[Federal Register Volume 65, Number 91 (Wednesday, May 10, 2000)]
[Notices]
[Pages 30144-30147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11606]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24440; File No. 812-12000]


New York Life Insurance and Annuity Corporation, et al., Notice 
of Application

May 3, 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 credits applied to premium payments made under certain 
deferred variable annuity policies and certificates.

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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 credits applied to premium payments made under: (i) Certain deferred 
variable annuity policies and certificates that NYLIAC will issue 
through SA III (the policies and certificates, including certain 
certificate data pages and endorsements, are referred to as ``Mainstay 
Policies'' or ``LifeStages Policies,'' collectively, the ``SA III 
Policies''), and (ii) policies and certificates, including certain 
certificate data pages and endorsements, the NYLIAC may issue in the 
future through SA III or any Future Account (collectively, the 
``Accounts'') which policies and certificates, including certain 
certificate data pages and endorsements, are substantially similar to 
the SA III Policies in all material respects (the ``Future Policies'' 
together with the SA III Policies, ``Policies''). Applicants also 
request that the order being sought extend to any National Association 
of Securities Dealers, Inc. (``NASD'') member broker-dealer controlling 
or controlled by, or under common control with NYLIAC, whether existing 
or created in the future, that serves as a distributor or principal 
underwriter of the Policies offered through the Accounts (collectively, 
``NYLIAC Broker-Dealers'').

APPLICANTS: New York Life Insurance and Annuity Corporation 
(``NYLIAC'') and its NYLIAC Variable Annuity Separate Account--III 
(``SA III''), any other separate accounts of NYLIAC (``Future 
Accounts'') that support in the future variable annuity policies and 
certificates that are substantially similar in all material respects to 
the SA III policies, and NYLife Distributors, Inc. (``NYLIFE 
Distributors'') (collectively referred to herein as ``Applicants'').

Filing Dates: The Application was filed with the Commission on February 
24, 2000, and amended and restated on May 3, 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 26, 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, N.W., Washington, DC 20549-0609. Applicants, c/o Linda M. 
Reimer, Esq., New York Life Insurance and Annuity Corporation, 51 
Madison Avenue, New York, New York 10010.

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, N.W., 
Washington, D.C. 20549-0102 (tel. (202) 942-8090).

Applicant's Representations

    1. NYLIAC is a stock life insurance company organized under the 
laws of the State of Delaware. NYLIAC is licensed to sell life, 
accident and health insurance and annuities in the District of Columbia 
and all states. NYLIAC serves as depositor for SA III, which was 
established in 1994 pursuant to authority granted under a resolution of 
NYLIAC's Board of Directors. NYLIAC

[[Page 30145]]

