3692 Federal Register / Vol. 60, No. 11 / Wednesday, January 18, 1995 / Notices

providing institutional research and

advisory reports.

Any interested person may, on or

before January 31, 1995 submit by letter

to the Secretary of the Securities and

Exchange Commission, 450 Fifth Street,

NW., Washington, DC 20549, facts

bearing upon whether the application

has been made in accordance with the

rules of the Amex and what terms, if

any, should be imposed by the

Commission for the protection of

investors. The Commission, based on

the information submitted to it, will

issue an order granting the application

after the date mentioned above, unless

the Commission determines to order a

hearing on the matter.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–1108 Filed 1–17–95; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–20828; File No. 812–9250]

The Penn Insurance and Annuity

Company, et al.

January 10, 1995.

AGENCY: Securities and Exchange

Commission (the ‘‘SEC’’ or the

‘‘Commission’’).

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (the ‘‘1940 Act’’).

APPLICANTS: The Penn Insurance and

Annuity Company (‘‘Company’’), PIA

Variable Annuity Account I (‘‘Separate

Account’’), and Horner, Townsend &

Kent, Inc. (‘‘Horner’’).

RELEVANT 1940 ACT SECTIONS: Order

requested under Section 6(c) for

exemptions from Sections 22(d), 26(a)(2)

and 27(c)(2) of the 1940 Act.

SUMMARY OF THE APPLICATION:

Applicants seek an order to permit the

Company (i) to deduct a mortality and

expense risk charge under certain

variable annuity contracts from the

assets of the Separate Account, or any

other separate account established by

the company in the future to support

materially similar variable annuity

contracts (the ‘‘Contracts’’), and (ii) to

waive the contingent deferred sales

charge for defined ‘‘medically related

free withdrawals’’ and ‘‘disability

related free withdrawals’’ under the

Contracts.

FILING DATE: The application was filed

on September 27, 1994.

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 on this application by writing

to the Secretary of the SEC and serving

Applicants with a copy of the request,

personally or by mail. Hearing requests

must be received by the SEC by 5:30

p.m. on February 6, 1995 and

accompanied by proof of service on the

Applicants in the form of an affidavit or,

for lawyers, a certificate of service.

Hearing requests should state of the

nature of the interest, the reason for the

request and the issues contested.

Persons may request notification of a

hearing by writing to the Secretary of

the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth

Street NW., Washington, DC 20549.

Applicants: C. Ronald Rubley, Associate

General Counsel, The Penn Mutual Life

Insurance Company, Independence

Square, Philadelphia, Pennsylvania

19172.

FOR FURTHER INFORMATION CONTACT:

Mark C. Amorosi, Staff Attorney, or

Wendy Finck Friedlander, Deputy

Chief, at (202) 942–0670, Office of

Insurance Products (Division of

Investment Management.

SUPPLEMENTARY INFORMATION: Following

is a summary of the application. The

complete application is available for a

fee from the Public Reference Branch of

the SEC.

Applicants’ Representations

1. The Company is a Delaware stock

life insurance company. The Company

is a wholly owned subsidiary of The

Penn Mutual Life Insurance Company

(‘‘Penn Mutual’’).

2. The Separate Account is a

segregated investment account

established under Delaware law on July

13, 1994 by the executive committee of

the Company’s board of directors. The

Separate Account is registered under the

1940 Act as a unit investment trust.

3. Horner, a wholly owned subsidiary

of Penn Mutual, is registered as a

broker-dealer under the Securities

Exchange Act of 1934. Horner will serve

as the principal underwriter. The

Contracts will be sold by licensed

insurance agents who are registered

representatives of Horner or of a

registered broker-dealer who has

entered into a selling agreement with

Horner.

4. The Contracts are individual

combination variable and fixed annuity

contracts. The amounts and timing of

purchase payments under the Contracts

will be determined by Contract Owners,

except as follows. The minimum initial

purchase payment is $2,000 for

Contracts qualifying as individual

retirement annuities under Section 408

of the Internal Revenue Code of 1986, as

amended, and for Contracts qualifying

as tax deferred annuities under Section

403(b) of the Internal Revenue Code.

The minimum initial purchase payment

for non-qualifying Contracts is $5,000.

The minimum subsequent purchase

payment is $250 for all Contracts.

Payments under a Contract in excess of

$1 million require the Company’s prior

approval.

5. The Contracts provide for five

forms of annuity payment options: (1)

an annuity for a specified number of

years; (2) a life annuity; (3) a life

annuity with payments guaranteed for

10 or 20 years; (4) a joint and survivor

annuity; or (5) such other form of

annuity as the Company may agree

upon with the Contract Owner. Except

for an annuity for a specified number of

years, which is available only on a fixed

basis, all of the options may be elected

on a variable or fixed basis.

