20296 Federal Register / Vol. 60, No. 79 / Tuesday, April 25, 1995 / Notices

40. How satisfied were you with the

assistance you received from OPM in filing

the paperwork needed to obtain benefits?

(Check One)

a. b Very satisfied.

b. b Generally satisfied.

c. b Neither satisfied or dissatisfied.

d. b Generally dissatisfied.

e. b Very dissatisfied.

41. Do you have a personal computer and

a modem?

(Check One)

a. b Yes.

b. b No. (Skip to Question #43)

42. Do you have access to any of the

following On-line services?

(Check All that Apply)

a. b CompuServe.

b. b USENET.

c. b America On-line.

d. b Prodigy.

e. b Genie.

f. b Other (Please specify.)

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Part V

Retirement Counseling

Please answer the following questions only if

you retired within the last two years.

43. Did you receive retirement counseling?

(Check One)

a. b No. (Skip to Question #51.)

b. b Yes.

44. Who initiated the contact to plan for

your retirement?

(Check One)

a. b I did.

b. b My agency did.

c. b I don’t remember.

45. Who did the counseling?

(Check One)

a. b An employee of my former agency.

b. b A contract employee to my former

agency.

c. b I don’t know.

46. When did your agency start to counsel

you concerning your retirement planning?

(Check One)

a. b More than one year before I retired.

b. b Six to twelve months before I retired.

c. b Less than six months before I retired.

47. What did the counseling cover?

(Check All That Apply)

a. b Retirement coverage.

b. b Amount of annuity.

c. b Survivor benefits.

d. b Health insurance benefits.

e. b Life insurance benefits.

f. b Social Security benefits.

g. b Thrift Savings Plan.

h. b Other (Please specify.)

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48. How satisfied were you that the

information from your agency (including

responses to your questions and concerns)

was accurate and up to date?

(Check One)

a. b Very satisfied.

b. b Generally satisfied.

c. b Neither satisfied nor dissatisfied.

d. b Generally dissatisfied.

e. b Very dissatisfied.

49. How satisfied were you with how well

your agency helped you in taking appropriate

actions (such as submitting retirement forms

and making decisions about health and life

insurance) and in learning what to expect

after you retired (such as how long it would

take to get your annuity, notices to be

received, tax withholding, etc.)?

(Check One)

a. b Very satisfied.

b. b Generally satisfied.

c. b Neither satisfied nor dissatisfied.

d. b Generally dissatisfied.

e. b Very dissatisfied.

Comments (Especially about any

improvements you would suggest.)

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50. How did your agency’s estimate of your

annuity compare with the annuity computed

by OPM?

(Check One And Skip To Question #52)

a. b The annuity estimate was close to the

annuity computed by OPM.

b. b The annuity estimate was significantly

more than the annuity computed by

OPM.

c. b The annuity estimate was significantly

less than the annuity computed by OPM.

d. b I did not receive an annuity estimate

from my agency.

e. b I don’t remember.

51. If your employing agency never

counseled you, where did you go to get

information on retirement and insurance

matters?

(Check All That Apply)

a. b National Association of Retired Federal

Employees (NARFE).

b. b Private publications (such as Federal

Employees Almanac).

c. b I contacted OPM directly.

d. b Other.

e. b I didn’t receive any retirement planning

information.

52. In planning your retirement, did you?

(Check One)

a. b Attend agency sponsored retirement

seminars AND receive individual

counseling from your personnel office.

b. b Only attend an agency sponsored

retirement seminar.

c. b Only receive individual counseling.

d. b Neither retirement seminars nor

individual counseling was provided by

my agency.

53. Were you provided a copy of ‘‘Thinking

About Retirement’’?

(Check One)

a. b Yes.

b. b No.

c. b I don’t know.

Thank you for your cooperation. We

appreciate your help. Please return the

completed questionnaire in the postage paid

envelope to: U.S. Office of Personnel

Management, Client Satisfaction Survey,

Room 4316, RIS/QAD, Attention: Dom

Marro/Nancy Wolf, 1900 E Street, N.W.,

Washington, DC 20415.

If you have any comments about how OPM

has served you or if you have suggestions on

how we can improve our service, please

write them in the space below.

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If you have questions concerning your

annuity or survivor annuity, write directly to:

U.S. Office of Personnel Management,

Retirement Operations Center, Boyers, PA

16017.

[FR Doc. 95–10122 Filed 4–24–95; 8:45 am]

BILLING CODE 6325–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Rel. No. IC–21021; No. 812–8154]

General American Life Insurance

Company, et al.

April 19, 1995.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’).

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (‘‘1940 Act’’).

