Document ID: SEC-2006-1129-0001
Agency: sec
Document Type: Notice
Title: Merrill Lynch Life Insurance Company, et al; Notice of Application
Posted Date: 2006-09-01T04:00Z

[Federal Register: September 1, 2006 (Volume 71, Number 170)]
[Notices]               
[Page 52177-52183]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01se06-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-27468; File No.812-13273]

 
Merrill Lynch Life Insurance Company, et al; Notice of 
Application

August 28, 2006.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an amended order pursuant to Section 
6(c) of the Investment Company Act of 1940 (``Act'') granting 
exemptions from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of 
the Act and Rule 22c-1 thereunder.

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    Applicants: Merrill Lynch Life Insurance Company (``MLLIC''), 
Merrill Lynch Life Variable Annuity Separate Account A, Merrill Lynch 
Life Variable Annuity Separate Account C, Merrill Lynch Life Variable 
Annuity Separate Account D, ML Life Insurance Company of New York 
(``MLNY''), ML of New York Variable Annuity Separate Account A, ML of 
New York Variable Annuity Separate Account C, ML of New York Variable 
Annuity Separate Account D, and Merrill Lynch, Pierce, Fenner & Smith 
Incorporated (``MLPF&S'') (except for MLLIC, MLNY, and MLPF&S, each a 
``separate account'' and collectively the ``Separate Accounts'').
    Summary of Application: The Applicants request an order amending an 
existing order to permit the recapture of amounts applied to purchase 
payments made under certain variable annuity contracts. Applicants also 
request that the relief under the order extend to any current or future 
separate accounts of Merrill Lynch and their successors in interest, 
which may offer or support contracts that are substantially similar in 
all material respects to the contracts described in the application and 
to any other NASD registered broker/dealers under common control with 
Merrill Lynch, that serves as distributor or principal underwriter for 
the contracts.
    Filing Date: The application was filed on February 15, 2006, and 
amended and restated on August 24, 2006.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested person 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 September 25, 2006, 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 Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants, c/o Kirsty Lieberman, Esq., 
Merrill Lynch Insurance Group, Inc., 1300 Merrill Lynch Drive, 2nd 
Floor, Pennington, New Jersey 08534.

FOR FURTHER INFORMATION CONTACT: Robert Lamont, Senior Counsel or Joyce 
M. Pickholz, Branch Chief, Office of

[[Page 52178]]

Insurance Products, Division of Investment Management, at (202) 551-
6795.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application; the complete application may be obtained for a fee from 
the Public Reference Branch of the Commission, 100 F Street, NE., 
Washington, DC 20549 (tel. (202) 551-8090).

