[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Notices]
[Pages 67008-67011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31264]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21610; No. 812-9740]


Pruco Life Insurance Company, et al.

December 19, 1995.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: Pruco Life Insurance Company (``Pruco Life''), Pruco Life 
Insurance Company Insurance Company of New Jersey (``Pruco Life of New 
Jersey''), The Prudential Insurance Company of America 
(``Prudential''), Pruco Life Flexible Premium Annuity Account 
(``Separate Account''), and Pruco Securities Corporation 
(``Securities'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act granting exemptions from the provisions of Sections 22(d), 
26(a)(2)(C), and 27(c)(2) of the 1940 Act.

SUMMARY of APPLICATION: Applicants seek an order to permit: (1) The 
deduction of a mortality and expense risk charge from the assets of the 
Separate Account or any other separate account (``Other Accounts'') 
established by Pruco Life, Pruco Life of New Jersey, or Prudential to 
support individual flexible premium annuity contracts (``Contracts'') 
as well as other variable annuity contracts that are substantially 
similar in all material respects to the Contracts (``Future 
Contracts'') (2) a waiver of the withdrawal charge for Contracts or 
Future Contracts issued in connection with the waiver of withdrawal 
charges endorsement (``Critical Care Access'') and (3) a reduction of 
the withdrawal charge to Contract and Future Contract owners age 84 or 
older to insure compliance with state non-forfeiture laws.

FILING DATE: The application was filed on August 25, 1995, and an 
amended and restated application was filed on December 4, 1995. In 
addition, Applicants have represented that they will file an amendment 
during the notice period to make the representations contained herein.

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 SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on January 
15, 1996, 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 
SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th 
Street, N.W., Washington, D.C. 20549. Applicants, Clifford E. Kirsch, 
Esq., The Prudential Insurance Company of America, Prudential Plaza, 
Newark, New Jerey 07102.

FOR FURTHER INFORMATION CONTACT: Pamela K. Ellis, Senior Counsel, or 
Wendy Finck Friedlander, Deputy Chief, both at (202) 942-0670, Office 
of Insurance Products (Division of Investment Management).


[[Page 67009]]

SUPPLEMENTARY INFORMATION: Following is a summary of the application; 
the complete application is available for a fee from the SEC's Public 
Reference Branch.

