Appendix — Prudential Insurance Co. of America v. Securities & Exchange Commission

Supreme Court brief1964

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_ APPENDIX A.

Opinion of the Gourt of Appeals |

- (Filed January, 20, 1964)

By STALEY, Circuit Judge. (Gaxey, Circuit. Judge, and

. gNEALON, District Jhdge, congyrring.

The narrow but provoc Blive question posed by this case

is whether, the Investment Company Act of 1940, 16 TSC.

¢XUa, applies to the Investment Fund resulting frog th

sale of Variabie anniity contracts to members of the publics

by The Pradential Isstranee Company of America. The \

Seturities atid Exchange Commission auswered thi< ques

tion in the fifirmative, regecting the view of Prullential that

the Act exempts such a program. because the contracts are

> Offered and sold by an insurance company. The case ix

‘before us on the. petition of Prudential for review of- the

order of the Comission entered pursuant to thi dete

munation, : —s

-Though there are variations in the form of the variably

annuities which Prudential proposes toself,’ their sah

characteristics are not, disputed and thejr nature hagepe

concisely summarized by ip Commission. ii Y page

‘<

it this cense: -

“In substance, the variable annuity. etiias whieh

Prudential proposes to sell to individuals provide that

* the purenaser will make moxthiy purchase payments

of fixed amounts over a period of years’ (the *pay-ur”

period), the proceeds ot Ww teh, after certanPdeductions.

will be investedLin a portfolio of securities, The. pur-

- chaser will be credited monthly with ‘units’ re presen’

‘ ¢ gi

A radeakin’ also intends to offer variah le group plang: in addiv

tien to the individual cHutrae ts. However, because the Commission

is presently dealing Withi the proble ms posed by such plans fi its -

“administrative capacity, they were excluded from the scope of its

opinion Accordigly. We do Likewise ,

r i

‘ f | a : .

ing his proportionate interest in this fund.’ The value

of these units will tluct late, essentially depending upon

the intestment results df the fund. During the annuity,

cor ‘pay-ont’ period, Prudential, guarantees thapThe

. . . "4 - - . .

purchaser will receive in cash the varymig value of a

fixed nimber @f units af monthly annuity payments,

Siti ally the pay wats made by the purchasers

will be plaved ina “Variable, Contract Account’ whieh.

Will be managed by Prudential and be subdivided into

two accounts. "Phe first, the gInvestment Fund? ae-

count, will have its asse ae invested primgrily in com-

“mon stocks and will: constitute the fund'in which the |

purchasers hold units;

is account will be dedicated |

solely to Je variable aun nity contract holders ani its

assets will not be subjec -to clainis of any other con-

tract or poltevholdee of the company. ‘Fle second; the’

‘Cher Assets’ accowut, qi-edministration account, will

receive the amounts deducted from the purchase pay-¢

pients to cover administration expenses, sales commis-

sious, and certain taxes, and to provide a surplus or

reserve. for the obligath tons to purchasers contatMed in

the cofitracts. Tran fers will be mad® periodically

_from the Other Asseté acconnt to the Investment Hund

accotmit to meet the ap Sara requirements that the

assets of the laiter be eur’ 16 the vompany’s existing

obligations under the vafiable contracts) Any excess

over the amounts estimated to be ne eded. tor the fore

going purposes may be declared as +0 calle ad‘ dividends’

whisdr will proy ide additions! Pane Units OF casi pay-

‘tnénts for the copteaet holders ; it will aiso be available”

2 sist ort the gu Tan TeCs il ‘contracts administered

sulting from lower “tocrtality ‘sete assumed; for ex.

ample, will de met out of the general sufplus of

Prudéntial, .-" -. ae ‘

-and for tauxe 5.

