[Federal Register Volume 65, Number 88 (Friday, May 5, 2000)]
[Notices]
[Pages 26251-26254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11224]


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SECURITIES AND EXCHANGE COMMISSION


Security Benefit Life Insurance Company, et al.

April 28, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order under section 6(c) of the 
Investment Company Act of 1940 (``1940 Act''), as amended granting 
exemptions from the provisions of Sections 2(a)(32), 22(c), and 
27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to permit the 
recapture of credit enhancements applied to the contract value of 
certain flexible premium deferred variable annuity contracts.

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    Summary of Application: Applicants seek an order under Section 6(c) 
of the 1940 Act, to permit, under specified circumstances, the 
recapture of certain credit enhancements (``Credit Enhancements'') 
applied to: (i) The Variflex Extra Credit contract (``Variflex Credit'' 
or ``Contract''), a flexible premium deferred variable annuity contract 
that Security Benefit issues through the Variflex Account: and (ii) 
other variable contracts and future variable contracts offered by the 
SBL Insurers and funded by the Separate Accounts or a Future Account 
(``Future Variable Contracts''), provided that the Future Variable 
Contract is substantially similar in all material respects to the 
Contract.
    Applicants: Security Benefit Life Insurance Company (``Security 
Benefit''); First Security Benefit Life Insurance and Annuity Company 
of New York (``First Security Benefit''); SBL Variable Annuity Account 
VIII (Variflex Extra Credit) (``Variflex Account,'' and, together with 
any other separate account of Security Benefit or First Security 
Benefit supporting variable annuity contracts, collectively referred to 
as the ``Separate Accounts''); any other separate account that will be 
established in the future by Security Benefit or First Security Benefit 
to support variable annuity contracts (``Future Accounts'') issued by 
Security Benefit or First Security Benefit (collectively, the ``SBL 
Insurers''); and Security Distributors, Inc. (``SDI''), (collectively 
referred to herein as ``Applicants'').
    Filing Dates: The Application was filed with the Commission on 
January 27, 2000, and amended and restated on March 22, 2000 and April 
27, 2000.
    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 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 May 23, 2000, 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 who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street NW., Washington, DC 20549-0609. Applicants, c/o Amy J. Lee, 
Esq., Associate General Counsel, Security Benefit Life Insurance 
Company, 700 Harrison Street, Topeka, KS 66636-0001.

FOR FURTHER INFORMATION CONTACT: Ronald A. Holinsky, Attorney, or Susan 
M. Olson, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Public Reference Branch of the SEC, 450 Fifth Street NW Washington, 
DC 20549-0102 (tel. (202) 942-8090).

Applicant's Representations

    1. Security Benefit is a stock life insurance company organized 
under the laws of the state of Kansas. Security Benefit offers life 
insurance policies and annuity contracts, as well as financial and 
retirement services. It is authorized to conduct life insurance and 
annuity business in the District of Columbia and all states except New 
York. Together with its subsidiaries, Security Benefit has total funds 
under management of approximately $8 billion.
    2. First Security Benefit is a stock life insurance company 
organized under the laws of the State of New York. First Security 
Benefit offers variable annuity contracts in New York and is admitted 
to do business in that state. First Benefit is a wholly-owned 
subsidiary of Security Benefit Group, Inc. (``Security Benefit 
Group''), a financial services holding company which is wholly-owned by 
Security Benefit.
    3. Variflex Account was established on September 12, 1994 as a 
segregated asset account of Security Benefit and is registered with the 
Commission as a unit investment trust (File No. 811-8836). Security 
Benefit is the legal owner of the assets in Variflex Account. Variflex 
Account currently has 17 subaccounts. Each subaccount invests 
exclusively in shares of a specific series of the SBL Fund, an open-end 
management investment company for which Security Management Company, 
LLC, a wholly-owned subsidiary of Security Benefit, serves as 
investment adviser. Variflex Account funds the variable benefits 
available under Variflex Credit. Security Benefit has filed a 
registration statement on Form N-4 under the 1940 Act and the 
Securities Act of 1933, as amended (the ``1993 Act'') to register 
interests in the Variflex Account under Variflex Credit (File No. 333-
93947).
    4. SDI, an affiliate of Security Benefit, serves as the principal 
underwriter for the Variable Contracts issued by Security Benefit, 
including Variflex Credit. SDI is registered with the Commission as a 
broker-dealer under the Securities Exchange Act of 1934, as amended, 
and is a member of the NASD. SDI is a wholly-owned subsidiary of 
Security Benefit Group.
    5. Variflex Credit is a flexible premium deferred variable annuity 
contract. Variflex Credit may be purchased as a non-tax qualified 
retirement plan for an individual, or on an individual basis, in 
connection with a retirement plan qualified under sections 403(b), 408, 
or 408A, of the Internal Revenue Code of 1986, as amended.
    6. Variflex Credit offers a ``Credit Enhancement'' feature under 
which Security Benefit may add an amount to each contractholder's 
``Contract Value'' \1\ at the time of any purchase payment. Credit 
Enhancements are allocated among the subaccounts in the same proportion 
that the applicable purchase payment is allocated. The amount of any 
Credit Enhancement is based on the total purchase payments made into

