Document ID: SEC-2006-1152-0001
Agency: sec
Document Type: Notice
Title: Principal Life Insurance Company; et al., Notice of Application
Posted Date: 2006-09-06T04:00Z

[Federal Register: September 6, 2006 (Volume 71, Number 172)]
[Notices]               
[Page 52593-52598]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06se06-118]                         

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 SECURITIES AND EXCHANGE COMMISSION

[Release Number IC-27471; File No. 812-13236]

 
Principal Life Insurance Company; et al., Notice of Application

August 29, 2006.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an Order pursuant to section 11(a) of 
the Investment Company Act of 1940, as amended (the ``Act''), approving 
the terms of a proposed offer of exchange.

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Applicants: Principal Life Insurance Company (``Principal'' or the 
``Company''); Principal Life Insurance Company Variable Life Separate 
Account (the ``Account''); and Princor Financial Services Corporation 
(``Princor'') (collectively, ``Applicants'').

Summary of Application: Applicants request an order approving the terms 
of a proposed offer of exchange of new flexible variable universal life 
insurance policies issued by Principal and participating in the Account 
(the ``New Policies'') for certain outstanding flexible variable 
universal life insurance policies issued by Principal and participating 
in the Account (the ``Old Policies'') (collectively with the New 
Policies, the ``Policies'').

[[Page 52594]]

Filing Date:  The application was filed on September 23, 2005, and 
amended on July 31, 2006, and August 29, 2006.

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 Secretary of the 
Commission and serving Applicants with a copy of the request, in person 
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 the Applicants, in the form of an affidavit or, for lawyers, 
a certificate of service. Hearing requests should state the nature of 
the writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of 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 John W. Blouch, Esq., 
Dykema Gossett PLLC, Franklin Square Building, 1300 I Street, NW., 
Suite 300 West, Washington, DC 20005.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Joyce M. Pickholz, Branch Chief, Office of Insurance Products, 
Division of Investment Management, at (202) 551-6795.

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, SEC's Public Reference Branch, 
100 F Street, NE., Room 1580, Washington, DC 20549 (telephone (202) 
551-8090).

