[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7256-7259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2975]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20875; File No. 812-9142]


First SunAmerica Life Insurance Company, et al.

February 1, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (``1940 Act'').

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APPLICANTS: First SunAmerica Life Insurance Company (``First 
SunAmerica''), FS Variable Annuity Account Two (``Separate Account''), 
and Vista Broker-Dealer Services, Inc. (``Vista'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from Sections 26(a) and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants seek an order to permit the 
deduction of mortality, expense risk, and distribution expense charges 
from the assets of the Separate Account under certain variable annuity 
contracts (``Contracts'') funded through the Separate Account and under 
materially similar contracts (``future contracts'') funded in the 
future through the Separate Account, and from the assets of any other 
separate account (``future separate accounts'') established in the 
future by First SunAmerica in connection with the issuance of contracts 
that are materially similar to the Contracts.\1\

    \1\Applicants have agreed to amend this application during the 
notice period to reflect that the future contracts and contracts 
issued by future separate accounts relying on the exemptive relief 
requested here shall be materially similar to the Contracts.

FILING DATE: The Application was filed on August 3, 1994, and amended 
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on November 22, 1994, and December 20, 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 the application 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 SEC by 5:30 p.m. on February 27, 1995, 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 may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants c/o Mark J. Mackey, Esq., Routier, Mackey and Johnson, P.C., 
1700 K Street, NW., Suite 1003, Washington, DC 20006.

FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, or Wendy Finck Friedlander, Deputy Chief, 
Office of Insurance Products, Division of Investment Management, at 
(202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the application. 
The complete application is available for a fee from the Public 
Reference Branch of the Commission.

