[Federal Register Volume 60, Number 46 (Thursday, March 9, 1995)]
[Notices]
[Pages 12997-12998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5814]



[[Page 12997]]

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-20938; File No. 812-9314]


The Northwestern Mutual Life Insurance Company, et al.

March 3, 1995.
AGENCY: Securities and Exchange Commission (the ``Commission'' or the 
SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``1940 Act'').

APPLICANTS: The Northwestern Mutual Life Insurance Company 
(``Northwestern''), NML Variable Annuity Account B (``Account B'') and 
Northwestern Mutual Investment Services, Inc. (``NMIS'').

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

SUMMARY OF THE APPLICATION: Applicants seek an order permitting the 
deduction of a mortality and expense risk charge from the assets of 
Account B under certain flexible premium variable annuity contracts 
(the ``Contracts'') and any materially similar contracts offered in the 
future by Account B.\1\

    \1\Applicants represent that they will amend the application 
during the Notice Period to reflect this representation.
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FILING DATE: The application was filed on November 3, 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 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 March 
28, 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 writer's interest, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o The Northwestern 
Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, WI 
53202.

FOR FURTHER INFORMATION CONTACT: Joseph G. Mari, Senior Special 
Counsel, 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 Commission's 
Public Reference Branch.

Applicants' Representations

    1. Northwestern, a mutual life insurance company organized under 
the laws of Wisconsin, is licensed to do business in all fifty states 
and the District of Columbia.
    2. Northwestern established Account B as a separate account under 
Wisconsin law to fund the Contracts. Account B is registered as a unit 
investment trust under the 1940 Act. Account B has nine subdivisions 
(``Divisions''), each of which invests in shares of the corresponding 
portfolio (``portfolio'') of Northwestern Mutual Series Fund, Inc. 
(``Fund''), which is registered under the 1940 Act as an open-end 
management investment company. Shares of each Portfolio are purchased 
by Northwestern for the corresponding division of Account B at net 
asset value.
    3. NMIS, a wholly-owned second tier subsidiary of Northwestern, is 
the underwriter of the Contracts and is the investment adviser for the 
Fund.
    4. The Contracts are individual periodic payment deferred variable 
annuity contracts that are intended to be used in connection with 
retirement plans qualified under Sections 403(b), 408, and 457 of the 
Internal Revenue Code (``Code'') or by other purchasers in situations 
which do not qualify for special treatment under the Code, and for 
roll-over of termination benefits from tax qualified corporate or HR-10 
plans or trusts. A contract owner may allocate purchase payments and/or 
the accumulation value among the Divisions of Account B. The Contract 
owner may select among annuity payment options that include variable or 
fixed annuity options.
    5. The Contracts are offered as either Front Load or Back Load 
Contracts. The minimum initial purchase payment for the Front Load 
Contracts is $10,000. For the Back Load Contracts, the minimum is $25 
for plans qualified under Sections 403(b), 408 (except individual 
retirement annuities (``IRAs'')) and 457 of the Code; $100 for IRAs and 
non-tax qualified Contracts; and $3,500 for roll-over of termination 
benefits from tax-qualified corporate or HR-10 plans.
    6. Front Load Contracts have a maximum front-end sales load of 4% 
deducted from each purchase payment. There are no withdrawal charges 
for Front Load Contracts. Back Load Contracts have no front-end sales 
load deducted from purchase payments. Withdrawals for Back Load 
Contracts are subject to a contingent deferred sales load at a maximum 
rate of 8%, and up to 10% of the Contract's accumulated value as of the 
last Contract anniversary can be withdrawn without a withdrawal charge 
subject to restrictions described in the Contract. The withdrawal 
charge reduces by 1% per year.
    7. The withdrawal charge for current and future Contracts will not 
exceed 8.5% of the purchase payments under the Contract. Applicants are 
relying on Rule 6c-8 under the 1940 Act to deduct the contingent 
deferred sales load.
    8. Contract owners may make unlimited transfers among the Divisions 
during the accumulation period, subject to a minimum of the lesser of 
$100 or the entire amount in the Division from which the transfer is 
made. A transfer fee of $25 may apply for each transfer in excess of 
twelve per Contract year.
    9. The Contracts are subject to an annual Contract fee of $30 which 
will be deducted on each Contract anniversary in proportion to the 
values in each Division. Applicants represent that the amounts 
collected will not exceed the corresponding administrative costs as 
defined by the applicable standards of Rule 262-1 under the 1940 Act.
    10. The Contracts permit, after the first Contract anniversary, 
deduction from purchase payments or from Contract benefits paid of 
premium taxes incurred. Northwestern currently waives this deduction by 
administrative practice.
    11. Northwestern reserves the right to charge for any tax liability 
it pays or reserves for resulting from the maintenance or operation of 
Account B or any of its Divisions.
    12. Northwestern imposes a charge as compensation for bearing 
certain mortality and expense risks under the Contracts. The charge is 
assessed daily and is based on the net asset value of Account B. The 
mortality and expense risk charge will not exceed .75% of the net 
assets of Account B attributable to the Front Load Contracts, and 1.25% 
of the net assets of Account B attributable to the Back Load Contracts. 
Northwestern intends to charge at the annual rate of .40% of the net 
asset value of Account B attributable to Front Load Contracts, of which 
.15% is for the mortality risk and .25% is for the expense risk, but 
reserves the right to increase or decrease the charge for these risks 
subject to a maximum of .75%. For the Back Load Contracts, the 
mortality and expense risk charge will be deducted on a daily basis at 
an annual rate of 1.25%, of which .50% is for the mortality risk and 
.75% is for the expense risk. For contracts offered in 
[[Page 12998]] the future that are materially similar to the Front Load 
Contracts and the Back Load Contracts all charges and expenses will be 
identical to, or lower than, the corresponding charges and expenses for 
the Front Load Contracts and the Back Load Contracts, respectively, as 
described in the application.\2\

