
[Federal Register: July 3, 2008 (Volume 73, Number 129)]
[Notices]               
[Page 38254-38260]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03jy08-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-28321; File No. 812-13457]

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

June 26, 2008.
AGENCY: The Securities and Exchange Commission (``Commission'').

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

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Applicants: Minnesota Life Insurance Company (``Minnesota Life''), 
Variable Annuity Account (``Separate Account''), and Securian Financial 
Services, Inc. (``SFS'') (collectively, ``Applicants'').

Summary of Application: Applicants seek an order pursuant to Section 
6(c) of the 1940 Act, exempting them from the provisions of Sections 
2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder to 
the extent necessary to permit recapture of certain bonuses (``Credit 
Enhancements'') applied to cumulative net purchase payments that reach 
certain aggregate amounts in accordance with the formula described in 
the application, made under (i) new deferred variable annuity contracts 
and certificates, including data pages, riders and endorsements, 
described in the application (the ``New Contracts'') and under (ii) any 
deferred variable annuity contracts and certificates, including data 
pages, riders and endorsements, that Minnesota Life may issue in the 
future (the ``Future Contracts'') through the Separate Account and any 
other separate accounts of Minnesota Life and its successors in 
interest (the ``Future Accounts''), provided that any such Future 
Contracts are substantially similar in all material respects to the New 
Contracts (New Contracts and Future Contracts referred to collectively 
as the ``Contracts''). Applicants also request that the exemptive 
relief extend to any Financial Industry Regulatory Authority 
(``FINRA'') member broker-dealers controlling, controlled by, or under 
common control with any Applicant, whether existing or created in the 
future, that in the future, may act as principal underwriter for the 
Contracts (``Future Underwriters''). Applicants would recapture Credit 
Enhancements previously applied to purchase payments under the New 
Contracts in the following circumstances: (1) In the event a contract 
owner exercises his or her right to cancellation/``free look'' under 
the New Contract; (2) if the Credit Enhancements were added to the 
contract within 12 months prior to the date of death of the contract 
owner (unless the New Contract is continued under the surviving spouse 
continuation option); and (3) if the Credit Enhancements were added to 
the contract within 12 months prior to the date of annuitization or 
partial annuitization of the contract. The requested relief would also 
apply to any Future Contract funded by the Separate Account or Future 
Accounts, provided that such Future Contract is substantially similar 
in all material respects to the New Contract.

Filing Date: The application was filed on November 21, 2007, and 
amended on June 24, 2008.

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, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30

[[Page 38255]]

p.m. on July 21, 2008, 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 Michael P. Boyle, 
Senior Counsel, Minnesota Life Insurance Company, 400 Robert Street 
North, St. Paul, Minnesota 55101.

FOR FURTHER INFORMATION CONTACT: Ellen J. Sazzman, Senior Counsel, at 
(202) 551-6762, or Harry Eisenstein, Branch Chief, at (202) 551-6795, 
Office of Insurance Products, Division of Investment Management.

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, 100 F Street, NE., Washington, DC 
20549 ((202) 551-8090).

