11776 Federal Register / Vol. 74, No. 52 / Thursday, March 19, 2009 / Notices 

Section 213.3113. The authority is 

amended to read: 

Section 213.3113 U.S. Department of 

Agriculture 

(f)(2) Positions of Agricultural 

Commodity Graders, Agricultural 

Commodity Technicians, and 

Agricultural Commodity Aides at grades 

GS–11 and below in the cotton, raisin, 

peanut, and processed and fresh fruit 

and vegetable commodities and the 

following positions in support of these 

commodities: Clerks, Office Automation 

Clerks, and Computer Clerks and 

Operators at GS–5 and below; ClerkTypists at grades GS–4 and below; and, 

under the Federal Wage System, High 

Volume Instrumentation (HVI) 

Operators and HVI Operator Leaders at 

WG/WL–2 and below, respectively, 

Instrument Mechanics/Workers/Helpers 

at WG–10 and below, and Laborers. 

Employment under this authority may 

not exceed 180 days in a service year. 

In unforeseen situations such as bad 

weather or crop conditions, 

unanticipated plant demands, or 

increased imports, employees may work 

up to 240 days in a service year. Cotton 

Agricultural Commodity Graders, GS–5, 

may be employed as trainees for the first 

appointment for an initial period of 6 

months for training without regard to 

the service year limitation. 

Section 213.3106. The authority is 

amended to read: 

213.3106 Department of Defense 

(b)(10) ‘‘Temporary or time-limited 

positions in direct support of U.S. 

Government efforts to rebuild and create 

an independent, free, and secure Iraq 

and Afghanistan, when no other 

appropriate appointing authority 

applies. Positions will generally be 

located in Iraq or Afghanistan, but may 

be in other locations, including the 

United States, when directly supporting 

operations in Iraq or in Afghanistan. No 

new appointments may be made under 

this authority after October 1, 2012.’’ 

Schedule B 

No Schedule B appointments were 

approved for January 2009. 

Schedule C 

The following Schedule C 

appointments were approved during 

January 2009. 

Section 213.3318 Environmental 

Protection Agency 

EPGS09005 Special Assistant to the 

Associate Administrator for Policy, 

Economics and Innovation. Effective 

January 30, 2009. 

Section 213.3343 Farm Credit 

Administration 

FLOT00080 Executive Assistant to 

Member, Farm Credit Administration 

Board. Effective January 13, 2009. 

Section 213.3344 Occupational Safety 

and Health Review Commission 

SHGS90002 Confidential Assistant to 

the Commission Member (Chairman). 

Effective January 14, 2009. 

Section 213.3382 National Endowment 

for the Arts 

NAGS00062 Counselor to the 

Chairman, National Endowment for the 

Arts. Effective January 22, 2009. 

Authority: 5 U.S.C. 3301 and 3302; E.O. 

10577, 3 CFR 1954–1958 Comp., p. 218. 

Kathie Ann Whipple, 

Acting Director, U.S. Office of Personnel 

Management. 

[FR Doc. E9–5982 Filed 3–18–09; 8:45 am] 

BILLING CODE 6325–39–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. IC–28646; File No. 812–13600] 

ING USA Annuity and Life Insurance 

Company, et al. 

March 13, 2009. 

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’’). 

APPLICANTS: ING USA Annuity and Life 

Insurance Company (ING USA) (the 

‘‘Life Company’’), Separate Account B of 

ING USA Annuity and Life Insurance 

Company (the ‘‘Account’’), and Directed 

Services LLC (DSL) (collectively, the 

‘‘Applicants’’). 

SUMMARY OF THE APPLICATION: The 

Applicants hereby request the 

Commission to issue an order pursuant 

to Section 6(c) of the Act to exempt 

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 recapture of certain 

bonuses applied to purchase payments 

with respect to (1) the deferred variable 

annuity contracts, including data pages, 

riders and endorsements, described 

herein that the Life Company intends to 

issue (the ‘‘Current Contracts’’), (2) the 

deferred variable annuity contracts, 

including data pages, riders and 

endorsements, substantially similar to 

the Current Contracts that the Life 

Company may issue in the future (the 

‘‘Future Contracts’’) (Current Contracts 

and Future Contracts referred to 

collectively as the ‘‘Contracts’’), (3) any 

other separate accounts of the Life 

Company and its successors in interest 

(‘‘Future Accounts’’) that support the 

Contracts, and (4) any Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) member broker-dealers 