Applicants' Representations

    1. Principal is a stock life insurance company and is a wholly-
owned subsidiary of Principal Financial Group, Inc. organized under the 
laws of Iowa in 1879. It is authorized to transact life insurance and 
annuity business in 50 states and the District of Columbia.
    2. The Account was established on November 2, 1987, pursuant to a 
resolution of the Executive Committee of Principal's board of 
directors. The Account is organized and registered under the Act as a 
unit investment trust (File No. 811-5118).
    3. Princor, the principal underwriter for the Policies and for 
certain other variable insurance policies and mutual funds sponsored by 
Principal, is a wholly-owned subsidiary of Principal Financial Group, 
Inc. Princor is registered with the Commission as a broker-dealer and 
is a member of NASD, Inc.
    4. The New Policies are offered pursuant to a registration 
statement filed on January 30, 2002, under the Securities Act of 1933 
(the `` '33 Act''), and effective on May 28, 2002 (File No. 333-81714).
    5. The New Policies are flexible premium variable universal life 
insurance policies that permit the accumulation of policy values on a 
variable, fixed or combination of variable and fixed basis. The New 
Policies allow for unscheduled premium payments or the establishment of 
a premium payment schedule. The New Policies terminate when the death 
proceeds are paid, when the maturity proceeds are paid, or when a 
policy is surrendered. The New Policy also terminates at the expiration 
of a 61-day grace period following a date when notice is given that the 
net policy value is less than the monthly policy charge. The New Policy 
matures at the insured's attained age of 100. On that date, if the 
insured is living, the Policy is in force and the insured does not want 
the maturity date extended, Principal will pay maturity proceeds equal 
to the net surrender value. The minimum face amount of a New Policy is 
$100,000.
    6. Policy values of the New Policies may be allocated to the 
Subaccounts of the Account that currently invest in 71 different 
investment company portfolios (``Underlying Funds''). Amounts invested 
in the Underlying Funds are subject to the management, administration 
and distribution fees paid and other expenses incurred by the 
Underlying Funds. Policy values may also be accumulated on a guaranteed 
basis by allocation to Principal's general account (the ``Fixed 
Account''). Fixed account interest is guaranteed to be credited at a 
rate of at least 3% compounded annually.
    7. The New Policy provides that after the initial allocation of 
premiums, the owner may transfer amounts among the subaccounts of the 
Account (``Subaccounts'') or the Fixed Account subject to the following 
restrictions. The owner may not make both a scheduled fixed account 
transfer and an unscheduled fixed account transfer in the same policy 
year where the transfer is from the Fixed Account. One unscheduled 
transfer from the Fixed Account may be made during the first 30-day 
period of each calendar quarter.
    8. Unscheduled transfers including transfers not involving the 
Fixed Account are otherwise allowed, subject to a fee of up to $25 for 
each unscheduled transfer after the first unscheduled transfer in a 
policy month. Scheduled transfers from one Subaccount to another 
Subaccount are allowed at no charge. The Company reserves the right to 
reject a transfer if the transfer would disrupt the management of the 
Underlying Funds or the Account.
    9. Policy values under the New Policies may be accessed by means of 
policy loans, partial surrenders, or total surrender. The owner of a 
New Policy may borrow up to 90% of the net policy value. The net loan 
cost is 1.0% during the first 10 policy years and 0.3% thereafter until 
the policy maturity date, when the net loan cost is zero. The net loan 
cost is computed based on loan interest at 5.0% per year for the first 
10 policy years, 4.3% after policy year 10, and 4.0% if coverage is 
extended beyond the maturity date, as offset by the loan crediting rate 
of 4.0%. The owner of a New Policy may make partial surrenders, each in 
a minimum amount of $500, on or after the 1st policy anniversary. The 
partial surrender may not be greater than 90% of the net policy value. 
A transaction fee of $25 is charged for each partial surrender after 
the second in a policy year. The policy value will be reduced by the 
amount of the partial surrender plus any transaction fee. The owner of 
a New Policy may surrender the policy in full. No surrender or 
contingent deferred sales charge is imposed on a total surrender. There 
is no refund of any monthly policy charge deducted before the full 
surrender effective date. A surrender will be paid at the end of the 
valuation period during which the surrender request is received, except 
that payment of the fixed account portion of the net surrender value 
may be deferred as set out in the prospectus.
    10. The New Policy offers a free look provision, whereby the 
insured can return the Policy along with a written request to terminate 
the Policy before the later of 10 days after the owner receives the 
policy, or such date as specified by applicable state law. If returned, 
the Company will refund the full amount of premiums when required by 
state law; otherwise, the Company will refund the net policy value.
    11. The owner of a New Policy may request a change in the policy 
face amount provided that the Policy is not in a grace period. The 
minimum increase in policy face amount is $10,000. Principal will 
approve the request to increase the face amount if the insured is alive 
and age 75 or less at the time of the request and Principal receives 
satisfactory evidence that the insured is insurable under underwriting 
guidelines in place at the time of the request. On or after the first 
policy

[[Page 52595]]

