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SECURITIES AND EXCHANGE COMMISSION

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WASHINGTON. D.C. 20549

DIVISION OF

INVESTMENT MANAGEMENT

January 24, 1989

Dear Sir/Madam:

This letter provides general guidance to insurance companies

filing post-effective amendments in connection with the offering

of'

variable life and variable annuity contracts. These comments

rèpresent the informal views of the staff of the Office of

Insurance Products and Legal Compliance and not necessarily those

of the Commission. In this regard, they are intended only to

assist registrants in the preparation of disclosure documents and

are not to be considered of precedential value in any court or

other official action.

The Commission recently issued a release amending Forms N-3

and N-4 requiring' consolidatior. :.f all expense-related data in a

table located near the front of each variable annuity prospectus:

See infra General Comment 1.

Procedural Comments Relating to Filinq Post-Effective Amendments

1.

Updatinq Reauirement

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Section 10(a) (3) of the Securities Act of 1933 ("1933 Act")

requires that any prospectus used more thap nine months after the

effective .date of the. registration statement contain information

as of a date not more than sixteen months prior to such use.

Therefore, any .separate account and its sponsor/depositor wishing .

to maintain a continuous public offering must file a posteffective amendment to the registration statement of the

separate account (and, where appropriate, its underlying

portfolio company) containing updated financial statements imd

other information. ~ules 485 and 486 under the 1933 Act goy-urn

this process.

2. Updating Procedures

Rule 486 specifies the procedures for updating the

registration statement of any separate account registered under

the Investment Company Act of 1940 ("1940 Act") either as a unit

investment trust ("trust account") or as a management investment

company ("management account"). Rule 485, as relevant here,

enumerates the procedures for updating the registration statement

of any management investment company serving as an underlying

portfolio company for a trust account ("underlying portfolio

c~mpany") .

The registrant remains responsible for determining whether

any changes in its registration statement (g.g., tax disclosure)

warrants filing a post-effective amendment under paragraph (a) of

Rule 485 or Rule 486 rather than paragraph (b).

Review of amendments will be expedited if, in addition to

copy , the transmittal letter enumerates

the material changes which require that the amendment be filed

under paragraph (a) rather than paragraph (b) of Rules 485 or

providing a red-lined

486.

The staff will make every effort to provide timely comments

on post-effective amendments filed pursuant to Rules 485 (a) or

486 (a) . If the registrant has not received comments within. 45

days after the Commission receives their Rule 485 (a) or 486 (a)

filing, it would be appropriate to inquire of the. staff as to

the status of the filing. Registrants that print disclosure

documents before comments have been provided will do so at their

own risk.

Any post-effective amendment filed pursuant to paragraph (b)'

of Rules 485 or 486 must include on its signature page the

appropriate certification of the registrant and, if necessary, be

accompanied by counsel i s representation that the post-effective

amendment does not contain disclosure

that would render it

ineligible to pecome effective pursuant to such paragraph. See

paragraph (e) of

Rules 485 and 486.

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Filings must be sent directly to the Commission and should

not be addressed or sent to members of the staff. If financial

statement requirements are satisfied by incorporating by

reference the Annual Report to Shareholders , it would be helpful

if a copy of the Annual Report is provided with the filing.

Rule 497 (b) requires that ten copies of the prospectus, in

being used, ,be filed with the

Commission within five days after the effective date. Rule

497 (0) specifies that investment companies filing on Forms N-1A,

the exact form in which, it is

N-3, or N~4 must file ten copies of both, the prospectus and, the

statement of Additional Information ("SAI") in the exact form in

which it is used. .Although not required, the staff would

appreciate one "redlined" courtesy copy' of these documents sent

to the staff reviewer.

3. Effective Date and Reauest for Acceleration

Registrants relying on the automatic effective date provided

by Rules 485 (a) and 486 (a) should note that a filing made on

March 2 will have a May leffective date. An acceleration

request will be necessary if a post-effective amendment is filed

after March 2 requesting a May 1 effective date. In general, an

acceleration request is necessary only if a post-effective

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amendment, filed pursuant to Rules 485 (a) or 486 (a), must become

effective before the earliest automatic effective date, which is

the sixtieth day following filing, or a later date between the

sixtieth and eightieth day following filing if such date is

specified on the facing page of the post-effective amendment. '

Registrants that file after March 2 must realize the

possibili ty that, due to heavy staff workload during the months

of March and April, there is no assurance that the staff will be

able to accelerate the filing. If a registrant determines that

it must request acceleration, the registrant should notify the

staff as soon as possible of the reason why the filing cannot be

made by March ,2, the nature of the material changes, and an

estimate

of the date the filing will be made.

.In accordance with Rule 461 of Regulation C under the 1933

Act, requests for acceleration of the effective date of a

registration

statement shall be made in writing by both the

registrant and the principal underwriter.

