Court Opinion

ID: 9421776
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:59:47.511472+00
Date Added: 2024-06-11T17:19:09.564405
License: Public Domain

Mr. Justice Brennan,
with whom Mr. Justice-Stewart joins,
concurring.
I join the opinion and judgment of the Court. However, there are additional reasons which lead me to the Court’s result, and since the nature of this case lends it to rather extended treatment, I will express these reasons separately.
First. The facts of this case are quite complex, but the basic problem involved is much more simple. I will try to point it up before developing the details of the sort of contracts sold by the respondents. It is. one of the coverage of two Acts of Congress which coricen-' trated on applying specific forms of regulatory controls to the various ways in which organizations get and administer other people’s money — the Securities Act of 19331 and the Investment Company Act of 1940.2 These Acts were specifically drawn to exclude any “insurance policy” and any “annuity contract” (Securities Act § 3 (a)(8)) *74arid any “insurance company” 3 (Investment Company Act § 3 (c) (3)) from their coverage. These exclusions were to take effect where the issuer of the policy or contract was subject to. the supervision of the state “insurance commissioner, bank commissioner, or any agency or officer performing like functions”- (Securities Act § 3 (a)(8)) or where a company classifiable as an “insurance company” was “subject to supervision by the insurance commissioner or a similar official or agency of a State” (Investment Company Act § 2 (a) (17)). The exclusions left these contracts and companies to the sole control of such state officials. • Except for these exclusions, there is little doubt that these .'contracts, and the companies issuing them would be subject to the Federal Acts.4
*75Why these exclusions? They could not have been made out of some general desire on the part of Congress to avoid any concurrent regulation by both the Federal Government and the States of investments or companies subject to the two- Acts. On the contrary, § 18 of the Securities Act and § 50 of the Investment Company Act preserve generally the jurisdiction of state officials over their subject matter; the former.in terms of “the jurisdiction of the securities commission (or any agency or office performing like functions) of any State” and the latter in terms of “the jurisdiction of any other commission, board, agency, or officer of . . .. any State or political subdivision.” Conversely, of course, however adequately State Securities Commissioners, might regulate an investment, it was not for that reason to be freed from federal regulation. Concurrent regulation, then, was1 contemplated by the Acts as a quite generally prevailing matter. Nor is it rational to assume that Congress thought that any business whatsoever regulated by a specific class of officials, the State Insurance Commissioners, would be' for that reason. so perfectly conducted and regulated that all the protections of the Federal Acts would be unnecessary.. This approach of personally selective deference to the state administrators is hardly to be attributed to Congress. The point must-have been that there then was a form of “investment” known as insurance (including “annuity contracts”) which did not present very squarely the sort of problems that the Securities Act and the Investment Company Act were devised to deal with, and which were, in many details, subject to a form of state regulation óf a sort which, made the federal regulation even less relevant.
At this time, of course, the sort of “variable annuity” contract with which we are concerned in this case did not exist. When Congress made the exclusions provided for in the Acts, it did not make, them with the “variable *76annuity” contract before it. Of course, the point is not that if the insurance industry seeks to retain its exemption, it must limit itself to the forms of policies and contracts in effect in 1933 and 1940. .But if a brand-new form of investment arrangement emerges which is labeled “insurance” or “annuity” by its promoters, the functional distinction that Congress set .up in 1933 and 1940 must be examined to test whether the contract falls within the sort of investment form that Congress was then willing to leave exclusively to the State Insurance Commissioners. In that inquiry, an analysis of the regulatory and protective purposes of the Federal Acts and of state insurance regulation as it then existed becomes relevant.5
At the core of the 1933 Act are the requirements of a registration statement and prospectus to be used in connection with the issuance of “securities” — that term being very broadly defined.6 Detailed schedules, set forth *77in the Act, list the material that the registration statement and the prospectus are to contain.7 The emphasis is on disclosure; the philosophy of the Act is that full disclosure of the details of the enterprise in which the investor is to put his money should be made so that he can intelligently appraise the risks involved.
The regulation of life insurance and annuities by the States proceeded; and still proceeds, on entirely different principles. It seems as paternalistic as the Securities Act of 1933 was keyed to free, informed choice. Prescribed contract clauses are ordained legislatively or administratively. Solvency and the adequacy of reserves to meet the company’s obligations are supervised by the establishment of permissible categories. of investments and through official examination.8 The system does not depend on disclosure to the public, and, once given this form of regulation and the nature of the “product,” it might be difficult in the case of the traditional life insurance or annuity contract to see what the purpose of it would be.
