[Federal Register Volume 61, Number 117 (Monday, June 17, 1996)]
[Notices]
[Pages 30647-30650]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15275]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22012; File No. 812-9954-01]


ITT Hartford Life and Annuity Insurance Company, et al.

June 11, 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'').

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APPLICANTS: ITT Hartford Life and Annuity Insurance Company (``ILA''), 
ICMG Registered Variable Life Separate Account One (``Separate 
Account''), and Hartford Equity Sales Company (``HESCO'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act 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 permitting the 
Separate Account and other separate accounts established in the future 
by ILA to support certain group flexible premium variable life 
insurance policies to deduct from premium payments an amount that is 
reasonably related to the increased federal tax burden of ILA resulting 
from the application of Section 848 of the Internal Revenue Code of 
1986, as amended.

FILING DATE: The application was filed on October 30, 1995. An amended 
application was filed on May 29, 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 on this application by writing to the 
Secretary of the Commission and serving Applicants with a copy of the 
request, personally or by mail. Hearing requests must be received by 
the commission by 5:30 p.m. on July 8, 1996, and should be accompanied 
by proof of service on Applicants in the form of an affidavit or, for 
lawyers, by certificate. Hearing requests should state the nature of 
the 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 Fifth Street, N.W., Washington, DC 
20549. Applicants, c/o Scott K. Richardson, Esq., Assistant Counsel, 
ITT Hartford Life Insurance Companies, P.O. Box 2999, Hartford, CT 
06104-2999.

FOR FURTHER INFORMATION CONTACT:
 Patrice M. Pitts, Special Counsel, Office of Insurance Products 
(Division of Investment Management) at (202) 942-0670.

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. ILA is a stock life insurance company engaged in the business of 
writing both individual and group life insurance and annuity policies 
in the District of Columbia and in all states except New York. ILA was 
redomesticated from Wisconsin to Connecticut on May 1, 1996. ILA is a 
wholly-owned subsidiary of Hartford Life Insurance Company.
    2. The Separate Account was established by ILA under the laws of 
the state of Connecticut, and is registered as a unit investment trust 
under the 1940 Act. The assets of the Separate Account are not 
chargeable with liabilities arising out of any other business which ILA 
may conduct. Income and realized and unrealized capital gains and 
losses of the Separate Account will be credited to the Separate Account 
without regard to any of ILA's other income or realized and unrealized 
capital gains and losses, or the income, gains and losses of other ILA 
separate investment accounts.

[[Page 30648]]

