[Federal Register Volume 61, Number 105 (Thursday, May 30, 1996)]
[Notices]
[Pages 27120-27123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13457]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21975; File No. 812-9696]


Washington National Insurance Company, et al.

May 22, 1996.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').

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

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APPLICANTS: Washington National Insurance Company (``Washington 
National'') and Separate Account I of Washington National Insurance 
Company (the ``Separate Account'').

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

SUMMARY OF APPLICATION: Applicants seek an order exempting Washington 
National and the Separate Account, which will be reorganized from a 
managed separate account to a separate

[[Page 27121]]

account organized as a unit investment trust (the ``Continuing Separate 
Account''), from the provisions of Sections 26(a)(2)(C) and 27(c)(2) of 
the 1940 Act, to the extent necessary to permit Washington National to 
deduct a mortality risk charge from the Continuing Separate Account.

FILING DATE: The application was filed July 27, 1995, and amended on 
November 15, 1995, February 8, 1996, and April 26, 1996.

HEARING OF 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 Secretary of the 
Commission and serving 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 June 17, 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 requester'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 5th Street, N.W., Washington, D.C. 
20549. Applicants, Craig R. Edwards, Esq., Washington National 
Insurance Company, 300 Tower Parkway, Lincolnshire, Illinois 60069-
3665.

FOR FURTHER INFORMATION CONTACT:
Mark C. Amorosi, Attorney, 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 Public 
Reference Branch of the Commission.

Applicants' Representations

    1. Washington National, the sponsor and depositor of the Separate 
Account, is a stock life insurance company organized under the laws of 
Illinois. Washington National is a wholly-owned subsidiary of 
Washington National Corporation, a holding company incorporated in 
Delaware in 1968 that acquired Washington National in 1968.
    2. The Separate Account was established by Washington National as a 
separate investment account to fund Washington National's tax-qualified 
and non-tax-qualified retirement benefits offered through group and 
individual variable annuity contracts (the ``Contracts''). The Separate 
Account meets the definition of a ``separate account'' under the 1940 
Act and is registered under the 1940 Act as an open-end management 
investment company. The Separate Account is divided into three sub-
accounts (the ``Sub-Accounts''), the Bond Sub-Account, the Short-Term 
Portfolio Sub-Account and the Stock Sub-Account. Washington National is 
the investment adviser for the Separate Account. Washington National 
has contracted with NBD Bank, an Illinois banking corporation, to act 
as sub-adviser for and to manage the investments of the Stock Sub-
Account.
    3. Applicants state that the Contracts are designed to provide 
retirement benefits under a variety of retirement programs. Although 
payments under outstanding Contracts continue to be received, 
Washington National no longer offers the Contracts for sale. Purchase 
payments under a Contract may be allocated to the fixed account or the 
variable account. The Contract also provides for, among other things: 
(a) a variety of annuity payout options beginning on the annuity 
commencement date; (b) surrender of the Contract prior to its maturity 
date for a cash payment representing all or part of the Contract's 
value; and (c) a death benefit payable if the annuitant dies before the 
maturity date.
    4. Washington National Equity Company (``WNEC''), formerly a 
registered broker-dealer which was a wholly-owned subsidiary of 
Washington National, served as the underwriter for the Separate 
Account. Applicants state that WNEC is no longer in existence.
    5. Various fees and charges are deducted under the Contracts. A 
daily mortality risk charge (the ``annuity rate guarantee charge'') 
equal to an effective annual rate of 0.80% of the average net assets of 
the Separate Account is deducted to compensate Washington National for 
bearing certain mortality risks under the Contracts. The mortality risk 
arises from Washington National's obligation to make annuity payments 
regardless of the mortality experience of persons receiving such 
payments. Washington National states that the mortality risk charge may 
not be increased under the Contract. If the deductions are insufficient 
to cover the actual cost of the mortality risk, Washington National 
will bear the loss. Conversely, if the deductions prove more than 
sufficient, the excess will be a profit to Washington National.
    6. Applicants state that currently an investment management charge 
is made daily from the Separate Account to Washington National which is 
equal on an annual basis to 0.50% of the average net assets of the 
Separate Account. Washington National pays NBD Bank, the sub-adviser 
for the Stock Sub-Account, a fee of 0.40% of the average net assets of 
the Stock Sub-Account.
    7. A daily asset-based financial accounting service charge equal to 
an effective annual rate of 0.35% of the average net assets of the 
Separate Account is deducted to reimburse Washington National for 
providing financial accounting services to the Separate Account, 
including preparation and maintenance of all accounting, bookkeeping, 
financial and other statements for the conduct of the business and 
operations of the Separate Account. Applicants state that this charge 
is guaranteed not to increase and is designed to cover the actual 
expenses incurred in providing these services. Washington National does 
not expect or intend to profit from the charge which will be deducted 
in reliance on Rule 26a-1.
    8. An annual contract maintenance charge of $30 is deducted from 
the Contract value on each Contract anniversary or on the date of full 
withdrawal or election of a settlement option if that date is not the 
Contract anniversary. The charge is deducted on a pro rata basis from 
the Contract value of each Sub-Account and the fixed account. The 
charge is not guaranteed, may be changed in the future and may be 
deducted more frequently than annually. Applicants represent that this 
charge will be deducted in reliance on Rule 26a-1 and is not greater 
than the cost of the bookkeeping and other administrative services to 
be provided for one year.
    9. The Separate Account currently pays all taxes, interest, 
brokerage fees and commissions, fees and expenses of legal counsel and 
independent auditors, custodian fees and expenses, expenses associated 
with meetings of the Contract owners, expenses incurred in the 
preparation, printing and distribution of reports and prospectuses by 
the Separate Account to its current owners, fees of and expenses 
incurred by directors of the Separate Account who are not Washington 
National's directors, officers or employees, fees and expenses 
associated with the approval, qualification or registration of the 
Contracts, extraordinary expenses if permitted by applicable laws and 
regulations, and all other fees and expenses incurred by or on behalf 
of the Separate Account which are not borne by Washington National 
(collectively, ``Separate Account Expenses''). During 1995, charges for 
the Separate Account Expenses were made against the assets of each Sub-
Account of the Separate Account at an annual rate of 0.20%.

