[Federal Register Volume 66, Number 119 (Wednesday, June 20, 2001)]
[Notices]
[Pages 33114-33117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15529]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25004; File No. 812-12418]


First Allmerica Financial Life Insurance Company, et al.

June 14, 2001.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order under section 6(c) of the 
Investment Company Act of 1940 (the ``1940 Act'') granting exemptions 
from the provisions of sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 
1940 Act and Rule 22c-1 thereunder to permit the recapture of credits 
applied to contributions made under certain deferred variable annuity 
contracts.

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SUMMARY OF APPLICATION: Applicants seek an order under section 6(c) of 
the 1940 Act to the extent necessary to permit, under specified 
circumstances, the recapture of certain credits applied to 
contributions made under deferred variable annuity contracts and 
certificates (the ``Contracts'') that First Allmerica will issue 
through the Separate Accounts (defined below), as well as other 
contracts that First Allmerica may issue in the future through the 
Separate Accounts or any other future separate account of First 
Allmerica (``Other Separate Account''), which contracts are 
substantially similar in all material respects to the Contracts (the 
``Future Contracts''). Applicants also request that the order being 
sought extend to any other National Association of Securities Dealers, 
Inc., (``NASD'') member broker-dealer controlling or controlled by, or 
under common control with, First Allmerica,

[[Page 33115]]

whether existing or created in the future, that serves as a distributor 
or principal underwriter for the Contracts or Future Contracts offered 
through the Separate Accounts or any Other Separate Account (``First 
Allmerica Broker-Dealer(s)'').

APPLICANTS: First Allmerica Financial Life Insurance Company (``First 
Allmerica'') Separate Account VA-K of First Allmerica, Separate Account 
VA-P of First Allmerica, Separate Account KG of First Allmerica, and 
Allmerica Select Separate Account of First Allmerica (together with the 
other Applicant separate accounts, the ``Separate Accounts''), and 
Allmerica Investment, Inc., (Collectively ``Applicants'').

FILING DATE: The application was filed on January 24, 2001 and an 
amended and stated application was filed on June 14, 2001.

HEARING OR NOTIFICATION OF HEARING: An order granting the applicants 
will be issued unless the SEC orders a hearing. Intersted persons may 
request a hearing by writing to the SEC's Secretary and serving 
Applicants with a copy of the request, in person or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on July 6, 2001, 
and should be 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 the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the 
Secretary of the Commission.