Applicants' Representations

    1. First SunAmerica is a stock life insurance company organized 
under the laws of the State of New York. On May 24, 1994, First 
SunAmerica established the Separate Account to fund variable annuity 
contracts. The Separate Account is registered under the 1940 Act as a 
unit investment trust. The Separate Account and each of its portfolios 
are administered and accounted for as part of the general business for 
First SunAmerica, but the income, gains and losses of each portfolio 
are credited to or charged against the assets held in that portfolio in 
accordance with the terms of the Contracts, without regard to other 
income, gains and losses of any other portfolio or arising out of any 
other business First SunAmerica may conduct.
    2. Vista is a broker-dealer registered under the Securities 
Exchange Act of 1934, and is the distributor for the Contracts.
    3. The Contracts provide for accumulation of contract values and 
payments of annuity benefits on a fixed and variable basis. The 
Contracts are [[Page 7257]] available for retirement plans that do not 
qualify for the special federal tax advantages available under the 
Internal Revenue Code (``non-qualified plans'') and for retirement 
plans that do qualify for the federal tax advantages available under 
the Internal Revenue Code (``qualified plans''). Purchase payments 
under the Contracts may be made to the general account of First 
SunAmerica under the Contract's fixed account option (``Fixed 
Account''), to the Separate Account, or allocated among them. The 
minimum initial purchase payment for a Contract is $5,000 for non-
qualified plans ($2,000 for qualified plans). Additional purchase 
payments may be made in amounts of at least $250 ($100 in the case of 
an automatic payment plan).
    4. Initially, the Contracts will be funded through six portfolios 
of the Separate Account. Each portfolio invests in assets in the shares 
of one of six available series of Mutual Fund Variable Annuity Trust 
(``Trust''): the Growth and Income Portfolio; the Capital Growth 
Portfolio; the International Equity Portfolio; the Assist Allocation 
Portfolio; the U.S. Treasury Income Portfolio; and the Money Market 
Portfolio. The Trust is register under the 1940 Act as a diversified, 
open-end, management investment company. Additional underlying funds 
may become available in the future.
    5. If the Contract owner dies during the accumulation period, a 
death benefit will be payable to the beneficiary upon receipt by First 
SunAmercia of due proof of death. The death benefit is reduced by the 
premium tax incurred by First SunAmerica, if any. If the Contract owner 
is younger than age 70 at the date of Contract issue, the death benefit 
is equal to the greatest of: (i) The total dollar amount of purchase 
payments made prior to the death of the Contract owner, reduced by any 
partial withdrawals and partial annuitizations; (ii) the Contract value 
at the end of the valuation period during which due proof of death (and 
an election of the type of payment to the beneficiary) is received by 
First SunAmerica; or (iii) the Contract value at that anniversary of 
the Contract issue date preceding the date of death--increased by any 
purchase payments made and reduced by any partial withdrawals and 
partial annuitizations since that anniversary--which yields the 
greatest result. If the Contract owner was at least age 70 on the 
Contract issue date, the death benefit will equal (ii) above.
    6. An annual contract administration charge of $30 is charged 
against each Contract. The amount of this charge is guaranteed and 
cannot be increased. This charge reimburses First SunAmerica for 
expenses incurred in establishing and maintaining records relating to a 
Contract. The contract administration charge will be assessed on each 
anniversary of the Contract date that occurs on or prior to the annuity 
date. In the event that a total surrender of Contract value is made, 
the charge will be assessed as of the date of surrender without 
proration. This charge is not assessed during the annuity period. The 
contract administration charge is at cost with no margin included for 
profit.
    7. During the accumulation period, amounts allocated to the 
Separate Account may be transferred among the portfolios and/or the 
Fixed Account. Both before and after the annuity date, Contract values 
may be transferred from the Separate Account to the Fixed Account. The 
first fifteen transactions effecting such transfers in any Contract 
year are permitted without the imposition of a transfer fee. A transfer 
fee of $25 is assessed on the sixteenth and each subsequent transaction 
within the Contract year. This fee will be deducted from Contract 
values that remain in the portfolio (or, where applicable, the Fixed 
Account) from which the transfer was made. If such remaining Contract 
value is insufficient to pay the transfer fee, then the fee will be 
deducted from transferred Contract values. The transfer is at cost with 
no anticipation of profit.
    8. Although there is a free withdrawal amount that applies to the 
first withdrawal during a contract year after the first, a contingent 
deferred sales charge (the ``Withdrawal Charge'') may be imposed upon 
certain withdrawals. Withdrawal Charges will vary in amount depending 
upon the contribution year of the purchase payment at the time of 
withdrawal. The Withdrawal Charge is deducted from remaining Contract 
value so that the actual reduction in Contract value as a result of the 
withdrawal will be greater than the withdrawal amount requested and 
paid. So that all withdrawals are allocated to purchase payments to 
which the lowest Withdrawal Charge (if any) applies, withdrawals will 
be allocated first to investment income, if any, which generally may be 
withdrawn free of Withdrawal Charge, and then to purchase payments on a 
first-in, first-out basis.
    9. Earnings in a Contract owner's account, and purchase payments no 
longer subject to the Withdrawal Charge, may be withdrawn at any time 
free of the Withdrawal Charge. There also may be a free withdrawal 
amount for the first withdrawal during a Contract year after the first 
Contract year. The additional free withdrawal amount is equal to 10% of 
purchase payments made more than one year before the date of withdrawal 
that remain subject to the Withdrawal Charge and that have not 
previously been withdrawn, less earnings in the Contract owner's 
account.
    10. Any amounts withdrawn that exceed the limits described about 
may be subject to a Withdrawal Charge in accordance with the table 
shown below.

                         Withdrawal Charge Table                        
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                                                              Applicable
                                                              withdrawal
                    Contribution year\2\                        charge  
                                                              percentage
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Zero.......................................................            6
First......................................................            6
Second.....................................................            5
Third......................................................            4
Fourth.....................................................            3
Fifth......................................................            2
Sixth......................................................            1
Seventh and later..........................................            0
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\2\Applicants represent that, with respect to a given purchase payment, 
  a contribution year is a year starting from the date of the purchase  
  payment in one calender year and ending on the anniversary of such    
  date in the succeeding calendar years. The contribution year in which 
  a purchase payment is made is ``contribution year zero,'' and         
  subsequent contribution years are successively numbered.              