APPLICANTS: General American Life

Insurance Company (‘‘General

American’’), General American Separate

Account Eleven (‘‘Account 11’’) and

Walnut Street Securities, Inc.

(‘‘Underwriter’’).

RELEVANT 1940 ACT SECTION: Order

requested under Section 6(c) granting

exemptions from Sections 27(c)(2) and

27(e) of the 1940 Act and from Rules

6e–3(T)(b)(13)(vii), 6e–3(T)(c)(4)(v) and

27e–1 thereunder.

SUMMARY OF APPLICATION: Applicants

request an order to permit Account 11

and other variable life insurance

separate accounts that General

American may establish in the future

(‘‘Future Accounts’’) to: (1) Deduct a

charge from premium payments under

certain variable life insurance contracts

to compensate General American for its

increased federal tax burden resulting

from the application of Section 848 of

the Internal Revenue Code of 1986, as

amended, to the receipt of such

payments; and (2) to permit General

American not to send such contract

owners a written notice of their refund

and withdrawal rights.
Federal Register / Vol. 60, No. 79 / Tuesday, April 25, 1995 / Notices 20297

1The Funds include General American Capital

Company, Variable Insurance Products Fund,

Variable Insurance Products Fund II, and Van Eck

Investment Trust.

2Contracts purchased in Kansas provide for a

return of an amount equal to the: (1) difference

between premium payments and amounts allocated

to Account 11; and (2) cash value on the date the

Contract is returned.

3Applicants undertake to make this

representation in an amendment to the Application,

which is to be filed during the notice period.

FILING DATES: The application initially

was filed on November 9, 1992,

declared inactive on August 12, 1993,

and amended on September 12, 1994,

and April 14, 1995.

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 15, 1995, 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 requestor’s interest, the

reason for the request, and the issues

contested. Persons may request

notification of a hearing by writing to

the Secretary of the Commission.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 5th Street,

N.W., Washington, D.C. 20549.

Applicants: c/o Matthew P. McCauley,

Esq., General American Life Insurance

Company, 700 Market Street, St. Louis,

Missouri 63101.

FOR FURTHER INFORMATION CONTACT:

Yvonne M. Hunold, Assistant Special

Counsel, or Wendy Friedlander, Deputy

Chief, at (202) 942–0670, Office of

Insurance Products (Division of

Investment Management).

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application; the complete application is

available for a fee from the

Commission’s Public Reference Branch.

Applicants’ Representations

1. General American, a mutual life

insurance company, is principally

engaged in offering insurance policies

and annuity contracts. General

American is authorized to conduct

business in the District of Columbia, all

states except New York, and ten

Canadian provinces.

2. Account 11 is a separate account

established by General American and

registered as a unit investment trust

under the 1940 Act. Account 11

currently has 13 sub-accounts, each of

which invests in corresponding

portfolios of one of four series-type

registered open-end, diversified

management investment companies

(collectively, ‘‘Funds’’).1 The Future

Accounts will be separate accounts, as

defined in Rule 0–1(e) under the 1940

Act, and registered as unit investment

trusts under the 1940 Act.

3. The Underwriter acts as principal

underwriter for certain variable life and

variable annuity contracts by General

American. The Underwriter is registered

as a broker-dealer under the Securities

Exchange Act of 1934 and is a member

of the National Association of Securities

Dealers, Inc. The Underwriter is an

indirect wholly-owned subsidiary of

General American.

4. Account 11 currently funds two

flexible premium variable life insurance

contracts offered by General American,

the VUL–95 Contract and the General

Select Plus Contract (together, ‘‘Existing

Contracts’’). Account 11 will, and

Future Accounts may, be used to fund

a new flexible premium variable life

insurance contract (‘‘Contract’’), as well

as other flexible premium variable life

insurance contracts (‘‘Future Contracts’’)

that in the future may be offered by

General American. (Future Contracts

and Existing Contracts are hereinafter

referred to together as ‘‘Other

Contracts’’.) Interests in all of the

contracts are or will be registered as

securities under the Securities Act of

1933.

5. The Contract offers the payment of

premiums in any amount and

frequency, subject to certain limitations,

three death benefit options, cash value,

loan privileges and other traditional life

insurance features. The Contract owner

may receive a refund of premium

payments by cancelling and returning

the Contract within the latest of: (1) 20

days of receipt (30 days for California

residents, and for age 60 or older), (2)

45 days of signing the application, or (3)

10 days of General American’s mailing

a notice of this provision to the Contract

owner.2

6. Certain charges and deductions are

made under the Contract to compensate

General American for its costs and

expenses.