Applicants' Representations

    1. Minnesota Life is a Minnesota stock life insurance company 
organized under the laws of Minnesota. All of the shares of the voting 
stock of Minnesota Life are owned by a second tier intermediate stock 
holding company named ``Securian Financial Group, Inc.,'' which in turn 
is a wholly-owned indirect subsidiary of Minnesota Mutual Companies, 
Inc.
    2. Minnesota Life is authorized to sell insurance and annuities in 
all states (except New York), and the District of Columbia. For 
purposes of the 1940 Act, Minnesota Life is the depositor and sponsor 
for the Separate Account. Minnesota Life also serves as depositor for 
several other separate accounts. Minnesota Life may establish one or 
more additional Future Accounts for which it will serve as depositor.
    3. The Separate Account is a segregated investment account under 
Minnesota law. Under Minnesota law, the assets of the Separate Account 
attributable to the Contracts and any other variable annuity contracts 
through which interests in the Separate Account are issued are owned by 
Minnesota Life, but are held separately from all other assets of 
Minnesota Life, for the benefit of the owners of, and the persons 
entitled to payment under, Contracts issued through the Separate 
Account. Consequently, such assets are not chargeable with liabilities 
arising out of any other business that Minnesota Life may conduct. 
Income, gains and losses, realized or unrealized, from each sub-account 
of the Separate Account, are credited to or charged against that sub-
account without regard to any other income, gains or losses of 
Minnesota Life. The Separate Account is a ``separate account'' as 
defined by Section 2(a)(37) of the 1940 Act, is registered with the 
Commission as a unit investment trust (File No. 811-4294), and 
interests in the Separate Account offered through the Contracts are 
registered under the Securities Act of 1933 on Form N-4, File No. 333-
111067.
    4. The Separate Account is divided into a number of sub-accounts. 
Each sub-account invests exclusively in shares representing an interest 
in a separate corresponding investment portfolio of one of several 
series-type, open-end management investment companies. The assets of 
the Separate Account support one or more varieties of variable annuity 
contracts, including the New Contract. Minnesota Life may issue Future 
Contracts through the Separate Account. Minnesota Life also may issue 
Contracts through Future Accounts.
    5. SFS is a wholly-owned subsidiary of Securian Financial Group, 
Inc. SFS serves as the principal underwriter of Minnesota Life separate 
accounts registered as unit investment trusts under the 1940 Act, 
including the Separate Account, and is the distributor of variable life 
insurance policies and variable annuity contracts issued through such 
separate accounts, including the Contracts. SFS is registered as a 
broker-dealer under the Securities Exchange Act of 1934 and is a member 
of FINRA. SFS may act as principal underwriter for Future Accounts of 
Minnesota Life and as distributor for Future Contracts.
    6. The New Contracts are deferred combination variable and fixed 
annuity contracts that Minnesota Life may issue to individuals on a 
``non-qualified'' basis or in connection with certain types of 
retirement plans that receive favorable federal income tax treatment 
under the Internal Revenue Code of 1986, as amended (the ``Code''). The 
New Contracts make available a number of sub-accounts of the Separate 
Account to which a contract owner may allocate net purchase payments 
and associated Credit Enhancement(s).
    7. The New Contracts also offer fixed-interest allocation options 
under which Minnesota Life credits guaranteed rates of interest for 
various periods. These include several guaranteed term account options 
and the Minnesota Life general account. A market value adjustment may 
apply to the fixed-interest allocation options under the New Contracts 
in certain circumstances.
    8. A contract owner's initial purchase payment must be at least 
$10,000 (unless a lower qualified plan limitation applies). Thereafter, 
a contract owner may choose the amount and frequency of purchase 
payments, except that the minimum subsequent purchase payment is $500 
($100 for automatic payment plans). A contract owner may make transfers 
of contract value among and between the sub-accounts and, subject to 
certain restrictions, among and between the sub-accounts and the fixed-
interest allocation options at any time. Contract value is the sum of a 
contract owner's values in the general account, guarantee periods of 
the guaranteed term account and sub-accounts of the Separate Account on 
any valuation date before the annuity commencement date.
    9. The New Contracts offer a contract owner a variety of annuity 
payment options. The contract owner may annuitize any time. A contract 
owner may choose to annuitize his/her entire contract or only a portion 
of the contract value. If a deferred sales charge (``DSC'') would 
otherwise apply to New Contract withdrawals at the time of 
annuitization, the DSC will be waived for amounts applied to provide 
annuity payments. In the event of a contract owner's (or the 
annuitant's, if any contract owner is not an individual) death prior to 
annuitization, the beneficiary may elect to receive the death benefit 
in the form of one of several annuity payment options instead of a lump 
sum.
    10. The New Contracts have a DSC which is applicable on surrender 
and withdrawal of accumulation values as described more fully below. 
Credit Enhancements are not recaptured upon surrender or withdrawal.
    11. If a contract owner withdraws contract value, Minnesota Life 
may deduct a DSC equal to a percentage of each purchase payment 
surrendered or withdrawn. The DSC is separately calculated and applied 
to each purchase payment at any time that the purchase payment (or part 
of the purchase payment) is surrendered or withdrawn. The amount of the 
DSC depends on how long a contract owner's purchase payment has been 
held under the New Contract. The DSC applicable to each purchase 
payment diminishes to zero over time as the purchase payment remains in 
the New Contract. The DSC does not apply in any circumstances under 
which Credit Enhancements will be recaptured.