- “a

‘During the pay-in period a a pure haser will have the

right to ternimete the contract and receive the value

of alleunits credited to his account, less certain termina-

“-tion ehirges. Ifa pure haser should die during the’

pay-in period, the contract is automatically terminated

and his beneti¢iary is paid the greater of (1) the value

of all units credite d to the purchaser's accomnt or (ii)

an amount equal to the total of all pure hase payment

TPs. : ‘

: “Absent death of. redemption, the payein period

normally runs forat least 1) vears. Thereafter, during,

the pay: -out period, the variable annuitant is entitled

to receive each month the ewrrent value of a fixed

numbers of units determined al the end of the pay-in

- period. This number of units ts calculated on the basis

ofthe number of units accumulated by the purchaser

during the pay-i I period, an assumed annual invest.

ment merement of aon from dividend and interest’

“jneome, and actuarial computation which take inte

account the length of the pay-out perigd anticipated in

‘light of the age and’ sex of the purchaser. and. anv

cO- annuitant, The value of the. Variable unit during

the pay in and pay-out periods will be determined at

the end of each month and will fetlect the changes in

the niarket vaine of the securities in the Investment

Fund account: realized gains and losses, ands dividend

or interest Income: Deduetions will be made for invest

ment advisory and offer expenses -in an amount equal

Tey Ab, {18 oe per pa ea of the vaine .ofe tie fund's issei~

. s }

Prudential concedes that such eontraets have been held to:

te **

securities * within the nreaning ot the Seeutities Act

155, Securities and Exchange Commission v: Variable

Annuity Life InsaraneeCo. | hereimafter called *VALIC™

399 US. 65 (1959), and it ‘is Willing to register them under

s -

eee 7 ? >

that Act. P rudential argues, however, | that the [mvestment

“Company Act of 1940 specitically exeludes insurance com-

panies from its seope.* The Commission agknowledged that

Prudential is excluded from the Act, but held that the

fund created by the sale “ot the contracts, which is to be

used for investment purposes, gives: rise to a separate

investinent company within the coverage of the statute,

The Coumnission concluded that Prudential ix not itself

‘an investment company but, is the creator of one, and pro

poses to be its, investine ut adviser and principal under-

writer | . :

2 Insurance companies are excluded from the definition of ‘i

vestment company’ -by 15 U.S.C. 3 804-366) (3). An insurances

company is éarlier detined as ‘“# company’ whieh is organized as

an insurance company, whose preuary and predominant business

. activity is the writing of insnrance-or the reinsuriny of risks ander-

written by insurance com panies ' ani which is subject -te super-

‘vision by the insurance commisiene rora similar official or agence)

of a State © * *."") 15 ULS.C. $80a-2(a) (]7). .

si ; : ° Z ore . . . : °

2 The essence of the, Commission's reasoning in this praeind | is cou- *

tamed in the following excerpt from its opinion :

“Thus, Prudential! is not itself an imvestment company, Dei tomen

it is the creator-of one—and proposes ‘to be its “iNvestinent

adviser” and ‘principal underwriter.” That an exempt insiir-

ance company pe sforms these funetions is irrelevant. The

Act's exelusion of insurance companies is to be readily ex,

plained : otherwise they would fall gyithin the statute by reason

cof the investment activities Which are a necessary ingredient,

ef their msurance business Where, however, an insurance

company (or any other entity ) creates at fund ‘exclusively for

investment. and sells equity interests in the fortunes of that

fund, the exemption does vot carry over to the fund. Further

- ‘more, that Prudential mas i the same contract also make, in

its own name and backed by its Own assets, certain Insurance

or annuity premises is alsovirrelevant. — V. ALIC held that such

“s promises do not make the contract as a whole exempt as “1

surance) though mad« by the same enfity and backed by t

sgme assets" ; . |

In this court, Brudential, ‘premising its argument on

the insurance company exclusion, asserts that this con

“struction of the statute is -inordinately. complicated, aly

“struse, and Without basis in law. It asserts that the statute

is plain and forecloses Coninission Jurisdiction in this

ease. However, since it a conceded that. Prudential is ex

cluded from the Aci, the issue is narrowed to the gine sion:

of whether the Comiuuission made a pe rinissibie interpre ta

tion in concluding: a the variable aunuliy pregram re

sults in the creation of a separate, son-exempt investment

company.

