[Federal Register Volume 60, Number 50 (Wednesday, March 15, 1995)]
[Notices]
[Pages 14044-14047]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6354]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20948; No. 812-9074]


Aetna Insurance Company of America, et al.

March 9, 1995.
agency: Securities and Exchange Commission (``Commission'' or ``SEC'').

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

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applicants: Aetna Insurance Company of America (``Aetna''); Variable 
Annuity Account I of Aetna (``Account I''), Variable Annuity Account II 
of Aetna (``Account II''), and any other Separate Accounts established 
in the future by Aetna (``Future Accounts,'' and together with Accounts 
I and II, ``Separate Accounts'') to support certain group and 
individual deferred variable annuity contracts (``Contracts'') or other 
variable annuity contracts that are substantially similar in all 
material respects to the Contracts (``Other Contracts'') and that may 
be issued in the future by Aetna;\1\ Aetna Life Insurance and Annuity 
Company (``ALIAC''), the principal underwriter of the Contracts; and 
Any Member Broker-Dealer of the National Association of Securities 
Dealers, Inc. (``NASD'') That May In The Future Serve As Principal 
Underwriter For The Contracts (``Future Underwriters'').

    \1\Applicants have undertaken to amend their application during 
the Notice Period to include the representation that Future 
Contracts will be substantially similar ``in all material respects'' 
to the Contract.

relevant 1940 act sections: Order requested under Section 6(c) of the 
1940 Act granting exemptions from the provisions of Sections 
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26(a)(2)(C) and 27(c)(2) of the 1940 Act.

summary of application: Applicants seeking an order permitting the 
deduction of a mortality and expense risk change from the assets of the 
Separate Accounts in connection with the issuance and sale of the 
Contracts or Other Contracts.

filing date: The application was filed on June 24, 1994, and amended on 
December 23, 1994 and February 23, 1995.

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 Commission's Secretary 
and serving the Applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on April 3, 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 Commission's 
Secretary.

addresses: Secretary, SEC, 450 5th Street NW., Washington, DC 20549. 
Applicants, c/o Aetna Insurance Company of America, 151 Farmington 
Avenue, Hartford, Connecticut 06156.

for further information contact: Yvonne M. Hunold, Assistant Special 
Counsel, or Wendy F. 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. Aetna, a stock life insurance company, is a wholly-owned 
subsidiary of Aetna Life Insurance and Annuity Company (``ALIAC''), 
which is, in turn, a wholly-owned subsidiary of Aetna Life and Casualty 
Company. Aetna is in the process of qualifying to do business and 
obtaining licenses to sell insurance in all jurisdictions except New 
York.
    2. The Separate Accounts are or will be established by Aetna for 
the purpose of funding variable annuity contracts. The Separate 
Accounts are or will be registered under the 1940 Act as unit 
investment trusts. Assets of the Separate Accounts will be allocated 
among the shares of one or more registered open-end investment 
companies (``Funds''), some of which may be managed by ALIAC or its 
affiliates.
    3. ALIAC is the principal underwriter of the Contracts and may act 
as investment adviser to some of the Funds. ALIAC is registered as a 
broker-dealer under the Securities Exchange Act of 1934 and as an 
investment adviser under the Investment Advisers Act of 1940. ALIAC is 
a member of NASD.
    4. Non-tax qualified Contracts are funded through Account I and 
Contracts purchased and used in connection with retirement plans under 
Sections 401(a) or 403(b) of the Internal Revenue Code, as amended 
(``Code'') are funded through Account II. Individual Contracts 
qualifying for favorable federal income tax treatment under Section 408 
of the Code and Contracts purchased by deferred compensation plans 
under Section 457 of the Code may be funded through either Account I or 
Account II.
    5. The Contracts may provide for, among other things single or 
installment premium payments, or a combination of the two, and deferred 
or immediate annuity payments on a fixed or variable basis beginning on 
a date elected by the Contract owners and in no event later than 
certain contractually established dates (``Retirement Date''). 
Additionally, Contract owners may allocate premium payments to: (a) One 
or more of the Funds available under a Contract; (b) in some Contracts 
to a fixed Interest Option, which is part of Aetna's general account; 
and (c) in some Contracts to a Credited Interest Option, with or 
without a market value adjustment upon redemption prior to the end of a 
guaranteed term, and assets attributable to such an option may be held 
in Aetna's general account or in a non-insulated, none-utilized 
separate account of Aetna.\2\