[[Page 26252]]

Variflex Credit less total withdrawals, including any withdrawal 
changes, from the Contract as of the date the purchase payment is 
applied. The percentage amounts are set forth in the table below:
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    \1\ The term ``Contract Value'' refers to the total value of the 
Contract which includes amounts allocated to the Subaccounts and the 
Fixed Account as well as any amount set aside in the loan account to 
secure loans.

------------------------------------------------------------------------
                                                                Credit
  Total purchase payments, less withdrawals and withdrawal   enhancement
                          charges                                (in
                                                               percent)
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Less than $10,000..........................................           0
At least $10,000 but no more than $1,000,000...............           4
$1,000,000 or more.........................................           5
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    7. The Variflex Credit provides for various withdrawal options, 
annuity benefits and payout annuity options, as well as transfer 
privileges among investment options.
    8. The Variable Contracts issued by the SBL Insurers permit 
contractholders to cancel their Variable Contracts and to receive a 
refund during the Free-Look Period.
    9. In most instances, a contractholder who returns the Variable 
Contract during the Free-Look Period will receive a refund of Contract 
Value plus any charges deducted from such Contract Value, minus the 
value of any Credit Enhancement.\2\ Contractholders also receive a 
refund of any amounts that may have been deducted for state premium 
taxes and/or other taxes. The value of the Credit Enhancement, not the 
amount originally credited, id deducted if the Variable Contract is 
canceled using the Free-Look Period.
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    \2\ Under the laws of a number of states, if Free-Look rights 
are exercised, the sponsoring insurance company is required to 
refund purchase payments.
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    10. Variflex Credit provides for a death benefit upon the death of 
the contractholder prior to the annuity start date. The death benefit 
proceeds will be the death benefit reduced by any unpaid loan balance 
including loan interest (``Contract Debt''), any pro rata account 
charge and any uncollected premium tax. If a contractholder dies before 
the annuity start date, the amount of the death benefit generally will 
be the greater of: (i) The sum of all purchase payments (not including 
Credit Enhancements), less any reductions caused by previous 
withdrawals; or (ii) the Contract Value on the date due proof of death 
and instructions regarding payment are received by Security Benefit 
less any Credit Enhancements applied during the 12 months prior to the 
date of the contractholder's death.
    11. Variflex Credit provides for withdrawal charge waivers upon a 
full or partial withdrawal in the event of confinement to a hospital or 
nursing facility or diagnosis of a terminal illness (``Eligible 
Withdrawal''). In the event of an Eligible Withdrawal, the 
contractholder would forfeit all or part of any Credit Enhancement 
applied during the 12 months preceding the withdrawal. The amount of 
Credit Enhancements to be forfeited is a percentage determined by 
dividing the amount of the Eligible Withdrawal by the total purchase 
payments made in the 12 months preceding that Eligible Withdrawal. For 
example, a withdrawal of $50,000 relative to $100,000 in purchase 
payments in the 12 months preceding the withdrawal would result in 
forfeiture of 50% of the Credit Enhancements applied during that 12 
month period.
    12. Applicants seek relief to: (1) Deduct from the death benefit 
the amount of any Credit Enhancement applied 12 months prior to the 
date of the contractholder's death; and (ii) deduct from an Eligible 
Withdrawal the amount of any Credit Enhancement applied 12 months 
before an Eligible Withdrawal. The requested relief would also apply to 
Future Variable Contracts that are substantially similar in all 
material respects to the Contracts.