    The Withdrawal Charge may be reduced or waived in certain 
circumstances, as described in the prospectus for the Contracts.
    11. First SunAmerica deducts a distribution expense charge from 
each portfolio of the Separate Account during each valuation period 
that is equal, on an annual basis, to 0.15% of the net asset value of 
each portfolio. This charge is designed to compensate First SunAmerica 
for assuming the risk that the cost of distributing the Contracts will 
exceed the revenues from the Withdrawal Charge. In no event will this 
charge be increased. The distribution expense charge is assessed during 
both the accumulation period and the annuity period; it is not applied 
to Contract values allocated to the Fixed Account.
    12. Annuity payments will not be affected by the mortality 
experience (death rate) of (i) persons receiving such payments or (ii) 
the general population. The annuity rates may not be changed under the 
Contract. First SunAmerica deducts a mortality risk charge from the 
Separate Account for assuming the risks that: (i) The life expectancy 
of an annuitant will be greater than that assumed in the guaranteed 
annuity purchase rates; (ii) the Withdrawal [[Page 7258]] Charge may be 
waived in the event of the death of the owner; and (iii) the death 
benefit must be provided before the annuity date. The charge is 
deducted from each portfolio of the Separate Account during each 
valuation period at an annual rate of 0.90% of the net asset value of 
each portfolio. If the mortality risk charge is insufficient to cover 
the actual costs of assuming the mortality risks, First SunAmerica will 
bear the loss; if the charge proves more than sufficient, the excess 
will be a gain to First SunAmerica. To the extent First SunAmerica 
realizes any gain, those amounts may be used at its discretion--
including to offset losses experienced when the mortality risk charge 
is insufficient. The mortality risk charge may not be increased under 
the Contract.
    13. First SunAmerica bears the risk that the contract 
administration charge will be insufficient to cover the cost of 
administering the Contracts. For assuming this expense risk, First 
SunAmerica deducts an expense risk charge form the Separate Account 
during each valuation period at an annual rate of 0.35% of the net 
asset value of each portfolio. If the expense risk charge is 
insufficient to cover the actual cost of administering the Contracts, 
First SunAmerica will bear the loss; if the charge is more than 
sufficient, the excess will be a gain to First SunAmerica. To the 
extent First SunAmerica realizes any gain, those amounts may be used at 
its discretion--including to offset losses when the expense risk charge 
is insufficient. The expense risk charge may not be increased under the 
Contract.
    14. Applicants represent that the aggregate amount of any 
Withdrawal Charges imposed and distribution expense charges paid will 
never exceed 9% of purchase payments previously made, and that First 
SunAmerica will monitor each owner's account for the purpose of 
ensuring that this limitation is not exceeded. Applicants undertake to 
include in the prospectus forming part of the registration statement 
for the Contracts statements describing the purpose of the distribution 
expense charge, and statements that the staff of the Commission deems 
such charge to constitute a deferred sales charge. Applicants undertake 
to abide by the representations and undertaking set forth in this 
paragraph relating to the distribution expense charge in connection 
with any future contracts, as well as materially similar contracts 
funded through future separate accounts, relying on the requested 
order.