[[Page 38256]]

    12. The New Contracts offer a standard DSC schedule as follows:

----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Contract Years Since Payment............     0-1     1-2     2-3     3-4     4-5     5-6     6-7     7-8      8+
Deferred Sales Charge (percent).........     8.0     8.0     7.0     6.0     6.0     5.0     4.0     3.0       0
----------------------------------------------------------------------------------------------------------------

    The DSC does not apply to:
     The annual free withdrawal amount (as discussed below).
     Amounts withdrawn to pay the annual maintenance fee, any 
transfer charge or any periodic charges for optional riders.
     Any amount attributable to recaptured Credit Enhancements.
     Amounts payable as a death benefit upon the death of the 
contract owner or the annuitant, if applicable.
     Amounts applied to provide annuity payments under an 
annuity option.
     Amounts withdrawn because of an excess contribution to a 
tax-qualified contract (including, for example, IRAs and tax sheltered 
annuities).
     The difference between any required minimum distribution 
due (according to Internal Revenue Service rules) on the New Contract 
and any annual free withdrawal amount allowed.
     A surrender or withdrawal requested any time after the 
first contract anniversary and if a contract owner meets the 
requirements of a qualifying confinement in a hospital or medical care 
facility.
     A surrender or withdrawal requested any time after the 
first contract anniversary and in the event that a contract owner is 
diagnosed with a terminal illness as described in the New Contract.
     A surrender or single withdrawal amount any time after the 
first contract anniversary if the unemployment waiver applies.
     If a certain optional living benefit is elected, 
withdrawals in a contract year if less than or equal to the limit 
specified for the benefit.
    13. A contract year is defined as a period of one year beginning 
with the contract issue date and continuing up to, but not including, 
the next contract anniversary, or beginning with a contract anniversary 
and continuing up to, but not including, the next contract anniversary.
    14. The amount withdrawn plus any DSC is deducted from the contract 
value. The amount of the DSC is determined from the percentages shown 
in the table above. For purposes of determining the amount of DSC, 
withdrawal amounts will be allocated to contract gain up to the free 
withdrawal amount, and then to purchase payments on a first-in, first-
out, basis. The amount of the DSC is determined by: (a) Calculating the 
number of years each purchase payment being withdrawn has been in the 
New Contract; (b) multiplying each purchase payment being withdrawn by 
the appropriate DSC percentage from the table; and (c) adding the DSC 
from all purchase payments calculated in (b). Unless otherwise 
instructed, the DSC will be deducted pro rata from all sub-accounts. 
The New Contract permits a contract owner to withdraw from his or her 
contract certain ``free amounts'' on an annual basis without imposition 
of the DSC. The annual free withdrawal amount shall be equal to 10% of 
purchase payments not previously withdrawn and received by Minnesota 
Life during the current contract year, plus the greater of: (i) 
Contract value less purchase payments not previously withdrawn as of 
the most recent contract anniversary; or (ii) 10% of the sum of 
purchase payments not previously withdrawn and still subject to the 
DSC, as of the most recent contract anniversary. The free withdrawal 
amount does not apply when a New Contract is surrendered.
    15. Subject to state availability, a contract owner may elect to 
purchase optional living benefit riders. A contract owner may only 
elect a single living benefit on a New Contract. These include a 
minimum guaranteed income benefit rider, a guaranteed minimum 
withdrawal benefit rider, and two guaranteed living withdrawal benefit 
riders.
    16. If a contract owner dies before the annuity start date, the New 
Contract provides for a death benefit payable to a beneficiary computed 
as of the date Minnesota Life receives written notice and due proof of 
death. The death benefit payable to the beneficiary depends on the 
death benefit option selected by the contract owner: The guaranteed 
minimum death benefit which is included as part of the base New 
Contract; or one of four optional death benefits.
    17. Minnesota Life will credit the contract value allocated to the 
sub-accounts and the fixed-interest accounts with a Credit Enhancement 
when total cumulative net purchase payments reach certain aggregate 
levels. The term ``cumulative net purchase payments'' is equal to the 
total of all purchase payments applied to the contract less any amounts 
previously withdrawn from contract value. The amount of the Credit 
Enhancement to be added will be calculated as follows: (a) Cumulative 
net purchase payments; multiplied by (b) the applicable Credit 
Enhancement percentage from the table below; minus (c) any Credit 
Enhancements previously applied to contract value.