[[Page 27122]]

    10. Although Washington National currently pays premium taxes, 
Washington National reserves the right to deduct premium taxes from 
purchase payments or to charge them against the Contracts to which they 
are attributable in the future. Premium taxes currently range up to 
3.5%.
    11. No sales charge is deducted from purchase payments. However, 
certain full or partial surrenders are subject to a contingent deferred 
sales charge (``Withdrawal Charge''). The Withdrawal Charge covers 
expenses relating to the sale of the Contracts. If the proceeds 
received from the Withdrawal Charge are not sufficient to pay such 
expenses, then Washington National will pay the excess out of its 
general assets, which may include proceeds derived from the annuity 
rate guarantee charge.
    The Withdrawal Charge is made at the rate of 6% of the amount 
withdrawn and is deducted from the amount withdrawn. In calculating the 
Withdrawal Charge, any amount which the Contract owner withdraws will 
be treated as a withdrawal of purchase payments until the Contract 
owner has withdrawn the total amount of all purchase payments received 
within 72 months of the date of withdrawal. The Withdrawal Charge 
applies to purchase payments on a first-in, first-out basis. The total 
Withdrawal Charge will never exceed 6% of the total purchase payments.
    Washington National will not deduct the Withdrawal Charge: (a) on 
the first 10% of the Contract value withdrawn from a Contract during 
any Contract year (determined as of the date of the first withdrawal 
during the year); (b) on purchase payments received more than 72 months 
prior to the date of withdrawal; (c) if the amount withdrawn is applied 
to (i) a settlement option after the Contract has been in effect for 
five or more years, or (ii) settlement options 2, 5 or 6 (as defined in 
the Contract) at any time; and (d) if the annuitant dies.
    12. Pursuant to an Asset Transfer Agreement and Plan of 
Reorganization (the ``Reorganization Agreement'') and subject to 
approval by persons entitled to vote in respect of the Separate Account 
(``Separate Account Voters''), the Separate Account will be 
restructured as a unit investment trust (the ``Reorganization''). 
Applicants state that the unit investment trust will be divided into 
three sub-accounts, each of which will invest exclusively in shares of 
a corresponding series of the Scudder Variable Life Investment Fund 
(the ``Fund'') whose investment objective is substantially the same as 
the current investment objective of the relevant Sub-Account of the 
Separate Account. In connection with the Reorganization, the assets of 
each Sub-Account of the Separate Account will be transferred to the 
corresponding portfolio of the Fund in exchange for shares of the 
portfolio of equal value. Applicants state that the Reorganization is 
intended to counteract the trend of net redemptions in the Separate 
Account which limits investment flexibility and threatens the ability 
of the Separate Account to best achieve its investment objectives. 
Applicants also state that the Reorganization will benefit Contract 
owners by providing economies of scale and simplifying record keeping.
    13. The Fund was organized as a Massachusetts business trust on 
March 15, 1985, for the purpose of serving as the funding vehicle for 
variable annuity contracts and variable life insurance policies to be 
offered by the separate accounts of certain life insurance companies. 
The Fund has six separate investment portfolios: the Bond Portfolio, 
the Money Market Portfolio; the Capital Growth Portfolio; the Growth 
and Income Portfolio; the Balanced Portfolio; and the International 
Portfolio. Only the Bond Portfolio, the Money Market Portfolio and the 
Capital Growth Portfolio of the Fund will be involved in the 