6. Two forms of administrative

charges are deducted from the

Contracts. First, the application states

that on every contract anniversary prior

to the Annuity Date and on every other

date when the Variable Account Value

is reduced to zero through a withdrawal

or transfer, the Company will deduct

from the Variable Account Value a

contract administration charge of $30 or,

if less, 2% of the Variable Account

Value. However, if the Variable Account

Value is greater than $50,000, there will

be no such deduction. The application

states that the charge is made by

cancelling accumulation units credited

to the Contract, with the charge

allocated pro rata among the

subaccounts comprising the Variable

Account Value. Second, the Company

will also deduct from the Separate

Account a daily administration charge

equal to an effective annual rate of

0.15% of the daily net assets of the

Separate Account. The application

states that these administration charges

are guaranteed not to increase. The

Company also states that the

administrative charges are intended not

to exceed the Company’s anticipated

administrative expenses over the

periods the Contracts are in force. The

Company represents that these charges

will be deducted in reliance on Rule

26a–1 under the 1940 Act.

7. A contingent deferred sales charge

(the ‘‘Sales Charge’’) of up to 6% may

be deducted in the event of full or

partial withdrawal from the contract

value prior to the Annuity Date. The

Sales Charge will be imposed only on

withdrawals of purchase payments in

cases where the purchase payment was

made within seven years of the date of
Federal Register / Vol. 60, No. 11 / Wednesday, January 18, 1995 / Notices 3693

1Applicants represent that, during the Notice

Period, the application will be amended to reflect

this representation.

the withdrawal. Purchase payments will

be treated as withdrawn on a first in,

first out basis. The following table

shows the schedule of the Sales Charge

that will be applied to withdrawal of a

purchase payment:

Number of full contract years

since purchase payment

Applicable

charge

(percent)

0 ................................................ 6

1 ................................................ 6

2 ................................................ 5

3 ................................................ 4

4 ................................................ 3

5 ................................................ 2

6 ................................................ 1

7 ................................................ 0

The Sales Charge may be reduced on

Contracts sold to a trustee, employer or

similar party pursuant to a retirement

plan or to a group of individuals, if such

sales are expected to involve reduced

sales expenses. The Applicant

represents that the reduction will not be

unfairly discriminatory to any Contract

Owner.

8. The Contracts provide that several

types of withdrawals may be made

without incurring a Sales Charge.

a. Seven-Year-Old Purchase

Payments. The Contract Owner may

withdraw any purchase payment which

was made more than seven years before

the withdrawal without incurring a

contingent deferred sales charge.

b. 15% Free Withdrawals. On the last

day of the first Contract Year and once

each Contract Year thereafter, the

Contract Owner may withdraw 15% of

the total purchase payments without

incurring the contingent deferred sales

charge.

c. Medically Related Free Withdrawal.

After the first Contract Year and before

the Annuity Date, the Contract Owner

may withdraw, without incurring a

contingent deferred sales charge, up to

the lesser of $500,000 or the Contract

Value if certain medically related

contingencies occur. This free

withdrawal is available if the Contract

Owner is (1) first confined in a nursing

home or hospital while the Contract is

in force and remains confined for at

least 90 days in a row or (2) first

diagnosed as having a fatal illness (an

illness expected to result in death

within two years for 80% of diagnosed

cases) while the Contract is in force.

This benefit is not available if the

Contract Owner’s age at time of issue is

greater than 75 or if the Contract Owner

has certain pre-existing conditions.

d. Disability Related Free Withdrawal.

After the first Contract Year, the

Contract Owner may withdraw, without

incurring a contingent deferred sales

charge, part or all of the Contract Value

if the Contract Owner becomes totally

disabled.

e. Other Free Withdrawals. There is

no contingent deferred sales charge

imposed upon minimum distributions

which are required by the Internal

Revenue Code qualified Contracts.

9. For all Contracts issued in

connection with the Separate Account,

the Company deducts a Mortality and

Expense Risk Charge that is equal, on an

annual basis, to 1.25% of the average

daily net assets of the Separate Account:

approximately 0.90% for mortality risks

and 0.35% for expense risks.

The mortality risks assumed by the

Company arise in part from the

Company’s guarantee that it is obligated

to make annuity payments at least equal

to payments calculated based on

annuity tables provided in the

Contracts, regardless of how long an

annuitant lives and regardless of any

general improvement in life expectancy.

