[Federal Register Volume 61, Number 88 (Monday, May 6, 1996)]
[Notices]
[Pages 20296-20298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11231]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21931; File No. 812-10100]


The Manufacturers Life Insurance Company of America, et al.

April 30, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

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

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APPLICANTS: The Manufacturers Life Insurance Company of America, 
(``Company''), Separate Account Three of The Manufacturers Life 
Insurance Company of America (``Account'') and ManEquity, Inc. 
(``ManEquity'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) for 
exemptions from Section 27(a)(3) of the 1940 Act and Rule 6e-
3(T)(b)(13)(ii) thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to permit the front-
end sales load imposed under certain flexible premium variable life 
insurance policies (``Policies'') to be eliminated for payments in 
excess of one Target Premium in any Policy year.

FILING DATE: The application was filed on April 23, 1996. Applicants 
represent that they will amend the application during the notice period 
to conform to the representation set forth herein.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless a hearing is ordered. Interested persons may 
request a hearing by writing to the SEC's Secretary 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 May 21, 1996 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 the date of a hearing by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, The Manufacturers Life Insurance Company of America, 
200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.

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

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.

Applicants' Representations

    1. The Company is a stock life insurance company organized under 
the laws of the State of Pennsylvania on April 11, 1977 and 
redomesticated under the laws of Michigan on December 9, 1992. The 
Company is a wholly-owned subsidiary of Manulife Reinsurance 
Corporation (U.S.A.), which in turn is a wholly-owned subsidiary of 
Manufacturers Life, a mutual life insurance company based in Toronto, 
Canada. The Company is authorized to do business in the District of 
Columbia and in all states of the United States except the State of New 
York.
    2. The Account was established under Pennsylvania law on August 22, 
1986. Since December 9, 1992, the Account has been operated under 
Michigan law. The assets of the Account fund the Policies and certain 
other variable life insurance policies issued by the Company. The 
Account is registered under the 1940 Act as a unit investment trust.
    3. ManEquity, an indirect, wholly-owned subsidiary of Manulife 
Reinsurance Corporation (U.S.A.), is registered with the Commission as 
a broker-dealer and is a member of the National Association of 
Securities Dealers, Inc. ManEquity is the principal underwriter for the 
Policies and for other variable life insurance policies and variable 
annuity contracts issued by the Company.
    4. The Policies are flexible-premium survivorship life insurance 
policies that permit accumulation of Policy Values on a variable, 
fixed, or combination of variable and fixed basis. The Company will 
issue a Policy with a face amount of at least $250,000, and will 
generally issue Policies only to persons who have not attained age 90.
    5. A Policy owner may pay premiums at any time and in any amount, 
subject to certain limitations. At a Policy's maturity, Policy Value, 
minus any outstanding Policy loans and unpaid interest thereon, is paid 
to the Policy owner.
    6. Policy Values currently may be allocated among sub-accounts of 
the Account (``Investment Accounts'') that

[[Page 20297]]