(a) Premium Tax Charge

A charge of 2.10% is deducted from

each premium payment for state taxes

assessed on premium payments

received by General American. Such

premium taxes vary from jurisdiction to

jurisdiction and range between 0.75% to

3.50%. This charge represents the

average deduction considered necessary

for General American to pay such taxes.

Some jurisdictions do not impose a

premium tax while others may impose

a tax that is greater than or less than the

2.10% deduction under the Contract. If

the average premium tax increases in

the future, General American may

increase this deduction.

(b) Section 848 Deferred Acquisition

Costs Charge

A charge of 1.25% (‘‘DAC Tax

Charge’’) will be deducted from each

premium payment to reimburse General

American for its increased federal

income tax burden resulting from

changes made to Section 848 of the

Internal Revenue Code of 1986

(‘‘Code’’), by the Omnibus Budget

Reconciliation Act of 1990 (‘‘OBRA

1990’’), affecting the treatment of

deferred acquisition costs. The

requested order would permit the

deduction of 1.25% of each premium

payment under the Contract and Future

Contracts. The 1.25% DAC Tax Charge

will not be deducted under Existing

Contracts issued prior to the receipt of

the requested order. However, the DAC

Tax Charge may be deducted under

Existing Contracts issued after issuance

of the requested order 3 and after

endorsements permitting the charge

have been approved by insurance

regulators in each applicable

jurisdiction. Applicants represent that

the DAC Tax Charge is a legitimate

expense of the company, is not used for

sales and distribution expenses and will

be reasonably related to General

American’s increased federal tax

burden.

(c) Administration Charge

The monthly administration charge is

$13 per month during the first Contract

year, and $6 per month thereafter. This

charge cannot be increased under a

Contract once it is issued.

(d) Selection and Issue Expense Charge

The selection and issue expense

charge is $0.16 per month per $1,000 of

face amount during the first Contract

year and $0.01 per month per $1,000 of

face amount thereafter. In the event that

the face amount is increased (other than

by a change in death benefit options or

increasing death benefit rider), this

charge is $0.16 per month per $1,000 of

increased face amount during the first

Contract year following the increase and

$0.01 per month per $1,000 of face

amount thereafter.

(e) Cost of Insurance Charge

The monthly cost of insurance charge

varies with each Contract because it is

based on the attained age, rate class, and

sex (except Montana) of the insured.
20298 Federal Register / Vol. 60, No. 79 / Tuesday, April 25, 1995 / Notices

4The value of Account 11’s net assets will reflect operating expenses of the Funds held by Account

11.

5 Grading percentages range, on a declining scale,

policy year, and vary depending on the sex, issue

(f) Charge for Riders

A monthly charge will be deducted

for any riders. This charge will vary

with each Contract.

(g) Mortality and Expense Risk Charge

A daily charge equivalent to an

effective annual rate of .90% of Account

11’s average daily net assets 4 will be

deducted for General American’s

assumption of mortality and expense

risks.

(h) Contingent Deferred Sales Charge

(‘‘CDSC’’)

For a period of up to 15 years after

issuance of the Contract or an effective

face amount increase, General American

will impose a CDSC upon surrender,

lapse, a requested decrease in face

amount or a partial withdrawal that

results in a decrease in face amount.

The amount of the CDSC will depend

upon a number of factors, including the

type of event, amount of premium

payments made prior to the event,

number of Contract years that has

elapsed since issuance of the Contract or

face amount increase, as applicable.

A separate CDSC applies to the initial

face amount and to each increase in face

amount and is deducted whenever, and

to the extent that, a surrender, lapse or

face amount decrease affects the

applicable increment of face amount.

The length of time over which a CDSC

will apply to any increment of face

amount will depend upon the attained

age of the insured on the issue date or

the effective date of the increase, as

applicable, and the insured’s sex and

risk class, as follows:

CONTINGENT DEFERRED SALES CHARGE PERIOD

[Duration in years]

Insured’s age

Male

nonsmoker

Male

smoker

Female

nonsmoker

Female

smoker

0–50 .................................................................................................................................................................. 15 15 15 15

51 ...................................................................................................................................................................... 14 14 14 14

52 ...................................................................................................................................................................... 13 13 13 13

53 ...................................................................................................................................................................... 12 12 12 12

54 ...................................................................................................................................................................... 11 11 11 11

55–79 ............................................................................................................................................................... 10 11 10 10

80 ...................................................................................................................................................................... 10 6 10 10

The CDSC will equal the CDSC

grading percentage 5 multiplied by the

sum of (1) and (2) where: (1) is 40% of

the lesser of the premium payments

made or the target premium for the

Contract, and (2) is the excess premium

surrender charge factor multiplied by

premium payments made in excess of

the target premium for the Contract.