The Company also assumes a

mortality risk in connection with the

provision of a death benefit. If the

Contract Owner dies prior to the

Annuity Date, the Company will pay the

beneficiary the greater of (1) the

Contract Value (i.e., the Variable

Account Value plus the Fixed Account

Value) for the valuation period in which

proof of death and any other required

information needed to make payment is

received at the Company’s office; or (2)

the sum of the Fixed Account Value on

the date the above information is

received at the Company’s office and the

net purchase payments allocated to the

Separate Account.

The application states that where the

Contract Owner dies before the age of 80

and where permitted by state law, an

‘‘enhanced death benefit’’ will be paid

to the beneficiary if it is greater than the

death benefit described previously. The

‘‘enhanced death benefit’’ is the sum of:

(1) The Fixed Account Value, and (2)

the net purchase payments allocated to

the Separate Account plus interest

accumulated at an annual interest rate

of 5% through the Contract Owner’s

attained age 69, and interest

accumulated at an annual interest rate

of 3% for years subsequent to attained

age 70.

The expense risk assumed by the

Company is the risk that the Company’s

administrative charges will be

insufficient to cover actual

administrative expenses over the life of

the contract.

Applicants’ Legal Analysis and

Conditions

1. Pursuant to Section 6(c) of the 1940

Act, the Commission may, by order

upon application, conditionally or

unconditionally exempt any person,

security, or transaction, or any class or

classes of persons, securities or

transactions, from any provision or

provisions of the 1940 Act or from any

rule or regulation 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 1940 Act.

2. Sections 26(a)(2)(C) and 27(c)(2) of

the 1940 Act prohibit a registered unit

investment trust and any depositor or

underwriter thereof from selling

periodic payment plan certificates

unless the proceeds of all payments are

deposited with a qualified trustee or

custodian and held under arrangements

which prohibit any payment to the

depositor or principal underwriter

except a fee, not exceeding such

reasonable amounts as the Commission

may prescribe, for performing

bookkeeping and other administrative

services.

3. Applicants request an order under

Section 6(c) exempting them from

Sections 26(a)(2)(C) and 27(c)(2) of the

1940 Act to the extent necessary to

permit the deduction of the mortality

and expense risk charge from the assets

of the Separate Account under the

Contracts. Applicants request that the

order also permit the deduction of the

Mortality and Expense Risk Charge from

the assets of any other separate account

established by the Company in the

future to support variable annuity

contracts offered on a basis similar in all

material respects to the basis on which

the Contracts are offered.

4. Applicants submit that their

request for an order that applies to the

Separate Account and to future separate

accounts issuing contracts that are

similar in all material respects to the

Contracts is appropriate in the public

interest. Such an order would promote

competitiveness in the variable annuity

contract market by eliminating the need

for the Company to file redundant

exemptive applications, thereby

reducing its administrative expenses

and maximizing the efficient use of its

resources.1 Applicants further represent

that the requested relief is consistent

with the purposes of the 1940 Act and

the protection of investors for the same

reasons. Investors would not receive any

additional benefit or additional

protection by the Company being

required to repeatedly seek exemptive
3694 Federal Register / Vol. 60, No. 11 / Wednesday, January 18, 1995 / Notices

relief with respect to the same issues

addressed in this application.

5. Applicants represent that the

mortality and expense risk charge is

reasonable in relation to the risks

undertaken by the company and within

the range of industry practice with

respect to comparable annuity products.

Applicants base this representation on

an analysis of the mortality risks, taking

into consideration such factors as any

contractual right to increase charges

above current levels, the guaranteed

annuity purchase rates, the nature of the

death benefit provided, the number of

transfers permitted without charge and

the ability to make free withdrawals.

The Company represents that it will

maintain at its principal office a

memorandum, available to the

Commission upon request, setting forth

in detail this analysis.

6. Applicants acknowledge that it is

possible that the Company’s revenues

from the contingent deferred sales

charge could be less than its costs of

distributing the Contracts. In that case,

the excess distribution costs would have

to be paid out of the Company’s general

assets, including the profits, if any, from

the mortality and expense risk charge.

In those circumstances, a portion of the

mortality and expense risk charge might

be viewed as offsetting a portion of the

costs relating to the distribution of the

Contracts. The Company represents that

there is a reasonable likelihood that the

proposed distribution financing

arrangements will benefit the Separate

Account and Contract Owners. The

basis for such a conclusion will be set

forth in a memorandum maintained by

the Company at its principal office and

available to the Commission upon

request.

7. The Company represents that the

Separate Account will invest only in

management investment companies that

undertake, in the event the company

adopts a plan to finance distribution

expenses under Rule 12b–1 under the

1940 Act, to have a board of directors,

a majority of whom are not interested

persons of the company within the

meaning of Section 2(a)(19) of the 1940

Act, formulate and approve any such

plan.