invest in nine investment company portfolios of Manulife Series Fund, 
Inc. and seven portfolios of NASL Series Trust, or may be allocated to 
a fixed rate (general account) option. Policy Values may be transferred 
among the Investment Accounts and to and from the fixed rate option, 
subject to certain restrictions described in the prospectus for the 
Policies. The Policies also permit asset allocation rebalancing and 
dollar cost averaging. Policy Values may be accessed by means of 
partial withdrawals or a total surrender of a Policy, or by taking a 
Policy loan.
    7. The Policies offer a choice of two death benefit options. Under 
Option 1, the death benefit is the face amount of the Policy or, if 
greater, the Policy Value multiplied by the corridor percentage 
applicable for the age of the youngest insured as set forth in the 
``Corridor Percentage Table'' which is contained in the prospectus. 
Under Option 2, the death benefit is the face amount of the Policy plus 
the Policy Value, or, if greater, the Policy Value multiplied by the 
corridor percentage applicable for the age of the youngest insured, as 
set forth in the Corridor Percentage Table. If the Policy is in force 
at the time of the last surviving insured's death, the Company will 
pay, upon receipt of due proof of death, an insurance benefit based on 
the death benefit option selected by the Policy owner.
    8. In those states where permitted, the Policies also provide for 
certain guarantees that a Policy will not go into default, even if a 
combination of Policy loans, adverse investment experience or other 
factors should cause the Policy's net cash surrender value to be 
insufficient to meet the monthly deductions due at the beginning of a 
Policy month. Depending upon the type of guarantee selected, for 
additional monthly premiums set forth in the Policy, the amounts of 
which are based upon (1) the supplementary benefits available under the 
Policy and selected by the Policy owner and (2) the risk classification 
of any life insured under the Policy, the Company will provide 
guarantees against lapse if, as of the beginning of the Policy month, 
the sum of all premiums paid to date less any partial withdrawals and 
less any Policy debt is greater than or equal to the sum of the 
premiums due for the guarantee elected since the Policy Date.
    9. The Company deducts a charge of 2.35% of each premium payment 
for state and local taxes and a charge of 1.25% of each premium payment 
to reimburse the Company for a portion of its increased federal tax 
liability in connection with receipt of premiums under the Policies 
under Section 848 of the Internal Revenue Code of 1986, as amended. The 
Company currently intends to cease these deductions at the end of the 
tenth Policy year, but reserves the right to continue these deductions 
beyond the tenth Policy year.
    10. The Policies have a front-end sales load equal to 5.5% of all 
premiums paid in each Policy year up to one Target Premium; \1\ for 
premium payments in excess of one Target Premium in a Policy year there 
is no front-end sales charge. This deduction is guaranteed to cease at 
the end of the tenth Policy year, or ten years after a face amount 
increase, as applicable. Payments made after ten Policy years, (or, if 
there has been a face amount increase, ten Policy years after that 
increase) are not subject to a front-end sales charge.
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    \1\ A Target Premium is a measure of premium specified in a 
policy that varies from insured to insured and never exceeds a 
Guideline Annual Premium (``GAP''), as defined in Rule 6e-3(T)(c)(8) 
under the 1940 Act.
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    11. In addition, the Company will assess surrender charges upon the 
surrender of a Policy, on certain partial withdrawals under a Policy, 
in the event of a decrease in the face amount of a Policy or a 
cancellation of an increase, and in the event that a Policy lapses. If 
applicable, these charges will be assessed if any of these transactions 
occurs within the applicable surrender charge period as set forth in 
the Policy. There are two surrender charges: a deferred underwriting 
charge (``DUC'') and a contingent deferred sales charge (``CDSC'').
    12. The DUC is $4 for each $1,000 of face amount of life insurance 
coverage initially purchased or added by increase. This charge applies 
only to the first $1,000,000 of face amount initially or the first 
$1,000,000 of each subsequent increase in face amount. The DUC is 
designed to cover the administrative expenses associated with 
underwriting and Policy issuance.
    13. The maximum CDSC under the Policies is equal to one Target 
Premium multiplied by percentages shown in Table 1 of the prospectus 
for the Policies, which percentage grade down over fifteen Policy years 
to 0% (but in no event will the sum of the CDSC and the front-end sales 
charge exceed the amount permitted by Section 27(a)(2) of the 1940 
Act). Except for surrenders to which the sales charge limitations 
provisions described below apply, 100% of the CDSC will be in effect 
for at least the first six Policy years for lives insured with either 
an average issue age (or average attained age at the time of a face 
amount increase) of 0-75. For average ages higher than 75, the CDSC 
will grade down more rapidly, at a rate that is also set forth in Table 
1 of the prospectus.
    14. In order to determine the CDSC applicable to a face amount 
increase, the Company will treat a portion of the Policy Value on the 
date of increase as a premium attributable to the increase. In 
addition, a portion of each premium paid on or subsequent to the 
increase will be attributed to the increase. In each case, the portion 
attributable to the increase will be the ratio of the GAP for the 
increase to the sum of the GAPs for the initial face amount and all 
increases including the requested increase.
    15. If a Policy is surrendered or lapsed, or a face amount decrease 
is requested at any time during the first two years after issuance (for 
corporate owned Policies) or after an increase in face amount, the 
Company will forego taking that part of the CDSC with respect to 
``premiums'' paid for the initial face amount or that increase 
(including the portion of Policy Value treated as premiums for the 
increase, as described above), whichever is applicable, which exceeds 
the sum of (i) 30% of the premiums paid up to the lesser of one GAP or 
the cumulative premiums paid to the surrender date, plus (ii) 10% of 
the premiums paid in excess of one GAP, up to the lesser of two GAPs or 
the cumulative premiums paid to the surrender date, plus (iii) 9% of 
the premiums paid in excess of two GAPs, reduced by the amount of all 
sales charges previously taken.
    16. Since a CDSC is deducted when a Policy terminates for failure 
to make the required payment following a Policy default, the sales 
charge limitation described above will apply if the termination occurs 
during the two-year period following issuance or any increase in face 
amount. If the Policy terminates during the two years after a face 
amount increase, the limitation will relate only to the CDSC applicable 
to the increase.
    17. A monthly charge (at a minimum rate of $30 per Policy month and 
a maximum rate of $60 per month) is deducted from the Policy Value for 
administration of the policies. The monthly administration charge is 
$.04 per $1,000 of ace amount until the later of the youngest living 
life insured's attained age 55 or the end of the fifteenth Policy year. 
Thereafter, the charge is $0.
    18. A cost of insurance charge that is guaranteed to be no more 
than that permitted under the applicable 1980 Commissioners Standard 
Ordinary Mortality Table is deducted from Policy Value each month. This 
charge compensates the Company for the death