anniversary, the policy owner may request a decrease in face amount 
that does not reduce total face amount below $100,000. There is no 
transaction fee for the face amount decrease.
    12. The New Policies offer a death benefit equal to a choice of the 
following options: (1) The greater of the total face amount or the 
surrender value multiplied by the applicable percentage based on 
Section 7702 of the Internal Revenue Code (``IRC''); (2) the greater of 
the total face amount plus the policy value or the surrender value 
multiplied by the applicable percentage; and (3) the greater of the 
total face amount plus premiums paid less partial surrenders (if 
positive) or the surrender value multiplied by the applicable 
percentage. Death proceeds equal the death benefit plus interest, minus 
loan indebtedness and any overdue monthly policy charges. Proceeds will 
be paid to the beneficiaries when the insured dies as long as the 
Policy is in force.
    13. The New Policies provide for a front-end sales load equal to 
the following percentages of premiums paid up to the target premium: 
4.50% in year 1, 7.0% in years 2 through 5, and 3.0% in years 6 
through10. The target premium is based on policy face amount, and the 
insured's age, risk classification and, if applicable, gender. The same 
charges apply to face amount increases and are based on the target 
premium for the increase (``incremental target premium''). Premiums 
paid after an increase in face amount are allocated between the ``base 
Policy'' and the ``incremental Policy'' that was added by the increase 
according to the relative face amounts of the base Policy and the 
incremental Policy. No charge applies to payments in excess of the 
applicable target or incremental target premium. For payments made more 
than 10 years after the last face amount increase (or, if none, initial 
premium payment), Principal reserves the right to charge up to maximum 
of 3.0% of premiums paid up to or equal to the relevant target or 
incremental target premium.
    14. 2% of premiums paid are deducted from premium payments under 
the New Policy for state, federal and local taxes. 1.25% of premiums 
received is deducted for Principal's increased federal income tax 
obligations attributed to its amortization over a ten year period of a 
portion of its expenses in offering the New Policies (``DAC Taxes'').
    15. Under the New Policies, on the policy date and each monthly 
date thereafter, a monthly policy charge is deducted from the policy 
value for: (a) Cost of insurance, (b) an asset based charge, and (c) 
charges for any optional insurance benefits added by riders. The cost 
of insurance charge for standard underwriting is guaranteed to be no 
more than that permitted under the applicable 1980 Commissioners 
Standard Ordinary Mortality Table (``1980 CSO Table''). Risk classes 
used in computing cost of insurance charges under the New Policy 
include preferred non-smoker, preferred smoker, standard non-smoker, 
and standard smoker, as well as a range of substandard and flexible 
underwriting classes which can carry charges in excess of the 1980 CSO 
Table. The annualized asset based charge equals 0.3% of variable policy 
value and can be increased to 0.6%. Exchange offerees will receive 
prior notice of any rate increase.
    16. The following supplemental insurance benefit riders are 
available (without charge unless indicated) and may be included in New 
Policies at issue: (a) A Change of Insured Rider allowing a business to 
change the insured when an employee leaves employment or ownership of 
the business changes; (b) an Enhanced Cash Surrender Value Rider 
providing for payment of an additional amount at the time of full 
surrender if it occurs during the first ten policy years; (c) an 
Extended Coverage Rider extending the Policy beyond the maturity date 