Applicant's Representations

    1. Pruco Life, a stock life insurance company, is organized in 
Arizona, and licensed to do business in the District of Columbia and 
all states of the United States except New York. Pruco Life is a 
wholly-owned subsidiary of Prudential.
    2. Pruco Life of New Jersey, a stock life insurance company, is 
organized in New Jersey. Pruco Life of New Jersey is a wholly-owned 
subsidiary of Pruco Life.
    3. Prudential, a mutual life insurance company, is organized in New 
Jersey.
    4. Securities will serve as the principal underwriter of the 
Contracts. Securities, an indirect wholly-owned subsidiary of 
prudential, is registered under the Securities Act of 1934 (``1934 
Act'') as a broker-dealer, and is a member of the National Association 
of Securities Dealers. The Contracts will be sold by registered 
representatives of Securities. Securities also may enter into 
agreements with other brokers registered under the 1934 Act who qualify 
to sell the Contracts.
    5. The Separate Account is a separate account established by Pruco 
Life to fund the Contracts. The Separate Account is registered with the 
Commission as a unit investment trust under the 1940 Act, and interests 
in the Contracts are registered as securities under the Securities Act 
of 1933.
    6. Pruco Life has established for each investment option offered 
under the Contracts a Separate Account subaccount (``Subaccount''), 
which will invest solely in a specific corresponding portfolio of 
certain designated investment companies (``Funds''). The Funds will be 
registered under the 1940 Act as opened management investment 
companies. Each portfolio of the Funds will have separate investment 
objectives and policies.
    7. The Contracts also provide for a fixed-rate option which 
guarantees a stipulated rate of interest for a one-year period, and a 
market-value adjustment option which guarantees a stipulated rate of 
interest if held for a seven year period.
    8. The Contracts are individual flexible premium annuity contracts. 
The Contracts may be purchased with an initial purchase payment of 
$10,000 or more. The minimum subsequent purchase payment for the 
Contracts is $1000. Net purchase payments may be allocated to one or 
more of the Separate Account Subaccounts, the fixed-rate option, or to 
the market-value adjustment option.
    9. The Contracts provide for a series of annuity payments beginning 
on the annuity date. The Contract owner may select from several annuity 
payout options.
    10. The Contracts provide for a death benefit if the annuity or the 
survivor of two co-annuitants dies during the accumulation period. The 
death benefit is the greater of: (1) The accumulated value under the 
Contract fund as determined on the date of receipt due proof of death 
by Pruco Life; (2) 100% of all premium payments made by the Contract 
owner under the Contract reduced by the amount of any partial 
withdrawals (including withdrawal charges) ; or (3) the greatest of the 
Contract fund values calculated on every third Contract anniversary, 
reduced by all subsequent withdrawals and withdrawal charges.
    11. Certain charges and fees are assessed under the Contracts. 
Pruco Life will deduct an administration charge from a Contract owner's 
account value to reimburse it for expenses relating to the 
administration and maintenance of the Contract. The administrative 
expense charge is deducted daily from the assets in each of the 
Subaccounts, and is equivalent to an effective annual rate .15%. 
Although there is no current intention to do so, Pruco Life reserves 
the right to impose an additional charge of up to $25 annually and upon 
surrender on Contracts with less than $50,000.
    12. Applicants represent that the administration charges will not 
increase during the life of the Contracts. In addition, Applicants 
represent that these charges are made with no anticipation of profit, 
and that the administrative charges comply with Rule 26a-1.
    13. A withdrawal charge may be made upon full or partial 
withdrawals under the Contract. The withdrawal charge will be imposed 
for expenses related to the sales and distribution of the Contracts. 
The amount of the withdrawal charge decreases annually from 7% to 0% 
over 8 Contract years. For the purposes of determining the withdrawal 
charge, withdrawals will be allocated to purchase payments on a first-
in, first-out basis so that all withdrawals are allocated to purchase 
payments to which the lowest (if any) withdrawal charge applies. In 
addition, a portion of the purchase payments may be withdrawn without 
the imposition of any charge (``Charge Free Amount''). This Charge Free 
Amount is equal to 10% of all purchase payments less all withdrawals of 
the purchase payments previously made plus the Charge Free Amount 
available in the immediately preceding Contract year not withdrawn in 
that year.
    14. No withdrawal charge is assessed if withdrawals are used to 
effect an annuity based on the life of an annuitant. Contracts issued 
to annuitants age 84 and older are subject to a reduced withdrawal 
charge.
    15. In those states which have approved a Critical Care Access 
endorsement, all or part of any withdrawal and annual administrative 
charges associated with a full or partial withdrawal, or any 
annuitization or withdrawal charge due on the annuity date, will be 
waived following the receipt of due proof that the annuitant or co-
annuitant (if applicable) has been confined to an eligible nursing home 
or hospital for a period of at least 3 months, or a physician has 
certified that the annuitant or co-annuitant has 6 months or less to 
live.
    16. Pruco Life proposes to deduct a daily mortality and expense 
risk charge. Pruco Life represents that this charge is equal to an 
effective annual rate of 1.25% of the net asset value of the Separate 
Account, and that it will not increase. Of this amount, approximately 
.80% is for mortality risks and .45% is for expense risks.
    17. Pruco Life assumes the mortality risk that the life expectancy 
of the annuitant will be greater than that assumed in the guaranteed 
annuity purchase rates, thus requiring Pruco Life to pay out more in 
annuity income than it had planned. In addition, Pruco Life is 
contractually obligated to provide a death benefit prior to the annuity 
date. Thus, Pruco Life assumes the risk that the owner may die at a 
time when the amount of the death benefit payable exceeds the then net 
surrender value of the Contracts. The expense risk assumed by Proco 
Life is that the Contract administration charge will be insufficient to 
cover the cost of administering the Contracts.
    18. In the event the mortality and expense risk charges are more 
than sufficient to cover Pruco Life's costs and expenses, any excess 
will be a profit to Pruco Life.
    19. A charge may be deducted for premium taxes and any taxes 
attributable to purchase payments. This may include any state or local 
premium taxes, any federal premium taxes, and any federal, state, or 
local income, excise, business or any other type of tax (or component 
thereof) measured by, or based upon, the amount of purchase payment 
received by Pruco Life. Applicants represent that premium taxes 
currently range from 1% to 5%. 