FOR FURTHER INFORMATION CONTACT: Mark Cowan, Senior Counsel, at (202) 
942-0675, or Keith Carpenter, Branch Chief, and (202) 942-0679, Office 
of Insurance Products, Division of Investment Management.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o First Allmerica 
Financial Life Insurance Company, 440 Lincoln Street, Worcester, 
Massachusetts, 01653, Attn: Sheila B. St. Hilaire, Esq.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 
20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. First Allmerica is a stock life insurance company organized 
under the laws of Massachusetts in 1844. Effective October 16, 1995, 
First Allmerica converted from a mutual life insurance company known as 
State Mutual Life Assurance Company Of America to a stock life 
insurance company and adopted in present name. First Allmerica is a 
wholly owned subsidiary of Allamerica Financial Corporation (``AFC''). 
First Allmerica is licensed to do business in all states, but currently 
sells variable annuity contracts only in New York and Hawaii.
    2. Each of the Separate Accounts is a segregated asset account of 
First Allmerica. Each of the Separate Accounts is registerd with the 
Commission as a unit investment trust under the 1940 Act (Separate 
Account VA-K, see File No. 811-8114; Allmerica Select Separate Account, 
see File No. 811-8116; Separate Account VA-P, see File No. 811-8872; 
and Separate Account KG, see File No. 811-7769). First Allmerica serves 
as depositor of each of the Separate Accounts. First Allmerica may in 
the future establish one or more Other Separate Accounts for which it 
will serve as depositor.
    3. Units of interest in the Separate Accounts under the Contracts 
will be registered under the Securities Act of 1933 (the ``1933 Act''). 
In that regard, the Separate Accounts have filed Form N-4 Registration 
Statements under the 1933 Act relating to the Contracts. Allmerica 
Select Separate Account filed a Form N-4 Registration Statement on 
January 19, 2001 under the 1933 Act relating to the Contracts, Separate 
Account VA-K filed a Form N-4 Registration Statement on January 24, 
2001, Separate Account VA-P Filed a Form N-4 Registration Statement on 
January 19, 2001, and Separate Account KG filed a Form N-4 Registration 
Statement on January 24, 2001. Registrants filed Pre-Effective 
Amendments to their registration statements on May 18, 2001. First 
Allmerica may in the future issue Future Contracts through the Separate 
Accounts and through Other Separate Accounts. The assets of the 
Separate Accounts are not chargeable with liabilities arising out of 
any other business of First Allmerica. Any income, gains or losses, 
realized or unrealized, from assets allocated to the Separate Accounts 
are, in accordance with the respective Contracts, credited to or 
charged against the Separate Accounts, without regard to other income, 
gains or losses of First Allmerica.
    4. Allmerica Investments, Inc., (``Allmerica Investments'') is an 
indirect wholly-owned subsidiary of First Allmerica and will be the 
principal underwriter of the Separate Accounts and distributor of the 
Contracts funded through Allmerica Select Separate Account (``Select 
Contracts''), Separate Account, VA-K (``VA-K Contracts''), Separate 
Account VA-P (``VA-P Contracts'') and Separate Account KG (``KG 
Contracts'') (collectively, the ``Contracts''), Allmerica Investments 
is registered with the Commission as a broker-dealer under the 
Securities Exchange Act of 1934 (the ``1934 Act'') and is a member of 
the NASD. The Contracts will be offered through registered 
representatives of Allmerica Investments, or through unaffiliated 
broker-dealers, which are registered under the 1934 Act and members of 
the NASD, that have selling agreements with Allmerica Investments. 
Allmerica Investments, or any successor entity, may act as principal 
underwriter for any Other Separate Account and distributor for any 
Future Contracts issued by First America. A successor entity also may 
act as principal underwriter for the Separate Accounts.
    5. The Select Contracts, VA-K Contracts, VA-P Contracts, and KG 
Contracts are substantially similar in all material respects. They 
differ principally in the mix of mutual funds underlying each of the 
Separate Accounts, in the distribution channels used in the offering of 
the Contracts, and in the amount of the Credit (5% for the Select 
Contracts and 4% for the VA-K Contracts, KG Contracts and VA-P 
Contracts). There are minor differences in some contract features. 
Contracts may be issued as individual retirement annuities (``IRAs,'' 
either ``Traditional IRAs'' or ``Roth IRAs''), in connection with 
certain types of qualified or non-qualified plans, or as non-qualified 
annuities for after-tax contributions only. In some situations, the 
Contracts may be issued on a group basis, rather than as an individual 
contract. Each of the group contracts consists of (i) a basic form of 
group annuity contract (the ``Group Contract'') issued to an employer 
or to a bank, trust company or other institution whose sole 
responsibility will be to serve as party to the Group Contract, (ii) a 
basic form of certificate issued under and reflecting the terms of the 
Group Contract, and (iii) forms of certificate endorsements to be used 
for specific forms of benefits under the certificates.
    6. Payments may be made to the Contract at any time prior to the 
Annuity Date, subject to certain minimums. Currently, the initial 
payment must be at least $5,000 ($2,000 for IRAs), with lower minimum 
payments under salary deduction or monthly automatic payment plans, and 
for certain employer sponsored retirement plans. The minimum

[[Page 33116]]