Reorganization. Scudder Investor Services, Inc. serves as the 
underwriter for the Fund.
    14. The Fund has adopted a plan for financing distribution expenses 
pursuant to Rule 12b-1 under the 1940 Act for a newly authorized class 
of shares (``Class B'' shares). Applicants state that the Continuing 
Separate Account will, at the time of the Reorganization and 
thereafter, invest only in a class of the Fund's shares for which such 
a Rule 12b-1 plan has not been adopted (``Class A'' shares).
    15. Pursuant to an investment advisory agreement with the Fund, and 
subject to the supervision and approval of the Fund's Board of 
Trustees, Scudder, Stevens & Clark, Inc. (the ``Adviser'') renders 
investment advisory services to the Fund's portfolios. Under the 
investment advisory agreement, the Adviser charges the Fund an 
investment management fee with respect to the Bond Portfolio at the 
annual rate of 0.475% of its average net assets, with respect to the 
Money Market Portfolio at the annual rate of 0.370% of its average net 
assets, and with respect to the Capital Growth Portfolio at the annual 
rate of 0.475% of its average net assets. In addition, the Fund bears 
certain expenses for clerical, accounting and certain other services 
provided to the Fund. In 1995, these other expenses were deducted at an 
annual rate of 0.085%, 0.130% and 0.095% of the average net assets of 
the Bond Portfolio, the Money Market Portfolio and the Capital Growth 
Portfolio, respectively.
    16. Applicants state that Washington National will assume all costs 
to be incurred by the Separate Account in effecting the Reorganization. 
In exchange for the assets of each of the Sub-Accounts of the Separate 
Account, shares of the corresponding portfolio of the Fund will be 
issued. Shares of the Capital Growth Portfolio will be issued in return 
for the assets of the Stock Sub-Account, shares of the Bond Portfolio 
will be issued for the assets of the Bond Sub-Account, and shares of 
the Money Market Portfolio will be issued for the assets of the Short-
Term Portfolio Sub-Account.
    17. The number of shares of each portfolio to be issued in 
connection with the Reorganization to the respective corresponding sub-
account of the Continuing Separate Account will be determined by 
dividing the value of the net assets to be transferred from the 
particular Sub-Account of the Separate Account as of the business day 
immediately preceding the effective date of the Reorganization by the 
net asset value per share of the corresponding portfolio of the Fund.
    18. Applicants state that, after the Reorganization, the investment 
management fee and the charge for Separate Account Expenses will not be 
deducted from the Continuing Separate Account. Applicants state, 
however, that the portfolios of the Fund in which the sub-accounts of 
the Continuing Separate Account will invest after the Reorganization 
will deduct an investment management fee and a charge for operating 
expenses of each portfolio of the Fund.
    19. Applicants state that the Reorganization will not have any 
adverse economic impact on the Contract owners' interests under the 
Contracts. Applicants state that the overall level of fees and charges 
borne, directly or indirectly, by Contract owners will not be 
materially greater (and generally should be lower) immediately after 
the Reorganization than immediately before it. The investment 
management fee for each of the three available portfolios of the Fund 
is lower than the current rate charged to any of the Sub-Accounts of 
the Separate Account. Applicants state that in 1995 the sum of the 
investment management fee and the other operating expenses deducted 
from each of the three portfolios of the Fund (0.56% for the Bond 
Portfolio, 0.50% for the Money