also serves as depositor for several existing Future Accounts, one or 
more of which may support obligations under Future Policies. NYLIAC may 
establish additional Future Accounts for which it will serve as 
depositor.
    2. NYLIFE Distributors is the principal underwriter of SA III. 
NYLIFE Distributors 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. The SA III Policies are distributed by NYLIFE 
Distributors and sold by registered representatives of NYLIFE 
Securities, Inc., and registered representatives of unaffiliated 
broker-dealers that have entered into selling agreements with NYLIAC 
and NYLIFE Distributors. The SA III Policies also are distributed and 
sold by banking and financial institutions that have entered into 
selling agreements with NYLIAC or NYLIFE Distributors. NYLIFE 
Securities, Inc. and NYLIFE Distributors are wholly-owned subsidiaries 
of NYLIFE, LLC, which is a wholly-owned subsidiary of New York Life 
Insurance Company. NYLIFE Distributors may enter into similar 
arrangements for Future Policies. NYLIFE Distributors may act as 
principal underwriter for Future Accounts and distributor for Future 
Policies. A successor entity also may act as principal underwriter for 
any of the Accounts and distributor for any of the Policies.
    3. SA III is a segregated asset account of NYLIAC. SA III is 
registered with the Commission as a unit investment trust under the 
1940 Act. SA III will fund the variable benefits available under the SA 
III Policies. Units of interest in SA III under the SA III Policies it 
funds will be registered under the Securities Act of 1933 (``1933 
Act''). NYLIAC may issue Future Policies through SA III or through 
Future Accounts. That portion of assets of SA III that is equal to the 
reserves and other SA III Policy liabilities with respect to SA III is 
not chargeable with liabilities arising out of any other business of 
NYLIAC. Any income, gains or losses, realized or unrealized, from 
assets allocated to SA III are, in accordance with the SA III Policies, 
credited to or charged against SA III, without regard to other income, 
gains or losses of NYLIAC. The same will be true of any Future Account.
    4. Future Policies funded by SA III or any Future Accounts will be 
substantially similar to the SA III Policies in all material respects. 
Certain anticipated differences between SA III Policies and Future 
Policies are summarized below. SA III Policies will be sold by 
registered representatives of NYLIFE Securities, Inc., and unaffiliated 
broker-dealers that have entered into selling agreements with NYLIAC or 
NYLIFE Distributors. SA III Policies also will be sold by banking and 
financial institutions that have entered into selling agreements with 
NYLIAC and NYLIFE Distributors. NYLIAC may issue SA III Policies as 
individual or group flexible premium tax deffered variable annuity 
policies. NYLIAC may issue SA III Policies in connection with 
retirement plans that qualify for favorable federal income tax 
treatment under Sections 403, 408, or 457 of the Internal Revenue Code 
of 1986, as amended (``Code''). NYLIAC also may issue SA III Policies 
on a non-tax qualified basis. SA III Policies may be used for other 
purposes in the future, or offered only as qualified policies or non-
qualified policies.
    5. The minimum initial and subsequent premium payment for a non-
qualified policy is $5,000 for Mainstay Policies and $2,000 for 
LifeStages Policies. The minimum initial and subsequent premium for a 
qualified policy is $2,000 for both the Mainstay and LifeStages 
Policies. The maximum aggregate premium payments without prior approval 
of NYLIAC is $1,000,000. The maximum age of any annuitant as of issue 
date is 80. NYLIAC does not accept subsequent premium payments after 
the annuity date unless otherwise agreed to
    6. An owner call allocate premium payments or account value to one 
or more investment division of SA III, each of which will invest in a 
corresponding portfolio of a mutual fund. In addition, SA III Policies 
will permit premium payments to be allocated to fixed interest options 
funded through the fixed account (``Fixed Account'') which provides a 
guarantee of the premium payment allocated thereto and interest for 
specified periods. Policy owners may receive annuity payments after 
annuitization on a fixed basis.
    7. SA III currently consists of 26 investment divisions, all of 
which will be available under the SA III Policies. However, a policy 
owner may not allocate money to more than 18 variable investment 
divisions at any given time. Each investment division will invest in 
shares of a corresponding portfolio of an open-end, diversified series 
management investment company registered under the 1940 Act and whose 
shares are offered under the 1933 Act (each a ``Fund'' and 
collectively, ``Funds''). The Funds currently available under the SA 
III Policies are managed by various entities affiliated and 
unaffiliated with NYLIAC. The investment divisions and the fixed 
interest options will comprise the initial ``Allocation Alternatives'' 
under the SA III Policies.
    8. NYLIAC, at a later date, may determine to create additional 
investment divisions of SA III to invest in any additional portfolios 
of the Funds, or other portfolios or investments as may now or in the 
future be available. Similarly, investment divisions of SA III may be 
combined or eliminated from time to time. Future Policies may offer 
Funds managed by the same as well as other investment advisers.
    9. SA III Policies provide for various withdrawal options, annuity 
benefits and payout annuity option; transfer privileges among 
Allocation Alternatives; dollar cost averaging; death benefits; and 
other features. Mainstay Policies have the following charges: (i) A 
surrender charge as a percentage of premium payments declining from 8% 
in years one, two, three and four to 0% in year nine and thereafter, 
with a specified free withdrawal amount; and (ii) separate account 
annual expenses at the annual rate of 1.6% assessed against the net 
assets of each investment division. Also, each year during the 
accumulation phase and on full surrender, an annual policy service 
charge of $30 is deducted proportionately from each Allocation 
Alternative. The annual maintenance fee will be waived if the Policy 
owner's account value is $100,000 or greater on the date this fee is 
due. The Funds each impose investment management fees and charges for 
other expenses. LifeStages Policies have the same charges as listed 
above except that under LifeStages Policies, the surrender charge as a 
percentage of premium payments declines from 8% in years one, two and 
three to 0% in year nine and thereafter.
    10. Mainstay Policies have the following death benefit. If the 
policyholder or annuitant dies prior to the annuity commencement date, 
the designated beneficiary will receive, upon the receipt of proof of 
death, the greatest of: (1) The accumulation value, less any 
outstanding loan balance, less Credits (as defined below) applied 
within the 12 months immediately preceding death; (ii) the sum of all 
premium payments made, less any outstanding loan balance, partial 
withdrawals, and surrender charges on those partial withdrawals; or 
(iii) the reset value plus any additional premium payments made since 
the most recent reset anniversary, less any outstanding loan balance, 
proportional withdrawals made since the most recent reset anniversary, 
any surrender charges applicable to such proportional