controlling, controlled by, or under 

common control with any Applicant, 

whether existing or created in the 

future, that in the future, may act as 

principle underwriter for the Contracts 

(‘‘Future Underwriters’’). The 

circumstances under which the 

Contracts would allow the recapture of 

all or a portion of certain bonus credits 

(previously applied to premium 

payments) are where the bonus credits 

were applied and (1) the contract owner 

exercises his or her ‘‘free look’’ right, (2) 

in the event of the contract owner’s 

death within 12 months of the bonus 

credit being applied and any bonus 

credit applied after the contract owner’s 

death (unless the deceased contract 

owner’s spouse chooses to continue the 

Contract), or (3) upon a surrender or 

withdrawal where the surrender charge 

is waived due to the contract owner’s 

receipt of qualified extended medical 

care, or the owner is diagnosed with a 

qualifying terminal illness, as defined in 

the Contract, in which event the Life 

Company will recapture all bonus 

credits applied during the 12 months 

prior to receipt of such care or date of 

diagnosis, as applicable. 

FILING DATE: The application was 

originally filed on November 7, 2008; 

amended and restated applications were 

filed on March 6, 2009, and March 11, 

2009. 

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 April 3, 2009, 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, 100 F Street, 

NE., Washington, DC 20549. Applicant, 

c/o John S. (Scott) Kreighbaum, Esq., 


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ING, 1475 Dunwoody Drive, West 

Chester, Pennsylvania 19380. 

FOR FURTHER INFORMATION CONTACT: 

Patrick Scott, Senior Counsel, Office of 

Insurance Products, Division of 

Investment Management, SEC, at (202) 

551–6763, or Zandra Bailes, Branch 

Chief, at (202) 551–6975. 

SUPPLEMENTARY INFORMATION: Following 

is a summary of the application. The 

application is available for a fee from 

the Commission’s Public Reference 

Branch, 100 F Street, NE., Washington, 

DC 20549; (tel. (202) 551–8090). 

Applicants’ Representations 

1. ING USA is an Iowa stock life 

insurance company, which was 

originally incorporated in Minnesota on 

January 2, 1973. ING USA is a wholly 

owned subsidiary of Lion Connecticut 

Holdings, Inc. (‘‘Lion Connecticut’’) 

which in turn is an indirect wholly 

owned subsidiary of ING Groep N.V. 

(‘‘ING Group’’), a global financial 

services holding company based in The 

Netherlands. ING USA is authorized to 

sell insurance and annuities in all 

states, except New York, and the District 

of Columbia. For purposes of the Act, 

ING USA is the depositor and sponsor 

for Account B, as those terms have been 

interpreted by the Commission with 

respect to variable annuity separate 

accounts. ING USA also serves as 

depositor for several currently existing 

Future Accounts, one or more of which 

may support obligations under the 

Contracts. ING USA may establish one 

or more additional Future Accounts for 

which it will serve as depositor. 

2. ING USA established the Account 

as a segregated investment account 

under Delaware law on July 14, 1988. 

The Account is a ‘‘separate account’’ as 

defined by Rule 0–1(e) under the Act, is 

registered with the Commission as a 

unit investment trust (File No. 811– 

05626), and interests in the Account 

offered through the Contracts are 

registered on form N–4 (File No. 333– 

153622). 

3. The Account 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 

contracts, including the Contracts. 

4. DSL is a wholly owned subsidiary 

of Lion Connecticut Holdings, Inc., 

which is in turn a wholly owned 

subsidiary of ING Group. It serves as the 

principal underwriter of a number of 

ING USA separate accounts registered as 

unit investment trusts under the Act, 

including the Account, and is the 

distributor of the variable life insurance 

contracts and variable annuity contracts 

issued through such separate accounts, 

including the Contracts. DSL is 

registered as a broker-dealer under the 

Securities Exchange Act of 1934 and is 

a member of FINRA. DSL may act as 

principal underwriter for Future 

Accounts of the Life Company and as 

distributor for Contracts. Future 

Underwriters also may act as principal 

underwriter for the Account and as 

distributor for any of the Contracts. 