    \2\Applicants represent that they will amend the application 
during the Notice Period to reflect the representations in this 
paragraph.
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    13. The mortality risk borne by Northwestern under both versions of 
the Contracts arises from its obligation to make annuity payments 
regardless of how long an annuitant may live. The mortality risk is the 
risk that annuitants will live longer than Northwestern's actuarial 
projections indicate, resulting in higher than expected annuity 
payments.
    14. The expense risk borne by Northwestern under the Contracts is 
the risk that the charges for administering the Contracts, which are 
guaranteed for the life of each Contract, may be insufficient to cover 
the actual costs of issuing and administering the Contracts.
    15. The mortality and expense risk is higher for the Back Load 
Contracts than for the Front Load Contracts for several reasons. 
Collection of a significant front end load inherently reduces the risk 
that charges will fall short of corresponding expenses since receipt of 
deferred loads is far less certain. The Front Load Contracts require a 
minimum initial purchase payment of $10,000, compared with $25, $100 or 
$3,500 for Back Load Contracts. The economies of scale associated with 
larger units reduce the expense risk. Northwestern asserts that an 
additional mortality risk for the Back Load Contract exists because the 
withdrawal charge does not apply upon the death of the annuitant.

Applicants' Legal Analysis and Conditions

    1. Applicants request an exemption from Sections 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to the extent any relief is necessary to 
permit the deduction from Account B of the mortality and expense risk 
charges under the Contracts. Applicants request that the order also 
permit the deduction of the mortality and expense risk charges 
described herein from the assets of Account B pursuant to other 
contracts offered in the future through Account B, to the extent that 
such contracts are materially similar to the Contracts.
    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 submit that their request for an order that applies 
to materially similar contracts offered in the future by Account B is 
appropriate in the public interest. Such an order would promote 
competitiveness in the variable annuity contract market by eliminating 
the need for Northwestern to file redundant exemptive applications, 
thereby reducing its administrative expenses and maximizing the 
efficient use of its resources. Investors would not receive any benefit 
or additional protection by requiring Northwestern to seek repeatedly 
exemptive relief regarding the same issues addressed in the 
application.
    4. Applicants represent that they have reviewed publicly available 
information regarding the aggregate level of the mortality and expense 
risk charges under variable annuity contracts comparable to the Front 
Load Contracts and the Back Load Contracts currently being offered in 
the insurance industry taking into consideration such factors as 
current charge levels, the manner in which charges are imposed, the 
presence of expense and annuity rate guarantees and the markets in 
which the Contracts will be offered. Based upon this review, Applicants 
represent that the mortality and expense risk charges under the 
Contracts are within the range of industry practice for comparable 
contracts. Applicants will maintain and make available to the 
Commission, upon request, a memorandum outlining the methodology 
underlying this representation. Similarly, prior to making available 
any materially similar contracts through Account B, Applicants will 
represent that the mortality and expense risk charges under any such 
contracts will be within the range of industry practice for comparable 
contracts. Applicants will maintain and make available to the 
Commission, upon request, a memorandum outlining the methodology 
underlying such representation.
    5. Applicants represent that Account B will invest only in 
underlying funds which undertake, in the event they should adopt a plan 
under Rule 12b-1 under the 1940 Act to finance distribution expenses, 
to have a board of directors or trustees, a majority of whom are not 
interested persons as defined under Section 2(a)(19) of the 1940 Act, 
formulate and approve any such plan.
    6. Applicants do not expect the front-end sales load or contingent 
deferred sales load imposed under the Contracts will necessarily cover 
the expected costs of distributing the Contracts. Any shortfall will be 
made up from Northwestern's general assets which will include amounts 
derived from the mortality and expense risk charges. Northwestern has 
concluded that there is a reasonable likelihood that the distribution 
financing arrangement being used in connection with the Contracts will 
benefit Account B and the Contract owners. Northwestern will keep and 
make available to the Commission, upon request, a memorandum setting 
forth the basis for this representation.

Conclusion

    Applicants assert that for the reasons and upon the facts set forth 
above, the requested exemption from Sections 26(a)(2)(C) and 27(c)(2) 
of the 1940 Act to deduct the mortality and expense risk charge under 
the Contracts, or under materially similar contracts offered in the 
future by Account B, meets the standards in Section 6(c) of the 1940 
Act. Applicants assert that the exemptions requested are 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. 95-5814 Filed 3-8-95; 8:45 am]
BILLING CODE 8010-01-M