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SEC V. UNITED BENEFIT LIFE INS. CO., 387 U. S. 202 - Volume 387 - 1967 - Full Text - US Supreme Court Center - USSC Cases - Nolo
US Supreme Court Center > Volume 387 > SEC V. UNITED BENEFIT LIFE INS. CO., 387 U. S. 202 (1967) > Full Text
SEC V. UNITED BENEFIT LIFE INS. CO., 387 U. S. 202 (1967)
Petitioner, the Securities and Exchange Commission (SEC), brought this action to enjoin respondent, United Benefit Life Insurance Co. (United), from offering its "Flexible Fund Annuity" contract without meeting the registration requirements of the Securities Act of 1933, and to compel United to register the "Flexible Fund" as an "investment company" pursuant to § 8 of the Investment Company Act of 1940. The "Flexible Fund" contract is a deferred, or optional, annuity plan, under which the purchaser agrees to pay a fixed monthly premium for a certain number of years. United maintains the Fund consisting of the purchasers' premiums less expenses in a separate account invested mostly in common stocks to produce capital gains as well as interest return. The cash value of a purchaser's interest, which is measured by and varies with the investment experience of the "Flexible Fund" account, may be withdrawn before maturity, or, at maturity (when the purchaser's interest in the Fund ends), it may be used to purchase a conventional fixed dollar annuity. The contract also contains a provision for a guaranteed minimum cash value ranging from 50% of net premiums the first year to 100% after 10 years which is available before or at maturity. United features the program as an investment opportunity to gain through common stock investment. The SEC contended that the pre-maturity phase of the contract was separable, and constituted a "security" under the Securities Act. The Court of Appeals upheld the District Court's conclusion that the contract should be considered in its entirety, and, thus viewed, had the character of insurance and came within the optional annuity exemption in § 3(a) of the Securities Act. Though the Court of Appeals acknowledged as controlling S.E.C. v. Variable Annuity Life Insurance Co., 359 U. S. 65 (VALIC), which held that a variable annuity contract was an investment contract and not exempt from the securities laws as insurance, it read the decision only as holding that a company, in order to qualify its products as insurance, must bear a substantial part of the investment risk associated with the contract. The court felt that test was satisfied here by the
Page 387 U. S. 203
net premium guarantee and conversion to payments which included an interest element. Consequently, the question whether the "Flexible Fund" was an investment company under the Investment Company Act was not reached.
Page 387 U. S. 204
The "Flexible Fund Annuity" is a deferred, or optional, annuity plan having characteristics somewhat similar to those of the variable annuities this Court held, in S.E.C. v. Variable Annuity Life Insurance Co., 359 U. S. 65 (VALIC), to be subject to the Securities Act. Like the variable annuity, it is a recent effort to meet the challenge of inflation by allowing the purchaser to reap the benefits of a professional investment program while at the same time gaining the security of an insurance annuity. [Footnote 3] There are, however, significant differences between the "Flexible Fund" contract and the variable annuity, and it is claimed that these differences suffice to bring the "Flexible Fund" contract within the "optional annuity contract" exemption of § 3(a)(8) of the Securities Act, [Footnote 4] and to bring the "Flexible Fund" itself within
Page 387 U. S. 205
the "insurance company" exemption of § 3(c)(3) of the Investment Company Act, 54 Stat. 798, 15 U.S.C. § 80a-3(c)(3).
At maturity, the purchaser may elect to receive the cash value of his policy, measured either by his interest in the fund or by the net premium guarantee, whichever is larger. He may also choose to convert his interest into a life annuity under conditions specified in the
Page 387 U. S. 206
"Flexible Fund" contract. These conditions relate future benefits to dollars available at maturity, so the dollar benefits to be received will vary with the cash value at maturity. However, the net premium guarantee is, because of this conversion system, also a guarantee that a certain amount of fixed amount payment life annuity will be available at maturity.
"that a company must bear a substantial part of the investment risk associated with the contract . . . in order to qualify its
Page 387 U. S. 207
products as 'insurance.'"
The second problem United must face in a deferred annuity is to determine what amount will be available for the annuity fund at maturity. In a conventional annuity, where a fixed amount of benefits is stipulated, it is essential that the premiums both cover expenses and produce a fund sufficient to support the promised benefits. [Footnote 7] In fixing the necessary premium, mortality
Page 387 U. S. 208
experience is a subordinate factor, and the planning problem is to decide what interest and expense rates may be expected. There is some shifting of risk from policyholder to insurer, but no pooling of risks among policyholders. In other words, the insurer is acting in a role similar to that of a savings institution, and state regulation is adjusted to this role. [Footnote 8] The policyholder has no direct interest in the fund, [Footnote 9] and the insurer has a dollar target to meet.
The insurer may plan to meet the minimum guarantee by split funding -- that is, treating part of the net premium
Page 387 U. S. 209
as it would a premium under a conventional deferred annuity contract with a cash value at maturity equal to the minimum guarantee and investing only the remainder [Footnote 11] -- or by setting the minimum low enough that the risk of not being able to meet it through investment is insignificant. The latter is the course United seems to have pursued. [Footnote 12] In either case, the guarantee cannot be said to integrate the pre-maturity operation into the post-maturity benefit scheme. United could as easily attach a "Flexible Fund" option to a deferred life insurance contract or any other benefit which could otherwise be provided by a single payment. And the annuity portion of the contract could be offered independently of the "Flexible Fund." [Footnote 13] We therefore conclude that we must assess independently the operation of the "Flexible Fund" contract during the deferred period to determine whether that separable portion of the contract falls within the class of those exempted by Congress from the requirements of the Securities Act, and, if not, whether the contract constitutes a "security" within § 2 of that Act, 48 Stat. 74, 15 U.S.C. § 77b.
The provisions to be examined are less difficult of classification than the ones presented to us in VALIC. There, it was held that the entire plan under which benefits continued to fluctuate with the fortunes of the fund
Page 387 U. S. 210
after maturity, was not a contract of insurance within the § 3(a) exemption. A pooling of mortality risk was operative during the payment period, and the contract was one of insurance under state law, but a majority of this Court held that "the meaning of "insurance" . . . under these Federal Acts is a federal question," 359 U.S. at 359 U. S. 69, and "that the concept of insurance' involves some investment risk-taking on the part of the company." Id. at 359 U. S. 71. The argument
Approaching the accumulation portion of this contract in this light, we have little difficulty in concluding that it does not fall within the insurance exemption of
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§ 3(a) of the Securities Act. "Flexible Fund" arrangements require special modifications of state law, and are considered to appeal to the purchaser not on the usual insurance basis of stability and security but on the prospect of "growth" through sound investment management. [Footnote 15] And while the guarantee of cash value based on net premiums reduces substantially the investment risk of the contract holder, the assumption of an investment risk cannot, by itself, create an insurance provision under the federal definition. Helvering v. Le Gierse, 312 U. S. 531, 312 U. S. 542. The basic difference between a contract which to some degree is insured and a contract of insurance must be recognized.
"At the state level the Uniform Securities Act makes
Page 387 U. S. 212
explicit what seems to be the view of the great majority of blue sky administrators to the effect that variable annuities are securities. . . ."
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