With regard to a face amount increase,

multiplied by the sum of (1) and (2)

where: (1) Is 40% of the lesser of the

premium payments attributable to the

increase, and (2) is the excess premium

surrender charge factor multiplied by

the premium payments attributable to

the increase in excess of the target

premium for the increase. The excess

premium surrender charge factors vary

with the attained age, sex and risk class

of the insured. The target premium for

the Contracts is somewhat less than the

guideline annual premium (‘‘GAP’’) as

defined in Rule 6e–3(T)(c)(8).

The CDSC for the initial face amount

during the first two Contract years will

not exceed: (a) 30% of the first GAP

paid under the Contract; (b) 10% of the

second GAP paid; and (c) 9% of

premium payments made in excess of

two GAPs. The CDSC for any increase

in face amount during the first two

Contract years following the increase

will not exceed: (a) 30% of the first GAP

attributable to the increase; (b) 10% of

the second GAP attributable to the

increase; and (c) 9% of premium

payments attributable to the increase of

two GAPs.

7. Application of Section 848 of the

Code. Section 848 of the Code, as

amended by OBRA, requires life

insurance companies to capitalize and

amortize over a period of ten years part

of their general expenses for the current

year. Prior law allowed these expenses

to be deducted in full from the current

year’s gross income. Section 848

effectively accelerates the realization of

income from certain categories of life

insurance and other contracts

(‘‘Specified Contracts’’) categorized

under this Section and, thus, the

payment of taxes on that income. The

Contract and Other Contracts will be

categorized under Section 848 as

Specified Contracts. Taking into account

the time value of money, Section 848

increases the insurance company’s tax

burden because the amount of general

deductions that must be capitalized and

amortized is measured by the premiums

received under the Specified Contracts.

8. The amount of deductions subject

to Section 848 equals a percentage of the

current year’s net premiums received

(i.e., gross premiums minus return

premiums and reinsurance premiums)

under the Specified Contracts.

Consequently, 7.7% of the net

premiums received must be capitalized

and amortized under the schedule set

forth in Section 848(c)(1) of the Code.

9. The increased tax burden on every

$10,000 of net premiums received is

quantified as follows. For each $10,000

of net premiums received in a given

year, Section 848 requires General

American to capitalize $770 (i.e., 7.7%

of $10,000), and $38.50 of this amount

may be deducted in the current year.

The remaining $731.50 ($770 less

$38.50), which is subject to taxation at

the corporate tax rate of 35%, results in

General American owning $256.03

(.35% × $731.50) more in taxes for the

current year than it otherwise would

have owed prior to OBRA 1990.

However, the current tax increase will

be partially offset by deductions that

will be allowed during the next ten

years as a result of amortizing the

remainder of the $770 ($77 in each of

the following nine years and $38.50 in

year ten).

10. In its business judgment, General

American believes it appropriate to use

a discount rate of at least 10% in

evaluating the present value of its future

tax deductions for the following

reasons. Capital that General American

must use to pay its increased federal tax
Federal Register / Vol. 60, No. 79 / Tuesday, April 25, 1995 / Notices 20299

burden under Section 848 will be

unavailable for investment. The cost of

capital used to pay this increased tax

burden essentially will be General

American’s after tax rate of return on

surplus (i.e., return sought on invested

capital), which is 10% to 12%.

Accordingly, Applicants assert that the

after tax rate of return on surplus is

appropriate for use in this present value

calculation.

11. In determining the after tax rate of

return, General American considered a

number of factors, including market

interest rates, anticipated long-term

growth rate, acceptable risk levels,

inflation, and available information

about the rates of return obtained by

other mutual life insurance companies.

General American represents these are

appropriate factors to consider.

12. General American first projects its

future growth rate based on sales

projections, current interest rates,

inflation rate, and the amount of surplus

that it can provide to support such

growth. General American then uses

these factors, giving market interest

rates, acceptable risk level, and inflation

rate significantly more weight, to set a

rate of return on surplus equal to or in

excess of the anticipated rate of growth.

General American seeks to maintain a

ratio of surplus to assets that it

establishes based on its judgment of the

risks represented by various

components of its assets and liabilities.

Maintaining the ratio of surplus to

assets is critical to General American

maintaining a competitive rating from

various rating agencies and to offering

competitively priced products.

Consequently, General American’s

surplus must grow at least at the same

rate as its assets.

13. Using a federal corporate tax rate

of 35%, and assuming a discount rate of

10%, the present value of the tax effect

of the increased deductions allowable in

the following ten years, which partially

offsets the increased tax burden, comes

to $160.40. The effect of Section 848 on

the Contracts and Other Contracts is

therefore an increased tax burden with

a present value of $95.63 for each

$10,000 of net premiums received (i.e.,

$256.03 minus $160.40).