5. The Contracts are flexible premium 

deferred combination variable and fixed 

annuity contracts that the Life Company 

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 the Internal Revenue Code of 

1986, as amended. The Contracts may 

only be purchased with a minimum 

initial premium of $25,000. The 

Contracts make available a number of 

subaccounts of the Accounts to which 

an owner may allocate net premium 

payments and associated bonus credits 

(described below) and to which an 

owner may transfer contract value. The 

Contracts also offer fixed-interest 

allocation options under which the Life 

Company credits guaranteed rates of 

interest for various periods. A market 

value adjustment applies to the fixedinterest allocation options under the 

Contracts. Subject to certain restrictions, 

an owner may make transfers of contract 

value at any time among and between 

the subaccounts, and among and 

between the subaccounts and the fixedinterest allocation options. 

6. The Contracts offer a variety of 

annuity payment options to an owner. 

The owner may annuitize any time 

following the first contract anniversary. 

In the event of an owner’s (or the 

annuitant’s, if any owner is not an 

individual) death prior to annuitization, 

the beneficiary may elect to receive the 

death benefit in the form of one of the 

annuity payment options instead of a 

lump sum. The Contracts also offer 

living benefits that guarantee a 

minimum income benefit or lifetime 

withdrawals. 

7. The Life Company 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 $40 

that a Life Company deducts on each 

Contract Anniversary, the annuity 

commencement date and upon a full 

surrender of a Contract. The Life 

Company currently waives this charge 

and anticipates waving this charge for 

the foreseeable future on contract value 

or premiums of $100,000 or more when 

it is due to be deducted. A daily 

mortality and expense risk charge is 

deducted from the assets of the 

Accounts at a rate depending on the 

death benefit chosen as described 

below. The range of maximum mortality 

and expense risk charges is 2.65% to 

3.20% annually. A daily administrative 

charge is deducted from the assets of the 

Account at an annual rate of 0.15%. The 

Contracts provide for a charge of $25 for 

each transfer of contract value in excess 

of twelve transfers per contract year. 

The Life Company currently waives this 

charge and anticipates waiving this 

charge for the foreseeable future. The 

Contracts have a surrender charge in the 

form of a contingent deferred sales 

charge as described more fully below. A 

quarterly charge is assessed depending 

on the type of optional living benefit 

chosen, if any, as described below. 

8. The contingent deferred sales 

charge (the ‘‘CDSC’’) is equal to a 

percentage of each premium payment 

surrendered or withdrawn as specified 

in the table below. The CDSC is 

separately calculated and applied to 

each premium payment at any time that 

the premium payment (or part of the 

premium payment) is surrendered or 

withdrawn. The CDSC applicable to 

each premium payment diminishes to 

zero as the payment ages. 

Number of full years since payment of each premium Charge 

(%) 

0 ................................................ 9.0 

1 ................................................ 9.0 

2 ................................................ 9.0 

3 ................................................ 8.0 

4 ................................................ 7.0 

5 ................................................ 6.0 

6 ................................................ 5.0 

7 ................................................ 4.0 

8 ................................................ 2.0 

9+ .............................................. 0 

9. The CDSC does not apply when a 

death benefit is payable under the 

Contracts. Also, 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 


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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. 

10. An owner may purchase one of 

the optional living benefit riders 

described below, subject to availability 

in a given state and/or broker/dealer 

approval. The Applicants may add other 

optional living benefit riders to the 

Contract in the future. The minimum 

guaranteed income benefit rider (the 

‘‘MGIB Rider’’) guarantees that a 

minimum amount of annuity income 

will be available to the owner, 

regardless of fluctuating market 

conditions, if the owner annuitizes on 

or after the rider’s exercise date. The 

minimum guaranteed amount of annuity 

income will depend on: The amount of 

premiums paid and credits received 

during the specified number of contract 

years after the owner purchases the 

MGIB Rider; how the owner allocates 

the contract value among the 

subaccounts and fixed-interest 

allocations; and any withdrawals and 

transfers the owner makes while the 

MGIB Rider is in effect. The Life 

Company will deduct a maximum 

annual charge of 1.50% (currently, 

0.75%) quarterly of the MGIB Charge 

Base (as defined in the MGIB Rider). 