provided the insured is living and the Policy is still in force on the 
maturity date; (d) a Death Benefit Guarantee Rider extending the no-
lapse guarantee provision provided sufficient premiums are paid; and, 
(e) a Supplemental Benefit Rider which provides reduced-cost additional 
insurance (face amount).
    17. The Old Policies are offered pursuant to a registration 
statement filed on January 8, 1996, under the '33Act, and effective on 
February 1, 1997 (File No. 333-00101).
    18. The Old Policies are flexible premium variable universal life 
insurance policies that permit the accumulation of policy values on a 
variable, fixed, or combination of variable and fixed basis. Where 
permitted by state law, the Old Policies have either a 24-Month Minimum 
Required Premium provision (``24 MRP'') or a 5-Year No-Lapse Guarantee 
provision (``NLG''). The 24MRP provision ensures that the policy will 
not lapse during the first 24 months after the policy date if the 
premiums paid are greater than or equal to the minimum required 
premium. The NLG provision provides that if the owner pays total 
premiums satisfying the provision requirement, prior to the 5th policy 
anniversary, the policy will not terminate even if the net surrender 
value cannot cover the monthly policy charge. Old Policies terminate 
after the maturity date, upon payment of the death benefit, on a full 
surrender of a policy for its net surrender value, or at the end of a 
61-day grace period beginning the monthly date where the current 
monthly charges are higher than net surrender value and neither lapse 
prevention provision applies. The Old Policies maturity date is the 
policy anniversary following the 95th birthday of the insured. At 
maturity (assuming no extended coverage rider is in effect), the policy 
owner is paid accumulated policy value less outstanding policy loans 
and unpaid interest.
    19. The Old Policy minimum face amount is $50,000 (or $25,000 for 
guaranteed issue special underwriting). Values may be allocated to 
Subaccounts currently investing in 44 Underlying Funds or the Fixed 
Account guaranteeing at least 3% interest compounded annually.
    20. Policy values of the Old Policies may be transferred among the 
Subaccounts of the Account without charge, although Principal reserves 
the right to charge of up to $25 per unscheduled transfer after the 
first 12 in a policy year. Transfers to and from the Fixed Account are 
permitted subject to certain restrictions.
    21. Policy values under the Old Policies may be accessed by means 
of policy loans partial surrenders, or total surrenders. The owner of 
an Old Policy may borrow up to 90% of the net surrender value at a net 
loan cost of 2.0% for the first 10 policy years and 0.25% thereafter 
until maturity when the cost is zero. The net loan cost is based on 
loan interest at 8.0% per year. Interest credited to the loan account 
is 6.0% for the first ten policy years and 7.75% thereafter and 8.0% if 
coverage is extended beyond the maturity date. Partial surrenders of an 
Old Policy are permitted no more than two times per year in minimum 
amounts of $500. The total of the amount(s) surrendered may not be 
greater than 75% of the net surrender value (as of the date of the 
request for the first partial surrender in that policy year). The 
policy value is reduced by the amount of the partial surrender plus the 
lesser of $25 or 2% of the partial surrender. The owner of an Old 
Policy also may surrender the policy in full. There is a surrender 
charge including a contingent deferred sales load, contingent deferred 
administrative charge and other charges. Surrenders are paid at the end 
of the valuation period when the request is received, but the portion 
attributable to the fixed account may be deferred as the prospectus 
provides.