------------------------------------------------------------------------
                                                             Credit
           Cumulative net purchase payments               enhancement
                                                           percentage
------------------------------------------------------------------------
$250,000-$499,999.99.................................               0.25
$500,000-$749,999.99.................................               0.50
$750,000-$999,999.99.................................               0.75
$1,000,000 or more...................................               1.00
------------------------------------------------------------------------

    18. For example, an original purchase payment equal to $251,000 is 
made to the Contract; Minnesota Life applies a Credit Enhancement equal 
to 0.25% of purchase payments ($627.50) to the Contract. Subsequently, 
the contract owner requests a withdrawal from contract value of $35,000 
including applicable deferred sales charge. Cumulative net purchase 
payments are now equal to $251,000 - $35,000 = $216,000. An additional 
purchase payment of $300,000 is later added to the Contract, making 
cumulative net purchase payments equal to $216,000 + $300,000 = 
$516,000. Applying the formula: $516,000 x 0.5% = $2,580 less $627.50 
results in a Credit Enhancement added equal to $1,952.50.
    19. The Credit Enhancement amount is treated as earnings for 
purposes of federal taxes under the Contract. Minnesota Life will 
allocate the Credit Enhancement for the applicable purchase payment 
among the sub-accounts and fixed-interest accounts the contract owner 
selects in accordance with a contract owner's current purchase payment 
allocation instructions. Minnesota Life applies the Credit Enhancement 
to a contract owner's contract value either by ``purchasing'' 
accumulation units of an appropriate sub-account or adding to the 
contract owner's fixed-interest allocation option values. Minnesota 
Life reserves the right to increase or decrease the amount of the 
Credit Enhancement or discontinue the Credit Enhancement in the future. 
In such case Minnesota

[[Page 38257]]