11. The minimum guaranteed 

withdrawal benefit rider (the ‘‘MGWB 

Rider’’) guarantees a minimum amount 

may be withdrawn annually from the 

Contract for the lifetime of the 

annuitant, regardless of market 

performance and even if these 

withdrawals reduce the contract value 

to zero. The Life Company has a version 

of the MGWB Rider that guarantees the 

annual withdrawal amount for a second 

designated life as well. The Life 

Company will deduct a maximum 

annual charge of 1.30% (currently, 

0.75%), or 1.50% (currently 0.95%), 

quarterly of the charge base (as set forth 

in the MGWB Rider) for the single life 

or joint life MGWB rider, respectively. 

12. If an owner dies before the 

annuity start date, the Contracts provide 

for a death benefit payable to a 

beneficiary, computed as of the date a 

Life Company receives written notice 

and due proof of death. The death 

benefit payable to the beneficiary 

depends on the death benefit option 

selected by the owner: (1) Standard 

death benefit, (2) ratchet death benefit, 

or (3) combination (ratchet and rollup) 

death benefit. In addition to the death 

benefit options, the owner may select 

the earnings multiplier benefit, which 

provides a benefit equal to a percentage 

of any earnings on the Contract to be 

added to the death benefit payable. The 

Applicants may add other death benefit 

options to the Contract in the future. 

13. The standard death benefit equals 

the greater of the (1), (2) or (3), where: 

(1) Is the contract value less bonus 

credits applied since or within 12 

months prior to death; (2) is the 

standard death benefit, which is the 

sum of the standard death benefit base 

for covered funds and the contract value 

allocated to excluded funds—less the 

bonus credits applied since or within 12 

months prior to death; and (3) is the 

Contract’s cash surrender value. The 

maximum daily mortality and risk 

charge for the standard death benefit is 

the annual rate of 2.65% (currently 

1.60%). 

14. The ratchet death benefit equals 

the greater of (1), (2), (3) or (4), where: 

(1) Is the contract value less bonus 

credits applied since or within 12 

months prior to death; (2) is the 

standard death benefit; (3) is the ratchet 

death benefit, which is the sum of the 

ratchet death benefit base for covered 

funds and the contract value allocated 

to excluded funds—less bonus credits 

applied since or within 12 months prior 

to death; and (4) is the Contract’s cash 

surrender value. The maximum daily 

mortality and risk charge for the ratchet 

death benefit is the annual rate of 2.95% 

(currently 1.90%). 

15. The combination (ratchet and 

rollup) death benefit equals the greater 

of (1), (2), (3), (4) or (5), where: (1) Is the 

contract value less bonus credits 

applied since or within 12 months prior 

to death; (2) is the standard death 

benefit; (3) is the ratchet death benefit; 

and (4) is the lesser of (a) or (b) less 

bonus credits applied since or within 12 

months prior to death, where (a) is the 

rollup death benefit, which equals the 

sum of the rollup death benefit base for 

each of covered funds and special 

funds, and the contract value allocated 

to excluded funds, and (b) is the 

maximum rollup death benefit, which is 

equal to (i) multiplied by (ii) minus (iii), 

where (i) is the sum of all premiums 

paid and credits received, (ii) is the 

maximum rollup death benefit 

multiplier, currently 2.5, and (iii) is any 

adjustments for withdrawals; and (5) is 

the Contract’s cash surrender value. The 

maximum daily mortality and risk 

charge for the roll-up death benefit is 

the annual rate of 3.20% (currently 

2.15%). 

16. Each death benefit base (standard, 

ratchet or rollup) for covered funds or 

special funds starts out equaling 

premiums paid and credits received, 

adjusted for any withdrawals or 

transfers. Withdrawals and transfers 

reduce, on a pro-rata basis, each death 

benefit base. The ratchet death benefit 

bases are recalculated on each contract 

anniversary. The rollup death benefit 

bases are recalculated daily. 

17. Funds designated as covered 

funds participate fully in the guarantees 

in calculating the death benefit. Special 

funds may participate at less than the 

full rate, and excluded funds do not 

participate in the guarantees in 

calculating the death benefit due to their 

potential volatility; however, no funds 

are currently designated as excluded 

funds. These fund designations are 

disclosed in the prospectus. The Life 

Company may, at any time, designate 

any new and/or existing subaccount as 

a special fund with 30 days prior notice 

to contract owners. 

18. The earnings multiplier death 

benefit rider provides a benefit equal to 

a percentage of any earnings on the 

Contract, up to a maximum amount, to 

be added to the death benefit payable. 