4 . Selective Review

The staff 'encourages registrants to review Investment

Release No.. 13768 (Feb. 15, 1984), which

relates to selective review procedures. If the registrant

believes that selective review would be appropriate, a request

Company Act ("ICA")

for'selective review should be made in the transittal let'õ:;er

accompanying the filing. The request for selective revielJ should

~..'-- s,tate whether the material portions of the issuer l s registration

statement being amended have been reviewed by the staff in some

other context. The transmittal letter should also briefly

summarize the material changes in the registration statement.

5. Responding to staff Comments

To expedite' the review of post-effective amendments, the

following steps should be followed:

l) When drafting a written response ~o oral or written staff

comIents, the registrant should re~fond to each comment

individually by

repeating the staff comment, stating the

response and making a cross-reference to any changes in the

registration statement.

2) Prompt responses to comments and, if required, prompt

filing of subsequent amendments, will greatly facilitate the

post-effective amendment process. If an amendment to the

registration statement is required to be filed, it should be

marked to highl ight the changes.

3) When responding to comments in writing, if the registrant

believes that no change in the registration statement is

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necessary or appropriate in response to any comment, this

opinion, along with the basis for that opinion, should be

indicated. The staff reserves the right to comment further

on any sub~equent amendments or letters.

6. Amended Rule 24f-i Requirements

Rule 24f-i (a) (1) of the 1940 Act requires that any post-

effective amendrent to a registration statement that has

registered an indefinite number or amount of securities in

reliance on Rule 24f-2 must include certain information on its

facing sheet. fee ICA Release No. 13624 (Nov. 14, 1983). This

information con~ists of: (a) a. statement to the effect that the

issuer has regi~tered an indefinite number or amount of

securities in accordance with

Rule 24f-2 ("24f-2 Noticell), and

(b) the date on which the 24f-2 Notice for the issuer's most

recent fiscal year was filed or will be filed, or a statement

that the issuer need not file

a Rule 24f-2 Notice because it did

not sell any securities pursuant to the Rule 24f-2 declaration

during the most recent fiscal year.

When preparing the 24f-2 Notice, carefully review the

method of fee c~lculation described in paragraph (c) of Rule

24f-2. Note th:it only if the 24f-2 Notice is filed within two

months after the close .of the registrant's fiscal year may the

registration fee calculation be

based on the actual price

of sales less redemptions and repurchases. If the Rule 24f-2

Notice for a company with a fiscal year ended December 31 is

received by the Commission after February 28 ,~redemptions cannot

be netted again~t sales in calculating the fee. It is the

staff's longstanding position that fund shares issued in

'" ,connection with the reinvestment of dividends must be included

the fund for the fiscal

year. All 24f-~ Notices must include an opinion of counsel

stating whether the securities being registered were legally

issued, fully paid,. and non-assessable.

. in the total nu~r of shares sold by

7 . Exhibits to Reqistration statements

Registrants filing ~mendments to registration statemënts

must list all exhibits, lettered or numbered for convenient

reference. ~ Item 24 of Form N-1A, Item 24 of Form N-4, Item

28 of Form N-3 and Instructions as to Exhibits of ,Form S-6.

Where the exhibits are incorporated by reference, the ,reference

must be made in the list of exhibits as to where the documents

can be found.

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General Comments

1. Variable Annui tv Fee Table

The Commission recently issued a release amending Forms N-3

and N-4 to require the consolidation of all expense information

in a table located near

the front of the prospectus. See ICA

Release No. 16766 (Jan. 23, 1989).

For those separate accounts offering variable annuity

contracts whose registration statements become effective on or

after May 1, 1989, the revisions become effective for

prospectuses used on or after May 1, 1989. For those with fiscal

years ending on December 31, the revisions will become effective

on May 1, 1989 as to any prospectuses used on or after that date,

which is the date on which their post-effective amendments

ordinarily must become effective. For all other separate

accounts the revisions will become effective upon use of any

prospectus contained in any p~~t-effective amendment filed on or

after May 1, 1989.

Any mod~fications to your disclosure documents to include

expense-related information will require a post-effective

amendment. A post-effective amendment filed for this purpose

would not necessarily be disqualified from the provisions of

paragraph (b) of Rules 485 or 486 if it otherwise met the

condition for filirig under that paragraph.

2.

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Tax Disclosure

The Technical and Miscellaneous Revenue Act of 1988, as well

as the 1986 amendments to the Internal Revenue Code (the "Codell),

have altered certain çontractowner taxation matters relating to

variable annuity and life insurance contracts. Prospectus and/or

SAI tax disclosure reflecting these changes should be updated

accordingly.

3. Recent Section 403 (bl No~Action Letter

The staft has recently given no-action assurance relating to

variable annuity registrants' compliance with Section 403 (b) (11)

of the Code and Sections 22 (e), '27 (c) (1) and 27 (d) of the 1940

Act. See American Council of' Life Insurance (pub. avail. Nov.

28, 1988). The conditions in the no-action letter include, among

other things, prospectus and sales literature. disclosure

requirements and certain registration statement representations.

Representations may be made in Part C of Forms N-3 or N-4.

Please provide clear, concise, and prominent disclosure in

conformity with the no-action letter.