Life would seek any additional exemptive relief to the extent required.
    20. Minnesota Life intends to recapture or retain the Credit 
Enhancements only in the following circumstances. First, Minnesota Life 
recaptures or retains 100% of the Credit Enhancements in the event that 
the contract owner exercises his or her cancellation right during the 
``free look'' period. Second, Minnesota Life recaptures all of the 
Credit Enhancements added to the Contract within 12 months prior to the 
date of death of the contract owner (unless the Contract is continued 
under the surviving spouse benefit continuation option); any Credit 
Enhancement added to the Contract more than 12 months prior to the date 
of death would not be recaptured. Third, Minnesota Life will recapture 
all of the Credit Enhancements added to the Contract within 12 months 
prior to the annuitization date of the Contract. Any Credit Enhancement 
added to the Contract more than 12 months prior to the date of 
annuitization would not be recaptured. If only a partial annuitization 
were elected, a pro rata portion of the Credit Enhancements added to 
the Contract within 12 months of the annuitization date would be 
recaptured. So for example, if half the contract value were annuitized, 
half of the Credit Enhancements added within 12 months of the date of 
the annuitization would be recaptured.
    21. Investment gains attributable to the Credit Enhancement will 
not be recaptured. Since Minnesota Life does not recapture the 
investment gain/loss attributable to the Credit Enhancement, only the 
dollar amount of the Credit Enhancement added to the Contract is 
recaptured in the circumstances described in the application.
    22. With regard to variable contract value, several consequences 
flow from the foregoing. First, increases in the value of accumulation 
units representing Credit Enhancements accrue to the contract owner 
immediately. The initial value of such units belongs to the contract 
owner except in the limited circumstances of recapture. Second, 
decreases in the value of accumulation units representing Credit 
Enhancements do not diminish the dollar amount of contract value 
subject to recapture. Therefore, additional accumulation units must 
become subject to recapture as their value decreases. Stated 
differently, the proportionate share of any contract owner's variable 
contract value (or the contract owner's interest in the Separate 
Account) that Minnesota Life needs to ``recapture'' to avoid anti-
selection increases as variable contract value (or the contract owner's 
interest in the Separate Account) decreases. This has the potential to 
dilute somewhat the contract owner's interest in his/her Contract as 
compared to other contract owners who do not trigger the recapture 
provisions.
    23. Finally, because it is not administratively feasible to track 
the Credit Enhancements in the Separate Account which may still be 
subject to recapture, Minnesota Life deducts the daily mortality and 
expense risk charge and the daily administrative charge from the entire 
net asset value of the Separate Account. As a result, the daily 
mortality and expense risk charge, and any optional benefit charges 
paid by any contract owner may be greater than that which he or she 
would pay without the Credit Enhancement. In other words, any asset 
based fees taken on a dollar amount that is subsequently recaptured 
cannot be refunded to contract owners.
    24. Applicants request that the Commission, pursuant to Section 
6(c) of the 1940 Act, grant the exemptions set forth below from 
Sections 2(a)(32) and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder to permit Applicants to recapture Credit Enhancements 
previously applied to purchase payments under the New Contracts: (1) In 
the event a contract owner exercises his or her right to cancellation/
``free look'' under the New Contract; (2) if the Credit Enhancements 
were added to the Contract within 12 months prior to the date of death 
of the contract owner (unless the New Contract is continued under the 
surviving spouse continuation option); and (3) if the Credit 
Enhancements were added to the Contract within 12 months prior to the 
date of annuitization or partial annuitization of the Contract. The 
requested relief would also apply to any Future Contract funded by the 
Separate Account or Future Accounts provided such Future Contract is 
substantially similar in all material respects to the New Contract.
    25. The relief sought in this Application is intended to permit 
Minnesota Life with respect to the New Contract to: (i) Deduct any 
Credit Enhancements from amounts returned after a contract owner 
exercises his or her right to cancel the contract during the free-look 
period; (ii) deduct from any death benefit the amount of any Credit 
Enhancements applied during the 12 months prior to the date of the 
contract owner's death; and (iii) deduct from any annuitization benefit 
the amount of any Credit Enhancements applied during the 12 months 
prior to the date of annuitization or partial annuitization.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission to exempt 
any person, security or transaction, or any class or classes of 
persons, securities or transactions from the provisions of the 1940 Act 
and the rules promulgated 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 the 1940 Act.
    2. Subsection (i) of Section 27 provides that Section 27 does not 
apply to any registered separate account supporting variable annuity 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of 
subsection (i). Paragraph (2) provides that it shall be unlawful for a 
registered separate account or sponsoring insurance company to sell a 
variable annuity contract supported by the separate account unless the 
``* * * contract is a redeemable security; and * * * [t]he insurance 
company complies with Section 26(e) * * *''.
    3. Section 2(a)(32) defines a ``redeemable security'' as any 
security, other than short-term paper, under the terms of which the 
holder, upon presentation to the issuer, is entitled to receive 
approximately his proportionate share of the issuer's current net 
assets, or the cash equivalent thereof.
    4. Rule 22c-1 imposes requirements with respect to both the amount 
payable on redemption of a redeemable security and the time as of which 
such amount is calculated. In pertinent part, Rule 22c-1 prohibits a 
registered investment company issuing any redeemable security, a person 
designated in such issuer's prospectus as authorized to consummate 
transactions in any such security, and a principal underwriter of, or 
dealer in, such security from selling, redeeming or repurchasing any 
such security, except at a price based on the current net asset value 
of such security which is next computed after receipt of a tender of 
such security for redemption or of an order to purchase or sell such 
security.
    5. Applicants submit that to the extent that the recapture of the 
Credit Enhancement arguably could be seen as a discount from the net 
asset value, or arguably could be viewed as resulting in the payment to 
a contract owner of less than the proportional share of the issuer's 
net assets, in violation of

[[Page 38258]]