Applicant's Legal Analysis

    1. Section 6(c) of the 1940 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 1940 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 provisions of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    2. Applicants seek exemptive relief pursuant to section 6(c) from 
sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act and Rule 22c-
1 thereunder, to the extent necessary to permit the SBL Insurers to 
recapture: (1) The amount of any Credit Enhancement applied 12 months 
prior to the date of the contractholder's death from the amount of any 
death benefit; and (ii) the amount of any Credit Enhancement applied 12 
months before an Eligible Withdrawal from the amount of that Eligible 
Withdrawal.
    3. Subsection (i) of Section 27 of the 1940 Act provides that 
section 27 does not apply to any registered separate account funding 
variable insurance contracts, or to the sponsoring insurance company 
and principal underwriter of such separate account, except as provided 
in paragraph (2) of that subsection. Paragraph (2) provides that it 
shall be unlawful for such separate account or sponsoring insurance 
company to sell a contract funded by the registered separate account 
unless such contract is redeemable security.
    4. Section 2(a)(32) of the 1940 Act defines ``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 or her proportionate shares of the issuer's current 
net assets, or the cash equivalent thereof.
    5. Applicants state that a beneficiary's or contractholder's 
interest in the amount of a Credit Enhancement allocated to Contract 
Value is not vested until 12 months after the Credit Enhancement has 
been applied to the Variable Contract. Unless and until the 
beneficiary's and contractholder's interests in the amount of the 
Credit Enhancement have vested (i.e., 12 months after it has been 
applied to the Variable Contract), Security Benefit retains a right and 
interest in the Credit Enhancement. Thus, when Security Benefit 
recaptures any Credit Enhancement, it is simply retrieving its own 
assets, and because a contractholder's interest in the Credit 
Enhancement is not vested, the contractholder is not deprived of a 
proportionate share of the net assets of the Separate Account.
    6. Applicants state that because the amount paid as a death benefit 
does not include the amount of any Credit Enhancement applied to the 
Variable Contract 12 months prior to the date of death, the beneficiary 
arguably is not receiving the contractholder's proportionate share of 
the Separate Account's current net assets. Similarly, because the full 
or partial withdrawal amount of an Eligible Withdrawal results in the 
forfeiture of all or a portion of any Credit Enhancements applied 
during the 12 months preceding the Eligible Withdrawal, the 
contractholder arguably is not receiving his or her proportionate share 
of the Separate Account's current net assets. Applicants submit, 
however, that the recapture of the amount of any Credit Enhancement 
applied to the Variable Contract in the 12 months prior to the date of 
the contractholder's death or prior to an Eligible Withdrawal, as 
described herein, would not deprive a contractholder of his or her 
proportionate share of the issuer's current net assets. The prospectus 
clearly discloses that, for purposes of the death benefit, the 
beneficiary's interest in a Credit Enhancement will vest only if it has 
been added to Contract Value more than 12 months

[[Page 26253]]