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4. Variable Life and Variable Annui tv Ad~inistrative Expense

Charqes

Rules 6e-3 (T) (c) (4) (iv) and 6e-2 (c) (4) (iv) provide relief

of the 1940 Act to permit the deduction

from separate account assets of administrative expense charges

associated with variable life insurance contracts. Rule 26a-1

provides similar relief for variable annuity contracts.

Deductions of these administrat.ive expense charges may continue

only so long as the amounts collected do not exce~d cn~+~. The

above rules doeS; not extend to any

relief provided by the

amounts deducted in excess of actual costs. Disclosure of these

administrative expense charges should state that the charges have

been set at a level that will recover no more than the actual

from certain provisions

costs associated with administering the contract.

5. Use of Simplified Underwritinq

use simplified

If an insurance company intends to

underwriting that would result in the actual or guaranteed cost

of insurance charges exceeding the maximum allowed by the 1980

CSO Table, provide Summarv Paqe disclosure of the following:

(1) the amount by which the actual or guaranteed cost of

insurance charges will exceed the maximum allowed by the 1980 CSO

insurance charges (which may be

tables; and (2) that the cost of

viewed as substandard risk charges) are generally higher for

healthy individuals when this method of underwriting is used than

they would be if other methods of underwriting were used. (Note

that unless the registrant can substantiate a claim that the

portion of the charge that exceeds the 1980 CSO is properly

attributable to a substandard risk charge, it must be treated as

, sales load).

6. Fees and Charaes Associated with Variable Life Contracts

All fees and charges associated with a contract, incluqing

all forms of sales load i should be disclosed in one location in

the prospectus summary. See Form S-6, Instructions as to the

Prospectus, Instruction 2, presentation of Information. This

disclosure should inclu1e fees and charges assessed against the

portfolio company!

separate account and the underlying

7. Disclosure ReaErdina' Sales Load Shortfall

The registrant must disclose in the prospectus whether the

explicit sales load imposed on a variable life or variable

.annuity contract is designed to recover all of the contract Is

distribution costs. If not, the registrant must disclose from

what sources this shortfall will be recovered, particularly where

the shortfall is made up from general account assets consisting'

of, among other things, amounts derived from a mortality and

expense risk charge.

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8. Mixed and Shared Fundinq

Where a fund underlying a variable life contract sells its

shares to both variable annuity and variable life insurance

separate accounts of the same insurance company or of related

insurance companies ("mixed funding"), or to variable annuity .Q

. varia~le life insurance s£par~te accounts of unrelated insurance

companies ("shared funding"), or variable annuity and variable

life insurance separate accounts. of unrelated insurance companies

("mixed and shared funding"), the fund i s prospectus must disclose

involved in mixed and/or shared funding. Also, the

insurance product's prospectus must provide at a minimum an

explanatory cross-reference to the fund's risk disclosure

,the risks

regarding mixed and/or shared funding.

a mixed and/or

A separate account investing in a fund under

shared funding arrangement should file a copy of the mixed and/or

shared funding participation agreement as an exhibit to the

sep~rate account' s registrat~on statement.

9. Variable Life Illustrations

Registrant' s illustratio~s should include, among other

things, the following information:

1)

The illustrations should reflect all. ßepar.ate account

expenses as, well as the underlying fURd -expenses. For

fund (s) past the start-up stage, act~a_i-perating

e~es incurred by the u,nderlying'-fund(s) should be

used. The staff considers the start-up period to be

.'

one year after the fund has commenced operations/sales.

For funds that are adding a new series, it would be

appropriate to estimate the expenses that will be

incurred in that new series, so long as the estimate is ~

reasonable, . i.g., if they are in line with pr conform

to the actual expenses incurred by the other series.

_ 2)

The narrative to the illustrations should disclose the

existence and operation of any expense reimbursement

arrangement.. The narrative must disclose the amountof expenses that would have been ~nçurred absent the

rèimbursement agr~e~~nt and the likelihood of the

expense reimbursement agreement çontinuing past the

current year, as well as the effect of discontinuing

the agreement.

3)

The illustrations should reflect a simple average of

4)

'Registrant should file an actuarial opinion pertaining

the investment advisory fees of the underlying fund (s) .

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to the illustrations with each post-effective

amendment.

10. Allocation of Initial Purchase Payments for Variable Annuitv

Products

The staff has recently issued three no-action letters

concerning the allocation of an initial purchase payment for a

variable annuity contract to a money market subaccount during the

free look period. See Fidelity Investments Variable Annuity

Account I (pub. avail. Dec. 8, 1987), LBVIP Variable Annuity

Account I (pub. avail. Jan. 22, 1988), and MONY America Var.

Account A (pub.' avail. Oct. 26, 1988).

We trust that the above matters will assist you in the

preparation of forthcoming filings and will reduce unnecessary

delays.

Sincerely yours,

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Robert L. Dorsey ../

Assistant Chief

Office of Insurance Products

and Legal Cqml iance

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Jeffrey M. Ulness

Attorney

Office, of Insurance Products

and Legal Compl iance

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