This rider provides additional funds to 

the beneficiary that be used to help pay 

the taxes on the death benefit. Upon the 

owner’s death, this amount is payable as 

part of the death benefit payable. The 

maximum charge is 0.70% (currently 

0.30%). 

19. The Life Company intends to offer 

a bonus credit provision under the 

Contracts, pursuant to which the Life 

Company credits the contract value with 

a bonus credit amount that is a 

percentage of each premium payment 

made. The Life Company allocates the 

bonus credit for the applicable premium 

payment among the subaccounts and 

fixed-interest allocations the owner 

selects in proportion to the premium 

payment allocated to each investment 

option. The bonus credit varies based on 

the sum of all premiums paid: 5% on 

premiums up to $499,999.99; 6% on 

premiums between $500,000 and 

$999,999.99; and 7% on premiums of 

$1,000,000 or more. Additional 

premiums paid within 90 days of 

contract issuance will be included in 

determining the applicable bonus 

percentage. 

20. The Life Company recaptures or 

retains the bonus credits in several 

circumstances. First, the Life Company 

recaptures the bonus credits in the event 

that the contract owner exercises his or 

her ‘‘free look’’ right. Second, the Life 

Company recaptures the bonus credits 

applied since or months prior to the 

contract owner’s death and any bonus 

credits applied after the contract 

owner’s death (unless the deceased 

contract owner’s spouse chooses to 

continue the Contract). Third, the Life 

Company also will recapture the bonus 

credits upon surrender or withdrawal of 

corresponding premium payments 


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where the surrender charge is waived 

due to the owner’s receipt of qualified 

extended medical care, or the owner is 

diagnosed with a qualifying terminal 

illness, as defined in the Contract, in 

which event the Life Company will 

recapture all bonus credits applied 

during the 12 months prior to receipt of 

such care or date of diagnosis, as 

applicable. 

21. Because of the recapture 

provisions discussed above, the value of 

a bonus credit only vests or belongs 

irrevocably to the owner after the 

recapture period for the bonus credit 

expires. As to bonus credits resulting 

from premiums paid before the free look 

period ends, no part of the bonus 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 for the owner 

12 months after the Life Company 

applies them to an owner’s contract 

value. Under the bonus credit 

provisions, the Life Company applies 

the bonus credit to an owner’s contract 

value either by ‘‘purchasing’’ 

accumulation units of an appropriate 

subaccount or by adding to the owner’s 

fixed interest allocation option values. 

Bonus credits are allocated according to 

the contract owner’s premium allocation 

instructions. 

22. 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 a Life 

Company 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 a Life Company 

and other owners, and in his or her 

variable contract value vis-a`-vis a Life 

Company. Lastly, because it is not 

administratively feasible to track the 

unvested value of bonus credits in the 

Account, a Life Company 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, the daily 

administrative charge, and the daily 

bonus credit rider paid by any owner is 

greater than that which he or she would 

pay without the bonus credit. 

23. Applicants previously have 

received an order for exemptive relief to 

permit the recapture of certain bonus 

credits on the prior contracts in similar 

circumstances to those described above. 

That order encompassed relief for future 

contracts substantially similar to the 

prior contracts. Applicants assert that 

the Contracts described in the 

application differ from the prior 

contracts in the following respects. The 

range of maximum mortality and 

expense risk charges is higher, between 

2.65% and 3.20% annually. The 

mortality and expense risk charge 

depends on the death benefit option 

chosen, each having a maximum charge 

that is guaranteed within the range. The 

range for the prior contracts was from 

1.30% to 1.75% annually. The 

contingent deferred sales charge is 

slightly higher, by 1% more in years 0– 

2, 7 and 8. The bonus credit is also 

higher, up to 7% of each premium 

payment, and is based on aggregate 

premiums instead of age: 5% on 

premiums up to $499,999.99; 6% on 

premiums between $500,000 and 

$999,999.99; and 7% on premiums of 

$1,000,000 or more. However, the 

circumstances under which the Life 

Company would recapture the bonus 

credits remain the same. Because the 

Applicants believe the Commission may 

view these differences as material, 

Applicants are seeking an additional 

order as set forth in the application. 

Legal Analysis 

1. 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(f)* * *’’. 

2. 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. Rule 22c–l 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–l, 

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. 