    3. The Separate Account presently consists of twelve investment 
divisions, each of which invests exclusively in the shares of 
investment options available through seven open-end management 
investment companies.
    4. In the future, the board of directors of ILA may establish other 
separate accounts (``Future Accounts'') which may serve as funding 
vehicles for other variable life insurance policies issued by ILA. The 
Future Accounts will be organized as unit investment trusts, and will 
file registration statements under the 1940 Act and the Securities Act 
of 1933.
    5. HESCO will serve as the principal underwriter for certain group 
flexible premium variable life insurance policies (``Policies'') and 
any other variable life insurance policies (``Future Policies'') issued 
in the future by ILA through the Separate Account or Future Accounts. 
HESCO is registered as a broker-dealer under the Securities Exchange 
Act of 1934, and is a member of the National Association of Securities 
Dealers.
    6. In 1990, Congress amended the Internal Revenue Code of 1986 
(``Code'') by, among other things, enacting Section 848 thereof. 
Section 848 changed the federal income taxation of life insurance 
companies by requiring them to capitalize and amortize over a period of 
ten years part of their general expenses for the current year. Under 
prior law, those expenses were deductible in full from the gross income 
of the current year.
    7. The amount of expenses that must be capitalized and amortized 
under Section 848 generally is determined with reference to premiums 
for certain categories of life insurance contracts (``specified 
contracts''). More specifically, an amount of expenses equal to a 
percentage of the premiums for the current year (i.e., gross premiums 
minus return premiums and reinsurance premiums) must be capitalized and 
amortized for each specified contract. The percentage varies, depending 
upon the type of specified contract in question, in accordance with a 
schedule set forth in Section 848.
    8. In effect, Section 848 accelerates the realization of income 
from certain insurance contracts and, accordingly, the payment of taxes 
on the income generated by those contracts. Taking into account the 
time value of money, Section 848 increases the tax burden of an 
insurance company because the amount of general expenses that must be 
capitalized and amortized is measured by the premiums received under 
certain insurance contracts.
    9. The Policies and Future Policies to which a charge for the 
federal tax burden related to deferred acquisition costs (``tax burden 
charge'') will be applied are/will be among the specified contracts. 
They fall/will fall into the category of life insurance contracts under 
Section 848 for which 7.7% of net premiums received must be capitalized 
and amortized.
    10. The increased tax burden resulting from the application of 
Section 848 may be quantified as follows. For each $10,000 of net 
premiums received by ILA under the Policies, ILA may capitalize $770.00 
(i.e., 7.7% of $10,000). $38.50 of that amount may be deducted in the 
current year, leaving $731.50 (i.e., $770 minus $38.50) subject to 
taxation at the corporate tax rate of 35 percent. This works out to an 
increase in tax for the current year of $256.03 (i.e., 0.35  x  
$731.50). This increased federal income tax burden will be partially 
offset by deductions allowed during the next ten years as a result of 
amortizing the remainder of the $770--$77 in each of the following nine 
years, and $38.50 in year ten.
    11. To the extent that capital must be used by ILA to satisfy its 
increased tax burden under Section 848, such profits are not available 
to ILA for investment. ILA submits that the cost of capital used to 
satisfy its increased federal income tax burden under Section 848 is, 
in essence, its targeted rate of return on invested capital. Because 
ILA seeks a targeted rate of return on its invested capital of 10 
percent,\1\ ILA submits that a discount rate of 10% is appropriate for 
use in calculating the present value of its future tax deductions 
resulting from the amortization described above.
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    \1\ In determining the targeted rate of return on invested 
capital used in arriving at this discount rate, ILA first identified 
a reasonable risk-free rate of return that can be expected to be 
earned over the long term. ILA then determined the premium it needs 
to earn over that risk-free rate of return because of the nature of 
the products it sells. Applicants represent that such factors are 
appropriate to consider in determining ILA's targeted rate of return 
on invested capital.
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    12. Using a corporate tax rate of 35 percent, and assuming a 
discount rate of 10 percent, the present value of the federal income 
tax effect of the increased deductions allowable in the following ten 
years is $160.40. Because this amount partially offsets the increased 
tax burden, Section 848 imposes an increased tax burden on ILA equal to 
a present value of $95.63 ($56.03 minus $160.40) for each $10,000 of 
net premiums received under the Policies.
    13. ILA does not incur incremental federal income tax when it 
passes on state premium taxes to contract owners because premium taxes 
are deductible when computing federal income taxes. The same is not 
true for federal income taxes. Therefore, to offset fully the impact of 
Section 848, ILA must impose an additional charge that would make it 
whole not only for the $95.63 additional tax burden attributable to 
Section 848, but also for the tax on the additional $95.63 itself. This 
additional charge can be computed by dividing $95.63 by the complement 
of the 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% of net premiums.
    14. Based on its prior experience, ILA expects that all of its 
current and future deductions will be fully taken. ILA submits that a 
charge of 1.25% of net premium payments would reimburse it for the 
impact of Section 848, taking into account the benefit to ILA of the 
amortization permitted by Section 848 and the use by ILA of a discount 
rate of 10% (which is equivalent to its targeted rate of return) in 
computing the future deductions resulting from such amortization.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act provides, in pertinent part, that 
the Commission, by order upon application, may exempt any person, 
security or transaction (or any class or classes of persons, securities 
or transactions) from provisions of the 1940 Act or any rules 
thereunder, if and to the extent that the 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.
    2. Applicants request an order of the Commission pursuant to 
Section 6(c) exempting them from the provisions of Section 27(c)(2) of 
the 1940 Act and Rule 6e-3(T)(c)(4)(v) thereunder to permit ILA to 
deduct from premium payments received in connection with Policies and 
Future Policies an amount that is reasonable in relation in ILA's 
increased federal income tax burden related to the receipt of such 
premiums. Applicants further request an exemption from Rule 6e-
3(T)(c)(4)(v) to permit the proposed deductions to be treated as other 
than ``sale load'' for the purposes of Section 27 of the 1940 Act and 
the exemptions from various provisions of that Section found in Rule 
6e-3(T)(b)(13) under the 1940 Act.
    3. Section 27(c)(2) of the 1940 Act prohibits the sale of periodic 
payment plan certificates unless the proceeds of all payments (excepts 
such amounts as are deducted for sales load) are held under an 
indenture or agreement containing in substance the provisions required 
by Sections 26(a)(2) and

[[Page 30649]]