subsequent payment is $50 ($100 for KG Contracts). The Contracts permit 
the owner to allocate contributions to a fixed interest account 
(``Fixed Account'') of First Allmerica's general account, to accumulate 
interest at a fixed, guaranteed rate. First Allmerica's general account 
assets support the guarantee of principal and interest.
    7. Separate Account VA-K of First Allmerica will offer thirty-six 
Sub-accounts under the separate Account VA-K Contracts. These Sub-
Accounts will invest in a corresponding investment portfolio of the 
Delaware Group Premium Fund, of the Pioneer Variable Contracts Trust, 
of the AIM Variable Insurance funds, of The Alger American Fund, of the 
Alliance Variable Products Series Fund, Inc., and of the Franklin 
Templeton Insurance Products Trust. Allmerica Select Separate Account 
is currently comprised of forty Sub-Accounts, which will invest in a 
corresponding investment portfolio of the Allmerica Investment Trust, 
of the AIM Variable Insurance Funds, of the Alliance Variable Products 
Series Fund, Inc., of the Deutsche Asset Management VIT Funds, of the 
Eaton Vance Variable Trust, of the Fidelity Variable Insurance Products 
Fund, of the Fidelity Variable Insurance Products Fund II, of the 
Fidelity Variable Insurance Products Fund III, of the Franklin 
Templeton Variable Insurance Products Trust, of the INVESCO Variable 
Investment Funds, Inc., of the Janus Aspen Series, of the Pioneer 
Variable Contracts Trust, of the Scudder Variable Series II, and of the 
T. Rowe Price International Series, Inc. Separate Account KG is 
currently comprised of forty Sub-Accounts, which will invest in a 
corresponding investment series of the Kemper Variable Series, of the 
Scudder Variable Series I and Scudder Variable Series II, of The Alger 
American Fund, of the Dreyfus Investment Portfolios, of The Dreyfus 
Socially Responsible Growth Fund, Inc., and of the Credit Suisse 
Warburg Pincus Trust. Separate Account VA-P currently consists of 
thirty investment portfolios, which will invest in a corresponding 
investment portfolio of the Pioneer Variable Contracts Trust, of the 
AIM Variable Insurance Funds, of the Alliance Variable Products Series 
Fund, Inc., of the Delaware Group Premium Fund, of the Franklin 
Templeton Variable Insurance Products Trust, and of the Van Kampen Life 
Investment Trust. These Sub-Accounts are also made available to 
investors under other variable annuity contracts offered by First 
Allmerica.
    8. The Separate Accounts and Fixed Account of First Allmerica will 
comprise the initial investment options under the Contracts. First 
Allmerica in the future may determine to create additional Sub-Accounts 
of the Separate Accounts to invest in additional portfolios, other 
underlying portfolios or other investments in the future. Sub-Accounts 
may be combined or eliminated from time to time.
    9. The Contracts provide for various withdrawal options, annuity 
benefits and payout annuity options, as well as transfer privileges 
among Sub-Accounts, dollar cost averaging, death benefits, optional 
annuitization riders, and other features. The Contracts have charges 
consisting of: (i) A withdrawal charge as a percentage of contributions 
declining from 8.5% in years one through four to 0% after year nine, 
with a 15% ``free withdrawal'' amount in certain situations; (ii) 
asset-based charges at the annual rates of 1.40% for mortality and 
expense risks and 0.15% for administration expenses assessed against 
the net assets of each Sub-Account; and (iii) an annual contract fee of 
$30 for Contracts with an Accumulated Value of less than $75,000. The 
underlying Funds each impose investment management fees and charges for 
other expenses.
    10. Each time First Allmerica receives a contribution from an 
owner, it will allocate to the owner's contract value a credit 
(``Credit'') of a percentage of the amount of the contribution (5% for 
the Select Contracts and 4% for the VA-K Contracts, VA-P Contracts, and 
KG Contracts). First Allmerica will allocate Credits among the 
investment options in the same proportion as the corresponding 
contributions are allocated by the owner. First Allmerica will fund the 
Credits from its general assets. First Allmerica will recapture Credits 
from an owner only if the owner returns the Contract to First Allmerica 
for a refund during the ``free look'' period, which varies by state.
    11. Applicants seek an exemption pursuant to section 6(c) of the 
1940 Act from sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 1940 Act 
and Rule 22c-1 thereunder to the extent deemed necessary to permit 
First Allmerica to recapture Credits when an owner returns a Contract 
for a refund during the ``free look'' period, in which case first 
Allmerica will recover the amount of any Credit applicable to such 
contribution.

Applicants' Legal Analysis

    1. section 6(c) of the 1940 Act authorizes the commission to exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions from the provisions of the 1940 Act 
and the rules promulgated thereunder if and to the extent that such 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act. Applicants 
request that the commission, pursuant to section 6(c) of the 1940 Act, 
grant the exemptions summarized above with respect to the Contracts and 
any Future Contracts funded by the Separate Accounts or Other Separate 
Accounts, that are issued by First Allmerica and underwritten or 
distributed by Allmerica Investments or Allmerica Broker-Dealers. 
Applicants undertake that Future Contracts funded by the Separate 
Accounts or any Other Separate Account will be substantially similar in 
all material respects to the Contracts. Applicants believe that the 
requested exemptions are appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    2. Applicants represent that it is not administratively feasible to 
track the Credit amount in any of the Separate Accounts after the 
Credit is applied. Accordingly, the asset-based charges applicable to 
the Separate Accounts will be assessed against the entire amounts held 
in the respective Separate Accounts, including the Credit amount, 
during the ``free look'' period. As a result, during each period, the 
aggregate asset based charges against an owner's annuity account value 
will be higher than those that would be charged if the owner's annuity 
account value did not include the Credit.
    3. Subsection (i) of section 27 provides that section 27 does not 
apply to any registered separate account funding variable insurance 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of the 
subsection. Paragraph (2) provides that it shall be unlawful for any 
registered separate account funding variable insurance contracts or a 
sponsoring insurance company of such account to sell a contract funded 
by the registered separate account unless, among other things, such 
contract is a redeemable security. Section 2(a)(32) defines 
``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.
    4. Applicants submit that the recapture of the Credit if an owner