4. Section 6(c) of the Act authorizes 

the Commission to exempt any person, 

security or transaction, or any class or 

classes of persons, securities or 

transactions from the provisions of the 

Act and the rules promulgated 

thereunder, if and to the extent that 

such exemption is necessary or 

appropriate in the public interest and 

consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Act. 

5. Applicants submit that the 

requested exemptions are appropriate in 

the public interest and consistent with 

the protection of investors and the 

purposes fairly intended by the policy 

and provisions of the Act. Because the 

provisions described above may be 

inconsistent with recapture of a bonus 

credit, Applicants request exemptions 

from the Contracts described herein, 

and for future contracts that are 

substantially similar to the Contracts 

described herein, from Sections 

27(i)(2)(A) and 2(a)(32) of the Act, and 

Rule 22c–1 thereunder, pursuant to 

Section 6(c), to the extent necessary to 

recapture the bonus credit applied to a 

premium payment in the instances 

described above. Applicants seek 

exemptions therefrom out of an 

abundance of caution in order to avoid 

any question concerning the Contracts’ 

compliance with the Act and rules 

thereunder. 

6. To the extent that the recapture of 

the bonus credits arguably could be seen 

as a discount from the net asset value, 

or arguably could be viewed as resulting 

in the payment to an owner of less than 

the proportional share of the issuer’s net 

assets, in violation of Sections 2(a)(32) 

or 27(i)(2)(A) of the Act, the bonus 

credit recapture would trigger the need 

for relief absent some exemption from 

the Act. Rule 6c–8 provides, in relevant 

part, that a registered separate account, 

and any depositor of such account, shall 


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11780 Federal Register / Vol. 74, No. 52 / Thursday, March 19, 2009 / Notices 

be exempt from Sections 2(a)(32) 

27(c)(1), 27(c)(2) and 27(d) of the Act 

and Rule 22c–1 thereunder to the extent 

necessary to permit them to impose a 

deferred sales loan on any variable 

annuity contract participating in such 

account. However, the bonus credit 

recapture is not a sales load. Rather, it 

is a recapture of a bonus credit 

previously applied to an owner’s 

premium payments. The Life Company 

provides the bonus credit from its 

general account on a guaranteed basis. 

The Contracts are designed to be longterm investment vehicles. In 

undertaking this financial obligation, 

the Life Company contemplates that an 

owner will retain a Contract over an 

extended period, consistent with the 

long-term nature of the Contracts. The 

Life Company designed the product so 

that it would recover its costs (including 

the bonus credits) over an anticipated 

duration while a Contract is in force. If 

an owner withdraws his or her money 

during the free look period, a death 

benefit is paid, or a withdrawal or 

surrender is made before this 

anticipated period, a Life Company 

must recapture the bonus credits subject 

to recapture in order to avoid a loss. 

7. Applicants submit that the 

proposed bonus credit rider would not 

violate Section 2(a)(32) or 27(i)(2)(A) of 

the Act. The Life Company would grant 

bonus credits out of its general account 

assets and the amount of the bonus 

credits (although not the earnings on 

such amounts) would remain the Life 

Company’s until such amounts vest 

with the owner. Until the appropriate 

recapture period expires, a Life 

Company retains the right to and 

interest in each owner’s contract value 

representing the dollar amount of any 

unvested bonus credits. Therefore, if the 

Life Company recaptures any bonus 

credit in the circumstances described 

above, it would merely be retrieving its 

own assets. To the extent that the Life 

Company 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. 

8. Applicants further submit that the 

dynamics of the proposed bonus credit 

provisions would not violate Section 

2(a)(32) or 27(i)(2)(A) of the Act because 

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 the Account. 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 a Life Company 

and a Contract owner to shift due to 

Account performance and the vesting of 

such credits, would not cause the 

provisions to conflict with Section 

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. 

9. The Life Company’s granting of 

bonus credits would have the result of 

increasing an owner’s contract value in 

a way that arguably could be viewed as 

the purchase of an interest in the 

Account at a price below the current net 

asset value. Similarly, a Life Company’s 

recapture of any bonus credit arguably 

could be viewed as the redemption of 

such an interest at a price above the 

current net asset value. If such is the 

case, then the bonus credits arguably 

could be viewed as conflicting with 

Rule 22c–1. Applicants contend that 

these are not correct interpretations or 

applications of these statutory and 

regulatory provisions. Applicants also 

contend that the bonus credits do not 

violate Rule 22c–1. 