    \2\Applicants are not requesting Commission review of whether 
the Fixed Interest Option or any other Credited Interest Option 
under the Contracts are securities required to be registered under 
the 1933 Act. Applicants will not consider any order issued as a 
result of this application to be an expression of any view by the 
Commission on this issue.
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    6. The Contracts provide for the payment of a standard death 
benefit equal to the greater of (i) the cash value of the Contract 
account, or (ii) the sum of purchase payments less any withdrawals, or 
(iii) the contract holder's account value at the most recent seventh 
year anniversary of the Contract adjusted for purchase payments, 
withdrawals and amounts applied to an annuity option. The Contracts 
also provide for the payment of an enhanced death benefit equal to the 
greater of (i) the cash value of the Contract account, or (ii) during 
the first year of the Contract, the amount of premiums paid (adjusted 
for any withdrawals and any amount paid to an annuity option), or (iii) 
during subsequent years of the Contract, an [[Page 14045]] amount 
determined by increasing premiums paid in prior years by a 
contractually-determined factor (adjusted for any withdrawals or any 
amounts paid for an annuity option), or (iv) cash value on the most 
recent seventh year anniversary of the Contract, adjusted for purchase 
payments, withdrawals and amounts applied to an annuity option.\3\

    \3\The death benefit calculations in (iii) under the standard 
death benefit and in (ii), (iii) and (iv) under the enhanced death 
benefit apply until the Certificate Holder or annuitant reaches the 
death benefit maximum age shown in the Contract. Thereafter, the 
death benefit is only adjusted for purchase payments, withdrawals 
and amounts applied to annuity options. Currently, there is no 
limitation on the maximum death benefit payable under the standard 
death benefit or the enhanced death benefit; however, Aetna reserves 
the right in the future to impose a limitation on the maximum 
allowable death benefit under (iii) under the standard and under 
(ii), (iii) and (iv) under the enhanced death benefit.
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    7. Various fees and charges are deducted under the Contracts. Aetna 
may impose a maximum annual maintenance charge of $35 under the 
Contracts for administrative services provided to Contract holders. 
Aetna currently deducts a $30 annual maintenance charge from Cash Value 
on the Contract date, on each Contract Anniversary prior to the 
Retirement Date, and upon termination of the Contract. In addition, 
Aetna reserves the right to deduct a daily administrative expense 
charge of up to 0.25%, on an annual basis, of the net asset value of 
the Separate Accounts, to cover its administrative expenses during the 
accumulation period and the annuity period. Of the 0.25% maximum 
administrative expense charge, Aetna currently deducts 0.15% annually 
of the average daily net assets of the Separate Accounts during the 
accumulation period. An administrative charge currently is not imposed 
during the annuity period.
    8. No charge currently is made for transfers of cash values among 
the Funds or from a Fund to a Fixed or Credited Interest Option during 
the accumulation period. Aetna reserves the right to establish a 
minimum amount for transfers and to impose a transfer charge of up to 
$10 for each transfer request after the first twelve requests in each 
Contract year to reimburse Aetna for its transfer administrative costs 
during the accumulation period. No transfer fees are charged during the 
annuity period.
    9. No profit is anticipated from the maintenance charge, transfer 
fee and administrative expense charges, which will not be greater than 
Aetna's average expected cost of the services to be provided, defined 
in accordance with Rule 26a-1 under the 1940 Act. Applicants intend to 
rely on Rules 26a-1 and 6c-8(c) under the 1940 Act for the necessary 
exemptive relief to permit imposition of these fees. Aetna represents 
that it will monitor its administrative expenses and the proceeds of 
these charges on at least an annual basis to ensure compliance with 
Rule 26a-1 under the 1940 Act.
    10. No charge currently is deducted for premium taxes. Aetna 
reserves the right, however, to deduct such taxes from cash value under 
the Contracts at the time such taxes are payable. Aetna reserves the 
right to offer Other Contracts that permit the deduction of premium 
taxes from cash values or purchase payments. No charges currently are 
made for federal, state or local taxes, other than premium taxes, that 
Aetna incurs or that may be attributable to a Separate Account or the 
Contracts. Aetna reserves the right to deduct such taxes in the future 
for any such tax or economic burden from any sales load payable to 
Aetna with respect to the Contracts. Aetna will not deduct any such 
taxes from the assets of the Separate Accounts unless it has been 
specifically authorized to do so by the Commission. Applicants intend 
to rely on Rule 26a-2(d) under the 1940 Act to permit the deduction of 
taxes from the assets of a Separate Account.
    11. No sales charge is deducted from premium payments. Aetna 
reserves the right to deduct a contingent deferred sales charge 
(``CDSC'') of up to 9% of the amount withdrawn, on partial or full 
Contract surrenders and withdrawals of Account Value, and upon election 
of certain annuity payment options, to compensate Aetna for its 
distribution expenses. The CDSC is applied to purchase payments and not 
to any increases in Account Value. The maximum CDSC currently is 7%, 
decreasing by up to 1% per year after payment of a purchase payment 
until it reaches zero after seven years. The aggregate CDSC is 
guaranteed never to exceed 8.5% of aggregate premium payments. The CDSC 
may be waived under certain specified circumstances. Amounts 
attributable to purchase payments are considered withdrawn before 
amounts attributable to income, and the oldest purchase payments are 
considered withdrawn first when determining the amount of CDSC that 
should be applied.
    12. Aetna anticipates that the CDSC will not generate revenues that 
will be sufficient to pay all its distribution costs. Excess 
distribution costs, thus, would be paid out of Aetna's general assets, 
which may include profits derived from the mortality and expense risk 
charge assessed under the Contracts. Applicants will rely on Rule 6c-8 
under the 1940 Act to deduct the CDSC.
    13. A daily charge will be deducted from the net assets of the 
Separate Accounts to compensate Aetna for assuming certain mortality 
and expense risks. Aetna currently charges 0.35% for the expense risk, 
0.75% for standard mortality risks, and 0.15% for the enhanced death 
benefit, or a current total charge of 1.25%. Aetna reserves the right 
to charge up to .90% on an annual basis for standard mortality risks, 
in which event the charge for mortality and expense risks would be at a 
maximum annual rate of 1.40% of net assets.
    14. The mortality risk arises from Aetna's contractual obligation 
to make annuity payments (in accordance with the annuity tables and 
other provisions in the Contracts) regardless of how long any 
individual annuitant or all annuitants may live. The mortality risk is 
that an annuitant will live longer than predicted by Aetna's actuarial 
projections, thereby resulting in higher than expected annuity 
payments. This undertaking assures that neither an annuitant's own 
longevity, nor an improvement in general life expectancy, will 
adversely affect the monthly annuity payments that the annuitant will 
receive under the Contracts. Aetna also assumes a mortality risk in 
that Aetna may be obligated to pay either a standard death benefit or 
an enhanced death benefit in excess of a contract holder's account 
value.
    15. The expense risk assumed by Aetna is the risk that charges for 
administration expenses, which are guaranteed not to increase for the 
life of the Contracts, may be insufficient to cover the actual costs of 
issuing and administering the Contracts or Other Contracts.
    16. Aetna currently anticipates that, under ordinary circumstances, 
the mortality and expense risk charge will be more than sufficient to 
cover its costs. Accordingly, any excess will be profit to Aetna and 
may be available to pay distribution costs for the Contracts that are 
not covered by funds derived from the CDSC.