[[Page 67010]]
Furthermore, Pruco Life reserves the right to impose a charge of up to 
a maximum of .3% for federal income taxes measured by premiums upon 
each purchase payment received under the Contact, in those states where 
approval has been obtained. At present, no such charge is being made in 
any state.
    20. No transfer fee will be charged for the first 12 transactions 
(excluding dollar cost averaging transfers) effecting transfers in any 
contract year. Subsequent transfers within a Contract, year, however, 
will be assessed a fee of $25 per transfer.
    21. A market-value adjustment (``MVA'') will be made if a Contract 
owner withdraws or transfers money before its maturity date from a 
division of a fixed-rate investment option that is being credited with 
an unique guaranteed interest rate (``interest cell''). The MVA may 
increase or decrease either the amount transferred or the amount 
remaining in an interest cell after a partial withdrawal.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule, or regulation of the 1940 Act to 
the extent that the 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, in relevant part, 
prohibit a registered unit investment trust, its depositor or principal 
underwriter, from selling periodic payment plan certificates unless the 
proceeds of all payments, other than sales loads, are deposited with a 
qualified bank, and held under arrangements which prohibit any payment 
to the depositor or principal underwriter except a reasonable fee, as 
the Commission may prescribe, for performing bookkeeping and other 
administrative duties normally performed by the bank itself.
    3. Applicants request exemptions from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the 
deduction from the net assets of the Separate Account and the Other 
Accounts in connection with the Contracts and Future Contracts of the 
1.25% charge for the assumption of mortality and expense risks.
    4. Applicants represent that the 1.25% per annum mortality and 
expense risk charge is within the range of industry practice for 
comparable annuity contracts. This representation is based upon an 
analysis of publicly available information about similar industry 
products, taking into consideration such factors as the current charge 
levels, the existence of expense charge guarantees, and guaranteed 
annuity rates. Pruco Life will maintain at its principal offices, 
available to the Commission, a memorandum setting forth in detail the 
products analyzed in the course of, and the methodology and results of, 
Applicants' comparative review. In addition, Applicants will keep, and 
make available to the Commission, a memorandum setting forth the basis 
for the same representations, and that the mortality and expense risk 
charges are reasonable, with respect to the Future Contracts offered by 
the Separate Account of Other Accounts.
    5. Pruco Life has concluded that there is a reasonable likelihood 
that the Separate Account's and Other Accounts' proposed distribution 
financing arrangements will benefit the Separate Accounts and their 
investors. Pruco Life represents that it will maintain and make 
available to the Commission upon request a memorandum setting forth the 
basis of such conclusion. In addition, Applicants will keep, and make 
available to the Commission, a memorandum setting forth the basis for 
the same representations with respect to the Future Contracts offered 
by the Separate Account or Other Accounts.
    6. The Separate Account and Other Accounts will be invested only in 
management investment companies that undertake, in the event the 
company 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 the company's board members, 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.
    7. 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 current offering price described in 
the prospectus.
    8. Applicants request that the Commission issue an order under 
Section 6(c) of the 1940 Act exempting them from the provisions of 
Section 22(d) to the extent necessary to permit Applicants to reduce 
the withdrawal charge for annuitants 84 or older, and to waive the 
withdrawal charge for Critical Care Access.
    9. Applicants submit that the proposed reduction and waiver are 
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. Eligibility for the reduction 
of fees will be based on advanced age to comply with state non-
forfeiture laws, and eligibility for the Critical Care Access fee 
waiver will be based on the Contract or Future Contract owner 
experiencing the defined medically related contingencies. Therefore, 
these benefits will not unfairly discriminate among Contract and Future 
Contract owners. Applicants submit that the reduction in fees and fee 
waiver is advantageous to Contract and Future Contract owners by 
permitting them, upon experiencing such contingencies, to make 
withdrawals from the Contract or Future Contract with the imposition of 
either a reduced fee or no fee, respectively. Applicants represent that 
the reduction in charges and waiver will not result in dilution of the 
interests of any other Contract and Future Contract owners. Applicants 
also submit that reducing and waiving the withdrawal fee under such 
circumstances will not result in the occurrence of any of the abuses 
that Section 22(d) is designed to prevent.
    10. Applicants represent that the reduction and waiver of the 
withdrawal charge will be uniformly available to all eligible Contract 
and Future Contract owners, except where prohibited by state law, and 
that these provisions will be adequately described in the prospectus of 
the Contracts and Future Contracts.
    11. Applicants assert that the terms of the relief requested with 
respect to any Future Contracts funded by the Separate Account or Other 
Accounts are consistent with the standards enumerated in Section 6(c) 
of the 1940 Act. Without the requested relief, Applicants would have to 
request and obtain exemptive relief for each new Other Account it 
establishes to fund any Future Contract. Applicants submit that any 
such additional request for exemption would present no issues under the 
1940 Act that have not already been addressed in this application, and 
that investors would not receive any benefit or additional protections 
thereby.
    Applicants submit that the requested relief is appropriate in the 
public interest because it would promote competitiveness in the 
variable annuity contract market by eliminating the need for Applicants 
to file redundant exemptive applications, thereby reducing their 
administrative expenses 

[[Page 67011]]
and maximizing the efficient use of their resources. The delay and 
expense involved in having repeatedly to seek exemptive relief would 
reduce Applicants' 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 thus assert 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.

Conclusion

    For the reasons set forth above, Applicants represent that the 
exemptions requested are necessary and 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. NcFarland,
Deputy Secretary.
[FR Doc. 95-31264 Filed 12-26-95; 8:45 am]
BILLING CODE 8010-01-M