owner. Thus, to the extent that RLNY may grant and recapture
bonus credits in connection with variable contract value, it would not,
at either time, deprive any owner of his or her then proportionate
share of the Account's assets. It is the nature of the bonus recapture
provisions as they apply to variable contract value that an owner would
obtain a benefit from a bonus credit in a rising market because any
earnings on the bonus credit amount would vest with him or her
immediately. Over time this would, of course, cause the owner's share
of both the Contract's variable contract value and the Account's net
assets to be greater on a relative basis than it would have been
without the bonus credit. Conversely, in a falling market an owner
would suffer a detriment from a bonus credit because losses on the
bonus credit amount also would ``vest'' with him or her immediately. As
explained above, over time this would cause the owner's share of both
the Contract's variable contract value and the Account's net assets to
decrease on a relative basis.
4. Applicants do not believe that the dynamics of RLNY's proposed
bonus credit provisions would violate Sections 2(a)(32) or 27(i)(2)(A)
of the Act. To begin with, Section 2(a)(32) defines a redeemable
security as one ``under the terms of which the holder, upon
presentation to the issuer, is entitled to receive approximately his
proportionate share of the issuer's current net asset value. Taken
together, these two sections of the Act do not require that the holder
receive the exact proportionate share that his or her security
represented at a prior time. Therefore, the fact that the proposed
bonus credit provisions have a dynamic element that may cause the
relative ownership positions of RLNY and a Contract owner to shift due
to Account performance and the vesting schedule of such credits, would
not cause the provisions to conflict with Sections 2(a)(32) or
27(i)(2)(A). Nonetheless, in order to avoid any uncertainty as to full
compliance with the Act, Applicants seek exemptions from these two
sections.
5. Section 22(c) of the Act authorizes the Commission to make rules
and regulations applicable to registered investment companies and to
principal underwriters of, and dealers in, the redeemable securities of
any registered investment company. Rule 22c-1 thereunder imposes
requirements with respect to both the amount payable on redemption of a
redeemable security and the time as of which such amount is calculated.
Specifically, Rule 22c-1, in pertinent part, prohibits a registered
investment company issuing any redeemable security, a person designated
in such issuer's prospectus as authorized to consummate transactions in
any such security, and a principal underwriter of, or dealer in, such
security from selling, redeeming or repurchasing any such security,
except at a price based on the current net asset value of such security
which is next computed after receipt of a tender of such security for
redemption, or of an order to purchase or sell such security.
6. RLNY's granting of a bonus credit would have the result of
increasing an owner's contract value in a way that could be viewed as
the purchase of an interest in the Account at a price below net asset
value. Similarly, RLNY's recapture of any bonus credit could be viewed
as the redemption of such an interest at a price above net asset value.
If such is the case, then the bonus credit provisions could be viewed
as conflicting with Rule 22c-1 under the Act. Applicants contend,
however, that the bonus credits do not violate Rule 22c-1 under the
Act. The bonus credit provisions do not give rise to either of the
evils that Rule 22c-1 was designed to address. The Rule was intended to
eliminate or reduce, as far as was reasonably practicable, 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 other
unfair results, including speculative trading practices.
7. The evils 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. Backward pricing permitted
certain investors to take advantage of increases or decreases in net
asset value that were not yet reflected in the price, thereby diluting
the values of outstanding shares. The proposed bonus credit provisions
pose no such threat of dilution. An owner's
[[Page 79668]]
interest in his or her contract value or in the Account would always be
offered under the Contracts at a price determined on the basis of net
asset value. The granting of a bonus credit does not reflect a
reduction of that price. Instead, RLNY will purchase with its own money
on behalf of the owner, an interest in the Account equal to the bonus
credit. Because any bonus credit will be paid from RLNY's general
account and not from the assets of the Account, no dilution will occur
as a result of the credit. Likewise, because RLNY will use general
account assets to increase an owner's total contract value, no dilution
will occur from such an increase.
8. Recaptures of bonus credits result in a redemption of RLNY's
interest in an owner's contract value or in the Account at a price
determined on the basis of the Account's current net asset value and
not at an inflated price. Moreover, the amount recaptured will always
equal the amount that RLNY paid from its general account for the
credits. Similarly, although owners are entitled to retain any
investment gains attributable to the bonus credits, the amount of such
gains would always be computed at a price determined on the basis of
net asset value. Because neither of the harms that Rule 22c-1 was
intended to address arise in connection with the proposed bonus credit
provisions, the provisions do not conflict with the Rule. Nonetheless,
in order to avoid any uncertainty as to hill compliance with the Act,
Applicants seek exemptions from Rule 22c-1.
9. The bonus credit recapture provisions are necessary for RLNY to
offer the bonus credits. It would be unfair to RLNYto permit owners to
keep their bonus credits upon their exercise of the Contracts' ``free
look'' provision. Because no CDSC applies to the exercise of the ``free
look'' provision, the owner could obtain a quick profit in the amount
of the bonus credit at RLNY's expense by exercising that right.
Similarly, the owner could take advantage of the bonus credit by taking
withdrawals within the recapture period, because the cost of providing
the bonus credit is recouped through charges imposed over a period of
years. Likewise, because no additional CDSC applies upon death of an
owner (or annuitant), a death shortly after the award of bonus credits
would afford an owner or a beneficiary a similar profit at RLNY's
expense. In the event of such profits to owners or beneficiaries, RLNY
could not recover the cost of granting the bonus credits. This is
because RLNY intends to recoup the costs of providing the bonus credits
through the charges under the Contract, particularly the daily
mortality and expense risk charge and the daily administrative charge.
If the profits described above are permitted, certain owners could take
advantage of them, reducing the base from which the daily charges are
deducted and greatly increasing the amount of bonus credits that RLNY
must provide. Therefore, the recapture provisions are a price of
offering the bonus credits. RLNY simply cannot offer the proposed bonus
credits without the ability to recapture those credits in the limited
circumstances described herein.
10. Applicants state that the Commission's authority under Section
6(c) of the Act to grant exemptions from various provisions of the Act
and rules thereunder 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, RLNY's successors in interest,
Future Accounts and Future Underwriters from the provisions of Sections
2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder. 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 Act
because all of the potential members of the class could obtain the
foregoing exemptions for themselves on the same basis as the
Applicants, but only at a cost to each of them that is not justified by
any public policy purpose. As discussed below, the requested exemptions
would only extend to persons that in all material respects are the same
as the Applicants.
11. Applicants represent that Future Contracts will be
substantially similar in all material respects to the Contracts and
that each factual statement and representation about the bonus credit
provisions of the Contracts will be equally true of Future Contracts.
Applicants also represent that each material representation made by
them about the Account and DSI 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 NASD member.
Conclusion
Applicants request that the Commission issue an order pursuant to
Section 6(c) of the Act exempting them as well as Future Accounts and
Future Underwriters from the provisions of Sections 2(a)(32) and
27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent
necessary to permit the recapture of certain credits applied to
purchase payments made in consideration of the Contracts. Applicants
submit that, for all the reasons stated above, 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.
For the Commission by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32914 Filed 12-27-02; 8:45 am]
BILLING CODE 8010-01-P