Applicants' Legal Analysis

    1. Applicants request exemptions under Section 6(c) from Sections 
26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent necessary to 
permit the deduction of a mortality and expense risk charge from the 
assets of the Separate Accounts in connection with funding the 
Contracts and Other Contracts. Applicants further request that such 
exemptive relief be extended [[Page 14046]] to ALIAC as principal 
underwriter for the Aetna Contracts and to Future Underwriters, a class 
consisting of broker-dealers who may, in the future, act as principal 
underwriters of the Contracts. Applicants submit that the requested 
exemptions 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.
    2. Applicants state that the terms of the relief requested with 
respect to any Other Contracts funded by the Separate Accounts or 
distributed by any Future Underwriter are consistent with the standards 
set forth in Section 6(c) of the 1940 Act. Without the requested 
relief, exemptive relief would have to be requested for each new 
separate account established to fund the Other Contracts or for each 
Future Underwriter. Such additional requests for exemptive relief would 
present no issues under the 1940 Act not already addressed in this 
application. The requested relief would eliminate the need for the 
filing of redundant exemptive applications, thereby reducing 
administrative expenses, maximizing efficient use of resources and, 
thus, promoting competitiveness in the variable annuity market. Both 
the delay and the expense of repeatedly seeking exemptive relief would, 
Applicants assert, impair Aetna's ability to effectively take advantage 
of business opportunities as they arise. If Aetna were repeatedly to 
seek exemptive relief with respect to the same issues addressed in this 
application, investors would not receive additional protection or 
benefit and could be disadvantaged by Aetna's increased overhead. 
Applicants submit, therefore, that the requested relief 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.
    3. Section 6(c) of the 1940 Act authorizes the Commission to grant 
an exemption from any provision, rule or regulation of the 1940 Act to 
the extent that it 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.
    4. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, 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.
    5. Applicants submit that Aetna is entitled to reasonable 
compensation for its assumption of mortality and expense risks. 
Applicants represent that the mortality and expense risk charge under 
the Contracts with the standard death benefit is a reasonable and 
proper insurance charge to compensate Aetna for assuming certain risks 
under the Contracts, including the risk that: (a) annuitants under the 
Contracts will live longer as a group than has been anticipated in 
setting the annuity rates guaranteed in the Contracts; (b) the cash 
value will be less than the death benefit; and (c) administrative 
expenses will be greater than amounts derived from the administrative 
charges. Thus, Applicants assert that this charge is consistent with 
the protection of investors.
    6. Aetna represents that the annual charge of 1.25% of net assets 
for mortality and expense risks (.90% and .35%, respectively) assumed 
by it in connection with the standard death benefit is within the range 
of industry practice for comparable annuity contracts. This 
representation is based upon Aetna's analysis of publicly available 
information about similar industry products, taking into consideration 
such factors as current charge levels, the existence of charge level 
guarantees, and guaranteed annuity rates. Applicants represent that 
Aetna 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, its comparative 
survey.\4\