This congressional division of regulatory functions is .rational and purposeful in the case of a traditional life insurance or annuity policy, where the obligations of the company were measured in fixed-dollar terms and where the investor could not be said, in any meaningful sense, to be a sharer in the investment experience of the com*78pany. In fact, one of the basic premises of state regulation would appear to be that in one sense the investor in an annuity or life insurance company not become a direct sharer in the company’s investment experience; that his investment in the policy or contract be sufficiently protected to prevent this. But the situation changes where the coin of the company’s obligation is not money but is rather the present condition of its investment portfolio. To this extent, the historic functions of state insurance regulation become meaningless. Prescribed, limitations on investment, and examination of solvency and reserves become perfectly circular to the extent that there is no obligation to pay except in tarms measured by one’s portfolio. But beyond controlling corporate solvency and the adequacy of reserves, and maintaining observance of the legal, list of investments, the state plans of regulation do not go in regulating investment policy. Where the nature of the obligation assumed is such, the federally protected interests in disclosure to the investor of the nature of the corporation to whom he is asked to entrust his money and the purposes for which it is to be used become obvioujs and real. The contract between the investor and the organization no longer squares with the sort of contract in regard to which Congress in 1933 thought its “disclosure” statute was unnecessary.
The provisions of the Invéstment Company Act of 1940, which passes beyond a simple “disclosure” philosophy, also are informed by policies that are very relevant to. the contracts involved in this case. While the Act does. cover face-amount certificate companies whose obligations aré specified in fixed-dollar amounts,9 the majority of its provisions are of greatest regulatory relevance in the case of. the much more common sort of *79investment company, where the investors (or at least certain categories of them) participate on an “equity” basis in the investment experience of the enterprise. Salient' regulatory provisions call for registration and recital, by an investment company, of its investment policies and operating practices;10 regulate the relationships between the company and its investment adviser, including fees and provisions for termination of the' contract;11 regulate trading practices,12 changes in investment policy,13 the issuance of senior securities,14 proxies and voting trusts,15 the terms of redemption by investors of their interests in the company;16 regulate, in the case of periodic investment plans (which were made, subject to special regulation), the “sales load,” or amount of the investor’s payment that does not become part of his interest in the enterprise;17 and provide for detailed reports to investors.18 While these controls apply m many cases to fixed-dollar obligations, like face-amount certificates and the bonds of closed-end investment companies, they are of particular relevance to situations where the investor is committing his funds to the hands of others on an equity basis, with the view that the funds will be invested in securities and his fortunes will depend on the success of the investment. The traditional state insurance department regulation of contract terms, reserves, solvency, and permissible investmehts simply does not touch the points of definition of investment policy and investment technique, and control over investment policy changes and over the interests of the men who shape the policies of investment and furnish investment advice that the 1940 Federal Act provides. These controls may be largely irrelevant to traditional banks and insurance companies, which Congress clearly exempted; they were not investing *80heavily in equity securities and holding out the possibilities of capital gains through fund management; but where the investor is asked to put his money in a scheme for managing it on an equity basis, it is evident that the Federal Act’s controls become vital.
This is not to say that because subjection of the contracts in question here to federal regulation is desirable, it has in fact been accomplished; but one must apply a test in terms of the purposes of the Federal Acts as a guide to interpreting the scope of an exemption from their coverage for “insurance.” Cf. Securities & Exchange Comm’n v. W. J. Howey Co., 328 U. S. 293, 299. When Congress passed the Securities Act of 1933 and the Investment Company Act of 1940, no State Insurance Commissioner was, incident to his duties in regulating insurance companies, engaged in the sort of regulation, outlined above as provided in the Federal Acts, that Congress thought would be appropriate for the protection of people entrusting their money to others to be invested on an equity basis. There is no reason to suppose that Congress intended to make an exemption of forms of investment to which its regulatory scheme was very relevant in favor of a form of state regulation which would not be relevant to them at all.