[[Page 27123]]

Market Portfolio and 0.57% for the Capital Growth Portfolio) is less 
than the 0.70% sum of the investment management fee and the deduction 
for other expenses currently imposed against the assets of the three 
corresponding Sub-Accounts of the Separate Account.
    20. The application states that a Special Meeting of Separate 
Account Voters was held on March 12, 1996. The proposed transactions 
were approved at the Special Meeting by the vote of a majority of the 
outstanding voting securities with respect to each Sub-Account of the 
Separate Account. Applicants state that on September 22, 1995, a 
registration statement was filed on Form N-14 in connection with the 
Reorganization.

Applicants' Legal Analysis

    1. 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 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. 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.
    2. Applicants request exemptions from Sections 26(a)(2)(C) and 
27(a)(2) of the 1940 Act to the extent necessary to permit the 
deduction of the 0.80% mortality risk charge from the assets of the 
Continuing Separate Account. Applicants represent that the annuity rate 
guarantee charge under the Contracts is within the range of industry 
practice for comparable annuity contracts issued by other insurance 
companies. This representation is based upon Washington National's 
analysis of publicly available information about such other contracts, 
taking into consideration the particular annuity features of the 
comparable contracts, including such factors as current charge levels, 
charge level or annuity rate guarantees, the manner in which the 
charges are imposed and the markets in which the contracts have been 
offered. Applicants state that Washington National will maintain a 
memorandum, available to the Commission upon request, setting forth in 
detail the products analyzed in the course of, and the methodology and 
results of, its review.
    3. Applicants state that amounts derived from the annuity rate 
guarantee charge that exceed the expenses that the deductions were 
designed to cover will be offset by aggregate expenses of Washington 
National, which will include any distribution expenses not reimbursed 
by the contingent deferred sales charge. In such circumstances, a 
portion of the annuity rate guarantee charge could be viewed as 
providing for a portion of the costs relating to distribution of the 
Contracts.
    4. Applicants state that there is currently no distribution 
financing arrangement for the Contracts because no new Contracts are 
being distributed. Nevertheless, Applicants represent that there is a 
reasonable likelihood that the distribution financing arrangement for 
the Continuing Separate Account (to the extent that such an arrangement 
may be deemed to exist) will benefit the Continuing Separate Account 
and the Contract owners. Applicants state that Washington National will 
maintain a memorandum, available to the Commission upon request, 
setting forth in detail the basis for this conclusion.
    5. Washington National represents that the assets of the Continuing 
Separate Account will be invested only in a management investment 
company which undertakes, in the event it 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 a 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

    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. McFarland,
Deputy Secretary.
[FR Doc. 96-13457 Filed 5-29-96; 8:45 am]
BILLING CODE 8010-01-M