[Federal Register Volume 65, Number 100 (Tuesday, May 23, 2000)]
[Notices]
[Pages 33380-33383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-12865]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24456; File No. 812-12092]


Northbrook Life Insurance Company, et al.

May 16, 2000.
AGENCY: Securities and exchange Commission (``Commission'')

ACTION: Notice of application for an order pursuant to Section 11(a) of 
the Investment Company Act of 1940 (the ``Act'') approving the terms of 
an offer of a Longevity Reward Rider to owners of certain variable 
annuity contracts (the ``Contracts'').

-----------------------------------------------------------------------

    Applicants: Northbrook Life Insurance Company (``Northbrook''), 
Northbrook Life Insurance Company Variable Annuity Accout II (``Account 
II''), and Dean Witter Reynolds Inc. (``Dean Witter'').
    Summary of Application: Applicants seek an order approving the 
terms of a proposed offer to certain owners of the Contracts of a rider 
that (a) upon death of a Contract's owner, gives any surviving spouse 
theoption of continuing the Contract with a value equal to the death 
benefit then payable, (b) reduces or waives certain charges, and (c) 
imposes a new withdrawal charge on purchase payments made before or 
after the rider's issue date (the ``Rider Date'').
    Filing Date: The application was filed on May 15, 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 Secretary of 
the Commission and serving 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 June 7, 2000, and should be accompanied by 
proof of service on Applicants in the form of an affidvit 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, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, DC. 20549-0609. Applicants, Bruce A. 
Teichner, Esq., Associate Counsel, Allstate Life Insurance Company, 
3100 Sanders Road, Northbrook, Illinois 60062.

FOR FURTHER INFORMATION CONTACT: Ann L. Vlcek, Senior Counsel, Michael 
D. Pappas, Senior Counsel, or William J. Kotapish, Assistant Director, 
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 is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, N.W., 
Washington, DC. 20549-0102, (202) 942-8090.

Applicant's Representations

    1. Northbrook is a wholly-owned subsidiary of Allstate Life 
Insurance company (``Allstate Life''). Allstate Life is an indirect 
subsidiary of The Allstate Corporation, a publicly-traded insurance 
holding company. Northbrook is Account II's depositor within the 
meaning of the Act.
    2. Dean Witter is a wholly-owned subsidiary of Morgan Stanley Dean 
Witter & Co., a publicly-traded financial services company. Dean Witter 
is the principal underwriter of Account II. Dean Witter is registered 
as a broker-dealer under the Securities Exchange Act of 1934 (File No. 
9-14172).
    3. Account II is registered under the Act as a unit investment 
trust (File No. 811-6116). Account II funds the Morgan Stanley Dean 
Witter Variable Annuity II Contracts (defined above as the 
``Contracts'') that Northbrook and Dean Witter have offered and sold 
for a number of years.
    4. The Contracts, which are registered under the Securities Act of 
1933 (File No. 033-35412), are deferred annuity contracts under which 
Contract owners may make one or more purchase payments over a period of 
time (called the ``accumulation phase''). During the accumulation 
phase, the Contract owner's purchase payments, after deduction of 
certain charges, earn (at the owner's election) a ``variable'' return 
based on the investment performance of one or more of Account II's 
subaccounts and/or a fixed rate of return that Northbrook declares from 
time to time.
    5. At the end of the accumulation phase, the Contract owner elects 
whether to receive a ``lump sum'' payment of the Contract's accumulated 
value, or to receive that value under one of several payment options 
that Northbrook offers. Payment options are available on a variable 
and/or fixed basis. The Contracts incorporate many other features, 
including several ``death benefit'' options, partial withdrawal rights, 
full surrender rights, transfer privileges, and other optional rider 
benefits.
    6. The Contracts currently impose a withdrawal charge of up to 6% 
of any amount by which purchase payments withdrawn in any year exceed 
15% of the cumulative purchase payments that had been made as of the 
beginning of that year (the ``annual free withdrawal amount''). The 
withdrawal charge associated with each purchase payment declines 1% 
each year until it is 0% beginning in the seventh year after the 
payment was made. Unused portions of the annual free withdrawal amount 
do not carry over to future years.
    7. The Contracts also impose an annual Contract maintenance charge 
of $30, a $25 charge applicable to certain transfers in excess of 
twelve during a one-year period (which is currently being waived), a 
daily administrative charge at an annual rate of 0.10% of the 
Contract's value in Account II, a mortality and expense risk charge at 
an annual rate of 1.25% of the Contract's value in Account II (or 
higher if certain optional rider benefits are selected), and a charge 
corresponding to any applicable state premium taxes.
    8. Northbrook now proposes to offer a Longevity Reward Rider (the 
``LRR'') to owners of certain outstanding Contracts. The LRR provides 
additional Contract benefits. The benefits under the LRR include: (a) 
An option whereby a deceased owner's surviving spouse may continue the 
Contract using the then-current death benefit value as the new Contract 
value, if higher, rather