Second. Much bewilderment could be engendered by this case if the issue were whether the nontracts in question were “really” insürance or “really” securities — one or the other. It is rather meaningless to view the problejn as one of pigeonholing. these contracts in one category or the other. Obviously they have elements of conventional insurance, even apart from the fixed-dollar term life insurance and the disability waiver of premium insurance sold with some of these contracts (both of which are quite incidental to the main undertaking). They patently contain a significant annuity feature (unless one defines an annuity as a contract necessarily providing fixed-sum* pay*81ments),19 and the granting of annuities has been considered part of the business of life insurance.20 Of course, some urge that even the traditional annuity has few “insurance” features and is basically a form of investment. l.Appleman, Insurance. Law and Practice, § 83; Prudential Ins. Co. v. Howell, 29 N. J. 116, 121-122, 148 A. 2d 145, 148. But the point is that, even though these contracts contain, for what they are worth, features of traditional annuity contracts,, administering them also involves ■a very substantial and in fact predominant element of the businessmf an investment company, and that in a way totally foreign to the business of a traditional life insurance and annuity company, as traditionally regulated by state law. This is what leads to the conclusion that it is not within the intent of the 1933 and 1940 statutes to exempt them.
The individual deferred variable annuity contract of respondent Variable Annuity Life Insurance Company (VALIC) gives a basis for exploration of this. A sample *82contract, given in evidence in the District Court, is one issued to a 35-year-old male, providing for his making 30 annual payments of $1,000 each. Of this, $39.60 is the consideration for an undertaking by the company by which payment of the annual $1,000 is waived in the event of disability. Of the remaining $960.40, designated the “basic annuity premium,” specified percentages are. used to credit to the account of the investor certain “accumulation units.” Of the first year’s “basic annuity premium,” less than 45% is so used; for the next 4 years, the percentage is in the approximate range of 85% to 87%;21 for years 6 through 10, the figure is 89%, and for the remainder of the 30-year pay-in period it is 92%-. Declining term life insurance in a fixed-dollar amount, beginning at five times the annual “basic annuity premium” the first year and declining through a period of 5 years to nil, is provided as a benefit over and above the “accumulation units” credited to the account of the investor.22 The contract is said to build up a “cash value” as the investor’s payment “buys” further accumulation units, but while the value is one which can and would be finally settled by the. payment of dollars, the obligation owed by the company to the investor is not one owed to him in dollar terms. It is one which is measured only in terms of “units” — ;the petitioners suggest a resemblance to “shares” — in a portfolio. The units are established by an *83arbitrary computation which has the effect of dividing the company's investment assets as of a starting day into a number of units, and assigning to each unit its share of the over-all market value — though the division is not in fact made.23 Then monthly the value of the units is recomputed. This is done, broadly, by taking into account all interest and dividends paid on the company’s portfolio and all realized capital gains and. losses, with relevant income taxes, together with all unrealized capital shrinkage and increase, less a monthly surcharge of 0.15% (1.8% per annum) of asset value.24 New dollars from investors which “buy” units buy them at the new rate, thus preventing dilution, and those investors who draw down their accumulated units receive cash for them at such rate.25
*84The contract uses insurance terminology .throughout and many of the common features of life insurance and annuity policies are operative in regard to it at this “pay-in” stage. There are “incontestability” and “suicide” clauses (which mainly relate to the term insurance); a “grace period” allowed for the payment of premiums; a provision for “policy loans” (the drawing down of accumulated units in cash, subject to- replacement later to-the extent that repayment of the amount of money received will then permit, the transaction bearing a resemblance to the liquidation by a common stock .investor of his holdings in anticipation of a “bear market”); and provision for a “cash value” (that is, for the cashing in of the accumulated units, subject to a surrender charge in the early years). And very certainly the commitment of the *85company eventually to disburse the accumulated values on a life annuity basis once the pay-in period is over is present throughout this period. But what the investor is participating in during this period, despite its acknowledged “insurance” features, is something quite similar to a conventional open-end management investment company, under a periodic investment plan. The investor’s cash (less a charge analogous to a loading charge, which is, at least in the early years, very high, but which, it should be said, has to cover ann.uity premiúm taxes and some quite