8. Pursuant to Section 6(c) of the 1940

Act, the Applicants also request that the

Commission issue an order to provide

exemptive relief from Section 22(d) to

the extent necessary to permit the

Applicants to waive the contingent

deferred sales charge under the

Contracts and Future Contracts in the

event of the contingencies triggering the

right to make the medically related or a

disability related free withdrawal as

defined above.

9. Section 22(d) of the 1940 Act

prohibits a registered investment

company, its principal underwriter or a

dealer in its securities from selling any

redeemable security issued by such

registered investment company to any

person except at a public offering price

described in the prospectus. Rule 6c–8

adopted under the 1940 Act permits

variable annuity separate accounts to

impose a deferred sales charge.

Although Rule 6c–8, unlike proposed

Rule 6c–10, does not impose any

conditions on the ability of the

investment company involved to

provide for variations in the deferred

sales charges, Rule 6c–8 (again unlike

proposed Rule 6c–10) does not provide

an exemption from Section 22(d).

Applicants recognize that the proposed

waiver of the contingent deferred sales

charge in connection with ‘‘medically

related free withdrawals’’ or ‘‘disability

related free withdrawals’’ described

above could be viewed as causing the

Contracts to be sold at other than a

uniform offering price. Rule 22d–1 is

not directly applicable to Applicants’

proposed waiver of the contingent

deferred sales charge because that rule

has been interpreted as granting relief

only for scheduled variations in frontend sales loads, not deferred sales loads.

10. Rule 22d–2 under the 1940 Act

exempts registered variable annuity

accounts, their principal underwriters,

dealers and their sponsoring insurance

companies from Section 22(d) to the

extent necessary to permit variations in

the sales load or in any administrative

charge or other deductions from the

purchase payments, provided that such

variations reflect differences in costs or

services, are not unfairly discriminatory

and are adequately described in the

prospectus. Applicants, however, do not

represent that the waiver of the

withdrawal charge under the defined

circumstances reflects differences in

sales costs or services, and, for that

reason, Applicants do not rely on Rule

22d–2 for the requested relief, even

assuming that Rule 22d–2 does apply to

deferred sales loads.

11. Applicants submit that the

proposed waiver is consistent with the

policies of Section 22(d) and the rules

promulgated thereunder. One of the

purposes of Section 22(d) is to prevent

an investment company from

discriminating among investors by

charging different prices to different

investors. Applicants represent that, to

the extent permitted by state law, the

provisions relating to ‘‘medically related

free withdrawals’’ or ‘‘disability related

free withdrawals’’ will be included in

all Contracts. Eligibility will be based on

the Contract Owner experiencing the

defined medically related contingencies.

Therefore, the benefit will not unfairly

discriminate among Contract Owners.

Applicants submit that the waiver is

advantageous to Contract Owners by

permitting them, upon experiencing a

defined contingency, to make

withdrawals from the Contract without

imposition of the contingent deferred

sales charge. Applicants represent that

the waiver will not result in dilution of

the interests of any other Contract

Owners. Applicants also submit that

waiving the contingent deferred sales

charge under such circumstances will

not result in the occurrence of any of the

abuses that Section 22(d) is designed to

prevent.

12. Applicants represent that the

waiver of the contingent deferred sales

charge in connection with ‘‘medically

related free withdrawals’’ and

‘‘disability related free withdrawals’’

meets the substantive requirements of

Rule 22d–1 in that the waiver will be

uniformly available to all eligible

Contract Owners, except where

prohibited by state law, and that this

provision will be adequately described

in the prospectus of the Contracts.

Conclusion

Applicants assert that, for the reasons

and upon the facts set forth above, the

requested exemptions from Sections

22(d), 26(a)(2) and 27(c)(2) of the 1940

Act to permit the Company (i) to deduct

the mortality and expense risk charge

from the assets of the Separate Account

under the Contracts and (ii) to waive the

contingent deferred sales charge for

defined ‘‘medically related free

withdrawals’’ and ‘‘disability related

free withdrawals’’ under the Contracts

meet the standards in Section 6(c) of the

1940 Act. Applicants assert that the

exemptions requested are necessary and

appropriate in the public interest and

consistent with the protection of

investors and the policies 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. 95–1107 Filed 1–17–95; 8:45 am]

BILLING CODE 8010–01–M

THRIFT DEPOSITOR PROTECTION

OVERSIGHT BOARD

Affordable Housing Advisory Board

Meeting

AGENCY: Thrift Depositor Protection

Oversight Board.