27110 Federal Register / Vol. 61, No. 105 / Thursday, May 30, 1996 / Notices

registered securities association which

engages on an exclusive basis on its own

behalf, in collecting, processing, or

preparing for distribution or

publication, any information with

respect to (i) transactions or quotations

on or effected or made by means of any

facility of such exchange or (ii)

quotations distributed or published by

means of any electronic quotation

system operated by such association.

The federal securities laws require that

before the Commission may approve the

registration of an exclusive SIP, it must

make certain mandatory findings. It

takes a SIP applicant approximately 400

hours to prepare documents which

include sufficient information to enable

the Commission to make those findings.

Currently, there are only two exclusive

SIPs registered with the Commission;

The Securities Information Automation

Corporation (‘‘SIAC’’) and the National

Association of Securities Dealers, Inc.

(‘‘NASD’’). SIAC and the NASD are

required to keep the information on file

with the Commission current, which

entails filing a form SIP annually to

update information.

General comments regarding the

estimated burden hours should be

directed to the Desk Officer for the

Securities and Exchange Commission at

the address below. Any comments

concerning the accuracy of the

estimated average burden hours for

compliance with Commission rules and

forms should be directed to Michael E.

Bartell, Associate Executive Director,

Office of Information Technology,

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549 and Desk Officer for the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 3208, New Executive

Office Building, Washington, D.C.

20503.

Dated: May 22, 1996.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–13458 Filed 5–29–96; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–21981; No. 812–9848]

Aetna Life Insurance and Annuity

Company, et al.

May 23, 1996.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’).

ACTION: Notice of Application for an

Order under the Investment Company

Act of 1940 (‘‘1940 Act’’).

APPLICANTS: Aetna Life Insurance and

Annuity Company (‘‘Aetna’’) and

Variable Life Account B of Aetna Life

Insurance and Annuity Company

(‘‘Separate Account’’).

RELEVANT 1940 ACT SECTIONS: Order

requested under Section 6(c) granting

exemptions from Section 27(c)(2) of the

1940 Act and Rule 6e–3(T)(c)(4)(v)

thereunder.

SUMMARY OF APPLICATION: Applicants

request an order that will permit the

Separate Account, any future separate

accounts established by Aetna (‘‘Future

Accounts’’), and all other persons, other

than Aetna, that may, in the future serve

as a principal underwriter (‘‘Future

Broker-Dealers’’) of certain flexible

premium variable life insurance policies

issued by Aetna, to deduct from

premium payments an amount that is

reasonably related to the Aetna’s

increased federal tax burden resulting

from the receipt of those premium

payments, pursuant to Section 848 of

the Internal Revenue Code of 1986, as

amended (‘‘Code’’).

FILING DATE: The application was filed

on November 15, 1995 and was

amended on May 17, 1996.

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

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 18, 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 Commission.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 5th Street,

N.W., Washington, D.C. 20549.

Applicants: Susan E. Bryant, Esq., Aetna

Life Insurance and Annuity Company,

151 Farmington Avenue, Hartford,

Connecticut 06156.

FOR FURTHER INFORMATION CONTACT:

Pamela K. Ellis, Senior Counsel, or

Wendy Finck Friedlander, Deputy

Chief, Office of Insurance Products

(Division of Investment Management), at

(202) 942–0670.

SUPPLEMENTARY INFORMATION: The

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 is a stock life insurance

company, organized in Connecticut, and

is a wholly owned subsidiary of Aetna

Life and Casualty Company.

2. The Separate Account is a separate

account established by Aetna and

registered under the 1940 Act as a unit

investment trust. Currently, the Separate

Account has 17 subaccounts each of

which invests in a corresponding

investment portfolio of an open-end

management investment company

registered under the 1940 Act. The

Separate Account funds flexible

premium variable life insurance policies

issued by Aetna (‘‘Current Policies’’) for

which a registration statement has been

filed with the Commission to register

interests in the Current Policies under

the Securities Act of 1933, and flexible

premium variable life insurance policies

developed by Aetna in the future

(‘‘Future Policies’’) (Current Policies,

together with Future Policies,

‘‘Policies’’). Aetna anticipates that any

Future Accounts established to fund

Current Policies or Future Policies

would be registered under the 1940 Act

as unit investment trusts.

3. Aetna is the principal underwriter

and distributor for the Policies. Aetna is

a registered broker-dealer under the

Securities Exchange Act of 1934 (‘‘1934

Act’’), and is a member of the National

Association of Securities Dealers, Inc.