conventional mortality risks) goes to buy “units” in a portfolio managed by the persons in control of the corporation. His “units” fluctuate with the income and capital gain and loss experience of the management of the portfolio. He may cash them in, wholly or partially. The amount of his equity is subjected to a charge, on asset value, of 1.8% per annum. Except for the temporary term insurance and the waiver of premium coverage, the entire nature of the company’s obligation to its investor, during this period is not in dollars (though of course it will be converted into them, just as a commodity transaction can be), but solely in terms of the value of its portfolio. In this sort of operation, examination by state insurance officials to determine the adequacy of reserves and solvency becomes less and less meaningful. The disclosure policy of the Securities Act of 1933 becomes, by comparison, more and more relevant. And the detailed protections of the 1940 legislation — disclosure of investment policy, regulation of changes of that policy, of capital structure, conflicts of interest, investment advisers — all become relevant in an acute way here. These are the basic protections that Congress intended investors to have when they put their money into the hands of an investment trust; there is no adequate substitute for them in the traditional regulatory controls administered by state insurance departments, *86because these controls are not relevant to the specific regulatory problems of an investment trust.26
The same conclusions follow from a consideration of the next stage of this contract. Before the maturity date, when the schedule of payments in on the contract ceases and the payments out commence, the investor can draw down his “units” in cash, and dispense with all “annuity” features. Failing this, he is entitled to elect one of several annuity alternatives. These are, in the sample policy, a straight life annuity on the life of the investor, a straight life annuity with 10 years’ payments certain, and a joint and survivor annuity on the life of the investor and another. Again, while the duration of the company’s obligation to pay is independent of its investment experience, the amount of each payment is not a direct money obligation but a function of the status of the company’s portfolio. The amounts of the payments are calculated in this fashion: The dollar value of the accumulated units credited to the investor throughout the years is *87ascertained. A standard annuity table (including a 3% % interest assumption) is used to determine the dollar amount of the first monthly pay-out, based on a capital contribution of the accumulated amount, under the option selected by the investor. The number of “annuity units” (which are functions of the fluctuating asset value of the portfolio of the company) that this amount would buy is computed, and this number of annuity units is paid (transmuted into a varying cash payment) to the investor every subsequent month for the duration of the company’s commitment under the option selected. Like that of an “accumulation unit” during the pay-in period, the value in dollars of an “annuity unit” is readjusted monthly to give effect to the investment income of the securities in the company’s portfolio for the period, as well as to capital gains and losses, realized and unrealized. Since the first payment (which forms the basis for measurement of the subsequent payments) contains án assumed interest factor, and since the monthly valuation change includes income items — interest and dividends — received in respect of the company’s portfolio, to avoid paying double “interest” the 3%% assumed interest factor is wrung out every month by multiplying the preceding month’s valuation by 0.9971.27 And the 1.8% annual surcharge on asset value is applied also.28
*88The effect of this is that the investor, during the payout period, is in almost every way as much a participant in something equivalent to an investment trust as before. His monthly payment is not really a dollar payment, though it is converted into dollars before it is paid to him; it is a payment in terms of a portfolio of securities. It is true that the company has a fixed obligation to continue payments, and that the duration and the amount of the payments are not affected by collective longevity in excess of the company’s assumptions; the company’s obligation to continue payments is not limited in any way by reference to the number of units owned by all the investors *89at the start of their annuity periods. If the lives of the group of investors exceed the longevity assumptions of the table, the proceeds of what might otherwise have been characterized as a very high “loading charge” (8% at its lowest application, with 11% the minimum for the first’ 10 years) and a substantial “annual management fee” (1.8% of asset value annually) will have to provide, with the company’s other surplus and capital, enough to continue payments. But the -individual payment is still a payment measured basically in the same way as one’s interest in an investment trust is measured. And in a very real sense the investor is more vitally interested in the investment experience of the company at this period than he ever was in the pay-in period, and in a way more vitally than any holder of an open-end investment company certificate, or share in a publicly traded closed-end company ever is: he has become completely “locked in.” He obviously cannot draw down the present value of his “units” once the option to receive annuity payments has been exercised; he cannot “cash in his chips” that he bought in the faith of the management of the fund; his rights are technically assignable, but practically unmarketable since they depend on his individual life span. The company can radically change investment policies, change advisers, do whatever it pleases (so long as it does not run afoul of the minimal investment regulations of the State), and there is nothing the contract holder can do about it. It is not rational to say that Congress abandoned the very appropriate protections of the Investment Company Act in this investor’s case in favor of provisions of state regulation that are quite irrelevant to the basic problems of protecting him.