[[Page 52596]]

    22. If the policy is not in a grace period and monthly charges are 
not waived by rider, the Old Policy owner may increase the policy face 
amount by a minimum of $50,000. Principal will approve the face amount 
increase request if, at the time of the request, the owner is age 85 or 
less, and Principal receives satisfactory evidence that the owner is 
insurable under underwriting guidelines in place at that time. On or 
after the second policy anniversary, the owner may also request a face 
amount decrease provided it does not reduce the total face amount below 
$50,000. No transaction fee applies to such decrease.
    23. The Old Policies offer two death benefit options: A level death 
benefit equal to face amount or a death benefit equal to face amount 
plus policy value. If necessary to meet the definition of life 
insurance in section 7702 of the IRC, the death benefit under either 
option may be greater.
    24. The Old Policies have both a front-end sales load and a 
contingent deferred sales charge (``CDSC''). The front-end sales load 
is 2.75% of (a) premiums paid during each of the first ten policy years 
up to the target premium for the initial face amount, and (b) for the 
first ten policy years after a face amount increase, premiums allocable 
to that increase up to the target premium for that incremental increase 
(an ``incremental target premium''). Premiums paid after a face amount 
increase are allocated according to the relative face amounts of the 
``base Policy'' and the ``incremental Policy'' added by the increase. 
Within the first ten policy years (or years after an increase), 
payments in excess of the relevant base or incremental target premium 
are assessed a 0.75% front-end sales load. The charge does not apply to 
payments made after ten policy years or the equivalent period following 
an increase.
    25. A surrender charge consisting of the CDSC and a contingent 
deferred administrative charge (``CDAC'') is imposed upon full 
surrender of the Old Policy within ten years of the policy date or of a 
face amount increase. The CDAC is $3 per $1,000 of face amount, but is 
guaranteed not to exceed $1,500. The maximum CDSC is 47.25% of the 
first two target premiums received (and the first two target premiums 
received for any face amount increase) for insureds under age 66 years. 
If the insured is older than 65 at the policy date or the date of a 
face amount increase, then the number of target premiums to which CDSC 
charges apply is reduced from two to: (a) 1.5 for ages 66-70; (b) 1.1 
for ages 71-75; (c) 0.8 for ages 76-80; or (d) 0.5 for ages 81-85. 
(After age 85, Old Policies will no longer be issued nor face amount 
increases permitted.)
    26. The CDSC applies only at the time of a full surrender or lapse 
of an Old Policy; it does not apply to partial surrenders. There is a 
charge for processing partial surrenders equal to the lesser of $25 or 
2% of amount of the partial surrender. Decreases in face amount do not 
reduce the CDSC; it continues to reflect the highest face amount of the 
Old Policy. The amount of the CDSC is computed as of the date that the 
surrender or lapse occurs and decreases over time.\1\
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    \1\ In years 1 through 5, the CDSC charge is 100% of the maximum 
CDSC; in years 6 through 10, the charges for each year are 95.24%, 
85.715%, 71.43%, 52.38%, respectively. The CDSC for a surrender or 
lapse in the first two policy years may be lower for certain 
contracts as described in the application.
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    27. Under the Old Policies, charges are deducted from premium 
payments for: State and local taxes (2.2% of premiums) and federal 
taxes (1.25%). These charges are expected to recover tax obligations of 
Principal as a result of its receipt of premiums under the Old 
Policies.