[[Page 33381]]

than the current Contract value; (b) a reduced mortality and expense 
risk charge (i.e., at an annual rate that is .07% less than the rate 
that otherwise would apply); (c) a permanent waiver of the $30 annual 
Contract maintenance charge if the Contract's value exceeds $40,000 at 
any time; and (d) a reduction in the withdrawal charge that will apply 
to the withdrawal of any purchase payments that are made after the LRR 
is added to the Contract.
    9. Contract owners who elect the LRR will have a new three year 
withdrawal charge schedule that will apply to withdrawals made after 
the Rider Date. The new schedule would apply to any amount of such a 
subsequent withdrawal of purchase payments that exceeds the 15% annual 
free withdrawal amount, regardless of whether such withdrawn purchase 
payments were made before or after the Rider Date.
    10. The withdrawal charge under the new withdrawal charge schedule 
will begin at 3% and decline by 1% per year over three years to 0% by 
the end of the third year. For purchase payments made prior to the 
rider Date, the three year period runs from the Rider Date. For any 
purchase payment made subsequent to the Rider Date, the three year 
period runs from the date of that payment.
    11. The same exceptions to imposing the LRR withdrawal charge will 
apply as apply to the Contract's basic withdrawal charge. Specifically, 
no LRR withdrawal charge will be imposed at the time a payment option 
commences, upon the death of a Contract owner or annuitant, upon 
amounts withdrawn to satisfy any applicable minimum distribution 
requirements under the Internal Revenue Code, or upon amounts withdrawn 
that are within the 15% annual free withdrawal amount. These are the 
same exceptions as would apply to the Contracts without the LRR.
    12. The LRR will be offered only to Contract owners who have 
maintained their existing purchase payments in their Contracts for at 
least six years. Accordingly, no amount of withdrawal charge will 
remain on any purchase payments made prior to the Rider Date.
    13. Contract owners will not be permitted to elect for the LRR to 
apply to part of a Contract and not to the rest. Any election of the 
LRR must apply to the whole Contract.
    14. Applicants state that the principal purpose of offering the LRR 
is to reward the eligible Contract owners for their persistency. In 
addition, the LRR allows Northbrook to maintain the Contract on a 
competitive footing with other newer variable annuity contracts in the 
marketplace that offer the same or similar benefits.
    15. After an initial notification of the offer in the Contract 
prospectus or other communication to Contract owners by Dean Witter's 
registered representatives, the LRR will be offered by providing 
eligible owners who express an interest in learning the details of the 
offer, in addition to such prospectus, a separate document explaining 
the offer (``the Officer Document'').
    16. The Offering Document will advise such Contract owners that the 
offer is specifically designed for those Contract owners who intend to 
continue to hold their Contracts as long-term investment vehicles. The 
Offering Document will state that the offer is not intended for all 
Contract owners, and that it is especially not appropriate for any 
Contract owner who anticipates surrendering all or a significant part 
of his or her Contract within the next three years. In this regard, the 