Applicants' Legal Analysis

    1. Applicants hereby request that the Commission, under Section 
6(c) of the 1940 Act, grant exemptions from Section 26(a)(2) and 
27(a)(2) thereof to the extent necessary to permit the deduction of 
mortality and expense risk charges and a distribution expense charge: 
(i) From the Separate Account under the Contracts and under any future 
contracts; and (ii) from the assets of any future separate accounts 
which offer contracts materially similar to the Contracts.
    2. Pursuant to Section 6(c) of the 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.
    3. Sections 26(a)(2) and 27(c)(2) of the 1940 Act require, among 
other things, that all payments received under a periodic payment plan 
certificate sold by a registered unit investment trust, any depositor 
thereof or underwriter therefor, be held by a qualified bank as trustee 
or custodian, under arrangements which prohibit any payment to the 
depositor or principal underwriter except for the payment of a fee, not 
exceeding such reasonable amount as the Commission may prescribe, for 
bookkeeping and other administrative services.
    4. Applicants believe that extending the requested relief to the 
future contracts, as well as to materially similar contracts funded 
through future separate accounts, 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. Applicants 
submit that such an order would promote competitiveness in the variable 
annuity contract market by eliminating the need for First SunAmerica to 
file redundant exemptive applications, thereby reducing First 
SunAmerica's administrative expenses and maximizing the efficient use 
of First SunAmerica's resources. The delay and expense involved in 
having to seek exemptive relief repeatedly would impair the First 
SunAmerica's ability effectively to take advantage of business 
opportunities as they arise. Applicants further submit that the 
requested relief is consistent with the purposes of the 1940 Act and 
the protection of investors for the same reasons. Applicants submit 
that if First SunAmerica were required repeatedly to seek exemptive 
relief with respect to the issues addressed in this application, 
investors would not receive any benefit or additional protection 
thereby.
    5. Applicants assert that the aggregate of the mortality and 
expense risk charges, 1.25%, is reasonable in relation to the risks 
assumed by First SunAmerica under the Contracts and reasonable in 
amount, as determined by industry practice with respect to comparable 
annuity products. Applicants state that these determinations are based 
on their analysis of publicly available information about similar 
industry practices, taking into consideration such factors as current 
charge levels and benefits provided, the existence of expense charge 
guarantees, and guaranteed annuity rates. First SunAmerica undertakes 
to maintain at its home office, and make available to the Commission 
upon request, a memorandum detailing the methodology used in making 
these determinations.
    6. Similarly, before relying on any exemptive relief granted herein 
with respect to any future contracts or any materially similar 
contracts funded through future separate accounts, Applicants will 
determine that the mortality and expense risk charges under any such 
contracts will be reasonable in relation to the risks assumed by First 
SunAmerica and reasonable in amount, as determined by industry practice 
with respect to comparable annuity products. First SunAmerica will 
maintain at its home office, and make available to the Commission upon 
request, a memorandum detailing the methodology used in making these 
determinations.
    7. First SunAmerica submits that there is a reasonable likelihood 
that the Separate Account's distribution financing arrangement will 
benefit the Separate Account and its investors. First SunAmerica 
represents that it will maintain and make available to the Commission 
upon request a memorandum setting forth the basis for such conclusion. 
Similarly, before relying on any exemptive relief granted herein with 
respect to any future contracts or to any materially similar contracts 
issued by future separate accounts, Applicants will determine that 
there is a reasonable likelihood that the distribution financing 
arrangement will benefit the Separate Account (or [[Page 7259]] future 
separate accounts) and its (or their) investors. First SunAmerica will 
maintain and make available to the Commission upon request a memorandum 
setting forth the basis for such determination.
    8. First SunAmerica further represents that the assets of the 
Separate Account and any future separate accounts that rely on the 
requested order will be invested only in management investment 
companies that undertake, in the event they should adopt a plan for 
financing distribution expenses pursuant to Rule 12b-1 under the 1940 
Act, to have such plan formulated and approved by their board of 
directors, the majority of whom are not ``interested persons'' of the 
management investment company within the meaning of Section 2(a)(19) of 
the 1940 Act.

Conclusion

    Applicants submit that for the reasons and upon the facts set forth 
above, the exemptions from Sections 26(a)(2) and 27(c)(2) of the 1940 
Act to the extent necessary to permit the deduction of mortality, 
expense risk, and distribution expense charges from the assets of the 
Separate Account under the Contracts and under any future contracts, 
and from the assets of any future separate accounts offering contracts 
which are materially similar to the Contracts, meet the statutory 
standards of Section 6(c) of the 1940 Act. Accordingly, the Applicants 
assert that the requested exemptions 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.

    For the Commission, by the Division of investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2975 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M