Of course, in resolving this issue we Start with the

premise that securities Jegisiition must be broadly con

strued in order tocinsure the investing pulbilie at Pull meds

ure of protection. Securities and Exehange Commission y.

Capital Gains Researeh Bureau, Ine., Us, -

(Dec, 0, TG3y: Seeurities and Exchange Commission v.

Ralston Purina’ Co. BHI US. 118 (1955): Securities sand

‘Exchange Cotrilission vo W. J. Howey Co., 328 U.S, 293

(1946). The parties agrer: that the Barntory detinition-

gontained in the fuvestment Company et of T9400 ane

east in broad terms, "Phe eritical term is ‘company’, which,

so far as felevant to our discussiou, is détined as ‘ta trust,

a fund, orjany ere jibe of persons whe ther Ineo)

porated or pot.’ to ULS.C. § SQa-2(a) (8).

The Commission determined that the variable annuity

contracts constitute the purchasers an ‘‘erganized group

Gf persons’!; that they create a tttrust”* highd by Prudential

-for these purchaser: and, more importantiy, that the

separate Investment Fund resultigg from the sale of the

variable annnity contracts isa **fand” Within the statutory

detinition, Based upon this last decisive holding, the Com

Inission ‘then coueluded that the Investment Fund is the

of o

“issuer! of the variable anntiity securities, and that it ts

an ‘‘investment compatiy’’ subject to the Act." ~

Om this.score Prudential argues that the Act cin, yoneeed

only identifiabis business entities with some ‘sort of inter-

nal organization, aud that it is the only such entity in-

volved in this program. Thus, it is asserted that the ,pur-’

chasers cannet be described as gun ‘organized group of

persons ;*’ that the plan has so elements of: a common-law

trust: and that the “fund”? referred to in the Aet means a

mutual fund or any other similar entity, but not Pruden-

“tial’s Investment Fond. But, a~ Mr. Justice Brennan ha-

cogently. obse rved, the regulatory provisions of the Act

‘tare of particblay relevance to situations where the ine

vesior is committing his funds to the hands of others on

an equity basis, with’ the view cat “the tunds will be in,

vested in securities and his fortunes will depend jon the

_ Success of the investment.?"” VALIC, 359 U.S. at 79 ¢eon

curring opinion). Furthermore, a stady of the legislatice

history of the Act show-~ that Cong: "Oss Biteutionally

‘drafted’ the statutors detinitions in general terms in order

to control suecli situations regardless of the legal form or

structure Of the investment enterprise. " :

initigliy. it must be noted that the Committee reports +

of both the Klose and the Se nate state that the Jegisilation -

was drafted prine ipally on the basis of reports.submitted

hy thé Securities and Exchange Commission following an

extensive study of investment trusts and investment com

panies undertaken at the direction of Congress. IR. Rep.

No. 2630, Toth Cong, 3rd Sess. 5-6 (1940); °S. Rep. ‘No.

or ° Poe °

**Issuer’’ is defined as ‘‘every person {natural person or a

. company | “Who. issues Or. proposes to issue any security, or has

outstanding any security which it has issued.” lo USC.

§ 0a-2 (a)(21). ;

“Investment company’ means, inter alia, any issuer whieh ** pro-

poses to engage primarily, in the business of investing: feinvesting,

or trading in-securities.° 15 USC. 3 S0a-3(a) (1 .

1a eas

W775, THth Cong. ord Sess. 1, (1940). The Act itself con

tains.a sitnliar acknowledgment, Lo U.S.C. § S0a-T. Th

significance of. sae ft reports m Ascortaining the intent of

(Congress in enacting securities legislation. Was recentiy.

underscored by the. Supreme Court in Securities and Ex

change Commission v. Capital Gains Research Bureau,

Ine. U|S. ~ (195).