(‘‘NASD’’). Any Future Broker-Dealer

will be registered as a broker-dealer

under the 1934 Act, and will be a

member of the NASD.

4. Applicants propose to deduct from

premium payments received under the

Policies a 1.25% charge to reimburse

Aetna for the increase in its federal

income taxes resulting from Section 848

of the Code. The charge will be

reasonably related to Aetna’s increased

federal tax burden.

5. The Omnibus Budget

Reconciliation Act of 1990 (‘‘OBRA

1990’’), amending Section 848 of the

Code, requires life insurance companies

to capitalize and amortize over ten years

certain general expenses for the current

year. Prior law allowed these expenses

to be deducted in full from the current

year’s gross income. Section 848, as

amended, effectively accelerates the

realization of income from specified

contracts and, consequently, the

payment of taxes on that income. Taking

into account the time value of money,

Section 848 increases the insurance

company’s tax burden because the

amount of general deductions that must

be capitalized and amortized is

measured by the premiums received

under the policies.
Federal Register / Vol. 61, No. 105 / Thursday, May 30, 1996 / Notices 27111

1 In determining the rate of return used in arriving

at the discount rate, Aetna considered a number of

factors. These factors included current market

interest rates and expected interest rate trends,

inflation, Aetna’s anticipated long-term growth rate,

the level of risk acceptable to Aetna, and available

information about rates of return obtained by other

life insurance companies.

6. The amount of expenses subject to

Section 848 equals a percentage of the

current year’s net premiums received

(i.e., gross premiums minus return

premiums and reinsurance premiums)

under life insurance or other contracts

categorized under this Section. The

Policies will be categorized under

Section 848 as life insurance contracts

requiring 7.7% of the net premiums

received to be capitalized and amortized

under the schedule set forth in Section

848(c)(1).

7. The increased tax burden on every

$10,000 of net premiums received under

the Policies is quantified by Applicants

as follows. For each $10,000 of net

premiums received in a given year,

Aetna must capitalize $770 (i.e., 7.7% of

$10,000), and $38.50 of this amount

may be deducted in the current year.

The remaining $731.50 ($770 less

$38.50) is subject to taxation at the

corporate tax rate of 35% and results in

$256.03 (.35% × $731.50) more in taxes

for the current year than Aetna would

have owed prior to the enactment of

OBRA 1990. However, the current tax

increase will be offset partially by

deductions allowed during the next ten

years, which result from amortizing the

remainder of the $770 ($77 in each of

the following nine years and $38.50 in

year ten).

8. In Aetna’s business judgement, it is

appropriate to use a discount rate of at

least 10% in evaluating the present

value of its future tax deductions.

Capital that Aetna must use to pay its

increased federal tax burden under

Section 848 will be unavailable for

investment. The cost of capital used to

satisfy this increased tax burden

essentially will be Aetna’s after-tax rate

of return (i.e., the return sought on

invested capital), which is at least

10%.1 Accordingly, Applicants submit

that the targeted rate of return is

appropriate for use in this present value

calculation.

9. Using a federal corporate tax rate of

35%, and assuming a discount rate of

10%, the present value of the tax effect

of the increased deductions allowable in

the following ten years, which partially

offsets the increased tax burden,

amounts to $160.40. The effect of

Section 848 on the Policies is, therefore,

an increased tax burden with a present

value of $95.63 for each $10,000 of net

premium payments received (i.e.,

$256.03 minus $160.40).

10. Aetna does not incur incremental

federal income tax when it passes on

state premium taxes to Policy owners

because state premium taxes are

deductible in computing federal income

taxes. In contrast, federal income taxes

are not deductible in computing Aetna’s

federal income taxes. To compensate

Aetna fully for the impact of Section

848, Aetna must impose an additional

charge to make it whole for not only the

$95.63 additional tax burden

attributable to Section 848, but also the

tax on the additional $95.63 itself. This

additional charge can be determined by

dividing $95.63 by the complement of

35% federal corporate income tax rate

(i.e., 65%), resulting in an additional

charge of $147.12 for each $10,000 of

net premiums, or 1.47%.

11. Based on its prior experience,

Aetna reasonably expects to take fully

almost all future deductions. It is

Aetna’s judgement that a 1.25% charge

would reimburse it for the increased

federal income tax liabilities, under

Section 848. Applicants represent that

the 1.25% charge will be reasonably

related to Aetna’s increased federal

income tax burden under Section 848.

This representation takes into account

the benefit to Aetna of the amortization

permitted by Section 848 and the use of

a 10% discount rate (which is

equivalent to Aetna’s targeted rate of

return) in computing the future

deductions resulting from such

amortization.