14. General American does not incur

incremental federal income tax when it

passes on state premium taxes to

Contract Owners because state premium

taxes are deductible in computing

federal income taxes. Conversely,

federal income taxes are not deductible

in computing General American’s

federal income taxes. To compensate

General American fully for the impact of

Section 848, General American must

impose an additional charge to make it

whole not only for the $95.63 additional

tax burden attributable to Section 848,

but also for the tax on the additional

$95.63 itself. This federal tax can be

determined by dividing $95.63 by the

complement of 35% federal corporate

income tax rate (i.e., 65%), resulting in

an additional charge of $147.12 for each

$10,000 of net premiums, or 1.47%.

15. Based on its prior experience,

General American reasonably expects to

take almost all future deductions. It is

General American’s judgment that a

1.25% charge would reimburse it for its

increased federal income tax liabilities

under Section 848. Applicants represent

that the 1.25 charge will be reasonably

related to General American’s increased

federal income tax burden under

Section 848. This representation takes

into account the benefit to General

American of the amortization permitted

by Section 848 and the use of a 10%

discount rate (which is equivalent to

General American’s cost of capital) in

computing the future deductions

resulting from such amortization. To the

extent that General American’s actual

cost of capital exceeds an annual rate of

10%, the calculation of this increased

tax burden will continue to be

reasonable over time.

16. General American believes that

the 1.25% charge would have to be

increased if future changes in, or

interpretations of, Section 848 or any

successor provision result in a further

increased tax burden due to receipt of

premiums. The increase could be

caused by a change in the corporate tax

rate, or in the 7.7% figure, or in the

amortization period. Accordingly, the

Contract, Future Contracts and

endorsements to the Existing Contracts

offered after issuance of an order in this

matter will or may reserve the right to

increase, or decrease, the 1.25% charge

in response to such future changes or

interpretations that increase or decrease

its tax burden. Any increase of the

charge above 1.25% would require

additional exemptive relief from the

Commission under the 1940 Act.

Applicants’ Legal Analysis

1. Applicants request an order under

Section 6(c) of the 1940 Act for

exemptions from Section 27(c)(2) of the

1940 Act to the extent necessary to

permit the deduction from premium

payments of a DAC Tax Charge in an

amount that is reasonable in relation to

General American’s increased federal

tax burden based on receipt of

premiums under the Contract. The DAC

Tax Charge also may be included in

Future Contracts and may be added to

Existing Contracts issued after receipt of

the order requested herein. Applicants

also request exemptions from Rule 6e–

3(T)(c)(4)(v) under the 1940 Act to

permit the proposed DAC Tax Charge to

be treated as other than ‘‘sales load,’’ as

defined under Section 2(a)(35) of the

1940 Act, for purposes of Section 27 and

the exemptions from various provisions

of that Section found in Rule 6e–3(T).

2. Applicants also request an order

under Section 6(c) exempting them and

any Future Accounts from Section 27(e)

of the 1940 Act and Rules 27e–1 and

6e–3(T)(b)(13)(vii) thereunder to the

extent necessary to eliminate the

requirement of written notice to owners

of the Contract or Future Contracts

concerning certain withdrawal and

refund rights.

3. Section 6(c) authorizes the

Commission, by order and upon

application, to exempt any person,

security, or transaction, or class of

persons, securities, or transactions, from

any provisions of the 1940 Act. The

Commission grants relief under Section

6(c) to the extent an 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 1940 Act].’’

A. DAC Tax Charge

1. Section 27(c)(2). Section 27(c)(2)

prohibits any deduction from premium

payments made under periodic payment

plan certificates other than a deduction

for ‘‘sales load.’’ ‘‘Sales load’’ is defined

under Section 2(a)(35), in relevant part,

as the difference between the price of a

security to the public and that portion

of the proceeds from its sale which is

received and invested or held for

investment by the issuer (or in the case

of a unit investment trust, by the

depositor or trustee), less any portion of

such difference deducted for trustee’s or

custodian’s fees, insurance premiums,

issue taxes, or administrative expenses

or fees which are not properly

chargeable to sales or promotional

activities.

Sales loads on periodic payment plan

certificates are limited by Sections

27(a)(1) and 27(h)(1) to 9% of total

payments.