Applicants' Representations

    1. The Existing Order (Merrill Lynch Life Insurance Company, et 
al., Investment Company Act Release Nos. 26712 (Dec. 20, 2004) (Notice) 
(FR Dec. 28, 2004) and 26726 (Jan. 21, 2005) (Order)), exempts the 
Applicants with respect to certain variable annuity contracts described 
herein (``Contracts'') and other variable annuity contracts that are 
substantially similar in all material respects to the Contracts, that 
MLLIC and/or MLNY (together, the ``Companies'') may issue in the future 
(``Future Contracts''), and any other separate accounts of the 
Companies and their successors in interest (``Future Accounts'') that 
support Future Contracts, and certain NASD member broker-dealers which 
in the future, may act as principal underwriter of such contracts 
(``Future Underwriters''), from the provisions of Sections 2(a)(32) and 
27(i)(2)(A) of the Act and Rule 22c-1 thereunder, pursuant to Section 
6(c) of the Act, to the extent necessary to permit the recapture of all 
or a portion of the bonus amounts (previously attributable to premium 
payments under the bonus class of the Contracts (``XC Class'')) where 
the bonus amounts were applied and a contract owner (``Owner'') (1) 
returns the Contract during the ``Ten Day Right to Review'' period (the 
``Free Look Period''); (2) dies within six months of receipt and 
acceptance by MLLIC or MLNY of a premium payment (unless the Contract 
is continued under the spousal benefit continuation option); or (3) 
surrenders the Contract (in full or in part) or the surrender value is 
paid to the Owner within three years of receipt and acceptance by MLLIC 
or MLNY of a premium payment (pursuant to a bonus recapture schedule).
    2. Applicants now seek to amend the Existing Order by changing the 
current bonus structure. The Applicants propose to increase the maximum 
bonus amount percentage during certain promotional periods. However, 
the Applicants would continue to recapture bonus amounts only at the 
lower maximum percentage allowed by the Existing Order when an Owner 
surrenders the Contract (in full or in part) or the surrender value is 
paid to the Owner within three years of receipt and acceptance by MLLIC 
or MLNY of a premium payment (pursuant to a bonus recapture schedule). 
The change in the bonus structure may provide an Owner with an 
additional bonus amount that is not subject to recapture. However, when 
an Owner returns the Contract during the Free Look Period or dies 
within six months of receipt and acceptance by MLLIC or MLNY of a 
premium payment, then the Applicants propose to recapture the entire 
bonus amount.
    3. The Contracts are individual flexible premium deferred variable 
annuity contracts issued by the Companies through the Separate 
Accounts. The Contracts provide for the accumulation of values on a 
variable basis during the accumulation period, and provide for a 
variety of annuity settlement options. Certain Contracts may be 
purchased on a non-qualified tax basis. Certain Contracts also may be 
purchased and used in connection with plans qualifying for favorable 
federal income tax treatment. The Contracts currently offer four 
different charge structures, each referred to as a ``Class.'' Each 
Class imposes different surrender charges and asset-based insurance 
charges.
    4. The Owner determines at the time of application for a Contract 
how premium payments will be allocated among the subaccounts of the 
applicable Separate Account (``Subaccounts''). The Owner generally may 
allocate premium payments to up to 20 of any of the available 
Subaccounts. The Contract Value, which is the total value of an Owner's 
interest in the Contract as of the end of the valuation period, will 
vary with the investment performance of the Subaccounts selected, and 
the Owner bears the entire risk for amounts allocated to the 
Subaccounts.
    5. During the Free Look Period, an Owner has the right to return 
his or her Contract within ten days (or longer if required by state 
law). In those states that require the return of premium payments in 
the event of Contract cancellation, the Companies will refund the 
greater of all premium payments paid into the Contract (less any 
withdrawals) or the Account Value (less any bonus amounts) as of the 
date the Owner returns the Contract. The Companies will place premium 
payments into a predetermined or designated money market Subaccount for 
the first fourteen days following the Contract Date. After fourteen 
days, the greater of premium payments or Account Value initially 
required to be maintained in the money market Subaccount will be 
reallocated to the Subaccounts the Owner selected. However, if the 
Owner elected the Asset Allocation Program at the time he/she purchased 
the Contract, then the premium payments initially required to be 
maintained in the money market Subaccount will be reallocated according 
to the asset allocation model the Owner selected. If the Owner has not 
made any withdrawals and the Companies have placed premium payments in 
a money market Subaccount for the first fourteen days, the Companies 
guarantee they will allocate at least the Owner's premium payments to 
the Subaccounts selected by the Owner after the fourteen day period, 
regardless of charges or investment performance. The Companies reserve 
the right to discontinue providing this guarantee for Contracts issued 
after a specified date.
    6. In states that permit the return of Account Value in the event 
of Contract cancellation, the Companies will refund the Account Value 
(less any bonus amounts) as of the date the Owner returns the Contract. 
For Contracts issued in California, for Owners who are 60 years of age 
or older, the Companies will put all premium payments in a money market 
Subaccount for the first 35 days following the Contract Date, unless 
the contract owner directs the Companies to invest the premiums 
immediately in other Subaccounts. The Companies also will not provide 
the guarantee to Contracts issued in California for Owners who are 60 
years of age or older, whose premium payments are invested in a money 
market Subaccount. The Companies will invest premium payments 
immediately in the Subaccounts the Owner selected or according to the 
composition of the asset allocation model the Owner selected. The 
Companies will not provide the guarantee discussed above to Owners, in 
states where the Companies return Account Value, who elect to put their 
premium payments into a money market Subaccount. The Companies will not 
assess surrender charges against a Contract returned during the Free 
Look Period. The Companies will generally pay the refund within seven 
days after they receive the returned Contract. The Contract will then 
be considered void. The Companies recapture bonus amounts added to the 
Account Value if the Owner returns the Contract during the Free Look 
Period.
    7. During the accumulation period, an Owner may transfer Account 
Value among the Subaccounts up to twelve times per Contract year 
without charge. An Owner may make additional

[[Page 52179]]