Among the various types of Investment Companies

referred to‘in the exhaustive: report of the Commission

were those involving ‘tan agency relationship between the

individual contributors to the fund and the management

npon whom they confer substantially a power of attorney

to act as agent in the Investment.of the moKeys contribe.

uted. The aronup af individual investors is not a legal

entity but rather constitutes in essence a combination of

distinet individual inferests. (irphasis supplied.) eis

Doe. No. TOT, Foth Cong.; > Brd Sess, 24 (19595. Additionally,

the report made specific “reference to an investment cot-

‘panyeknown as the ** Alexander Fund’? whieh it described

as ‘merely a descriptive name given to the commingic!

funds of numerous investors who employed W. Wallace

Alexander as their agent to invest such funds.” Id. at 46.

Similarly, in deséribing the nature o. the investmen} enter

prises whieh Congress was secking to control, the House

ite port quotes bron jie ‘testimony of Couuttiissioie! Teas

(who stated that ** Bissentially these organizations are large

liguid pools of the ‘public's saving~-entrtsied to manage

ments to be invested.” IR. Rep. No. 2659, Toth Cong. dra

Ness. 6 (1940): | ;

fr these cifeumstanees we seject Prudential’ —

ment that the broad statutory phrase *'a trust, a funad,-<

any organized group Of person- Whether incorporated -or

not”? refers only to recognizable: business entities. On the

contrary, the legislative history compels the conelusion

that Prudential ‘< Investment Fund is a-‘tfund’) as that

term is used*in the statute: As we have previously seen,

"Ce,

= . “Se P

the Investment Fund is a completely segregated account,

devoted -to investing in securities. The cash for these in-

vestments is derived from: payments made by ‘the par-

_ chaser of the variable annuity contract. Though the

proceeds of the fund are held for the sole benefit of the

annuitant, it is this fund, and no other entity, in which

“he hasan interest” Thus, the fund is*se ‘parable from the

insnranee com: pany which, aS the Supreme Cotirt noted in -

VALIC, “enarantee|s|. nothing to the annuitant except

an interest in a portfolio of common stecks or other

.. equities—an interest that has a ceiling but no floor." 59

US. at 7) The reStrieted imterest of the annuitant ts

perhap= best expressed in the Court's pithy observation ~

that he *‘gets only a protretg share .of what the portfolio

of equity interests’ refleets—which may-be a lot, a little,

or nothing?’ - 359 U.S. at 71.,

It follows from this that the.Investment Fund, and

not Prudential, is the *tissuer’’ of these sec vrities for the

purposes of the Investment Company Act ‘or 1940. As the

Commission observed, **Prédential would in faet be the

writer of the Cconfracts—the insurance and annuity promises

and the obligation to set up the investment fund. But the in.

vestment fund, the ‘company’ to which. the’ investment

interests relate, is the. ‘issuer’ of those interests.**'

One of the principal’ arguments of Prudential im

favor of exclusion iv thit the existence of adequate state

* It is true that any deficiency in the variable contract acc: aunt

‘resulting from lower mortality than assumed would be met out of

the general surplus of Prudential. Hlowever, the actuary for

Prudential testified that the deductions provided for in the eon-

tract would be more adequate to satisfy the annuity obligations. ~

Hence, thy annuitant ’s interest in the oeneral assets of Prudential

is, at best. de minimis.

o ” F -

6 The mere fact that Prudentaal is the obligor of certain of ‘the

insuranes and annuity features of fhe contract ‘is not significant,

for the annuitant ’s investment participation aesvasnnesits solely by

the Inv estivent Fund. .

5, OE Qa - Eile .