2. Rule 6e–3(T)(b). Certain provisions

of Rule 6e–3(T) provide exemptive relief

from Section 27(c)(2) if the separate

account issues flexible premium

variable life insurance contracts, as

defined in subparagraph (c)(1) of that

Rule. Rule 6e–3(T)(b)(13)(iii) provides

exemptive relief from Section 27(c)(2) to

permit an insurer to make certain

deductions, other than sales load,

including ‘‘[t]he deduction of premium

or other taxes imposed by any State or

other governmental entity.’’
20300 Federal Register / Vol. 60, No. 79 / Tuesday, April 25, 1995 / Notices

3. Applicants assert that the proposed

deduction with respect to Section 848 of

the Code arguably is covered by

subparagraph (b)(13)(iii)(E) of Rule 63–

3(T), but that the language of paragraph

(c)(4) of the Rule appears to require that

deductions for federal tax obligations

from receipt of premium payments be

treated as ‘‘sales load.’’ Applicants state

that they request relief from Section

27(c)(2) only to preclude the possibility

that a charge related to the increased

burden resulting from Section 848 is not

covered by the exemption provided by

Rule 6e–3(T)(b)(13)(iii)(E). Applicants

submit that the public policy reasons

underlying subparagraph (b)(13)(iii)(E)

provide support for the exemption

requested.

4. Rule 6e–3(T)(c)(4). Paragraph (b)(1),

together with paragraph (c)(4), of Rule

6e–3(T) provide an exemption from the

Section 2(a)(35) definition of ‘‘sales

load’’ by substituting a new definition to

be used for purposes of the Rule.

Rule 6e–3(T)(c)(4) defines ‘‘sales

load’’ during a period as the excess of

any purchase payments made during

that period over certain itemized

charges and adjustments, including a

deduction for state premium taxes.

Under a literal reading of paragraph

(c)(4) of the Rule, a deduction for an

insurer’s increased federal tax burden

does not fall squarely into those

itemized charges or deductions,

arguably causing the deduction to be

treated as part of ‘‘sales load.’’

Applicants maintain, however, that

there is no public policy reason why a

tax burden charge designed to cover the

expense of federal taxes should be

treated as sales load or otherwise be

subject to the sales load limits of Rule

6e–3(T). Moreover, Applicants assert

that nothing in the administrative

history of Rule 6e–3(T) suggests that the

Commission intended to treat tax

charges as sales load.

5. Applicants argue that the

exemption is necessary in order for

Account 11 and any Future Account to

rely on subparagraph (c)(13)(i), which

provides critical exemptions from

Sections 27(a)(1) and 27(h)(1) of the

1940 Act. Applicants note that issuers

and their affiliates may only rely,

however, on subparagraph (b)(13)(i) if

they meet its alternate limits that apply

to sales load as defined in paragraph

(c)(4). Applicants represent that they

and Future Accounts could not meet

these limits if the DAC Tax charge is

included in sales load.

6. Applicants assert that the public

policy that underlies paragraph (b)(13)

of Rule 6e–3(T), and particularly

subparagraph (b)(13)(i), like that which

underlies Sections 27(a)(1) and 27(h)(1),

is to prevent excessive sales loads from

being charged for the sale of periodic

payment plan certificates. Applicants

argue that this legislative purpose is not

furthered by treating a federal income

tax charge based on premium payments

as a sales load because the deduction is

not related to the payment of sales

commissions or other distribution

expenses. Applicants assert that the

Commission has concurred with this

conclusion by excluding deductions for

state premium taxes from the definition

of sales load in paragraph (c)(4) of each

Rule.

7. Applicants suggest that the source

for the definition of ‘‘sales load’’ found

in paragraph (c)(4) of Rule 6e–3(T)

supports this analysis. In adopting

paragraph (c)(4) of the Rule, the

Commission intended to tailor the

general terms of Section 2(a)(35) to

flexible premium variable life insurance

contracts to ease verification by the

Commission of compliance with the

sales load limits of subparagraph

(b)(13)(i) of the Rule. Just as the

percentage limits of Section 27(a)(1) and

27(h)(1) depend on the definition of

sales load in Section 2(a)(35) for their

efficacy, the percentage limits in

subparagraph (b)(13)(i) of Rule 6e–3(T)

depend on paragraph (c)(4), which does

not depart, in principle, from Section

2(a)(35).