prior to the date of the contractholder's death.
    As described above, the Contract provides that if a contractholder 
dies before the annuity start date, the amount of the death benefit 
generally will be the greater of: (i) The sum of all purchase payments 
(not including Credit Enhancements), less any reductions caused by 
previous withdrawals; or (ii) the Contract Value on the date due proof 
of death and instructions regarding payment are received by Security 
Benefit less any Credit Enhancements applied during the 12 months prior 
to the date of death.
    Similarly, the Contract provides in relevant part that in the event 
of an Eligible Withdrawal, a contractholder would forfeit all or part 
of any Credit Enhancement applied 12 months before the Eligible 
Withdrawal, depending upon the amount of the Eligible Withdrawal 
relative to the total purchase payments made in the 12 months preceding 
that Eligible Withdrawal. Furthermore, since a contractholder's 
interest in the Credit Enhancement allocated to Contract Value is only 
vested 12 months after the Credit Enhancement has been applied to the 
Variable Contract, Security Benefit asserts that it is simply 
retrieving its own assets when recapturing any Credit Enhancement when 
it pays a death benefit or in connection with an Eligible Withdrawal.
    7. Applicants content that annuity contracts, unlike life insurance 
contracts, are not intended to insure against the risk of premature 
death. Instead, annuity contracts are intended to provide an income 
stream to the contractholder or a named beneficiary, for the life of 
the annuitant or for a period of years. The risk to an insurer under an 
annuity contract typically is that the annuitant lives longer than the 
insurer's prediction.
    8. Applicants assert that if Credit Enhancements are applied to the 
death benefit under an annuity contract before a minimum period of time 
has elapsed from the time that a Credit Enhancement has been credited, 
the insurer runs the risk of adverse selection. Similarly, the insurer 
runs the risk of adverse selection if Credit Enhancements are applied 
to withdrawals not subject to a withdrawal charge due to the 
confinement of the insured to a hospital or nursing facility or 
diagnosis of a terminal illness, unless a minimum period of time has 
elapsed from the time that a Credit Enhancement has been credited. With 
respect to the death benefit, the insurer runs the risk that, for 
example, a terminally ill contractholder will make a large purchase 
payment in order to leverage the amount of money he or she is able to 
transfer to the beneficiary. With respect to the withdrawal charge 
waiver due to the confinement of the contractholder to a hospital or 
nursing facility or diagnosis of a terminal illness, the insurer runs 
the risk that, for example, a contractholder will make a large purchase 
payment in order to leverage the amount of money he or she is able to 
apply to medical care payments. SBL believes that requiring a year to 
elapse before a Credit Enhancement may be included in a death benefit 
or in an Eligible Withdrawal is an appropriate means to ensure that the 
Variable Contracts are not used as a risk-free vehicle to leverage the 
amount of money someone may wish to transfer to a beneficiary or to a 
medical care facility.
    9. Section 22(c) of the 1940 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 to accomplish the same purposes as 
contemplated by section 22(a). Rule 22c-1 thereunder prohibits a 
registered investment company issuing a redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in such security, and a principal underwriter of, or 
dealer in, such security, from selling, redeeming, or repurchasing any 
such security except as 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.
    10. Applicants state that Security Benefit's recapture of the 
Credit Enhancement in instances in which: (i) Fewer than 12 months have 
elapsed between the time that the Credit Enhancement has been applied 
to the Contract, and the death of the Contractholder; or (ii) fewer 
than 12 months have elapsed between the time that the Credit 
Enhancement ;has been applied to the Contract, and an Eligible 
Withdrawal, might arguably be viewed as resulting in the redemption of 
redeemable securities for a price other than one based on the current 
net asset value of the applicable subaccount of a Separate Account. In 
other words, because any such Credit Enhancement paid by Security 
Benefit is immediately added, on a conditional basis, to the Contract 
Value of certain contractholders, and further because these amounts are 
allocated to certain subaccounts for the benefit of the contractholder, 
the net asset value of each subaccount arguably is affected by these 
credits.
    11. Applicants contend, however, that the recapture of the Credit 
Enhancement under the circumstances summarized herein should not be 
deemed to be a violation of section 22(c) and Rule 22c-1. To the extent 
that the recapture practices summarized herein are considered to be 
technical violations of these provisions. Applicants respectfully 
request relief from section 22(c) and Rule 22c-1 in order to recapture 
Credit Enhancements as discussed above for Contracts and Future 
Variable Contracts provided within 12 months of: (i) The 
contractholder's death before the annuity start date; or (ii) an 
Eligible Withdrawal.
    12. Applicants content that the recapture of the Credit Enhancement 
does not involve either of the practices that Rule 22c-1 was intended 
to eliminate or reduce as far as reasonably practicable, 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 their redemption or repurchase at a price above it; and 
(ii) other unfair results, including speculative trading practices.
    13. Applicants argue that the proposed recapture of the Credit 
Enhancement poses no threat of dilution. To effect a recapture of a 
Credit Enhancement, Security Benefit redeems (and other SBL Insurers 
will redeem) interests in a contractholder's subaccounts at a price 
determined on the basis of the current accumulation unit value of each 
of the subaccounts of the Separate Account in which the 
contractholder's Contract Value is allocated. The amount recaptured in 
the event of a death benefit, or an Eligible Withdrawal, will be equal 
to the amount of the Credit Enhancement paid out of the assets of 
Security Benefit. That amount will be redeemed at the current 
accumulation unit value of the applicable subaccount(s) as of the date 
of receipt of the death claim, or withdrawal request, in proper order. 
Thus, Applicants assert that no dilution will occur upon the recapture 
of a Credit Enhancement. Applicants further submit that the second 
practice 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 Credit Enhancement. 
However, to avoid any uncertainty as to full compliance with the 1940 
Act, Applicants request an

[[Page 26254]]

exemption from the provisions of section 22(c) and Rule 22c-1 to the 
extent deemed necessary to permit them to recapture the Credit 
Enhancement that is or will be made available under the Variable 
Contracts and Future Variable Contracts.

Conclusion

    Applicants submit that their request for an order for the exemptive 
relief described above 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, and that, 
therefore, the Commission should grant the requested order.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-11224 Filed 5-5-00; 8:45 am]
BILLING CODE 8010-01-M