transfers, but the Companies currently charge a $25 transfer fee per 
transfer (guaranteed not to exceed $30) after the first twelve 
transfers in a Contract year. Currently, the minimum transfer amount is 
$100 or the total value of the Subaccount if less than $100. The 
Account Value remaining in a Subaccount after a transfer must be at 
least $100 or MLLIC or MLNY will transfer the total value of that 
Subaccount.
    8. The Owner may surrender the Contract or make a partial 
withdrawal from Account Value during the accumulation period. The 
minimum amount that may be withdrawn is $100, and at least $5,000 
surrender value must remain in the Contract after a partial withdrawal 
(and any associated surrender charge) is made (except if the Guaranteed 
Minimum Withdrawal Benefit is elected in which case the minimum 
surrender value after a partial withdrawal requirement is waived.) If 
an Owner surrenders a Contract or takes a partial withdrawal, the 
Companies may deduct a surrender charge to compensate them for expenses 
relating to the sale of the Contracts, such as commissions, preparation 
of sales literature, and other promotional activity. Upon partial 
withdrawal, the Companies also may deduct any applicable premium taxes. 
Upon surrender, the Companies also will deduct any applicable contract 
fee, accrued but uncollected rider charges, and applicable premium 
taxes. The surrender charge will be reduced using the ``free withdrawal 
amount'' provided for in the Contract. The free withdrawal amount is 
the portion of any partial withdrawal or surrender that is not subject 
to a surrender charge. The free withdrawal amount is the greater of: 
(a) 10% of the amount of each premium subject to a surrender charge 
(not to exceed the amount of each premium that had not been previously 
withdrawn as of the beginning of the Contract year), less any prior 
withdrawals during that Contract year; and (b) the ``gain'' in the 
Contract plus premiums remaining in the Contract that are no longer 
subject to a surrender charge. Any amount previously withdrawn from the 
Contract during that Contract year will be taken into account in 
determining the ``free withdrawal amount'' available as of the date of 
the withdrawal request. For the purpose of calculating the surrender 
charge, the Companies make withdrawals as if gain is withdrawn first, 
followed by premiums. Premium payments are assumed to be withdrawn on a 
first-in, first-out (``FIFO'') basis. The surrender charge equals a 
percentage of each premium withdrawn. With regard to the XC Class 
offered under the Contracts, each premium is subject to the charge for 
the applicable period specified below from the date it is received and 
accepted by MLLIC or MLNY, as follows:

------------------------------------------------------------------------
                                         Surrender charge percentage (as
 Complete years elapsed since payment      a percentage of the premium
              of premium                            payment)
------------------------------------------------------------------------
0 years...............................  8.0
1 year................................  8.0
2 years...............................  7.0
3 years...............................  7.0
4 years...............................  6.0
5 years...............................  6.0
6 years...............................  5.0
7 years...............................  4.0
8 years...............................  3.0
9 years...............................  0
------------------------------------------------------------------------

    The Companies recapture all or a portion of the bonus amounts added 
to the Account Value if the Owner surrenders the Contract or makes a 
partial withdrawal within three years of MLLIC's or MLNY's receipt and 
acceptance of a premium payment.
    9. Under certain circumstances, the Contract may be terminated due 
to inactivity. If no premiums have been received during the prior 24 
months (36 months in New York), the total of all premiums paid (less 
any partial withdrawals) is less than $2,000 ($5,000 in New York), and 
the Account Value is less than $2,000 ($5,000 in New York), then the 
Contract may be terminated. No Contract will be terminated solely due 
to negative investment performance. Termination for inactivity is 
treated as a surrender for purposes of bonus recapture (not applicable 
if the Guaranteed Minimum Withdrawal Benefit is elected). Also, partial 
annuitizations would be considered to be partial withdrawals for 
purposes of calculations under the Contract, including bonus 
recaptures.
    10. A Surrender charge will not be deducted from payments made 
under any of the death benefits. Upon payment of the death benefit, the 
Companies may deduct any applicable premium taxes. The Companies will 
also recapture any bonus amounts added to the Account Value if the 
Owner (the first Owner to die, if there are Co-Owners, or the first 
Annuitant, if any Owner is not a natural person) dies within six months 
of MLLIC's or MLNY's receipt and acceptance of the corresponding 
premium payment. However, if an Owner dies and the Contract is 
continued under the spousal benefit continuation option, any bonus 
amounts not previously recaptured will no longer be subject to 
recapture as of the spousal continuation date.
    11. If an Owner elects the XC Class under the Contracts, then the 
Companies will add a bonus amount to the Account Value each time the 
Owner makes a premium payment. With regard to an initial premium 
payment, the Companies will apply the corresponding bonus amount to an 
Owner's Account Value on the Contract Date. With regard to each 
additional premium payment, the Companies will apply a corresponding 
bonus amount to an Owner's Account Value at the end of the valuation 
period during which that premium payment is received and accepted at 
MLLIC's or MLNY's Service Center.
    12. Under the Existing Order, to calculate each bonus amount, the 
Companies allocate the corresponding premium payment to one or more 
bonus tiers based on the amount of cumulative premium payments made 
under the Contract, as follows:

------------------------------------------------------------------------
                                                                 Then
                                       Then         Then       minimum
                 If cumulative       maximum      current     guarantee
    Tier       premium payments       bonus        bonus        bonus
                     are:             amount       amount       amount
                                    percentage   percentage   percentage
                                       is:          is:          is:
------------------------------------------------------------------------
1..........  Less than or equal            5.0          4.5          3.0
              to $25,000.
2..........  Greater than $25,000          5.5          4.5          3.0
              but less than or
              equal to $125,000.
3..........  Greater than                  5.5          4.5          3.5
              $125,000 but less
              than or equal to
              $500,000.
4..........  Greater than                  6.0          5.5          4.0
              $500,000 but less
              than or equal to
              $1,000,000.
5..........  Greater than                  7.0          5.5          4.5
              $1,000,000.
------------------------------------------------------------------------

[[Page 52180]]

    Under the application, the Applicant's propose to change the bonus 
structure as follows:

----------------------------------------------------------------------------------------------------------------
                                                                               Then
                                                                             maximum
                                                                  Then      recapture       Then         Then
                                                                maximum       amount      current      minimum
                             If cumulative premium payments      bonus      percentage     bonus      guarantee
           Tier                           are:                   amount        for         amount       bonus
                                                               percentage  withdrawals   percentage     amount
                                                                  is:          and          is:       percentage
                                                                            surrenders                   is:
                                                                               is:
----------------------------------------------------------------------------------------------------------------
1........................  Less than or equal to $25,000....          7.0          5.0          4.5          3.0
2........................  Greater than $25,000 but less              7.0          5.5          4.5          3.0
                            than or equal to $125,000.
3........................  Greater than $125,000 but less             7.0          5.5          4.5          3.5
                            than or equal to $500,000.
4........................  Greater than $500,000 but less             7.0          6.0          5.5          4.0
                            than or equal to $1,000,000.
5........................  Greater than $1,000,000..........          7.0          7.0          5.5          4.5
----------------------------------------------------------------------------------------------------------------

    As is the case under the Existing Order, under this proposed 
structure, the Companies may apply different bonus percentages to each 
premium payment (unless cumulative premium payments are less than or 
equal to $25,000) by breaking out the payment according to the ranges 
in the above table and multiplying the portion of the payment allocated 
to each tier by that tier's current bonus amount percentage. However, a 
premium payment will only be allocated to the first tier if cumulative 
premium payments are less than or equal to $25,000. If the initial 
premium payment exceeds $25,000, the first tier will not apply and the 
second tier will apply to all cumulative premiums less than or equal to 
$125,000. For example, an initial premium payment of $20,000 would 
receive a current bonus amount of $900 ($20,000 x 0.045 (tier 1)). If 
the initial premium payment is $100,000, the current bonus amount would 
be $4,500 ($100,000 x 0.045 (tier 2)). However, an initial premium 
payment of $700,000 would receive a current bonus amount of $33,500 
($125,000 x 0.045 (tier 2) + $375,000 x 0.045 (tier 3) + $200,000 x 
0.055 (tier 4)). No bonus amount will be based on a percentage that 
exceeds the maximum bonus amount percentages shown in the above table. 
In addition, no subsequent recapture of bonus amounts will exceed the 
maximum recapture amount percentages shown in the above table (except 
when an Owner dies within six months of a premium payment and under the 
Free Look Period). When calculating each bonus amount, ``cumulative 
premium payments'' do not include bonus amounts previously added to 
Account Value. The bonus amount is allocated among the Subaccounts in 
the same manner as the corresponding premium payment. The Companies may 
change the current bonus amount percentage, but it will never be less 
than the minimum guaranteed bonus amount percentage listed in the 
table.
    13. The Companies may offer promotional programs with promotional 
rates for XC Class Contracts issued within specified periods of time 
(each, a ``Promotional Period''). Such promotional programs may apply 
to initial and/or subsequent premium payments received during the 
Promotional Period. Initial and/or subsequent premium payments received 
after the Promotional Period will receive the current bonus amount 
percentage in effect at that time. No bonus amount applied pursuant to 
a promotional program will be based on a percentage that exceeds the 
maximum bonus amount percentages shown in the above table. In addition, 
no subsequent recapture of bonus amounts will exceed the maximum 
recapture amount percentages shown in the above table (except when an 
Owner dies within six months of a premium payment or under the Free 
Look Period). The Companies may terminate any promotional programs or 
offer other promotional programs at any time in their sole discretion.
    14. If the Owner returns the Contract during the Free Look Period, 
then the Owner will not receive any portion of the bonus amounts (i.e., 
the Companies will ``recapture'' the full amount of each bonus). In the 
event of the death of the Owner (or upon the death of the first Owner 
to die if there are Co-Owners, or upon the death of the first Annuitant 
if any Owner is not a natural person), the Companies will recapture all 
remaining bonus amounts corresponding to premium payments received and 
accepted within the previous six months of death. Thus, under the XC 
Class, if an optional guaranteed minimum death benefit (``GMDB'') is 
not chosen, the death benefit equals the Account Value less any bonus 
amounts credited in the prior six months and less uncollected charges. 
If a GMDB is chosen, the death benefit equals the greater of the 
Account Value less any bonus amounts credited in the prior six months 
and less uncollected charges or the GMDB Base. However, in the event 
the Contract is continued under the spousal beneficiary continuation 
option, any bonus amounts not previously recaptured will no longer be 
subject to recapture as of the spousal continuation date. In the event 
of partial withdrawal or surrender within three years of MLLIC's or 
MLNY's receipt and acceptance of a premium payment, the Companies may 
recapture all or a portion of the corresponding bonus amount based on 
the bonus recapture percentages presented in the following schedule:

------------------------------------------------------------------------
                                                               Bonus
                                                             recapture
                                                          percentage for
                                                          surrenders and
 Completed years since receipt and acceptance of premium      partial
                         payment                          withdrawals up
                                                          to the maximum
                                                             recapture
                                                              amount
                                                            percentage
------------------------------------------------------------------------
0.......................................................             100
1.......................................................              65
2.......................................................              30
3+......................................................               0
------------------------------------------------------------------------

    In the event of partial withdrawal or surrender within three years 
of MLLIC's or MLNY's receipt and acceptance of a premium payment, the 
Companies will never exceed the maximum recapture amount of the bonus. 
For example, if an Owner makes an initial $10,000 premium payment, the 
Companies will add a $700 bonus amount to the Account Value (assuming 
the maximum 7.0% bonus amount percentage). In the event of partial 
withdrawal or surrender, if it has been two years since the receipt and 
acceptance of this premium payment, then the maximum

[[Page 52181]]

bonus amount that the Companies will recapture is $150 ($10,000 x .050 
x .30).
    15. The Companies will recapture any bonus amounts subject to 
recapture from the Owner's Account Value at the end of the valuation 
period during which the transaction request is received and accepted at 
MLLIC's or MLNY's Service Center. For each premium payment, the maximum 
bonus amount subject to recapture is equal to the applicable bonus 
recapture percentage for surrenders and partial withdrawals multiplied 
by (a) minus (b) where: (a) is the premium applied multiplied by the 
maximum recapture amount percentage; and (b) is the sum of each 
previously recaptured bonus amount attributable to that premium payment 
divided by the bonus recapture percentage on the date such amount was 
recaptured.
    16. The Companies will deduct bonus amounts subject to recapture 
based on the associated premiums withdrawn from the Contract, which are 
determined on a ``first-in, first out'' (or ``FIFO'') basis. Currently, 
the Companies do not recapture any bonus amounts on withdrawals that 
are within the ``free withdrawal amount.'' The Companies reserve the 
right to recapture bonus amounts on withdrawals that are within the 
``free withdrawal amount'' in the future. The amount actually 
recaptured is based on the bonus amount subject to recapture multiplied 
by the ratio of: (i) The associated premium payment withdrawn that was 
subject to a surrender charge to (ii) The total amount of that premium 
payment remaining in the Contract immediately prior to the withdrawal 
that was subject to a surrender charge. The Companies will deduct any 
recaptured bonus amounts on a pro rata basis from among the Subaccounts 
the Owner is invested in, based on the ratio of the Owner's Subaccount 
value to his or her total Subaccount value before the partial 
withdrawal.
    17. If the Companies recapture a bonus amount, they will take back 
the bonus amount as if it had never been applied. However, the 
accumulated gain or loss on bonus amounts is not subject to recapture. 
Thus, an Owner bears any investment loss and retains any investment 
gain attributable to bonus amounts. The Companies will not re-credit 
any charges, including asset-based insurance charges, imposed on bonus 
amounts subsequently recaptured. The Applicants propose to amend the 
Existing Order by increasing the maximum bonus amount percentage during 
certain promotional periods. However, the Applicants would continue to 
recapture bonus amounts only at the lower maximum percentage allowed by 
the Existing Order when an Owner surrenders the Contract (in full or in 
part) or the surrender value is paid to the Owner within three years of 
receipt and acceptance by MLLIC or MLNY of a premium payment (pursuant 
to a bonus recapture schedule). Thus, when an Owner surrenders the 
Contract, the change in the bonus structure would provide an Owner with 
an additional bonus amount that is not subject to recapture. However, 
when an Owner returns the Contract during the Free Look Period or dies 
within six months of receipt and acceptance by MLLIC or MLNY of a 
premium payment, then the Applicants propose to recapture the entire 
bonus amount. Thus, under the application, even though the Companies 
would increase the maximum bonus amount percentage up to 7.0%, the 
bonus amount recaptured would remain the same as it is under the 
Existing Order with the exception of the Free Look Period and when an 
Owner dies within six months of a premium payment. For example, under 
the Existing Order, if the Owner makes a premium payment of $10,000, 
which is allocated to Tier 2, he would receive a maximum bonus of $550. 
If the Owner surrenders the Contract within one year of the Companies' 
receipt and acceptance of that premium payment, the Companies recapture 
$550, the entire bonus amount. Under the application, if the bonus 
amount percentage is 7% and the Owner makes a premium payment of 
$10,000 and is in Tier 2, he would receive a maximum bonus of $700. If 
the Owner surrenders the Contract within one year of the Companies' 
receipt and acceptance of that premium payment, the maximum amount the 
Companies would be permitted to recapture would still be $550 (the 
amount of premium paid multiplied by the maximum recapture amount 
percentage allocated to Tier 2). Thus, under the application, $150 of 
the bonus would not be subject to recapture (except during the Free 
Look Period and when an Owner dies within six months of a premium 
payment as described above). If the Owner withdrew the premium payment, 
the recapture would still be based on the bonus recapture schedule in 
the Existing Order (which recaptures 100% of the maximum recapture 
amount percentage in the first year, 65% in the second year, and 30% in 
the last year).