Section 2(a)(32) or 27(i)(2)(A) of the 1940 Act and Rule 22c-1 
thereunder, the Credit Enhancement recapture would then trigger the 
need for relief absent some exemption from the 1940 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), 
27(c)(1), 27(c)(2) and 27(d) of the 1940 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. 
Applicants assert, however, that the Credit Enhancement recapture is 
not a sales load but a recapture of a Credit Enhancement previously 
applied to a contract owner's purchase payments. Minnesota Life 
provides the Credit Enhancement from its general account on a 
guaranteed basis. The Contracts are designed to be long-term investment 
vehicles. In undertaking this financial obligation, Minnesota Life 
contemplates that a contract owner will retain a Contract over an 
extended period, consistent with the long-term nature of the Contracts. 
Minnesota Life contends that it designed the Contract so that it would 
recover its costs (including the Credit Enhancements) over an 
anticipated duration while a Contract is in force. If a contract owner 
withdraws his or her money during the free look period, the contract 
owner dies shortly after Credit Enhancements are applied, or the 
Contract is annuitized before this anticipated period, Minnesota Life 
asserts it must recapture the Credit Enhancement subject to recapture 
in order to avoid a loss.
    6. Applicants submit that the proposed recapture of the Credit 
Enhancement would not violate Section 2(a)(32) or 27(i)(2)(A) of the 
1940 Act or Rule 22c-1 thereunder. Minnesota Life would grant Credit 
Enhancements out of its general account assets. Applicants submit that 
a contract owner's interest in the Credit Enhancements does not vest 
until the expiration of the free look period and the expiration of the 
12-month period following the application of a Credit Enhancement to 
the contract owner's Contract; until such time, Minnesota Life 
generally retains the right to and interest in each contract owner's 
contract value representing the dollar amount of any unvested Credit 
Enhancement amounts. Therefore, Applicants submit if Minnesota Life 
recaptures any Credit Enhancements or part of a Credit Enhancement in 
the circumstances described above, it would merely be retrieving its 
own assets. Applicants further submit that to the extent that Minnesota 
Life may grant and recapture Credit Enhancements in connection with 
variable contract value, it would not, at either time, deprive any 
contract owner of his or her then proportionate share of the Separate 
Account's assets.
    7. Applicants further submit that the operation of the proposed 
Credit Enhancements would not violate Section 2(a)(32) or 27(i)(2)(A) 
of the 1940 Act because the recapture of Credit Enhancements would not, 
at any time, deprive a contract owner of his or her proportionate share 
of the current net assets of the Separate Account. Section 2(a)(32) 
defines a redeemable security as one ``under the terms of which the 
holder, upon presentation to the issuer, is entitled to receive 
approximately his proportionate share of the issuer's current net asset 
value.'' Applicants assert that taken together, these two sections of 
the 1940 Act do not require that the holder receive the exact 
proportionate share that his or her security represented at a prior 
time. Therefore, Applicants submit that the fact that the proposed 
Credit Enhancement provisions have a dynamic element that may cause the 
relative ownership positions of Minnesota Life and a contract owner to 
shift due to Separate Account performance would not cause the 
provisions to conflict with Sections 2(a)(32) or 27(i)(2)(A). 
Nonetheless, in order to avoid any uncertainty as to full compliance 
with the 1940 Act, Applicants seek exemptions from these two sections.
    8. Minnesota Life's granting of Credit Enhancements would have the 
result of increasing a contract owner's contract value in a way that 
arguably could be viewed as the purchase of an interest in the Separate 
Account at a price below the current net asset value. Similarly, 
Minnesota Life's recapture of any Credit Enhancements arguably could be 
viewed as the redemption of such an interest at a price above the 
current net asset value. If such is the case, then the Credit 
Enhancements arguably could viewed as conflicting with Rule 22c-1. 
Applicants contend that these are not correct interpretations or 
applications of these statutory and regulatory provisions. Applicants 
also contend that the Credit Enhancements do not violate Rule 22c-1.
    9. Rule 22c-1 was intended to eliminate or reduce, as far as was 
reasonably practicable: (1) The dilution of the value of outstanding 
redeemable securities of registered investment companies through their 
sale at a price below net asset value or their redemption at a price 
above net asset value; or (2) other unfair results, including 
speculative trading practices. Applicants submit that the industry and 
regulatory concerns prompting the adoption of Rule 22c-1 were primarily 
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 permitted 
certain investors to take advantage of increases or decreases in net 
asset value that were not yet reflected in the price, thereby diluting 
the values of outstanding shares.
    10. Applicants submit that the Credit Enhancements do not give rise 
to either of the two concerns that Rule 22c-1 was designed to address. 
First, Applicants contend that the proposed Credit Enhancements pose no 
such threat of dilution. A contract owner's interest in his or her 
contract value or in the Separate Account would always be offered at a 
price based on the net asset value next calculated after receipt of the 
order. The granting of a Credit Enhancement does not reflect a 
reduction of that price. Instead, Minnesota Life would purchase with 
its general account assets, on behalf of the contract owner, an 
interest in the Separate Account equal to the Credit Enhancement. 
Because the Credit Enhancement will be paid out of the general account 
assets, not the Separate Account assets, Applicants submit that no 
dilution will occur as a result of the Credit Enhancement. Recaptures 
of Credit Enhancements result in a redemption of Minnesota Life's 
interest in a contract owner's contract value or in the Separate 
Account at a price determined based on the Separate Account's current 
net asset value and not at an inflated price. Moreover, the amount 
recaptured will never exceed the amount that Minnesota Life paid from 
its general account for the Credit Enhancement. Similarly, although a 
contract owner is entitled to retain any investment gains attributable 
to the Credit Enhancement, the amount of such gains would always be 
computed at a price determined based on net asset value.
    11. Second, Applicants submit that speculative trading practices 
calculated to take advantage of backward pricing will not occur as a 
result of Minnesota Life's recapture of the Credit Enhancement. 
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 importantly, the 
Credit Enhancement recapture simply does not