Applicants’ Legal Analysis

1. Applicants request an order under

Section 6(c) of the 1940 Act exempting

them and any Future Accounts from the

provisions of Section 27(c)(2) of the

1940 Act, and Rule 6e–3(T)(c)(4)(v)

thereunder, to the extent necessary to

permit Applicants and any Future

Accounts to deduct from premium

payments made under the Policies, a

charge in an amount that is reasonable

in relation to Aetna’s increased federal

tax burden related to the receipt of such

premium payments, without treating

such charge as a sales load. Applicants

assert that it is appropriate to deduct a

charge for an insurer’s increased tax

burden attributable to premiums

received, and to exclude the deduction

of this charge from sales load, because

it is a legitimate expense of the

company and not for sales and

distribution expenses. In addition,

Applicants request that the order extend

the same exemptions granted to Aetna,

to any Future Broker-Dealer that may in

the future serve as principal underwriter

for the Current Policies or Future

Policies.

2. Section 6(c) authorizes the

Commission, by order and upon

application, to exempt any person,

security, or transaction, or class of

persons, securities, or transactions, from

any provisions of the 1940 Act. The

Commission grants relief under Section

6(c) to the extent an 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.

3. The Separate Account is, and the

Future Accounts will be, regulated

under the 1940 Act as issuers of

periodic payment plan certificates.

Accordingly, the Separate Account, the

Future Accounts, and Aetna are subject

to Section 27 of the 1940 Act.

4. Section 27(c)(2) prohibits the sale

of periodic payment plan certificates

unless the following conditions are met.

The proceeds of all payments (except

amounts deducted for ‘‘sales load’’)

must be held by a trustee or custodian

having the qualifications established

under Section 26(a)(1) for the trustees of

unit investment trusts.

5. ‘‘Sales load’’ is defined under

Section 2(a)(35), in relevant part, as:

The difference between the price of a

security to the public and that portion of the

proceeds from its sale which is received and

invested or held for investment by the issuer

(or in the case of a unit investment trust, by

the depositor or trustee), less any portion of

such difference deducted for trustee’s or

custodian’s fees, insurance premiums, issue

taxes, or administrative expenses or fees

which are not properly chargeable to sales or

promotional activities.

Sales loads on periodic payment plan

certificates are limited by Sections

27(a)(1) and 27(h)(1) to a maximum of

9% of total payments.

6. Rule 6e–3(T) provides a range of

exemptive relief to separate accounts

issuing flexible premium variable life

insurance contracts, as defined in

subparagraph (c)(1) of that Rule.

For example, paragraph (b)(13)(iii)(E)

of Rule 6e–3(T) provides exemptive

relief from Section 27(c)(2) by

permitting an insurer to make certain

deductions, other than sales load,

including the insurer’s tax liabilities

from receipt of premium payments

imposed by states or by other

governmental entities. Applicants assert

that the proposed tax burden charge

arguably is covered by subparagraph

(b)(13)(iii) or Rule 6e–3(T). Applicants

note, however, that the language of

paragraph (c)(4) of the Rule appears to

require that deductions for federal tax

obligations resulting from receipt of
27112 Federal Register / Vol. 61, No. 105 / Thursday, May 30, 1996 / Notices

premium payments be treated as ‘‘sales

load.’’

7. Rule 6e–3(T)(c)(4) defines ‘‘sales

load’’ during a period as the excess of

any payments made during that period

over certain specified charges and

adjustments, including a deduction for

state premium taxes. Under a literal

reading of paragraph (c)(4) of the Rule,

a deduction for an insurer’s increased

federal tax burden does not fall squarely

into those itemized charges or

deductions, arguably causing the

proposed tax burden charge to be

treated as part of ‘‘sales load.’’

8. Applicants submit that the Rule 6e–

3(T)(c)(4)(v) limitation of the premium

tax exclusion from the definition of

‘‘sales load’’ to state premium taxes

probably is an historical accident

related to that fact that when Rule 6e–

3(T) was adopted in 1984, and when it

was amended in 1987, the additional

Code Section 848 tax burden

attributable to the receipt of premiums

did not exist. Applicants further submit

that nothing in the administrative

history of Rule 6e–3(T) suggests that the

exclusion from the definition of sales

load of deductions for tax liabilities

attributable to the amount of premium

payments received was tied to the type

of government entity imposing such

taxes.