Offering Document will encourage Contract owners to carefully evaluate 
their personal financial situation when deciding whether to accept or 
reject the offer of the LRR. In addition, the Offering Document will 
explain how an owner of a Contract contemplating acceptance of the LRR 
may avoid the LRR withdrawal charge if no more than the annual 15% free 
withdrawal amount is withdrawn in any one year and any subsequent 
purchase payments are maintained until expiration of the applicable LRR 
withdrawal charge period. In this regard, the Offering Document will 
state in clear plain English that, if a significant amount of the 
Contract's value is surrendered or withdrawn during the three years 
following the Rider Date: (a) the LRR's benefits may be more than 
offset by the LRR withdrawal charge; and (b) a Contract owner may be 
worse off than if he or she had rejected the offer.
    17. To accept the LRR, an owner must complete an internal election 
form. This election form will include the disclosure set forth in 
Condition No. 1 under ``Applicant' Conditions'' below.
    18. The compensation to registered representatives who offer the 
LRR to Contract owners is expected to take the form of annual ``trail'' 
commissions equal to approximately 0.70% of the Contract's average 
value. On the sale of a new Contract, the registered representative 
would currently earn a commission equal to approximately 5% of purchase 
payments made, plus annual trail commission of approximately .10%.
    19. The Contracts provide a basic death benefit equal to the 
highest of (a) the Contract's accumulated value; (b) the cumulative 
amount of all purchase payments made to date (with approximate 
adjustment for any partial withdrawals that have been made); and (c) 
the Contract's accumulated value on the most recent death benefit 
anniversary, which are every sixth anniversary of a Contract's issuance 
beginning with the sixth, with appropriate adjustment for subsequent 
purchase payments and partial withdrawals. The Applicants assert that 
this basic death benefit can be of quite significant value to a 
Contract Owner and that it can reasonably be expected that, in many 
cases where an owner has died, the death benefit will exceed the 
Contract's then accumulated value. The Applicants maintain, therefore, 
that the LRR could have considerable value for a surviving spouse who 
wishes to continue the Contract.
    20. The .07% reduction in the mortality and expense risk charge 
and, in cases involving more than $40,000 of Contract value, the waiver 
of the $30 annual charge that otherwise would apply are further 
benefits that the LRR would provide. These benefits are guaranteed and 
cannot be reduced or withdrawn. In particular, if the Contract value 
ever exceeds $40,000 at any time following the Rider Date, the $30 
charge will be waived for the remaining duration of the Contract, even 
if its value subsequently falls below $40,000.
    21. Finally, additional purchase payments made after the LRR is 
added to a Contract will be subject only to the 3%/3-year withdrawal 
charge schedule provided for in that rider, rather than the Contract's 
regular 6%/6-year withdrawal charge schedule that would have applied to 
those same purchase payments if the LRR had not been added to the 
Contract. Applicants assert that this is a substantial benefit to any 
Contract owner, including a surviving spouse, who may have an interest 
in making further purchase payments.