Applicants' Legal Analysis

    1. The Applicants request that the Commission amend the Existing 
Order and, pursuant to Section 6(c) of the Act, grant the exemptions to 
permit the Applicants (1) to recapture all bonus amounts attributable 
to premium payments under the Contract's XC Class when an Owner returns 
the Contract during the Free Look Period; (2) to recapture all bonus 
amounts attributable to premium payments under the Contract's XC Class 
when an Owner dies within six months of receipt and acceptance by MLLIC 
or MLNY of a premium payment (unless the Contract is continued under 
the spousal benefit continuation option); or (3) to recapture all or a 
portion of bonus amounts attributable to premium payments under the 
Contract's XC Class when an Owner surrenders the Contract (in full or 
in part) or the surrender value is paid to the Owner (because the 
Contract has been terminated for inactivity) within three years of 
receipt and acceptance by MLLIC or MLNY of a premium payment (pursuant 
to a bonus recapture schedule).
    2. Because the provisions may be inconsistent with a recapture of 
bonus amounts, the Applicants request exemptions for the Contracts 
described herein, and for Future Contracts, from Sections 2(a)(32) and 
27(i)(2)(A) of the Act, and Rule 22c-1 thereunder, pursuant to Section 
6(c), to the extent necessary to recapture the bonus amounts. The 
Applicants seek exemptions in order to avoid any questions concerning 
the Contracts' compliance with the Act and rules thereunder. The 
exemptions requested herein are necessary or appropriate in the public 
interest and consistent with the protection of investors and purposes 
fairly intended by the policy and provisions of the Act.
    3. To the extent that the bonus amount recapture might be seen as a 
discount from the net asset value, or might be viewed as resulting in 
the payment to an Owner of less than the proportionate share of the 
issuer's net assets, the bonus amount recapture would trigger the need 
for relief absent some exemption from the Act. Rule 6c-8 provides, in 
relevant part, that a registered separate account, and any depositor of 
such account, shall be exempt from Sections 2(a)(32), 22(c), 27(c)(1), 
27(c)(2), and 27(d) of the Act and Rule 22c-1 thereunder to the extent 
necessary to permit them to impose a deferred sales load on any 
variable annuity contract participating in such account. However, the 
bonus amount recapture is not a sales load, but a recapture of bonus 
amounts MLLIC or MLNY previously attributed to an Owner's premium 
payments. The Companies provide the bonus amounts from their general 
accounts on a guaranteed basis. The Contracts are

[[Page 52182]]