The respondents seek to equate this contract with a fixed-dollar “participating” annuity sold by a mutual company, or one sold by a stock company on a participating basis. This contention is not persuasive. While *90investment experience in a “participating” contract can redound to the benefit of the policyholder, the contracts are sold as fixed-dollar obligations. The “dividends” are promoted as such.. During the pay-in period, they might b.e thought of as a reduction of premium.29 They' may very well represent favorable mortality risk experience, particularly where the company’s investments are conservative. And the annuity-paying insurance company’s investments are doubtless administered in the light of the fixed obligation of.the company. The company is not committed by its literature to perform part of the job of a common-stock investment trust.30 No one has yet tried to follow the academic suggestion of respondent VALIC, and reduce the fixed guarantee óf a traditional life annuity to the point of insignificance and make the rest of the return to the contract holder variable, by selling it on a “participating” basis.31 The comparison of the premium cost of such a contract to its fixed return might well make it unsalable to the public. Even more unpersuasive is the respondents’ argument that even in a traditional annuity the policyholder bears the investment risk in the sense that he star the risk of the company’s insolvency. The prevention m-*91solvency and the maintenance of “sound” financial condition in terms of fixed-dollar obligations is precisely what traditional state regulation is aimed at. The protection of share- interests in a fluctuating} managed fund has received the attention of specific federal legislation. Both are “investment risks” in a sense, but they differ vastly in kind and lend themselves to different regulatory schemes.
Accordingly, while these contracts contain insurance features, they contain to a very substantial degree elements of investment contracts as administered by equity investment trusts. They contain these elements in a way different in kind from the way that insurance and annuity policies did when Congress wrote the exemptions for them in the 1933 Act and the 1940 Act. Since Congress was intending a broad 'coverage in both these remedial Acts and since these contracts present regulatory problems of the very sort that Congress was attempting to solve by them, I conclude that Congress-did not intend to exclude contracts like these by reason of the “insurance” exemptions.
Third. The respondents contend that a reversal of the judgment will put them out of business. The reason given is that if the Investment Company Act of 1940 applies to them, they are probably categorizable under it as open-end management companies,32 and it is *92declared unlawful by § 18 of the Act for an open-end company to have outstanding any “senior security,” that is, any security senior to any other class of securities. These companies have capital stock, and the contracts in question would be securities senior to the stock.33 If one assumes that this is correct, there is of course the possibility that the SEC might use its broad dispensing powers in this regard, and, in any event, the whole point would be of no concern at all if the contracts in question were issued by mutual companies.34 But in the final analysis, it is not decisive of the issues here that a holding that these con*93tracts are subject to the Federal Acts might require some modification in the business of issuing them. Since these contracts are in fact covered by the Acts, there can be no reason why their issuers should be able to carry on the investment business in a way which Congress has forbidden.
Similarly, it’may be conceded freely that this form of investment contract may be one of great potential benefit to the public. So, of course, may be orthodox open-end investment trusts, and they clearly are regulated by federal law. In short, notions that this form of arrangement is a desirable one and that it might be well to allow it to exist for a while immune from federal regulation are not relevant to the matter for decision. Congress regulates by general statutes. The passage of a federal regulatory statute is a delicate balancing of many national legislative interests and political forces. Congress need not go through the initial travail of re-enacting its general regulatory scheme every time a new form of enterprise is introduced, if that new form falls within the scheme’s coverage. If there is deemed wise any adjustment of the regulatory scheme in the light of new developments in the subject matter to which it extends, Congress may make it.