Applicants' Legal Analysis

    1. Section 11(a) of the Act makes it unlawful for any registered 
open-end company, or any principal underwriter for such a company, to 
make or cause to be made an offer to the holder of a security of such 
company, or of any other open-end investment company, to exchange that 
security for a security in the same or another such company on any 
basis other than the relative net asset values of the respective 
securities, unless the terms of the offer have first been submitted to 
and approved by the Commission.
    2. section 11(c) of the Act, in pertinent part, requires, in 
effect, that any offer of exchange of the securities of

[[Page 33382]]

a registered unit investment trust for the securities of any other 
investment company be approved by the Commission regardless of the 
basis of the exchange.
    3. Standing alone, Section 11(a) by its terms applies only to 
exchanges of securities issued by ``open-end'' investment companies, 
which, under Section 5(a)(1) of the Act, includes only management-type 
investment companies. Account II itself, as noted above, is a unit 
investment trust-type (rather than a management-type) of investment 
company under Section 4(2) of the Act. It would appear, therefore, that 
Section 11 could require Commission approval for Applicants' offer of 
the LRR only if that falls within the ambit of Section 11(c).
    4. Applicants do not conceded that their offer of the LRR to 
existing Contract owners necessarily constitutes an offer of securities 
of a registered unit investment trust in exchange for securities of any 
other investment company within the purview of Section 11(c). Nor do 
Applicants concede that, for purposes of Section 11, a Contract with 
the LRR is a different security than a contract without the LRR. 
Nevertheless, Applicants request an exemption pursuant to Section 11(a) 
of the Act to the extent deemed necessary to permit the offer of the 
LRR as described herein.
    5. Applicants have considered whether they could rely on Rule 11a-2 
under the Act. Applicants believe and represent that the only provision 
in Rule 11a-2 that could prevent such reliance would be the so-called 
``tacking'' requirement in Rule 11a-2(d)(1). Applicants state that 
since the LRR withdrawal charge continues for only three years, and 
since the most recent purchase payment made by Contract owners who are 
eligible for the LRR was made at least six years prior to the Rider 
Date, the tracking requirement effectively would prohibit the 
imposition of any portion of the LRR's withdrawal charge with respect 
to purchase payments made prior to the Rider Date. For that reason, 
Applicants have concluded that Rule 11a-2 is unavailable to them.
    6. Congress enacted Section 11 to prevent ``switching,'' i.e., the 
practice of inducing security holders of one investment company to 
exchange their securities for those of a different investment company 
solely for the purpose of exacting additional selling charges. 
Applicants assert that the LRR would not involve ``switching.'' 
Applicants maintain, to the contrary, that the purpose of the LRR is to 
enable Contract owners to enhance their Contracts through the rider 
without having to buy a new variable annuity contract. Applicants 
represent that because the LRR provides clear benefits, as described 
above, the LRR's sole purpose is not to exact additional selling 
charges (or any other type of charge).
    7. Applicants state that the LRR would not result in any 
duplicative charges. Applicants represent that the limited withdrawal 
charge provided under the LRR is reasonable in relation to the benefits 
that the rider provides and the costs that Applicants will incur in 
providing those benefits. Those costs will include costs of developing 
and administering the LRR, the direct dollar costs of the charges that 
will be waived or reduced and the benefits that will be paid under the 
LRR, and the costs of distributing the LRR to Contract owners and 
educating them about it.
    8. Applicants represent that any possible withdrawal charge under 
the LRR is modest in amount. Applicants state that, if the Contract 
owner makes no withdrawals during the three years after the Rider Date, 
there is no possibility that any withdrawal charge will ever be 
deducted that exceeds what would have been deducted absent the LRR. 
Applicants also state that even if purchase payments are withdrawn 
during that three year period, the LRR withdrawal charge will apply 
only if more than the 15% annual free withdrawal amount is withdrawn in 
any year.
    9. The LRR will be offered only to Contract owners who already have 
demonstrated an inclination to maintain their Contracts for substantial 
periods of time. Applicants believe that the income taxes that are 
generally payable when earnings are withdrawn from a Contract, as well 
as the tax penalties that may apply if those withdrawals are made prior 
to the owner's reaching age 59\1/2\, serve as additional motivations 
that cause most owners to hold their Contracts for a substantial number 
of years (and often until retirement).
    10. Applicants state that any withdrawal charge will be waived for 
withdrawals of any amounts necessary to meet any federal tax law 
minimum distribution requirements applicable to a Contract.
    11. Under all these circumstances, Applicants believe that, as a 
practical matter, few owners that add the LRR to their Contracts will 
ever actually pay any additional withdrawal charges as a result; and to 
the extent that the LRR succeeds in its purpose of maintaining the 
Contracts on a competitive footing in the marketplace, withdrawals 
should be even further reduced.
    12. Applicants state that except for the withdrawal charge as 
described above, the LRR will not result in any increase in or 
imposition of any charge. Accordingly, Applicants assert that except 
for the potential imposition of the LRR withdrawal charge on certain 
withdrawals that occur within three years after the Rider Date, every 
aspect of a Contract will be at least as favorable after the LRR is 
added as it was before. Applicants maintain that adding the LRR to a 
Contract will have no adverse tax consequences to a Contract's owner.
    13. In light of these considerations, Applicants do not believe 
there is any public policy or purpose under Section 11 (or otherwise) 
that would preclude offering the LRR on the terms and subject to the 
conditions stated herein.