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withdrawals, and Credits applied within the 12 months immediately 
preceding death.
    11. NYLIAC will apply a premium credit (``Credit'') to the account 
of an SA III Policy owner whenever the owner makes a premium payment. 
The amount of the Credit will equal a percentage (``Credit Rate'') of 
the premium payment according to the premium credit schedule then in 
effect. The Credit Rate applicable to a premium payment will depend on 
the total amount of premiums received under a Policy (``Total 
Accumulated Premiums''). In addition, if NYLIAC receives more than one 
premium payment within 180 days of the policy date (as defined in the 
Policy), NYLIAC will adjust the Credits applied to such payments using 
the Credit Rate applicable to the later payment(s) made during that 
period. NYLIAC will apply any additional Credit amounts resulting from 
such adjustments as of the date it receives the later premium 
payment(s).
    NYLIAC proposes to use the following premium credit schedule for 
initial premium payments under the SA III Policies:

------------------------------------------------------------------------
                                                     But less    Credit
        Total accumulated premiums at least           than--      rate<SUP>1</SUP>
------------------------------------------------------------------------
Minimum...........................................     $50,000       3.0
$50,000...........................................     100,000      3.25
100,000...........................................     500,000       4.5
500,000...........................................   1,000,000       4.5
1,000,000.........................................   2,500,000       4.5
2,500,000.........................................   5,000,000       5.0
5,000,000.........................................   Unlimited      5.0
------------------------------------------------------------------------
\1\ Credit rate as a percentage of premium payment.