10. Rule 22c–1 was intended to 

eliminate or reduce, as far as was 

reasonably practicable, (1) 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 (2) other unfair results, 

including speculative trading practices. 

Applicants submit that 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. 

11. The bonus credit provisions do 

not give rise to either of the two evils 

that Rule 22c–1 was designed to 

address. First, the bonus credit 

provisions pose no such threat of 

dilution. An owner’s interest in his or 

her contract value or in the Account 

would always be offered at a price based 

on the net asset value next calculated 

after receipt of the order. The granting 

of a bonus credit does not reflect a 

reduction of that price. Instead, the Life 

Company will purchase with its general 

account assets, on behalf of the owner, 

an interest in the Account equal to the 

bonus credit. Because the bonus credit 

will be paid out of the general account 

assets, not the Account assets, no 

dilution will occur as a result of the 

bonus credit. Recaptures of bonus 

credits result in a redemption of the Life 

Company’s interest in an owner’s 

contract value or in the Account at a 

price determined based on the 

Account’s current net asset value and 

not at an inflated price. Moreover, the 

amount recaptured will always equal 

the amount that the Life Company paid 

from its general account for the bonus 

credits. Similarly, although an owner is 

entitled to retain any investment gains 

attributable to the bonus credits, the 

amount of such gains would always be 

computed at a price determined based 

on net asset value. 

12. Second, Applicants submit that 

speculative trading practices calculated 

to take advantage of backward pricing 

will not occur as a result of the Life 

Company’s recapture of the bonus 

credit. Variable annuities are designed 

for long-term investment, and by their 

nature, do not lend themselves to the 

kind of speculative short-term trading 

that Rule 22c–1 was designed to 

prevent. More to the point, the bonus 

credit recapture simply does not create 

the opportunity for speculative trading. 

13. Rule 22c–1 should have no 

application to the bonus credit 

available, as neither of the harms that 

Rule 22c–1 was intended to address 

arise in connection with the proposed 

bonus credit. Nonetheless, in order to 

avoid any uncertainty as to full 

compliance with the Act, Applicants 

request an exemption from the 

provisions of Rule 22c–1. 

14. Applicants submit that the 

Commission should grant the 

exemptions requested in the application 

even if the bonus credit provisions 

arguably conflict with Section 2(a)(32) 

or 27(i)(2)(A) of the Act or Rule 22c–1 

thereunder. The bonus credit provisions 

are generally beneficial to an owner. 

The recapture provisions of the Contract 

temper this benefit somewhat, but 

unless the owner dies, the owner retains 

the ability to avoid the bonus credit 

recapture in the circumstances 

described herein. While there would be 

downside in a declining market in that 

the owner would bear any losses 

attributable to the bonus credit, it is the 

converse of the benefits an owner would 

receive on the bonus amounts in a rising 

market because earnings on the bonus 


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Federal Register / Vol. 74, No. 52 / Thursday, March 19, 2009 / Notices 11781 

1A nonexclusive list of the Commission’s actions 

to stabilize financial markets during this credit 

crisis include: Adopting a package of measures to 

strengthen investor protections against naked short 

selling, including rules requiring a hard T+3 closeout, eliminating the options market maker 

exception of Regulation SHO, and expressly 

targeting fraud in short selling transactions (See 

Securities Exchange Act Release No. 58572 

(September 17, 2008), 73 FR 54875 (September 23, 

2008)); issuing an emergency order to enhance 

protections against naked short selling in the 

securities of primary dealers, Federal National 

Mortgage Association (‘‘Fannie Mae’’), and Federal 

Home Loan Mortgage Corporation (‘‘Freddie Mac’’) 

(See Securities Exchange Act Release No. 58166 

(July 15, 2008), 73 FR 42379 (July 21, 2008)); taking 

temporary emergency action to ban short selling in 

financial securities (See Securities Exchange Act 

Release No. 58592 (September 18, 2008), 73 FR 

55169 (September 24, 2008)); approving emergency 

rulemaking to ensure disclosure of short positions 

by hedge funds and other institutional money 

managers (See Securities Exchange Act Release No. 