8. Applicants further suggest that the

exclusion from the definition of ‘‘sales

load’’ under Section 2(a)(35) of

deductions from premiums for ‘‘issue

taxes’’ indicates that it is consistent

with the policies of the 1940 Act to

exclude from the definition of ‘‘sales

load’’ in Rule 6e–3(T) deductions made

to pay an insurer’s costs attributable to

its federal tax obligations. By extension,

it is equally consistent to exclude such

charges from Rule 6e–3(T)(c)(4)

definition of sales load. Additionally,

the exclusion of administrative

expenses or fees that are ‘‘not properly

chargeable to sales or promotional

activities’’ also suggests that the only

deductions intended to fall within the

definition of ‘‘sales load’’ are those that

are properly chargeable to sales or

promotional activities. The proposed

deductions will be used to compensate

General American for its increased

federal tax burden attributable to the

receipt of premiums and not for sales or

promotional activities. Therefore, the

language in Section 2(a)(35) further

indicates that not treating such

deductions as sales load is consistent

with the policies and provisions of the

1940 Act.

9. Finally, Applicants submit that it is

probably an historical accident that the

exclusion of premium tax in

subparagraph (c)(4)(v) of Rule 6e–3(T)

from the definition of ‘‘sales load’’ is

limited to state premium taxes. When

Rule 6e–3(T) was adopted and later

amended, the additional Section 848 tax

burden attributable to the receipt of

premiums did not yet exist.

10. Applicant’s Conditions for DAC

Tax Relief: Applicants agree to the

following conditions:

(a) General American will monitor the

reasonableness of the 1.25% DAC Tax

Charge;

(b) The registration statement for any

variable life insurance contract under

which the 1.25% charge is deducted

will include: (1) disclosure of the

charge; (2) disclosure explaining the

purpose of the charge; and (3) a

statement that the charge is reasonable

in relation to General American’s

increased federal tax burden under

Section 848 of the Code; and

(c) General American also will

include as an exhibit to the registration

statement for any variable life insurance

contract under which the 1.25% charge

is deducted an actuarial opinion as to:

(1) the reasonableness of the charge in

relation to General American’s

increased federal tax burden under

Section 848 of the Code; (2) the

reasonableness of the after-tax rate of

return that is used in calculating such

charge; and (3) the appropriateness of

the factors taken into account by

General American in determining such

after-tax rate of return.

11. Request for Class Relief.

Applicants also request exemptions to

deduct the DAC Tax Charge for any

Future Account established by General

American to support Future Contracts,

as defined in Rule 6e–3(T)(c)(1).

Applicants assert that granting

exemptive relief to deduct the 1.25%

DAC Tax Charge from the assets of any

Future Account established in

connection with the issuance of Future

Contracts would promote

competitiveness in the variable life

insurance market by eliminating the

need for General American to file

redundant exemptive applications,

thereby reducing its administrative

expenses and maximizing the efficient

use of its resources. Applicants further

represent that the delay and expense

involved in having repeatedly to seek

exemptive relief would impair General

American’s ability effectively to take

advantage of business opportunities as

they arise. Further, any additional

requests for exemptive relief for such

Future Accounts would present no

issues under the 1940 Act that have not

already been addressed in this

application. Without the requested

relief, General American would have to
Federal Register / Vol. 60, No. 79 / Tuesday, April 25, 1995 / Notices 20301

obtain exemptions for each Future

Account with respect to the same issues

addressed in this application. Thus,

investors would receive no benefit or

additional protection and might be

disadvantaged by General American’s

increased overhead expenses.

12. Applicants submit that, for the

reasons stated above, it is appropriate in

the public interest and consistent with

the protection of investors and the

purposes fairly intended by the policy

and provisions of the 1940 Act to

deduct a DAC Tax Charge and to

exclude it from sales load.

B. Waiver of Notice of Withdrawal and

Refund Rights

1. Section 27(e) requires, with respect

to any periodic payment plan certificate

sold subject to Section 27(d), written

notification of the right to surrender and

receive a refund of the excess sales load.

Section 27(d) requires the refund of any

excess sales load paid during the first

eighteen months after issuance of a

periodic payment plan certificate. Rule

27e–2 establishes the requirements for

the notice mandated by Section 27(e)

and prescribes Form N–271–1 for that

purpose. Rule 6e–3(T)(b)(13) modifies

the requirements of Section 27 and the

rules thereunder. Rule 6e–

3(T)(b)(13)(vii) adopts Form N–27–1,

originally intended for application to

contractual plans, and requires it to be

sent to a contract owner upon issuance

of the contract and again during any

lapse period in the first two contract

years. The Form requires statements of

(1) the contract owner’s right to a refund

of the excess sales load for a surrender

during the first two contract years, (2)

the date that the right expires, and (3)

the circumstances in which the right

may not apply upon lapse. Thus,

Section 27(e) of the 1940 Act and Rules

27e–1 and 6e–3(T)(b)(13)(vii), in effect,

require a notice of right of withdrawal

and refund, on Form N–271–1, to be

provided to owners of the Contracts or

Future Contracts (‘‘Contract Owners’’)

entitled to a refund of sales load in

excess of the limits stated in paragraph

(b)(13)(v)(A) of Rule 6e–3(T).