 48 Stat. 74, as amended, 15 U. S. C. §§ 77a-77aa.

 54 Stat. 789, as amended, 15 U. S. C. §§ 80a-l to 80a-52.
The Court’s opinion makes it clear why the issue is identical under the McCarran-Ferguson Act, 59 Stat. 33, as amended, 15 U. S. C. §§ 1011-1015.

 Defined ás a “company which is organized as an insurance company, -whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or á similar official or agency of a State . . . .” Investment Company Act § 2 (a) (17). The business of the respondents ■here consists solely of issuing contracts of the nature of those in question here.

 Under the Securities Act, it would appear that in the case of the ordinary insurance policy,'.the exemption would be. just confirmatory-of the policy’s noncoverage under the definition of security. See H. R. Rep. No. 85, 73d Cong., 1st Sess. 15. The status of an ordinary annuity contract might be different. But, in any event, absent the specific insurance exclusion, it would appear that the variable annuity contract would come under the term “investment contract” or possibly “certificate of interest or participation in any profit-sharing, agreement” in the definition of security,' §2(1). On the other hand, even an ordinary insurance company might be an investment company within the meaning of § 3 (a)(1) and .§ 3 (a)(3) of the Investment Company Act, were it not for the specific exemption. The Chief Counsel of the SEC’s Investment Trust Study .testified that the specific exemption was necessary in the light of the definition. ■ See Hearings before Subcommittee of the Senate Committee-on Banking and Currency on S. 3580, 76th Cong., 3d Sess. 181. A fortiori a company issuing the sort of contracts in question here would be included if there were no question of the insurance exemption.

 No subsequent development in state insurance regulation appears to have occurred which would better adapt the system to regulation of companies performing the functions of investment trusts; but of course, in any event, the issue is the scope of state regula .ion in 1933 and 1940. The basic patterns do not appear to have changed and present-day regulation (apart from any measures which may have been taken specifically to deal with the contracts in question) can be examined to see the sort of regulation that Congress was deferring to in the Acts.

 “. . . any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a ‘security,’ or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” Securities Act §2(1), 15 U. S. C. §77 (b)(1).

 Securities Act §§ 7 and 10 and Schedules A and B.

 A leading text on life insurance outlines the areas of state life insurance regulation as follows: the establishment of a standard of solvency for the setting up of minimum reserves; the organization of domestic companies and the admission of foreign insurers; the rendition of annual statements and the making (frequently on a cooperative basis among the States) of periodic examinations; overseeing the equitable treatment of policyholders by prescribing contract terms and checking misrepresentation, discrimination, rebating and “twisting”; licensing and regulating the conduct of agents; and supervision of investments in accord with a statutory permissive list. Huebner and Black, Life Insurance (5th ed. 1958), pp. 518-524.

 See § 3 (a) (2). - Specific regulatory provisions for this sort of company are found in § 28. Reserve requirements are established by the Federal Act as a method of regulation.

 8

 § 15.

 § 12.

 § 13.

 § 18.

 § 20.

 22

 27.

 30 (d~

 The important insurance State of Connecticut has. See Spellacy v. American Life Ins. Assn., 144 Conn. 346, 355, 131 A. 2d 834, 839. In any event, these contracts are annuities, “life annuities,” in the sense that they provide for payments at periodic intervals for a period measured by a human life or lives, with the payments representing both an income element and a liquidation of contributed capital, with no further return of the investor’s capital after the. annuity period runs. Cf. Heubner and Black, op. cit., supra, at 99-100. Cf course, there are annuity contracts which provide payments only for terms of years. See Vance, Insurance (3d ed..l951), p. 1020. These have no mortality factor, and, it would appear, no insurance element at-all. One of the alternative settlement options under one respondents policies is a “variable” form of such an arrangement.

 State statutes make it clear that the writing of traditional annuities is part of the usual business of life insurance companies. See, e. g., Cal. Insurance Code § 101; Conn. Gen. Stat., 1949, c. 295, §6144; Smith-Hurd Ill. Ann. Stat,, Tit. 73, §616; N. Y. Insurance Law, §§ 46, 190. Cf. Huebner and Black, op. cit., supra, at 92'; Mehr and Osier, Modern Life Insurance (rev. ed. 1956), pp. 69-70.