[[Page 38259]]

create the opportunity for speculative trading.
    12. Applicants assert that the Credit Enhancement is generally 
beneficial to a contract owner. The recapture tempers this benefit 
somewhat, but unless the owner (1) exercises his or her right to cancel 
the contract during the ``free look'' period, or (2) Minnesota Life 
applies Credit Enhancements and a death benefit during the same 12-
month period, or (3) Minnesota Life applies Credit Enhancements and a 
contract owner annuitizes during the same 12-month period, the contract 
owner retains the ability to avoid the Credit Enhancement recapture in 
the circumstances described in the application. While there would be a 
small downside in a declining market where the contract owner bears the 
downside risk of incurring losses attributable to the Credit 
Enhancements applied, it is the converse of the benefits a contract 
owner would receive on the Credit Enhancement amounts in a rising 
market because earnings on the Credit Enhancement amount vest with him 
or her immediately. Applicants submit that as any earnings on Credit 
Enhancements applied would not be subject to recapture and thus would 
be immediately available to a contract owner, over time this would 
increase the contract owner's share of contract value in the Separate 
Account more than it would have increased without the Credit 
Enhancements. Likewise any losses on Credit Enhancements would also not 
be subject to recapture and over time would decrease the contract 
owner's share of contract value in the Separate Account by more than it 
would have decreased had the Credit Enhancements never been applied. 
Applicants submit that the Credit Enhancement recapture does not 
diminish the overall value of the Credit Enhancement.
    13. Applicants assert that the Credit Enhancement recapture 
provision is necessary for Minnesota Life to offer the Credit 
Enhancement and prevent anti-selection--the risk that a contract owner 
would make significant purchase payments into the Contract solely to 
receive a quick profit from the Credit Enhancements and then withdraw 
his or her money. Applicants submit it would be unfair to Minnesota 
Life to permit a contract owner to keep his or her Credit Enhancement 
upon his or her exercise of the Contract's ``free look'' provision. 
Because no DSC applies to the exercise of the ``free look'' provision, 
individuals could purchase the contract with no intention of keeping 
it, and the contract owner could obtain a quick profit in the amount of 
the Credit Enhancement at Minnesota Life's expense by exercising that 
right in just a short period of time. Applicants submit it would also 
be unfair to Minnesota Life to permit a contract owner to keep his or 
her Credit Enhancements paid shortly before death or annuitization. 
Rather than spreading purchase payments over a number of years, a 
contract owner could knowingly make very large payments shortly before 
death or annuitization to obtain a quick profit in the amount of the 
Credit Enhancement thereby leaving Minnesota Life less time to recover 
the cost of the Credit Enhancement, to its financial detriment. 
Applicants further submit because no additional DSC applies upon death 
of a contract owner (or annuitant), a death shortly after the award of 
Credit Enhancements would afford a contract owner or a beneficiary a 
similar profit at Minnesota Life's expense. Finally Applicants submit 
that because no additional DSC applies upon annuitization, if a 
contract owner annuitizes his or her contract shortly after the award 
of the Credit Enhancement, such event would afford a contract owner a 
similar profit at Minnesota Life's expense.
    14. Applicants submit that in the event of such profits to a 
contract owner or beneficiary, Minnesota Life could not recover the 
cost of granting the Credit Enhancements. This is because Minnesota 
Life intends to recoup the costs of providing the Credit Enhancement 
through the charges under the Contract, particularly the daily 