    NYLIAC may apply Credits for subsequent premium payments under SA 
III Policies using the same or a different credit schedule. In 
addition, NYLIAC may apply Credits for initial and subsequent premium 
payments under Future Policies using the same or a different premium 
credit schedule. The Credit Rate under future premium credit schedules 
will range between 2.0% to 6.0%. NYLIAC will notify Policy owners of 
any change in the premium credit schedule prior to implementing such 
change. NYLIAC currently does not expect to change the premium credit 
schedule more often than five times a year. Any change in the premium 
credit schedule will apply to all premium payments received after the 
schedule becomes effective.
    12. NYLIAC will determine the premium breakpoint and credit 
percentages of future premium credit schedules based on several 
factors, including product expense levels, policy experience, and 
competitive position. NYLIAC expects to incur certain expenses, such as 
those related to policy issue, maintenance and servicing, that will 
affect the profitability of the policy. As premiums paid under a policy 
increase, these expenses should have less of an unfavorable impact on 
profitability. NYLIAC generally expects to be able to afford to apply 
larger Credits on larger policies. Accordingly, depending on future 
expense levels, NYLIAC may change future premium amount breakpoints or 
credit percentages to maintain a consistent level of profitability. In 
addition, NYLIAC expects different size policies to reflect different 
persistency or mortality experience that will affect the profitability 
of the policies. Poor persistency or high mortality experience will 
adversely affect profitability. NYLIAC generally expects to be able to 
afford to apply a larger Credit on policies with higher persistency or 
lower mortality experience. Accordingly, depending on whether future 
persistency or mortality experience is favorable or unfavorable, NYLIAC 
may change future premium amount breakpoints or credit percentages to 
maintain a consistent level of profitability. Finally, NYLIAC will 
monitor changes in the marketplace for policies with credit or similar 
features, and may change future premium amount breakpoints or credit 
percentages to maintain a competitive position in the marketplace.
    13. NYLIAC will allocate Credits among the Allocation Alternatives 
in the same proportion as the corresponding premium payments are 
allocated by the owner. NYLIAC will fund Credits from its general 
account assets. The Credits are vested when applied, except under the 
following circumstances: (i) NYLIAC will recapture all Credits if the 
owner returns a SA III Policy to NYLIAC for a refund during the 10-day 
(or longer, if required) ``free-look'' period; and (ii) the amount of 
any death benefit will not include any Credit applied to an owner's 
account within 12 months of the date of death.
    14. Applicants seek exemption pursuant to Section 6(c) of the 1940 
Act from Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act, and 
Rule 22c-1 thereunder, to the extent deemed necessary to permit NYLIAC 
to issue policies that provide for Credits upon the receipt of premium 
payments, and to recapture Credits in the following instances: (i) If 
the Policy owner returns the Policy to NYLIAC for a refund during the 
10-day (or longer, if required) ``free-look'' period; and (ii) the 
amount of any death benefit will not include any Credit applied to an 
owner's account within 12 months of the date of death.

Applicants' 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 
consist with the provisions of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act. Applicants 
request that the Commission, pursuant to Section 6(c) of the 1940 Act 
grant the exemptions requested below with respect to SA III Policies, 
and any Future Policies funded by SA III or Future Accounts, that are 
issued by NYLIAC and underwritten or distributed by NYLIFE Distributors 
or any other NYLIAC Broker-Dealers. Applicants undertake that Future 
Policies funded by SA III or any Future Account will be substantially 
similar in all material respects to the SA III Policies. 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 1940 Act.
    2. Applicants represent that it is not administratively feasible to 
track the Credit amount in the Accounts after the Credit is applied. 
Accordingly, the asset-based charges applicable to the Accounts will be 
assessed against the entire amounts held in the respective Accounts, 
including the Credit amount, during the period when the owner's 
interest in the Credit is not completely vested. As a result, during 
such periods, the aggregate asset-based charges assessed against an 
owner's annuity account value will be higher than those that would be 
charged if the owner's annuity account value did not include the 
Credit.
    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 policies, or to the sponsoring insurance company and 
principal underwriter of such account, except as provided in paragraph 
(2) of that subsection. Paragraph (2) provides that it shall be 
unlawful for such a separate account or sponsoring insurance company to 
sell a policy funded by the registered separate account unless ``(A) 
such contract is a redeemable security.'' Section 2(a)(32) of the 1940 
Act defines ``redeemable