designed to be long-term investment vehicles. In undertaking this 
financial obligation, the Companies contemplate that an Owner will 
retain a Contract over an extended period, consistent with the long-
term nature of the Contracts. The Companies designed the product so 
that they would recover their costs (including the bonus amounts) over 
an anticipated duration while a Contract is in force. If an Owner 
withdraws his money during the Free Look Period, or a death benefit is 
paid, or a withdrawal or surrender is made, before this anticipated 
period, the Companies must recapture the bonus amounts subject to 
recapture in order to avoid a loss. However, if a withdrawal or 
surrender is made, the Companies will absorb the loss for the bonus 
amount that exceeds the maximum recapture amount percentage.
    4. Applicants submit that the recapture of bonus amounts does not 
violate Section 2(a)(32) of the Act. The bonus amount recapture 
provision pursuant to the Contract's XC Class does not deprive the 
Owner of his or her proportionate share of the issuer's current net 
assets. In the case of death of the Owner, an Owner will have the full 
right to any bonus amounts not previously recaptured six months 
following MLLIC's or MLNY's receipt and acceptance of the corresponding 
premium payment. In the case of partial or full surrender, an Owner's 
right to a portion of a bonus amount not previously recaptured will 
begin one year following MLLIC's or MLNY's receipt and acceptance of 
the corresponding premium payment, and an Owner will have the full 
right to any such remaining bonus amount three years following MLLIC's 
or MLNY's receipt and acceptance of the corresponding premium payment. 
Until that time, the Companies generally retain the right and interest 
in the dollar amount of any bonus amounts subject to recapture. Thus, 
when the Companies recapture all or a portion of a bonus amount, they 
are only retrieving their own assets, and because an Owner does not 
have an interest in the bonus amount, such Owner would not be deprived 
of a proportionate share of the applicable Separate Account's assets 
(the issuer's current net assets) in violation of Section 2(a)(32). 
Therefore, such recapture does not reduce the amount of the applicable 
Separate Account's current net assets an Owner would otherwise be 
entitled to receive. However, to avoid uncertainty as to full 
compliance with the Act, the Applicants request an exemption from the 
provisions of Sections (2)(a)(32) and 27(i)(2)(A) to the extent deemed 
necessary to permit them to recapture all or a portion of the bonus 
amounts under the Contracts and Future Contracts.
    5. As a result of the bonus amounts available under the Contract's 
XC Class, an Owner who made an initial premium payment of $10,000 in 
the first Contract year could be viewed as having an Account Value of 
$10,450 before any earnings accrued. The Companies' addition of bonus 
amounts might arguably be viewed as resulting in an Owner purchasing a 
redeemable security for a price below the current net asset value. 
Further, by recapturing the bonus amounts, the Companies might arguably 
be redeeming a redeemable security for a price other than one based on 
the current net asset value of the applicable Separate Account.
    6. Applicants argue that an Owner's interest in his or her Account 
Value would always be offered at a price based on the net asset value 
next calculated after receipt of the order. The granting of bonus 
amounts does not reflect a reduction of that price. Instead, the 
Companies will purchase with their own general account assets an 
interest in the applicable Separate Account equal to the bonus amounts. 
Because the bonus amounts will be paid out of MLLIC's or MLNY's assets, 
not the applicable Separate Account's assets, no dilution will occur as 
a result of the bonus amounts.
    7. Applicants submit that the recapture of bonus amounts does not 
involve either of the two harms that the Commission intended to 
eliminate or reduce with Rule 22c-1. The Commission's stated purposes 
in adopting Rule 22c-1 were to avoid or minimize: (1) Dilution of the 
interests of other security holders; and (2) speculative trading 
practices that are unfair to such holders. These two concerns were the 
result of backward pricing, the practice of basing the price of a 
mutual fund share on the net asset value per share determined as of the 
close of the market on the previous day. Backward pricing allowed 
investors to take advantage of increases or decreases in net asset 
value that were not yet reflected in the price, and thereby the values 
of outstanding mutual fund shares were diluted.
    8. According to Applicants, the proposed recapture of bonus amounts 
under the Contracts does not pose such threat of dilution. The bonus 
amount recapture will not alter an Owner's net asset value. The 
Companies will determine an Owner's surrender value (an amount equal to 
the Account Value reduced by any charges (including the surrender 
charge) and increased by any credits applied upon surrender) under a 
Contract in accordance with Rule 22c-1 on a basis next computed after 
receipt of an Owner's request for surrender (likewise, the calculation 
of death benefits and annuity payment amounts will be in full 
compliance with the forward pricing requirement of Rule 22c-1). The 
amount recaptured will equal all or a portion of bonus amounts that 
MLLIC or MLNY paid out of its general account assets. It is not 
administratively feasible to track the bonus amount in the Separate 
Accounts after the Companies apply the bonus. As a result, the asset-
based charges applicable to the Separate Accounts will be assessed 
against the entire amount held in the Separate Accounts, including the 
bonus amount, during the time the bonus amount is subject to recapture. 
During this time, the aggregate asset-based charges assessed against an 
Owner's Account Value will be higher than those that would be charged 
if the Owner's Account Value did not include the bonus amount, but the 
increment will obviously be only a small percentage of the bonus 
amount. On the other hand, an Owner will retain any investment benefit 
from the bonus amount. Although an Owner will retain any investment 
gain attributable to the bonus amounts, the Companies will determine 
the amount of such gain on the basis of the current net asset value of 
the Subaccount. Thus, no dilution will occur upon the recapture of 
bonus amounts.
    9. Further, the other harm that Rule 22c-1 was designed to address 
(speculative trading practices calculated to take advantage of backward 
pricing) will not occur as a result of MLLIC's or MLNY's recapture of a 
bonus amount. Variable annuities are designed for long-term investment, 
and by their nature, do not lend themselves to the kind of speculative 
short-term trading that Rule 22c-1 was designed to prevent. More to the 
point, the bonus recapture simply does not create the opportunity for 
speculative trading.
    10. Applicants assert that rule 22c-1 should have no application to 
a bonus amount, as neither of the harms that Rule 22c-1 was designed to 
address are present in the recapture of bonus amounts. However, to 
avoid uncertainty as to full compliance with the Act, the Applicants 
request an exemption from the provisions of Rule 22c-1 to the extent 
deemed necessary to permit them to recapture bonus amounts available 
through the XC Class under the Contracts and Future Contracts.