2. Applicants note that the CDSC may

be deducted upon surrender, face

amount reduction or lapse of the

Contract, which does not assess any

other sales charges. The CDSC does not,

during the first two Contract years, or

during the first two Contract years after

the increase in face amount, exceed the

limits described under paragraph

(b)(13)(v)(A) of Rule 6e–3(T), beyond

which sales charges are characterized as

‘‘excess sales charges.’’ Thus,

Applicants assert that no ‘‘excess sales

charge’’ is ever paid by a Contract

Owner surrendering, reducing the face

amount, or lapsing in the first two

Contract years, or during the first two

Contract years after the increase in face

amount. Moreover, Applicants state that

the Contract does not impose an excess

sales load upon lapse, thus negating the

value of a notice being sent during the

lapse period.

3. Rule 27e–1, pursuant to which

Form N–271–1 was first prescribed,

specifies in paragraph (e) that a notice

need be mailed when there is otherwise

no entitlement to receive any refund of

sales charges. Moreover, Rule 27e–1 and

Rule 6e–2, from which Rule 6e–3(T) was

derived, were adopted in the context of

front-end loaded products only and in

the broader context of the companion

requirements in Section 27 for the

depositor or underwriter to maintain

segregated funds as security to assure

the refund of any excess sales charges.

4. Applicants submit that requiring of

a Form N–271–1 could confuse Contract

Owners or encourage them to surrender

during the first two Contract years, or

surrender or decrease face amount

during the first two Contract years

following a face amount increase, when

it may not be in their best interests to

do so. A Contract Owner with a

declining contingent deferred sales load,

unlike a contract with a front-end sales

charge, does not foreclose the

opportunity, at the end of the first two

Contract years, to receive a refund of

monies spent. Such a Contract Owner

has not paid any excess sales charge

and, as the deferred sales charge

declines over the life of the Contract,

may never pay it. Applicants thus assert

that encouraging a surrender during the

first two Contract years could cost such

a Contract owner more in total sales

load, relative to total premium

payments, than would otherwise be

paid if the Contract were held for the

long-term period originally intended.

5. Applicants submit that the absence

of excess sales charge and, therefore, the

absence of an obligation to assure

repayment of that amount, do not create

a right in a Contract owner which Form

N–271–1 was designed to highlight. In

the absence of this right, the notification

contemplated by Form N–271–1 is an

unnecessary and counter-productive

administrative burden the cost of which

appears unjustified. Any other purpose

potentially served by Form N–271–1

would already be addressed by the

required Form N–271–2 Notice of

Withdrawal Right, generally describing

the charges associated with the

Contract, and prospectus disclosure

detailing the sales load design. Neither

Congress, in enacting Section 27, nor

the Commission, in adopting Rule 27e–

1, contemplated the applicability of

Form N–271–1 in the context of a

contract with a declining contingent

deferred sales load.

C. Applicants’ Conclusion

For the reasons and upon the facts set

forth above, Applicants submit that the

exemptions requested under Section

6(c) of the 1940 Act form: (1) Section

27(c)(2) of the 1940 Act and Rule 6e–

3(T)(c)(4)(v) thereunder to permit

General America to deduct up to 1.25%

from premium payments as a DAC Tax

Charge, and (2) under Section 27(e) of

the 1940 Act and Rules 27e–1 and 6e–

3(T)(b)(13)(vii) thereunder to permit the

elimination of the requirement of

written notice to owners of the Contract

or Future Contracts concerning certain

withdrawal and refund rights, 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.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–10132 Filed 4–24–95; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

Commercial Space Transportation

Advisory Committee; Open Meeting

Pursuant to Section 10(a)(2) of the

Federal Advisory Committee Act (Pub.

L. 92–463, 5 U.S.C. App. 2), notice is

hereby given of a meeting of the

Commercial Space Transportation

Advisory Committee (COMSTAC). The

meeting will take place on Thursday,

May 18, 1995, from 8:30 a.m. to 12:30

p.m. in Room 2230 of the Department of

Transportation’s headquarters building

at 400 Seventh Street, SW, in

Washington, DC. This will be the

twenty-first meeting of the COMSTAC.

In addition to reports from the

respective COMSTAC Working Groups,

the meeting will provide a legislative

update on Congressional activities

involving commercial space

transportation; a briefing on the status of

the insurance industry; an activities

report from the Office of Commercial

Space Transportation; and other related

topics. This meeting is open to the

public; however, space may be limited.

Additional information may be obtained

by contacting Linda H. Strine at (202)

366–5770.