> 7 . a . } . . .

regulation was the basis for the exemption of imsSurance

companies, But this tine of argument was conclusively:

“reiectod by the Supreme Court in VALIC for thy reason

‘that variable annuities are **<eeurities’’ and involve con-

siderations of investinent not. present in the conventional

contract of insurance: Prudentras atlemptes to distinguish

VALIC on the grounds that the company therg invoived

wis not, on the basis df.the Court’. decision, primarily or

predominantly engaged in the business of writing insur-

ance.- But- elles of the merits of this distinetion, that

casehoids unequivocally that adequatesstal regulation ‘of

insuraneg is immaterial when variable annuity contract-

are beimg considered under a Federal statute. ¥

Prudential also asserts that the »pecifié “exemption

‘provided for the common trast fund~ of banks shows that

reguiation under the Act was imposed on an institutional

rather than on a funetional basis. Tt ts pointed out that

“this exemption is provided am addition to the’ general

exetnplion ‘tor banks "Prodentia! declares that suel com

mon trust funds “are tiinetionally indistingnishable from

InVestiient companies,. but were excluded from the Ac

because they were in fact “part ot the banking bus Ines

and intended to be covered bys the broaed exemption for

banks.’ We think that this specific exemption leads to th

opposite conclusion, toy i> HOD omission reasoned:

ie 5 Obviotsty, if as Prudential argues, the

eyemption of bank- and nisuraiee companies | had

liewn intemdedd to wielude an exemption of funds set up

hy such Companies, there would have been mo need to

provide for the additional specitic exe mption of fund-

set up by Lee. Congress thus viewed such funds,

fen though usually maintained a> departments of the |

bank, as separate trom the baukiig bisities=, “Lt rested

this exempliot on the speere! considerations that the

fund- were used for bon otide fiduciary purposes:

rather thar? a- a medium for general public investment

| 10a

and had only a dimited mmpact in the nivestment fund

picture.” \ | |

Considerations of logic and -poliey previde further

support for our conclusion. The Investment Company Act

of 1940 contains significant - “safeguards for the protection.

‘af those who, like the purchasers, ef vafiable annuities,

invest in “seenrifies:”’ These -afeguards, characterized by

“the Commission as insurimg ‘*corporate democracy,” * Ah-

clude disclosure of investiuent policy. and operating prac:

tices, and the regulation of fees, trading practices, and

changes in investment policy, See VAL 1, 359 U.S. at 79°

The mere faet that the ifvestmient program in the case at

bar is under the aegis ofgan insuranee company ought not

to negate compliance w ith these controis in the absence of

‘compelling ire umstances. We find ne sueh circumstances

here.

We have considered “the other contention- advanced

by Prudenttal, but find that they are merely Variations on

its insdragice. company eNXclisiow argument and: have Deen

fully disposed of by, the Commission, "

The order of the Commission will by: affirmed. ”

A true Copy: ioe tp

Teste: .- s : a .

Clerk of the -l nited States (Court

a? A prey als for fhe Therd (re wit,

- os ifa

‘APPENDIX B

The Findings and Opinion and Order of the Commieston

Dated January 22, 1963 - -

: ay Cary, Chairnian : . ° .

ea L.

We are here confronted agai ‘with the question of the

‘impact of the’ Investment Company Act of JMO (0 Act”’)

pen areangements arising out of the issuance of variable.

annuity contracts. The contextis a request.by the Pruden-

tia! Insurance Company ‘of America (¢*?rudential’’) tor an

order declaring that the offér and sale of variable annuity

contrat. will not subject Prudential, in whole erin part, to

the Act? In a so-called alternative application, Pradentiat

‘asks, that any entity found subject to the Att be exempted

from certain of if provisiotis.” Fert .

Bt :

t See The Variable Annuity Life insurance Company of America,

“Tnvestment Company Act Release No, 2974 (February ar 1960

> The order Is requested purstiant to Sections 3(bs (2). ble 45

and 38(a) of the Act. Seetion 3(b) (2) essentially provides that

an investment company shall not include any isstier which the Com-

mission finds to be primarily engaged in a business or businesses

other than that of Investing, reinvestitty, owning. holding er trad-

ing dn securities Sectlon Sye 05) excepts an Insurance compan

from the coverage of the Net. Section 3804 empowers the Com-

miesion to issue rules, regulations and orders necessary or appro-

priate to the exercise of its powers. i .