[[Page 33117]]

returns the Contract during the free look period would not deprive an 
owner of his or her proportionate share of the issuer's current net 
assets. Applicants state that an owner's interest in the amount of the 
Credit allocated to his or her annuity account value upon receipt of an 
initial contribution is not vested until the applicable free-look 
period has expired without return of the Contract. Until or unless the 
amount of any Credit is vested, Applicants submit that First Allmerica 
retains the right and interest in the Credit amount, although not in 
the earnings attributable to that amount. Applicants argue that when 
First Allmerica recaptures any Credit it is simply retrieving its own 
assets, and because an owner's interest in the Credit is not vested, 
the owner has not been deprived of a proportionate share of the 
applicable Separate Account's assets, i.e., a share of the applicable 
Separate Account's assets proportionate to the owner's annuity account 
value (including the Credit).
    5. In addition, Applicants state that it would be patently unfair 
to allow an owner exercising the free-look privilege to retain a Credit 
amount under a Contract that has been returned for a refund after a 
period of only a few days. Applicants state that if First Allmerica 
could not recapture the Credit, individuals could purchase a Contract 
with no intention of retaining it, and simply return the Contract for a 
quick profit.
    6. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put their 
contributions and the amount of the credit to work for them in the 
selected Sub-Accounts. In addition, the owner will retain any earnings 
attributable to the Credit, and the principal amount of the Credit will 
be retained under the conditions set forth in the application.
    7. Applicants submit that the provisions for recapture of any 
Credit if an owner returns a Contract or any Future Contract during the 
free look period under the Contracts will not violate sections 2(a)(32) 
and 27(i)(2)(A) of the 1940 Act. Nevertheless, to avoid any 
uncertainties, Applicants request an exemption from those Sections, to 
the extent deemed necessary, to permit the recapture of any Credit if 
an owner returns a Contract or any Future Contract during the free look 
period without the loss of the relief from section 27 provided by 
section 27(i).
    8. Section 22(c) of the 1940 Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company, whether or not members of any 
securities association, to the same extent, covering the same subject 
matter, and for the accomplishment of the same ends as are prescribed 
in section 22(a) in respect of the rules which may be made by a 
registered securities association governing its members. Rule 22c-1 
thereunder prohibits a registered investment company issuing 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.
    9. Arguably, First Allmerica's recapture of the Credit may be 
viewed as resulting in the redemption of redeemable securities for a 
price other than one based on the current net asset value of the 
Separate Accounts. Applicants contend, however, that recapture of the 
Credit does not violate section 22(c) and Rule 22c-1. Applicants argue 
that the recapture does not involve either of the evils that Rule 22c-1 
was intended to eliminate or reduce, namely: (i) The dilution of the 
value of outstanding redeemable securities of registered investment 
companies through their sale at a price below net asset value or their 
redemption or repurchase at a price above it, and (ii) other unfair 
results including speculative trading practices. See Adoption of Rule 
22c-1 under the 1940 Act, Investment Company Release No. 5519 (Oct. 16, 
1968). To effect a recapture of a Credit, First Allmerica will redeem 
interests in an owner's Contract at a price determined on the basis of 
current net asset value of the respective Sub-Accounts. The amount 
recaptured will equal the amount of the Credit that First Allmerica 
paid out of its general account assets. Although owners will be 
entitled to retain any investment gain attributable to the Credit, the 
amount of such gain will be determined on the basis of the current net 
asset value of the respective Sub-Accounts. Thus, no dilution will 
occur upon the recapture of the Credit. Applicants also submit that the 
second harm that Rule 22c-1 was designed to address, namely, 
speculative trading practices calculated to take advantage of backward 
pricing, will not occur as a result of the recapture of the Credit. 
However, to avoid any uncertainty as to full compliance with the 1940 
Act, Applicants request an exemption from the provisions of section 
22(c) and Rule 22c-1 to the extent deemed necessary to permit them to 
recapture the Credit, as described herein, under the Contracts and 
Future Contracts.

Conclusion

    Applicants submit that their request for an order is appropriate in 
the public interest. Applicants state that such an order would promote 
competitiveness in the variable annuity market by eliminating the need 
to file redundant exemptive applications, thereby reducing 
administrative expenses and maximizing the efficient use of Applicants' 
resources. Applicants argue that investors would not receive any 
benefit or additional protection by requiring Applicants to repeatedly 
seek exemptive relief that would present no issue under the 1940 Act 
that has not already been addressed in their application described 
herein. Applicants submit that having them file additional applications 
would impair their ability effectively to take advantage of business 
opportunities as they arise. Further, Applicants state that if they 
were required repeatedly to seek exemptive relief with respect to the 
same issues addressed in the application described herein, investors 
would not receive any benefit or additional protection thereby.
    Applicants submit, based on the grounds summarized above, that 
their exemptive request meets the standards set out in section 6(c) of 
the 1940 Act, namely, that the exemptions requested are necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the 1940 Act, and that, therefore, the Commission should 
grant the requested order.

For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15529 Filed 6-19-01; 8:45 am]
BILLING CODE 8010-01-M