[[Page 20298]]

benefits provided under the Policies and varies from insured to insured 
based upon issue age, gender (except where unisex rates are mandated by 
law), smoking status and risk class. Cost of insurance rates on amounts 
added by face increase are based on the same factors, but determined 
based upon the time of increase instead of issue.
    19. A mortality and expense risk charge is deducted from Policy 
Value at the beginning of each Policy month, at a rate of .067% through 
the later of the tenth Policy year and the youngest life insured's 
attained age 55. Currently, it is expected that this charge will reduce 
to .0215 per month thereafter, although the Company reserves the right 
not to reduce this charge.
    20. Charges will be imposed on certain transfers of Policy Values, 
including a $35 charge for transfers in any Policy month after the 
first transfer, a $15 charge for each asset allocation rebalancing 
transfer and a $5 charge for each dollar cost averaging transfer when 
Policy Value does not exceed $15,000.

Applicants' Legal Analysis

    1. Section 27(a)(3) of the 1940 Act provides that the amount of 
sales charge deducted from any of the fist twelve monthly payments of a 
periodic payment plan certificate may not exceed proportionately the 
amount deducted from any other such payment, and that the amount 
deducted from any subsequent payment may not exceed proportionately the 
amount deducted from any other subsequent payment. This prohibition is 
commonly referred to as the ``stair-step'' rule.
    2. Rule 6e-3(T)(b)(13)(ii) provides an exemption from Section 
27(a)(3), provided that the proportionate amount of sales charge 
deducted from any payment does not exceed the proportionate amount 
deducted from any prior payment.
    3. Under the Policies described herein, a Policy owner paying 
premiums in excess of the Target Premium in any of the first ten Policy 
years will pay a 5.5% front-end sales load on the portion of the 
premium up to the Target Premium, but will pay no front-end sales load 
on premiums about the Target Premium in that year. Applicants submit 
that this sales load structure could be deemed to violate Section 
27(a)(3). In addition, a Policy owner paying more than a Target Premium 
in any of the first ten Policy years who subsequently makes a premium 
payment equal to the Target Premium will pay a higher front-end sales 
in that subsequent Policy year. Consequently, the exemption provided in 
Rule 6e-3(T)(b)(13)(ii) would be unavailable.
    4. According to the Applicants, Section 27 was designed to protect 
Policy owners against sales load structures that deducted large amounts 
of front-end sales charges so early in the life of a Policy that little 
of the Policy owner's early payments were actually invested, or if an 
owner redeemed in the early years of an investment, that investor would 
recoup little of his or her investment upon redemption. Applicants 
assert that the front-end sales load structure under the Policies does 
not present these concerns. Rather, Applicants state that they expect 
that by imposing a lower front-end sales load on premiums in excess of 
the Target Premium, the Company will lower the aggregate level of sales 
load paid in each of the first ten Policy years (or the first ten years 
after a face amount increase).
    5. Applicants state that the Company's front-end sales load 
structure significantly benefits Policy owners by eliminating sales 
charges on payments in excess of Target Premiums in any Policy year. 
According to the Applicants, the Company could avoid the stair-step 
issue presented by Section 27(a)(3) and Rule 6e-3(T) simply by imposing 
a higher front-end load on the full amount of premium payments in each 
Policy year, including amounts over the Target Premium. Under this 
arrangement, however, a Policy owner would pay a higher overall sales 
load, and would be left with a smaller percentage of his or her premium 
payment for investment under the Policy. Further, if the Company were 
to impose the higher sales charge on premiums about the Target Premium, 
it would generate more revenue from the Policies than it believes 
necessary to support the distribution costs associated with the 
Policies.
    6. Rule 6e-3(T)(b)(13)(ii) contains an exception to its policy 
prohibiting increases in sales load that allow insurance companies to 
charge a lower sales charge or amounts transferred to a flexible 
premium variable life insurance policy from another plan of insurance, 
and thereafter to impose a full sales charge on later premium payments. 
Applicants contend that this exception implicitly recognizes that 
insurance companies incur lower costs on premium payments that consist 
of amounts transferred from other policies and permits insurance 
companies to pass those costs savings through to Policy owners. For the 
same reason, Applicants submit that the Company should be permitted to 
pass through to Policy owners its reduced costs with respect to 
premiums about the Target Premium by reducing its front-end sales load 
on premiums above the Target Premium in each Policy year that a front-
end sales load applies.

Conclusion

    For the reasons set forth above, Applicants submit that the 
requested exemptions from the provisions of Section 27(a)(3) of the 
1040 Act and Rule 6e-3(T)(b)(13)(ii) thereunder, are in accordance with 
the standards of Section 6(c) of the 1940 Act, and with the protection 
of investors and the purposes and policies of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-11231 Filed 5-3-96; 8:45 am]
BILLING CODE 8010-01-M