e . Ais u sete 2

'Prudeptial was oranizest.in 1875 under the laws of New Jersey

and is subject to regulation oy the New dérsey Department of

Banking and Insurance. .Sitice tts organization, it has been en

gaged mm writing life ani disabilits Insurayer. As 3f ‘December

31. 1960. it Kad life insurance in foree oft about #52 billion and

Assets of over $16 billion Pridential is a mutual: iusurance com

pany with approximately 36 million polievholders. As Prudential

‘deseribes itl A mutuaigcompany has ne owners eacept Its poliey: Vv:

holders. whe have the mide power te Vote ler direc ‘TOPs and whe

participate in the successful ee of the enterprise. [Iti

is a non-profit finanesat iystitution whose function is te provide

isUranice protection t its contract hol ders at. a price which ts,

as exactly as the scienves of accountancy amd actuarial computatgon

van determine, the cost of such protection to the company.’

eke a, = a ¢ * sh

In substance, the variable annuity contracts whith Pro.

dential proposes to sellto individuals provide that the pur-

chasers will make monthly purchase payment» “ fixed

amoynts over a period Of years (the ** pay-wi"” per ol}, the

proceeds of whieh, after certain deductions, will be. se OS

in a portfolio of securities. The purchaser will be credited |

monthly with ‘units’? representing his proportionate av

terest in this fund. The valué_of these units will fluctuate,

essentially depending upor the investment results of the

fund. ° During the annuity,.or ** pay- out’ period, Prudential

guarantees that the purchaser will receive in eas the vary-

ing value of a fixed naeeuer of units as monthly annuity ,

payvinents.

’ Specifically tly payments made by the purchasers will

be placed ina Variable Copitraet Account” which will be

managed by Prudential and be sub-divided into two ae-

counts. The first. the “Investment Fund*" aecount,. will

have its assets invested primarily in common stocks and

will constitute the fund in whieh the purchasers’ hold Tanits;

this account will be dedieatéd solely to the variable annuity

contract holders:and its assets will not be subject to claim

of any other. contract or policyholder of the company.

The second. the ‘Other Assets”’ account, an administration

account, will receii the. amounts deducted from the pur-

chase payments to cover administration expenses, sale=

commissions, ‘ind ¢e rtain taxes, and to provide a ig

or reserve for the obligations to purchasers contained 1

the contract-.’ Transfers will be made periodically fiom

the Other Asset~ account to the Investment Fund account

to meet the contractuai requirements that the assets of the

es : : f

*The deductions tront the pure ase payments will range from”

ALT: to 54.2' eof the first vear’s payments depending en the size

of, the ‘patments, and ‘will be smailer in subsequent years, averas-

ing Over a lO-vear period from 10.24; to L48'c. The variations

in the ranges are based in*part on the ‘size of the “contract pur-

chase payments

s .

loa

latter be equal fo the company 's existing obligations undes

the variable contract=. Any excess over the amounts est!"

mated to be needed aor the foregoing purposes. Inay be

declared as so-catled **dividends”™” w hichwill prov ide addi-

tional fund ufiits or cash payments ‘for the contract hotd-

ers: it will also be av nila e to support the guarantees oii

‘contracts administe “iby Prudential “s other operations.

us |

Any deficiency resulting ‘from lower mortality than as

sumed, fer example, will be met out of the general surplus

ef} rudential.” ,

During the payin period a purchaser will have the

right to terminate the contract and receive the valué of all

units credited to fis account, less certain te rufination

charges, Ifa pure hacer should die during the pay in period,

_ the contract ix automatiGilly terminated and his beneficiary

Ls paid the greater of (1) the value of all units eredited to

the purchaser’s account or (1) a amount equal to the

total of all pure hiase payments made. ;

\phbose “nit death or redemption, the pay in period normally

rups for at least 1% years. Thereafter, during the pay-out

period, the variablé annuitant is, entitled to receive each

month the earrent value of a fixed number of unit= deter

mined at tie end of the payin period. "Phi- nutfiber of

units is calculated on “the basis of the number of units ac

enmulated hy the purchaser during the payin period, an

As a mutual company, Pendential ordinarily would pass on to

its polic) holders the benefit. of favorable mortality or expense ex-

perience ; this could be done iu the Torna of reduce] premiums. —

®The actuary for Prudential testified that the deductions pro

vided for in the Variabhe Annuity Contracts would be more than

adequate, wn his Opinion, to satisfy the variable annuity obligations

of the company. .