9. Applicants also request exemptions

for any Future Accounts that Aetna may

establish to support the Current Policies

or any Future Policies, as well as for

each Future Broker-Dealer that may

distribute the Current Policies or Future

Policies.

10. Applicants assert that the

standards of Section 6(c) are satisfied

because the requested relief is

appropriate in the public interest and

consistent with the purposes of the 1940

Act and the protection of investors. The

exemptive relief would eliminate the

need for Aetna to file additional

exemptive applications for each Current

Policy or Future Policy to be issued

through a Future Account with respect

to the same issues under the 1940 Act

that have been addressed in this

application, as well as for each Future

Broker-Dealer that distributes the

Current Policy or Future Policy, and

thus would promote competitiveness in

the variable life insurance market by

avoiding delay, reducing administrative

expenses, and maximizing efficient use

of resources. Applicants further assert

that the exemptive relief would enhance

Aetna’s ability to effectively take

advantage of business opportunities as

they arise. If Aetna were required to

seek exemptive relief repeatedly with

respect to the same issues addressed in

this application, investors would not

receive any benefit or additional

protection thereby and might be

disadvantaged as a result of increased

overhead expenses.

11. Applicants believe that a charge of

1.25% of premium payments would

reimburse Aetna for the impact of

Section 848 of the Code, as currently

written on its federal income tax

liabilities. Aetna believes, however, that

it may have to increase this charge if

any change in, or interpretation of,

Section 848 or any successor provision

results in a further increased federal

income tax burden due to the receipt of

premiums. Such an increase could

result from a change in corporate federal

income tax rate, a change in the 7.7%

figure, or a change in the amortization

period.

Conditions for Relief

1. Aetna will monitor the

reasonableness of the 1.25% charge.

2. The registration statement for each

Policy under which the 1.25% tax

burden charge is deducted will: (a)

disclose the charge; (b) explain the

purpose of the charge; and (c) state that

the charge is reasonable in relation to

Aetna’s increased federal tax burden

under Section 848 of the Code.

3. The registration statement for each

Policy providing for the 1.25% tax

burden charge will contain as an exhibit

an actuarial opinion as to: (a) the

reasonableness of the charge in relation

to Aetna’s increased federal tax burden

under Section 848 of the Code resulting

from the receipt of premiums; (b) the

reasonableness of the targeted rate of

return that is used in calculating such

charge; and (c) the appropriateness of

the factors taken into account by Aetna

in determining such targeted rate of

return.

Conclusion

For the reasons and upon the facts set

forth above, Applicants submit that the

requested exemptions from Section

27(c)(2) of the 1940 Act and Rule 6e–

3(T)(c)(4)(v) thereunder, 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.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–13544 Field 5–29–96; 8:45 am]

BILLING CODE 8010–01–M

[Rel. No. IC–21978; 812–10162]

Lord Abbett Global Fund, Inc., et al.;

Notice of Application

May 23, 1996.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of Application for

Exemption under the Investment

Company Act of 1940 (the ‘‘Act’’).

APPLICANTS: Lord Abbett Global Fund,

Inc. (the ‘‘Fund’’), Lord, Abbett & Co.

(‘‘Lord Abbett’’), and Dunedin Fund

Managers Limited (‘‘Dunedin’’).

RELEVANT ACT SECTIONS: Order requested

under section 6(c) of the Act for an

exemption from section 15(a) of the Act.

SUMMARY OF APPLICATION: Applicants

request an order that would permit the

implementation, without shareholder

approval, of a new sub-advisory

agreement (the ‘‘New Sub-Advisory

Contract’’) for a period of up to 120 days

following the termination of the former

sub-advisory contract on March 19,

1996 (‘‘Former Sub-Advisory Contract’’)

(the ‘‘Interim Period’’). The order also

would permit the sub-adviser to receive

from the Fund fees earned during the

Interim Period after shareholders have

approved the New Sub-Advisory

Contract.

FILING DATE: The application was filed

on May 21, 1996.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the SEC 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

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 writer’s interest, the reason for the

request, and the issues contested.

Persons who wish to be notified of a

hearing may request notification by

writing to the SEC’s Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Applicants: The Fund and Lord Abbett,

767 Fifth Avenue, New York, New York

10153 and Dunedin, Dunedin House, 25

Ravelston Terrace, Edinburgh EH4 3EX,

Scotland.

FOR FURTHER INFORMATION CONTACT:

Elaine M. Boggs, Staff Attorney, at (202)

942–0572, or Alison E. Baur, Branch

Chief, at (202) 942–0564 (Division of

Investment Management, Office of

Investment Company Regulation).