    28. Under the Old Policies to reimburse Principal for the cost of 
maintaining the Old Policies, the guaranteed maximum $10.00 per month 
administration charge is assessed.
    29. The Old Policy cost of insurance charge for standard 
underwriting is guaranteed to be no more than that permitted under the 
applicable 1980 CSO Table and is deducted from the Old Policy value 
each month. This charge compensates Principal for providing insurance 
protection under the Old Policy and varies from insured to insured 
based upon issue age, gender (except where unisex rates are mandated by 
law), duration since issue, smoking status and risk classification. 
Risk classes used in computing cost of insurance charges under the Old 
Policies include: preferred non-smoker, preferred smoker, standard non-
smoker and standard smoker. In addition, the Company offers substandard 
and flexible underwriting arrangements which may result in charges in 
excess of the 1980 CSO Table.
    30. A mortality and expense risks charge is deducted monthly from 
each Old Policy's Subaccount value. The annual rate for policy years 1 
through 9 is 0.90% and 0.27% thereafter.
    31. The Old Policies may be issued with optional insurance riders 
providing for a waiver of charges or premiums in the event of 
disability, change of insured, accelerated benefits in the event of 
terminal illness, extended coverage beyond the Old Policy's maturity 
date and a death benefit guarantee. Where permitted by state law, [if 
certain conditions are met] the death benefit guarantee rider is 
included with an Old Policy automatically at issue. Under the Old 
Policies, there are three optional riders that permit face amount 
increases without new evidence of insurability (the ``Increase 
Riders''). A policy owner may only select one.
    32. The Company also issues an Accounting Benefit Rider on Old 
Policies. It can be used only in connection with sale of the Old 
Policies as corporate owned life insurance (the ``Accounting Benefit 
Rider'') and effectively waives the surrender charges. This rider is 
designed to minimize the adverse impact on the financial statements of 
the purchaser (a corporation or other business entity), which would 
otherwise result under generally accepted accounting principles, by 
allowing the purchaser to match its expenses incurred in connection 
with the issuance of the Old Policy with its liquidation value.
    33. Applicants represent that the most significant differences 
between the Old and New Policies are the following:
    (a) The New Policies were designed exclusively for the corporate-
owned life insurance market. The Old Policies were designed for the 
retail market and, secondarily, for the corporate-owned life insurance 
market.
    (b) The New Policy has no surrender charges. The Old Policy has 
surrender charges comprised of a contingent deferred sales charge and a 
contingent deferred administrative charge during the first ten policy 
years and ten years following each face amount increase.
    (c) The New Policy does not have an administration charge. The Old 
Policy has an administration charge of $10.00 per month.
    (d) The New Policies currently offer a Fixed Account funding option 
and 71 Subaccounts; the Old Policies offer a Fixed Account funding 
option and 44 Subaccounts.
    (e) The maximum sales charge for the Old Policy imposed for years 
one through 10 after issue or face amount increase is 2.75% of premiums 
paid up to a target premium and 0.75% of excess premiums paid over the 
target premium. The maximum sales charge for the New Policy is 4.50% of 
premiums paid in policy year one up to the target premium, 7.0% of 
target premiums paid in policy years 2 through 5, and 3.0% of target 
premiums paid in policy years 6 through 10. The Company reserves the 
right to impose a charge under the New Policy for years 11 and beyond 
up to 3.0% of target premiums. The Old