The purchaser may elect one of three pay-out periods: *(1) the -

purchaser's’ life, (2) a Mminuneun ten-year period plus the pur

cHaser’s remaining life, or (3) until the death of both the pirchaser

and another designated perso. ? 4

Ww 5 .

l4a

assume! annual investment increment of 2147 from divi-

dend and interes jncome, and actuarial computations which

take into account-the léngth of the pay-out period ‘antici-

pated in light of the age asd sex of the purchaser and any

co-annuitant. The value, of the variable unit during the.

pay- in and: pay-out periods will be determined at the end.

of éach month arid will reflect the changes in the market

value of the securities im the -Investment Fund account,

realized gains and losses, and dividend or interest inconte.”

Deductions will be made for investment advisory and other

expenses Lian amount equalte 0.66 per annum of the value

xX} i 5

of the fund's assets and for taxes.

Th guddition to the ecoutracts. described above which are

to be sold to individuals, Prudential proposes to offer and

sell variable group contracts as a meanssol funding ene

ployee pension or profit-sharing. plans that are «ual tied

under Section 401 of the Internal Revenue Code and to.

organizations enumerated. tn Seetian 10) (3) of the

Code” As we are presently «ealing with the problems of

group plans in an administra:t ive capacity, we shall not

treat “them iy thix opinion.”

on ; Ti:

uw Pas é

The variable annuity is a recent.creation having several

facets, It raises important, new and unresolved questions

* * Since the number of tuuitsto be distributed durin? -the pay-out

period is calculated on the basis Of a 212) investment incremes\t

assumption, a.2!o'. investment returtitis used as the base from

which the actual, investment results of the fund are- medsure:|

‘That is, the value of the unité will ingrease only if the fund's

. e . “.

investment results are greater thay 2'o'.. The use of this factor

involves increasing the number of variable units credited durtuy

the pay-1 periad at an eVective rete of 2lo's per vear.’ *

“See Rule de-3, Investment Company Act Release No 3605

(January 7. 1963), which exempts transactions of insurance eom

panies from the Act with respect to certain group annuity con.’

* tracts where, among other things, benetits pavable to employees’

are fixed,

loa arts P

as to the séope and interrelation of state reguiatibn of in-/ ee

“surance companies and the federal regulation of investment

companies. These questions are of practical importance to

the imsurance aml, the investinent industries and evoke

strong and conflicting opinions.-’ They are presented ‘ in a

complicated form, smee ‘they involve the consideration to- ‘

gether of the different operating and regulatory languages

and techniques of ‘insurance’! and ‘tinvestment’’ which

have in the past appeared onlsin separate contexts?” &

Kor the sake of ‘clarity these competing considerations

require that’ we emphas size certajn points at the outset to

avoid confusion and to eliminate possrble ‘miseanception= as

to the issues and our holdin.

In its argument Prudential emphas izes the value of the

variable ‘annuity as @ retirement program and the import- -

ance that’ if ioetguade available to the public by Tife insurance

companies, It points to the striet and compre shensive regu :

lation of insurarieg companies by the state of New Jersey:

and the virtues of Pridential’s business histery and par-

ticular form of organization, it then argues that these

would fulf¥ protect dgaimst any, abuse in the issuance or

maAnagemelsl of variable annuity ‘contracts.