    \4\Applicants have undertaken to amend their application during 
the Notice Period to include this representation.
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    7. Applicants further represent that the additional mortality risk 
charge of 0.15% for the enhanced death benefit is reasonable in 
relation to the risks assumed under the Contracts. Based on an 
actuarial analysis of the cost of providing an enhanced death benefit, 
it was determined that the additional mortality risk charge of up to 
0.15% was a reasonable charge for providing the enhanced death benefit 
in relation to the risks assumed by Aetna under the Contracts. Aetna 
will maintain at its principal offices,\5\ available to the Commission, 
upon request, a memorandum setting forth in detail the methodology used 
in determining that the additional risk charge of up to 0.15% for the 
enhanced death benefit is reasonable in relation to the risks assumed 
by Aetna under the Contracts.

    \5\Applicants have undertaken to amend their application during 
the Notice Period to include this representation.
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    8. Similarly, prior to making available any Other Contracts through 
the Separate Accounts, Applicants represent that the mortality and 
expense risk charges under such Other Contracts will be within the 
range of industry practice for comparable contracts. Aetna undertakes 
to maintain at its principal offices, available to the Commission upon 
request, memoranda setting forth in detail the products analyzed in the 
course of, and the methodology and results of, of its comparative 
surveys and analyses in reaching these determinations.
    9. Applicants acknowledge that, if a profit is realized from the 
mortality and expense risk charge, all or a portion of such profit may 
be available to pay distribution expenses not reimbursed by the CDSC 
deducted under the Contracts. Aetna has concluded that there is a 
reasonable likelihood that the proposed distribution financing 
arrangements will benefit the Separate Accounts and the Contract 
holders. The basis for that conclusion is set forth in a memorandum 
which will be maintained by Aetna at its administrative offices and 
will be available to the Commission.
    10. Applicants represent that Other Contracts will be offered only 
if Aetna concludes that the proposed distribution financing arrangement 
will benefit such Other Contracts and the Separate Accounts established 
in connection with their issuance and the Contract owners. The basis 
for such conclusion will be set forth in a memorandum which will be 
maintained by Aetna at its administrative offices and will be made 
available to the Commission, upon request.\6\

    \6\Applicants have undertaken to amend their application during 
the Notice Period to include these representations.
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    11. Accordingly, Applicants assert that the deduction for the 
assumption of mortality and expense risks is 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.
    12. Aetna also represents that the Separate Accounts will only 
invest in management investment companies which undertake, in the event 
they should adopt a plan under Rule 12b-1 to finance distribution 
expenses, to have a board of directors or trustees, a 
[[Page 14047]] majority of whom are not ``interested persons'' of the 
company, formulate and approve any such plan in accordance with Rule 
12b-1.

Conclusion

    For the reasons set forth above, Applicants represent that the 
exemptions requested to permit the daily deduction from the assets of 
the Separate Accounts of the charge for assumption of mortality and 
expense risks, including an enhanced death benefit, at a maximum annual 
rate of 1.40% of net assets, 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. McFarland,
Deputy Secretary.
[FR Doc. 95-6354 Filed 3-14-95; 8:45 am]
BILLING CODE 8010-01-M