[[Page 52597]]

Policies charge 3.45% and the New Policies charge 3.25% of premiums 
paid for Federal, state and local taxes.
    (f) The Old Policy currently has a mortality and expense risks 
charge of 0.90% of the Subaccount values. The New Policy has an asset-
based charge of 0.30% of Subaccount values.
    (g) Flexible and substandard underwriting programs are available 
under both the Old and New Policies. If flexible or substandard 
underwriting was used to issue the Old Policy or will be used to issue 
the New Policy, the cost of insurance charges may be greater than 
standard underwriting because of higher anticipated mortality. Although 
the calculation methodologies used to determine the cost of insurance 
charges for substandard and for flexible underwriting programs are 
different for the Old and New Policies, the cost of insurance charge 
for substandard and for flexible underwriting on New Policies will 
never exceed the cost of insurance charges for substandard and for 
flexible underwriting on Old Policies.
    (h) The minimum face amount for Old Policies is $50,000 and 
$100,000 for New Policies.
    (i) The Old Policy minimum face amount increase is $50,000, while 
the New Policy provides for a minimum face amount increase of $10,000. 
The Old Policy permits face amount decreases only after the second 
policy year; the New Policy permits decreases after the first policy 
year. The New Policies do not permit decreases that would reduce the 
face amount below $100,000; the Old Policies set this floor at $50,000 
($25,000 for guaranteed issue underwriting).
    (j) The Old Policies offer a choice of two death benefit options; 
the New Policies offer three.
    (k) The net loan cost on the Old Policy is 2% during the first 10 
policy years, and 0.25% thereafter until the policy maturity date, when 
the net loan cost is zero. The net loan cost for the New Policy for the 
same periods is 1%, 0.3% and zero.
    (l) Both Old and New Policies offer these riders: Change of 
Insured, Extended Coverage (meaning coverage beyond the Maturity Date) 
and Death Benefit Guarantee. The Supplemental Benefit and the Enhanced 
Cash Surrender Value riders are only offered in the New Policy. The Old 
Policies offer the following riders that are unavailable under the New 
Policies: Waiver of Monthly Policy Charges, Accidental Death Benefit, 
Cost of Living, Extra Protection Increase, Salary Increase, Child Term, 
Waiver of Specified Premium, Spouse Term Insurance, Accelerated 
Benefits, and Accounting Benefit. Applicants represent that these 
riders have not been made available under the New Policies because they 
are not designed for the corporate-owned life insurance market or the 
New Policies do not need them because there are no surrender charges.
    34. Applicants represent that the offer to exchange New Policies 
for Old Policies will be made to all of the approximately 125 policy 
owners who own one or more of the 1,000 Old Policies that meet all of 
the following criteria on the offer date: (i) Are trust or corporate 
owned; (ii) are used in connection with nonqualified deferred 
compensation plans (``NQDC plans''); (iii) are not within the 61 day 
grace period and have not lapsed; (iv) qualify for a New Policy under 
Principal's current underwriting requirements; (v) have an insurable 
interest and written consent from the insured employee permitting the 
owner to purchase the New Policy; (vi) were not issued with guaranteed 
issue underwriting; and (vii) are not currently named in any filed 
bankruptcy or insolvency proceeding.
    35. Applicants also represent that the offer to exchange New 
Policies for Old Policies will be made by providing owners of Old 
Policies with a prospectus for the New Policy, accompanied by a letter 
explaining the offer and sales literature that compares the two 
Policies. Applicants state that the offering letter will advise the Old 
Policy owner that personalized illustrations of the Old Policy and the 
New Policy using the information particular to that owner are available 
without cost upon request.
    36. Applicants represent that the exchange offer will remain open 
for at least 6 months after the date of an order granting the exchange 
application. Applicants state that, upon acceptance of the exchange 
offer, a New Policy will be issued with the same face amount and policy 
value as the Old Policy surrendered in the exchange, unless the face 
amount of the New Policy is increased to meet the definition of life 
insurance under section 7702 of the IRC.
    37. Applicants further represent that immediately following the 
exchange, the ``owner'' and ``insured'' of the New Policy must be the 
same as the ``owner'' and ``insured'' under the exchanged Old Policy. 
Applicants state that the New Policy will treat all charges and loads, 
the free look period, the incontestability, and suicide provisions as a 
new issue.
    38. Applicants indicate that the risk class for a New Policy 
acquired by the exchange will be the one most similar to the risk class 
for the Old Policy. Applicants state the if the Old Policy includes a 
face amount increase at a risk class worse than that for the Old Policy 
as originally issued, then the New Policy will be issued at the risk 
class most similar to that for the Old Policy as originally issued. 
Applicants indicate that new evidence of insurability will not be 
required as a condition of the exchange unless (i) the owner applies to 
have the insured's rating upgraded; or (ii) the owner requests a face 
amount increase at the time of the exchange. Applicants represent that 
any increase in face amount or upgrade in rating in connection with the 
exchange will take effect under the New Policy on the monthly 
anniversary after the new underwriting requirements have been 
satisfied.
    39. Applicants represent that no surrender charge will be deducted 
upon the surrender of an Old Policy in connection with an exchange, and 
no premium loads will be deducted from the proceeds of that surrender 
when applied to the purchase of the New Policy as part of the exchange. 
Applicants state that all costs associated with the administration of 
the exchange offer, including the costs of commission payments, will be 
borne solely by the Company.
    40. Applicants state that the exchange is available only to Old 
Policies that do not have any outstanding loans and that loans can be 
repaid either in cash or by means of a partial surrender. Applicants 
represent that the face amount the Old Policy has after any loan has 
been repaid will be the face amount of the New Policy. Applicant 
further represent that any offering materials delivered to the Old 
Policy owners describing the exchange will include the fact that loans 
must be repaid prior to the exchange and that repayment of the loan by 
means of a partial surrender could have adverse tax consequences.