58591A (September 21, 2008), 73 FR 55557 

(September 25, 2008)); proposing rules to 

strengthen the regulation of credit rating agencies 

and making the limits and purposes of credit ratings 

clearer to investors (See Securities Exchange Act 

Release No. 57967 (June 16, 2008), 73 FR 36212 

(June 25, 2008); entering into a Memorandum of 

Continued 

credit amount vest with him or her 

immediately. 

15. The bonus credit recapture 

provisions are necessary for the Life 

Company to offer the bonus credits and 

avoid anti-selection against it. It would 

be unfair to the Life Company to permit 

an owner to keep his or her bonus 

credits upon his or her exercise of the 

Contract’s ‘‘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 the Life 

Company’s expense by exercising that 

right. Likewise, because no additional 

CDSC applies upon death of an owner 

(or annuitant) or where the CDSC is 

waived upon a surrender or withdrawal 

due to the owner’s receipt of qualified 

extended medical care or the owner is 

diagnosed with a qualifying terminal 

illness, a death or this type of surrender 

or withdrawal shortly after the award of 

bonus credits would afford an owner or 

a beneficiary a similar profit at the Life 

Company’s expense. 

16. In the event of such profits to an 

owner or beneficiary, the Life Company 

could not recover the cost of granting 

the bonus credits. This is because the 

Life Company 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, an owner 

could take advantage of them, reducing 

the base from which the daily charges 

are deducted and greatly increasing the 

amount of bonus credits that the Life 

Company must provide. Therefore, the 

recapture provisions are a price of 

offering the bonus credits. The Life 

Company simply cannot offer the 

proposed bonus credits without the 

ability to recapture those credits in the 

limited circumstances described herein. 

17. 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, the Life Company’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 with respect to the 

Contracts. 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. 

The Commission has previously granted 

exemptions to classes of similarly 

situated persons in various contexts and 

in a wide variety of circumstances, 

including class exemptions for 

recapturing bonus credits under variable 

annuity contracts. 

18. Applicants represent that any 

contracts in the future will be 

substantially similar in all material 

respects to the Contracts, but 

particularly with respect to the bonus 

credits and recapture of bonus credits, 

and that each factual statement and 

representation about the bonus credit 

provisions will be equally true of any 

Contracts in the future. Applicants also 

represent that each material 

representation made by them about the 

Account and DSL will be equally true of 

Future Accounts and Future 

Underwriters, to the extent that such 

representations relate to the issues 

discussed in the application. In 

particular, each Future Underwriter will 

be registered as a broker-dealer under 

the Securities Exchange Act of 1934 and 

be a FINRA member. 

19. For the reasons above, Applicants 

submit that the bonus credit provisions 

involve none of the abuses to which 

provision of the Act and rules 

thereunder are directed. The owner will 

always retain the investment experience 

attributable to the bonus credit and will 

retain the principal amount in all cases 

except under the circumstances 

described herein. Further, the Life 

Company should be able to recapture 

such bonus credits to limit potential 

losses associated with such bonus 

credits. 

Conclusion 

Applicants submit that the 

exemptions requested are necessary or 

appropriate in the public interest, 

consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Act, and consistent with and 

supported by Commission precedent. 

Applicants also submit, based on the 

analysis listed above, that the provisions 

for recapture of any bonus credit under 

the Contracts does not violate Section 

2(a)(32) and 27(i)(2)(A) of the Act and 

Rule 22c–1 thereunder. The Applicants 

hereby request that the Commission 

issue an order pursuant to Section 6(c) 

of the Act to exempt the Applicants 

with respect to (1) the Contracts, (2) 

Future Accounts that support the 

Contracts, and (3) 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 the bonus 

credits (previously applied to premium 

payments) in the circumstances 

described above. 

For the Commission, by the Division of 

Investment Management, pursuant to 

delegated authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–5980 Filed 3–18–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59578; File No. S7–06–09] 

Order Granting Temporary Exemptions 

Under the Securities Exchange Act of 

1934 in Connection with Request of 

Chicago Mercantile Exchange Inc. and 

Citadel Investment Group, L.L.C. 

Related to Central Clearing of Credit 

Default Swaps, and Request for 

Comments 

March 13, 2009. 

I. Introduction 

In response to the recent turmoil in 

the financial markets, the Securities and 

Exchange Commission (‘‘Commission’’) 

has taken multiple actions to protect 

investors and ensure the integrity of the 

nation’s securities markets.1 Today the 


sroberts on PROD1PC70 with NOTICES