[[Page 52183]]

    11. Applicants submit that the bonus amount provisions are 
generally beneficial to Owners. The recapture provisions temper this 
benefit somewhat, but only if an Owner redeems his or her money under 
the circumstances described herein. While there would be a small 
downside in a declining market where an Owner would bear any losses 
attributable to the bonus amounts up to the maximum recapture amount 
percentage, it is the converse of the benefits an Owner would receive 
on the bonus amounts in a rising market. As any earnings on bonus 
amounts applied would not be subject to recapture and thus would be 
immediately available to an Owner, likewise any losses on bonus amounts 
would also not be subject to recapture and thus would be immediately 
available to an Owner. The bonus amount recapture provision does not 
diminish the overall value of the bonus amounts.
    12. MLLIC's or MLNY's recapture of bonus amounts is designed to 
prevent anti-selection against it. The risk of anti-selection would be 
that an Owner could make significant premium payments into the Contract 
solely in order to receive a quick profit from the bonus amounts. By 
recapturing the bonus amounts, the Companies protect themselves against 
the risk that an Owner will make such large premium payments, receive 
the bonus amounts, and then withdraw his or her money from the 
Contract. The Companies generally protect themselves from this kind of 
anti-selection, and recover their costs in situations where an Owner 
withdraws his or her money early in the life of a Contract, by imposing 
a surrender charge. However, where an Owner withdraws his money during 
the Free Look Period or a death benefit is paid, the Companies do not 
apply this charge.
    13. The Applicants seek relief herein not only for themselves with 
respect to the support of the Contracts, but also with respect to 
Future Accounts or Future Contracts described herein. The Applicants 
represent that the terms of the relief requested with respect to any 
Contracts or Future Contracts funded by the Separate Accounts or Future 
Accounts are consistent with the standards set forth in Section 6(c) of 
the Act and Commission precedent. The Commission has previously granted 
class relief (from certain specified provisions of the Act for separate 
accounts that support variable annuity contracts) that is materially 
similar to the relief described in the application.
    14. In addition, the Applicants seek relief herein with respect to 
Future Underwriters (i.e., a class consisting of NASD member broker-
dealers that may also act as principal underwriter of the Contracts and 
Future Contracts). The Commission has regularly granted relief to 
``future underwriters'' that are not named, and are not affiliates of 
the applicants. The Applicants represent that the terms of the relief 
requested with respect to any Future Underwriters are consistent with 
the standards set forth in Section 6(c) of the Act and Commission 
precedent.
    15. Applicants argue that without the requested class relief, 
exemptive relief for any Future Account, Future Contract, or Future 
Underwriter would have to be requested and obtained separately. These 
additional requests for exemptive relief would present no issues under 
the Act not already addressed herein. If the Applicants were to 
repeatedly seek exemptive relief with respect to the same issues 
addressed herein, investors would not receive additional protection or 
benefit, and investors and the Applicants could be disadvantaged by 
increased costs from preparing such additional requests for relief. The 
requested class relief is appropriate in the public interest because 
the relief will promote competitiveness in the variable annuity market 
by eliminating the need for the Companies to file redundant exemptive 
applications, thereby reducing administrative expenses and maximizing 
efficient use of resources. Elimination of the delay and the expense of 
repeatedly seeking exemptive relief would, the Applicants opine, 
enhance the Applicants' ability to effectively take advantage of 
business opportunities as such opportunities arise. The Applicants' 
request for class exemptions 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 Act, and 
that an order of the Commission including such class relief, should, 
therefore, be granted. Any entity that currently intends to rely on the 
requested exemptive order is named as an Applicant. Any entity that 
relies upon the requested order in the future will comply with the 
terms and conditions contained in the application.

Conclusion

    Applicants submit that their request for an amended order meets the 
standards set out in Section 6(c) of the Act and that an order amending 
the Existing Order should, therefore, be granted.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Nancy M. Morris,
Secretary.
 [FR Doc. E6-14538 Filed 8-31-06; 8:45 am]

BILLING CODE 8010-01-P