 .The precise percentages are: first year, 44.79%; second, 85.27%; third, 85.82%; fourth, 86.45%; fifth, 87,17%.- The pattern for the second through fifth years would appear to reflect the diminishing cost of declining term insurance sold as part of the contract.

 The cost of such insurance, bought separately, would be about 2% of the first 5-years’ pay-ins. Longer terms than the 5-year are available. The contract is sold without term life insurance and without waiver of premium on disability to persons who are deemed “uninsurable.” The fixed-dollar term insurance and the disability waiver risks of VALIC are heavily reinsured in orthodox insurance companies.

 Even before there are contract holders, a “unit” is set up in terms of the then value of the company’s investment portfolio. While the number of units credited to investors does not accordingly account for the entire value of the “fund,” the value of the units fluctuates as the value of thf company’s investment portfolio fluctuates in the same fashion as if they were shares in an open-end investment fund.

 The surcharge is accounted for in the same way as that part of the premium gross income that does not go toward the crediting of accumulation units. The analogy is to an annual “management fee” in an investment trust. Of course, the surcharge is not in fact paid to anyone as a fee for-any specific purpose; but to the extent that it is made, a portion of the company’s assets is freed from being charged with the valuation of units credited to investors. To this extent, the company’s assets become available for the payment of expenses, for the satisfaction of its obligations in the event the investors as a group outlive their tabular expectancy, and for dividends to common stockholders.

 A concrete example of a few years’ hypothetical experience during the pay-in period may illustrate the workings of these contracts. It is based on the specific contract described in the text.
Assume a unit value of $1 at the start of the contract. The investor’s first annual payment of 11,000, less the disability waiver premium and the “loading charge,” buys 430 units at the $1 rate.
Assume a favorable year in the company’s portfolio’s market performance; net capital gains (realized and unrealized) of 15% and *84interest and dividends of 3% of original value, all net of income taxes. On the average asset value at month ends during the year, the 1.8% annual charge would come to about 2% of original value. This would make the value of a unit after a year about $1.16.
Of the second annual premium of $1,000, $819 goes toward buying 706 units at the new rate of $1.16. Thus after the second annual premium, the investor has 1,136 units to his credit.
Assume a very favorable second year in the market, with net capital gains of 25% of the year’s beginning value (29 cents a unit) and income items of 5% of beginning value (about 6 cents a unit), all net of income taxes. The annual charge of 1.8% will come to about 2.4 cents per unit, and the resulting value at year end will be about $1.49, per unit.
Of the third annual premium of $1,000, $824 goes toward buying 553 units at the new rate of $1.49. Thus after the third annual premium, the investor has 1,689 units to his credit.
Assume a bear market the third year, with a 12% net capital shrinkage in the company's portfolio (about 18 cents a unit) and income at 2% of beginning value (3 cents a unit), all net of income taxes. The 1.8% charge would come to about 2.5 cents a unit. These adjustments would give a year end unit value of about $1.31 a unit.
If instead of going on with the contract, the investor then “cashed in his chips,” he would get $2,212.59 for his 1,689 units, less a $10 surrender charge.

 The least-subtle .example of the absent protections is that regarding investment policy. The state investment lists are minima; within the limits of the lists, the companies have very broad discretion in making investments, see Mehr and Osier, op. cit., supra, at 612, and there appears to be no control at all over their changing their investment policies. The difference in emphasis between the two forms of regulation and the obvious correspondence of the contract in question with an investment trust in this essential regulatory matter hardly needs underscoring.
Even the minimal controls over investment policy furnished by the prescribed lists are administered primarily by one State, the State of incorporation. New York’s Insurance Law, § 90, applying in terms the local controls, at least “in substance,” to foreign companies doing business within the State, appears the exception rather than the rule. See Vance, op. cit., supra, at 43. Other States insist on their own requirements as to part of the assets of a foreign insurance company doing a local business. See Cal. Insurance Code § 1153. Some States explicitly make some deference to the State of incorporation. See Smith-Hurd Ill. Ann. Stat., Tit. 73, § 723 (e).