mortality and expense risk charge and through efficiencies associated 
with administering contracts with higher aggregate purchase payments. 
Applicants assert that if the profits described above are permitted, a 
contract owner could take advantage of them, reducing the base from 
which the daily charges are deducted and greatly increasing the amount, 
and cost, of Credit Enhancements that Minnesota Life must provide. 
Therefore, the recapture provisions are a price of offering the Credit 
Enhancements. Applicants submit that Minnesota Life simply cannot offer 
the proposed Credit Enhancements without the ability to recapture those 
Credit Enhancements in the limited circumstances described in the 
application.
    15. Applicants state that the Commission's authority under Section 
6(c) of the 1940 Act to grant exemptions from various provisions of the 
1940 Act and rules thereunder is broad enough to permit orders of 
exemption that cover classes of unidentified persons. Applicants 
request an order of the Commission that would exempt them, Minnesota 
Life's successors in interest, Future Accounts and Future Underwriters 
from the provisions of Sections 2(a)(32) and 27(i)(2)(A) of the 1940 
Act and Rule 22c-1 thereunder with respect to the Contracts. Applicants 
submit that the exemption of these classes of persons is appropriate in 
the public interest and consistent with the protection of investors and 
the purposes fairly intended by the policy and provisions of the 1940 
Act because all of the potential members of the class could obtain the 
foregoing exemptions for themselves on the same basis as the 
Applicants, but only at a cost to each of them that is not justified by 
any public policy purpose. As discussed in the application, the 
requested exemptions would only extend to persons that in all material 
respects are the same as the Applicants. Applicants note that the 
Commission has previously granted exemptions to classes of similarly 
situated persons in various contexts and in a wide variety of 
circumstances, including class exemptions for recapturing bonus-type 
credits under variable annuity contracts.
    16. Applicants represent that any Future Contracts will be 
substantially similar in all material respects to the New Contracts, 
but particularly with respect to the Credit Enhancements and recapture 
of Credit Enhancements and that each factual statement and 
representation about the Credit Enhancement feature will be equally 
true of any Future Contracts. Applicants also represent that each 
material representation made by them about the Separate Account and SFS 
will be equally true of Future Accounts and Future Underwriters, to the 
extent that such representations relate to the issues discussed in the 
Application. In particular, each Future Underwriter will be registered 
as a broker-dealer under the Securities Exchange Act of 1934 and be a 
member of FINRA.
    17. Based upon the foregoing, Applicants submit that the recapture 
of the proposed Credit Enhancement involves none of the abuses to which 
provisions of the 1940 Act and rules thereunder are directed. The 
contract owner will always retain the investment experience 
attributable to the Credit Enhancement and will retain the principal 
amount in all cases except under the circumstances described herein. 
Further, Applicants assert that Minnesota Life should be able to 
recapture such Credit Enhancement to limit potential losses associated 
with such Credit Enhancements.

Conclusions

    Applicants submit that the exemptions requested are necessary or

[[Page 38260]]

appropriate in the public interest, consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the 1940 Act, and consistent with and supported by Commission 
precedent. Applicants also submit that the provisions for recapture of 
Credit Enhancements under the Contracts do not violate Section 2(a)(32) 
and 27(i)(2)(A) of the 1940 Act and Rule 22c-1 thereunder.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-15071 Filed 7-2-08; 8:45 am]

BILLING CODE 8010-01-P