Applicants' Conditions

    Applicants consent to the following conditions:
    1. The Offering Document will contain concise, plain English 
statements that: (a) the LRR is suitable only for Contract owners who 
expect to hold their Contracts as long term investments; and (b) if a 
significant amount of the Contract's value is surrendered or withdrawn 
during the first three years after the Rider Date, the LRR's benefits 
may be more than offset by that charge, and a Contract owner may be 
worse off than if he or she had rejected the LRR.
    2. The Offering Document will disclose in concise plain English the 
only aspect in which adding the LRR rider could disadvantage a Contract 
owner (i.e., through the possible imposition of the LRR withdrawal 
charge).
    3. A Contract owner choosing to add the LRR will complete and sign 
the election form, which will prominently restate in concise, plain 
English the statements required in Condition No. 1, and will return it 
to Northbrook. If the election form is more than two pages long, 
Northbrook will use a separate document to obtain the Contract owner's 
acknowledgment of the statements referred to in Condition No. 1 above.
    4. Applicants will maintain and make available the following 
separately identifiable records, for the time periods specified below, 
for review by the Commission upon request: (a) Northbrook will maintain 
records showing the level of LRR purchases and how it relates to the 
total number of Contract owners eligible to acquire the LRR (at least 
quarterly as a percentage of the number eligible); (b)(i) Northbrook 
will maintain copies of any form of Offering Document, prospectus

[[Page 33383]]

disclosure, election form, acknowledgment form, or offering letter, 
regarding the offering of the LRR, including the dates(s) used, and 
(ii) Dean Witter will maintain copies of any other written materials or 
scripts for presentations used by registered representatives regarding 
the LRR, including the dates used; (c) records showing information 
about each LRR purchase that occurs, including (i) the following 
information to be maintained by Northbrook: The name of the Contract 
owner; the Contract number; the election form (and separate 
acknowledgment form, if any, used to obtain the Contract owner's 
acknowledgment of the statements required in Condition No. 1 above), 
including the date such election or acknowledgment form was signed; the 
date of birth, address and telephone number of the Contract owner; the 
issue date of the LRR; the amount of the Contract's value on that date; 
and persistency information relating to the Contract (date of any 
subsequent withdrawals and withdrawal charges paid); and (ii) the 
following information to be maintained by Dean Witter: The name of the 
Contract owner, the Contract number, the registered representative's 
name, CRD number, firm affiliation, branch office address and telephone 
number; the name of the registered representative's broker-dealer; and 
the amount of commissions paid to the registered representative that 
relates to the LRR; and (d) each of Northbrook and Dean Witter will 
maintain logs showing any Contract owner complaints received by it 
about the LRR, state insurance department inquiries to it about the 
LRR, or litigation, arbitration or other proceedings to which it is a 
party regarding the LRR.
    5. Applicants will include the following information on the logs 
referred to in Condition No. 4(d) above: date of complaint or 
commencement of proceeding; name and address of the person making the 
complaint or commencing the proceeding; nature of the complaint or 
proceeding; and persons named or involved in the complaint or 
proceeding.
    6. Applicants will retain (i) the records specified in Condition 
Nos. 4(a) and (d) above for six years from creation of the record; (ii) 
the records specified in Condition No. 4(b) above for six years after 
the date of last use; and (iii) the records specified in Condition No. 
4(c) for five years from the Rider Date. The records referred to in 
these conditions will be prepared and retained, for the periods 
specified herein, by Northbrook and Dean Witter. Nevertheless, upon 
request of the Commission or its staff, Northbrook and Dean Witter 
shall coordinate the prompt assembly of such records for review at a 
single easily accessible location.

Conclusion

    For the reasons discussed above, Applicants submit that the LRR 
offer is necessary or appropriate in the public interest and consistent 
with the protection of investors and the purposes fairly intended by 
the policies and provisions of the Act. Applicants submit that the 
requested order should therefore be granted.
    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-12865 Filed 5-22-00; 8:45 am]
BILLING CODE 8010-01-M