 The reciprocal of 1.000 plus monthly interest at the rate of 3%% per annum.

 A concrete hypothetical example of the workings of the contract in the pay-out period may be useful. Assume that the investor described in the text and in footnote 25 did not cash in his contract, but kept it during the entire 30-year pay-in period. Assume that he has accumulated, through premium-payment “purchases” at varying prices throughout the years, 14,000 units and that the value of a unit has mounted to $3 over the years. The investor can now take his $42,000 in cash, if he chooses. But let. us assume that he is healthy and without dependents, so that he is moved to elect the option of a straight life annuity. This capital contribution of $42,000 by a 65-*88year-old male would buy a fixed-dollar annuity of $286 a month. This is in fact what our investor will get the first month. But this first monthly payment will be used to fix the number of annuity units he will receive monthy for the rest of his life.
Assume that the value at this time of an annuity unit is $2. (While the value of an annuity unit tends to move in the same direction as the value of an accumulation unit, it differs from it because every month it is multiplied by 0.9971 to “wring out” the assumed interest factor in the annuity table. So over'the years, the current values of the two sorts of units will drift apart, pven though they move the same way with the fluctuations of the company’s portfolio.) At the $2 rate, the first monthly payment is 143 units, and this number of units will be paid the investor monthly for life.
Assume that there is a sharp break in the market during the first month of the pay-out period. (Actually, there is a one-month lag in computation, but for the purposes of demonstration this can be ignored.) Suppose, this market break shrinks the capital value of the company’s portfolio by 8% (16 cents a unit). Assume income items during the month at 3% per annum (0.5 cents). Then deduct the omnipresent 1.8% annual charge (0.3 cents). This puts the current value at $1,842; the 0.9971 multiplier must be applied to wring out the interest assumption in the annuity table. This gives an adjusted value of $1.8367. The investor is then paid, for his second monthly payment, 143 units at this new rate, or $262.65.
The recomputation of the unit value takes place monthly, and every month the investor is paid 143 units at the new rate; whatever this may come to in dollars.

 See Mehr and Osler, op. tit., supra, at 583; cf. Fuller v. Metropolitan Life Ins. Co., 70 Conn. 647, 666, 41 A. 4, 11.

 In the traditional form of insurance, the appreciation potential of common stocks is said not to be the predominant reason for an insurer’s investing in them. While many States allow investment in them in varying degrees, commentators emphasize that the purpose of such investment is primárily diversification of investment; in certain industries, common stock may be the only sort of available investment. Huebner and Black, op. cit., supra, at 505. Of course, the primary investment aim of the traditional insurer is preservation of dollar capital with income. Id., at 507.

 VALIC’s hypothetical is an annuity based on an investment return of %% Per annum and an average mortality at 110 years.

 According to § 5, “ ‘Open-end company’ means a management company [i. e., an investment company other than a unit investment trust or a face-amount certificate company, § 4] which is offering for sale or has outstanding ■ any redeemable security of which it is the issuer.” The redeemability of these contracts during the pay-in-period would appear to make their issuer come under this definition. Even if the companies were considered closed-end companies, they argue that other provisions of § 18 would pose very difficult problems for them. See § 18 (a).

 The companies say that this is because their contracts are debt obligations. It is quite doubtful whether the contracts can be described as debts; certainly they are not much more of a debt than a redeemable share in an orthodox open-end company is; here the redemption feature is expressed in outright redeemability during the pay-in period and in liquidation on an annuity basis in the pay-out period. But in any event, whether the contracts are debts or not, they have priority over the companies’ stock, and the provisions dealing with senior securities would appear to cover them.

 The most basic purpose of the provision might be viewed by the SEC as the protection, in the case of the traditional open-end company, of the investment certificate holders from the creation of securities senior to their interests (as well as preventing, in the interest of their purchasers,' the creation of a ■ class of “senior” securities which would be senior only to freely redeemable junior securities). Since it is the senior securities here which are the analogs of open-end investment trust certificates, quite the contrary situation might be thought to be presented. The SEC’s dispensing authority in regard to the Investment Company Act is found in §6 (c), which provides: “The Commission, by rules and regulations upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this title or of any rule or regulation thereunder, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title.”