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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.
    4. Applicants submit that the Credit recapture provisions 
summarized herein would not deprive a Policy owner of his or her 
proportionate share of the issuer's current net assets. An owner's 
interest in the amount of the Credit applied to his or her annuity 
account value upon receipt of an initial premium payment is not vested 
until the applicable free-look period has expired without return of the 
Policy. Similarly, an owner's interest in the amount of any Credits 
applied upon receipt of premium payments made during the 12 months 
prior to the date of death also is not vested. Until or unless the 
amount of any Credit is vested, NYLIAC retains the right and interest 
in the Credit amount, although not in any earnings attributable to that 
amount. Thus, Applicants argue that, when NYLIAC recaptures any Credit, 
it is simply retrieving its own assets, and because an owner's interest 
in the Credit is not vested, the owner has not been deprived of a 
proportionate share of the applicable Account's assets.
    5. In addition, with respect to Credit recaptures upon the exercise 
of the free-look privilege, Applicants state that it would be patently 
unfair to allow an owner exercising that privilege to retain a Credit 
amount under a Policy that has been returned for a refund after a 
period of only a few days. Applicants state that if NYLIAC could not 
recapture the Credit, individuals could purchase a Policy with no 
intention of retaining it, and simply return it for a quick profit.
    6. Furthermore, Applicants state that the recapture of Credits 
relating to premium payments made within 12 months of death is designed 
to provide NYLIAC with a measure of protection against ``anti-
selection.'' Applicants state that the risk here is that, rather than 
spreading premium payments over a number of years, an owner will make 
very large payments shortly before death, thereby leaving NYLIAC less 
time to recover the cost of the Credits applied, to its financial 
detriment. NYLIAC intends to recover the costs of the Credits applied 
through a portion of the early surrender charge and the separate 
account charge imposed under the Policies. NYLIAC may use any excess to 
recover distribution costs relating to the Policy and as a source of 
profit. The amounts recaptured equal the Credits provided by NYLIAC 
from its own general account assets, and any gain would remain as part 
of the Policy's value.
    7. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put an 
amount greater than their premium payments to work for them in the 
selected Allocation Alternatives. Also, owners will retain any earnings 
attributable to the Credit and, unless any of the contingencies 
summarized above apply, the principal amount of the Credit.
    8. Applicants submit that the provisions for recapture of any 
Credits under the SA III Policies do not, and any such Future Policy 
provisions will not, violate Sections 2(a)(32) and 27(i)(2)(A) of the 
1940 Act. Nevertheless, to avoid any uncertainties, Applicants request 
an exemption from Sections 2(a)(32) and 27(i)(2)(A), to the extent 
deemed necessary, to permit the recapture of any Credit under the 
circumstances described herein with respect to SA III Policies and any 
Future Policies, without the loss of the relief from Section 27 
provided by Section 27(i).
    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, whether or not members of any 
securities association, to the same extent, covering the same subject 
matter, and for the accomplishment of the same ends as are prescribed 
in Section 22(a) of the 1940 Act in respect of the rules which may be 
made by a registered securities association governing its members. 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 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.
    10. Arguably, NYLIAC's recapture of the Credit might 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 Accounts. 
Applicants contend, however, that the recapture of the Credit is not 
violative of Section 22(c) and Rule 22c-1. Applicants argue that the 
recapture of the Credit does not involve either of the evils that Rule 
22c-1 was intended to eliminate or reduce as far as reasonable 
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. To effect a recapture of the Credit, 
NYLIAC will redeem interests in an owner's annuity account at a price 
determined on the basis of the current net asset value of the 
respective Accounts. The amount recaptured will equal the amount of the 
Credit that NYLIAC paid out of its general account assets. Although 
owners will be entitled to retain any investment gain attributable to 
the Credit, the amount of such gain will be determined on the basis of 
the current net asset value of the respective Accounts. Thus, 
Applicants assert that no dilution will occur upon the recapture of a 
Credit. 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 Credit. However, to avoid any uncertainty as to 
full compliance with the 1940 Act, Applicants request an exemption from 
the provisions of Section 22(c) and Rule 22c-1 to the extent deemed 
necessary to permit them to recapture the Credit under the SA III 
Policies and Future Policies.

Conclusion

    Applicants submit, based on the grounds summarized above, that 
their exemptive request meets the standards set out in Section 6(c) of 
the 1940 Act, namely, that the exemptions requested 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, and that, therefore, the Commission should 
grant the requested order.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11606 Filed 5-9-00; 8:45 am]
BILLING CODE 8010-01-M