26(a)(3) of the 1940 Act. Sections 27(a)(1) and 27(h)(1), in effect, 
limit sales load on periodic payment plan certificates to 9% of total 
payments.
    4. Certain provisions of Rule 6e-3(T) provide a range of exemptive 
relief for the offering of flexible premium variable life insurance 
policies such as the Policies and Future Policies. For example, subject 
to certain conditions, Rule 6e-3(T)(b)(13)(iii) provides exemptions 
from Section 27(c)(2) that include permitting the payment of certain 
administrative fees and expenses, the deduction of a charge for certain 
mortality and expense risks, and ``[t]he deduction of premium taxes 
imposed by any state or other governmental entity.''
    5. Rule 6e-3(T)(c)(4) defines ``sales load'' charged during a 
contract period as the excess of any payments made during the period 
over the sum of certain specified charges and adjustments, including 
``[a] deduction for and approximately equal to state premium taxes[.]'' 
Applicants submit that the proposed tax burden charge is akin to a 
state premium tax charge in that it is an appropriate charge related to 
ILA's tax burden attributable to premiums received under the Policies 
and Future Policies.
    6. Applicants represent that the requested exemptions from Rule 6e-
3(T)(c)(4)(v) are necessary in connection with Applicants' reliance on 
certain provisions of Rule 6e-3(T)(b)(13), particularly on subparagraph 
(b)(13)(i), which provides exemptions from Sections 27(a)(1) and 
27(h)(1) of the 1940 Act. Issuers and their affiliates may rely on Rule 
6e-3(T)(b)(13)(i) if they meet the Rule's alternative limitations on 
``sales load,'' as defined in Rule 6e-3(T)(c)(4). Applicants 
acknowledge that a deduction for an insurance company's increased 
federal tax burden does not fall squarely within any of the specified 
charges or adjustments which are excluded from the definition of 
``sales load'' in Rule 6e-3(T)(c)(4). Nevertheless, Applicants submit 
that there is no public policy reason for treating such increased 
federal tax burden as sales load.
    7. Applicants assert that the public policy which underlies Rule 
6e-3T(b)(13)(i), like that which underlies Sections 27(a)(1) and 
27(h)(1), is to prevent excessive sales loads from being charged in 
connection with the sale of periodic payment plan certificates. 
Applicants submit that the treatment of a federal income tax charge 
attributable to premium payments as sales load would in no way further 
this legislative purpose because such a deduction bears no relation to 
the payment of sales commissions or other distribution expenses. 
Applicants assert that the Commission has concurred in this conclusion 
by excluding deductions for state premium taxes from the Rule 6e-
3(T)(c)(4) definition of ``sales load.''
    8. Applicants submit that Rule 6e-3(T)(c)(4) tailors the general 
terms of Section 2(a)(35) of the 1940 Act to variable life insurance 
contracts. Applicants further submit that, just as the percentage 
limits of Sections 27(a)(1) and 27(h)(1) depend on the definition of 
``sales load'' in Section 2(a)(35) for their efficacy, the percentage 
limits in Rule 6e-3(T)(b)(13)(i) depend on Rule 6e-3(T)(c)(4). 
Applicants submit that Rule 6e-3(T)(c)(4) does not depart, in 
principal, from Section 2(a)(35).
    9. Applicants assert that Section 2(a)(35) excludes from ``sales 
load'' expenses or fees ``not properly chargeable to sales or 
promotional activities.'' Because the proposed tax burden charge will 
be used to compensate ILA for its increased federal tax burden 
attributable to the receipt of premiums, and such cost is not properly 
chargeable to sales or promotional activities, Applicants submit that 
not treating the proposed tax burden charge as sales load is consistent 
with the policies of the 1940 Act.
    10. Applicants further assert that Section 2(a)(35) excludes from 
the definition of ``sales load'' deductions for premiums for ``issue 
taxes.'' Applicants submit that the exclusion of charges for expenses 
attributable to federal taxes from sales load (as defined in Section 
2(a)(35)) is consistent with the policies of the 1940 Act. By 
extension, Applicants submit, it is equally consistent to exclude such 
charges, including the proposed tax burden charge, from the definition 
of ``sales load'' in Rule 6e-3(T)(c)(4).
    11. For these reasons, Applicants submit that deducting a charge 
from variable life insurance contract premium payments for an insurer's 
tax burdens attributable to its receipt of such payments, and excluding 
that charge from sales load, is consistent with the policies of the 
1940 Act. Applicants assert that this is because such a deduction is an 
appropriate charge related to the insurer's tax burden attributable to 
the premium payments received.
    12. Applicants seek the relief requested herein with respect to the 
Policies and Future Policies. Without the requested relief, ILA would 
have to request and obtain exemptive relief for each Future Contract to 
be issued. Such additional requests for exemptive relief would present 
no issues under the 1940 Act not already addressed in this request for 
exemptive relief.
    13. Applicants submit that the requested relief would promote 
competitiveness in the variable life insurance market by eliminating 
the need for them to file redundant exemptive applications, thereby 
reducing ILA's administrative expenses and maximizing efficient use of 
its resources. Applicants further submit that the delay and expense 
involved in having to seek exemptive relief repeatedly would impair 
ILA's ability to take advantage of business opportunities as they 
arise. Moreover, if Applicants were required to seek exemptive relief 
repeatedly with respect to the 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 for ILA. For these reasons, Applicants assert that the 
requested relief is appropriate in the public interest and consistent 
with the protection of investors.

Conditions for Relief

    Applicants agree to comply with the following conditions for 
relief.
    1. ILA will monitor the reasonableness of the tax burden charge.
    2. The registration statement for the Policies and Future Policies 
under which the 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 ILA's increased federal tax burden 
under Section 848 resulting from the receipt of premiums.
    3. The registration statement for any Policies of Future Policies 
under which a tax burden charge is deducted will contain as an exhibit 
an actuarial opinion as to: (a) the reasonableness of the charge in 
relation to ILA's increased federal tax burden under Section 848 
resulting from the receipt of premiums; (b) the reasonableness of the 
targeted rate of return used in calculating such charge; and (c) the 
appropriateness of the factors taken into account by ILA in determining 
the 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--to permit the deduction of 
1.25% of premium payments under the Policies and any Future Policies--
would be 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.


[[Page 30650]]


    For the Commission, by the Division of Investment Management, by 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-15275 Filed 6-14-96; 8:45 am]
BILLING CODE 8010-01-M