Applicants' Legal Analysis

    1. Section 11(a) of the Act makes it unlawful for any registered 
open-end company, or any principal underwriter for such a company, to 
make an offer to the holder of a security of such company, or of any 
other open-end investment company, to exchange his security for a 
security in the same or another such company on any basis other than 
the relative net asset values of the respective securities, unless the 
Commission has approved the terms of the offer by exemptive order or 
the offer complies with Commission rules adopted under section 11 
governing exchange offers. Section 11(c) of the Act, which applies to 
offers to exchange the securities of a registered unit

[[Page 52598]]

investment trust for the securities of any other investment company, 
provides that the requirements of section 11(a) are applicable 
regardless of whether the exchange is on the basis of net asset value.
    2. Because the proposed exchange offer constitutes an offer of 
exchange of two securities, each issued by a registered unit investment 
trust, Applicants may make the proposed exchange offer only after the 
Commission has approved the terms of the offer by an order pursuant to 
section 11(a) of the Act unless the terms of the exchange offer are 
consistent with those permitted by Commission rule.
    3. Rule 11a-2 provides blanket Commission approval of certain types 
of offers of exchange of one variable annuity contract for another or 
of one variable life insurance contract for another. Variable annuity 
exchanges are permitted by Rule 11a-2 provided that the only variance 
from a relative net asset value exchange is an administrative fee 
disclosed in the offering account's registration statement and a sales 
load or sales load differential calculated according to methods 
prescribed in the rule. However, no exchange is permitted under Rule 
11a-2 that involves a variable annuity acquired or exchanged that has 
both a front-end and a deferred sales load. Although the conditions 
required by Rule 11a-2 for variable life insurance policies are less 
extensive than those for variable annuities, there is Commission 
language in the release adopting Rule 11a-2 that suggests that the rule 
may have been intended to permit only exchanges of funding options 
within a single variable life insurance policy but not the exchange of 
one such policy for another. Investment Company Act Release No. 13407 
(July 28, 1983) at ``(2) Exchange Offers by Variable Life Insurance 
Separate Accounts.'' Because of the uncertainty as to the relief 
accorded by Rule 11a-2 for variable life insurance policies, Applicants 
can not rely on that rule.
    4. Rule 11a-3 takes a similar approach to that of Rule 11a-2. As 
with Rule 11a-2, the focus of Rule 11a-3 is primarily on sales or 
administrative charges that would be incurred by investors for 
effecting exchanges. Applicants represent that the terms of the 
proposed offer are consistent with the Commission's approach in Rule 
11a-3, to the extent that no additional sales charges will be incurred 
in connection with the exchange and no administrative fees will be 
charged to effect the exchange. However, because the investment company 
involved in the proposed exchange offer is a registered separate 
account and is organized as a unit investment trust rather than as a 
management investment company, Applicants can not rely upon Rule 11a-3.
    5. Applicants represent that the terms of the proposed exchange 
offer do not present the abuses against which section 11 was intended 
to protect. Applicants assert that no additional sales load or other 
fee will be imposed at the time of exchange, other than charges related 
to new underwriting needed for (i) certain optional insurance riders, 
(ii) a change to an improvement of underwriting classification, or 
(iii) a face amount increase.
    6. Applicants state that the policy value and face amount of a New 
Policy acquired in the proposed exchange will be the same immediately 
after the exchange as that of the Old Policy immediately prior to the 
exchange, except in those instances where the face amount is increased 
so as to comply with Section 7702 of the IRC. Accordingly, Applicants 
assert that the exchanges, in effect, will be relative net asset value 
exchanges that would be permitted under section 11(a) if the Account 
were registered as a management investment company rather than as a 
unit investment trust.
    7. Applicants represent that the description of the proposed 
exchange offer in letters to old policy owners and in the New Policy's 
prospectus will provide full disclosure of the material differences 
between the Old and New Policies. Further, Applicants state that: (a) 
Those letters, and any other sales literature used in connection with 
the exchange offer, will have been filed with NASD, Inc. for review; 
(b) each old policy owner will be offered, at no charge, personalized 
illustrations that compare the Old and New Policies; and (c) the 
personal illustrations will show whether a New Policy has greater or 
lesser costs and charges than the Old Policy. Applicants maintain that 
the New Policies should be less expensive than the Old Policies for 
many, if not most, policy owners, and contend that even where 
personalized illustrations show that the New Policy may be more 
expensive than the Old Policy, the owner may determine that the 
availability of a broader range of variable investment options under 
the New Policy make the New Policy more attractive than the Old Policy. 
Applicants assert that the disclosure and the illustrations provided 
upon request will provide Old Policy owners with sufficient information 
to determine which Policy they prefer.
    8. Applicants contend that, like those cited, the present 
application involves an exchange offer that does not present any 
duplication of sales loads or administrative fees. Because no 
additional sales load or administrative charges for effecting an 
exchange will be incurred as a result of any exchange pursuant to the 
proposed offer (other than in connection with underwriting for riders 
or for a face amount increase or for an improvement of underwriting 
classification), Applicants submit that the terms of the proposed offer 
are routine ones that may properly be approved by an order issued by 
the Division of Investment Management pursuant to delegated authority.

Conclusions

    Applicants submit that, for the reasons summarized above and to the 
extent necessary or appropriate, approval of Applicants' offer of 
exchange as described, and subject to the conditions set forth in this 
Application, is appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policies and provisions of the Act. Therefore, Applicants submit that 
the Commission should grant the approval sought by this Application.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E6-14699 Filed 9-5-06; 8:45 am]

BILLING CODE 8010-01-P