Let there be io mistake as to thes: pre mises; We here

astume, for purposes of this opinion, that the merit. of

Variable annuities are-as claimed by Prudential. - We shall

raise ne question as to the fide “pues ot New .ler SON ‘~ rege

lation of insurance companies ‘and activities, ndr as to

/Prudential’s of experience or management, We alse .°° 97

agree that. Prudential, because of the predominant nature met

of its insurance business, is at jusuranc, company as de

tiniedd i in Seetion 2oayi17) of the Act and, as ach, exeepted

fromi the detinition, of an investmen) company under Bec °

tion: Be) (3). Ali of these matters are irrelevant to the

issue ~ in this proceeding and gur decision.

"The true issues are clear and can be simpis

variable’ ANMUItS contracts, constitute or inelude a

a: ak

“an ee

relation

. a ,

e e

shi ip subject to che Investme nt C ompany ast and, if so, What

are the consequences ? Prudential’ < principal and alter-

native applications would seem 10 suggest separate dis-

cussion of two questions. . The first, the coverage of the

©.

Ate 10 what relationships it applies: and the second, the

spec itic provisions~—what the Aet requires of those, relation-

‘ships to which tt applies, For a proper comprehénsion

oY th issues, however, these questions should ‘not be so

. separated. “While the letter of the statute, operates with

erespect to ene hh separately, the spirit is seen in their inte i>

relation. . ‘

The Investment Yompany, Act isin some respects wot an

easy statute, bnt its essence for the purposes involved here

if quite clear. The Act designates the relationships to

which it applies-—most vitally hers, that of the contributor

toa poal of equity ¢ capital managed and invested in see MTT:

ies atchis/risk. Tt applies to such al relations “nip in w hat

ever form or by whomever ere ated, it sets ertain require-

reece oa heré, thad-ultimate control .of ---—-——-- ~

poliey and mahagement bein the hands of those where

funds are at risk.. Matas, St BS

The whale historv and structure of the Act indicate tan-

mistakably that, as Justice Brennan stated in Securities

an? Evchange Commission. y. Variable Anniaty Life Ta-

surance Co, of America (oO Valiee’’)!° its provisions “are of

partiantar relevance to situations where the investor is

‘committing his funds to the hands of others on aa equits

dasis, With the view that the finds will he drivested ‘in secuari-

ties ane his fortune will depend pon Ate success Of the

mnvwestment. apd-‘where the investor is asked to pit-hi-

money ina scheme for managing it-on an equity basis, it

js évident thatthe Net's contro® become vital." That i-

this case, “The contracts here require Prudential to estal-

= - bc ° i

1 289 TS. 65 (1959),

td. at pp. 7, 80 (concurring Open ) -

* ” . Fd ; --. 3 .

a . » ;

: ‘ . "

la oo ; ‘ :

lia . ¢

' ae

dish a fund to be duvested in securities for the benefit: and

at the risk of purchasers of the cCOMtPacts exclusively,

We hiokt that dlie varial li annuity contracts create a

relationship subject to the Act and, accordingly, deny Prue,

vdential’s principal application implying ‘they do not. “No

quere rigid or technical application of specific provisions of

the Act, our decision follows from its fundamental intent

and: philosophy te provide certain’ protections to investors

1. precisely ‘such ‘liquid’ peots of the, public SAVIDES et)

trusted to manaiements to begmvested’” ns that created

under the contracts in the present case. Morevore, the basis

and logie of the Supreme ¢ ‘oyrt! < decision in the Vali case

indichte this conclusion. ¢ a

Thus. Prudential ix not itself ay imvestmpent GOMpAny.

“put it is the creator of ove—-and proposes to be its “invest,

Inent adviser’? and **principal underwriter.7' That an

exempt insuranes. COMMITS ‘performs these, funetrons |

ivrelevant. The Act’s exclusion of insurance companie sis

fo be readily explained: others ise they would ‘fall within

the Statute by reason of fhe’ investinent activities which

“=.

are a necessary -ingredient of their insnrancée Varsimess,

Where, however, an insarance company ver any‘ other

entity) éreates a fund exclusively. for investment, and ae Ie,

equity interests in the fortunes of that fund, the exemption

floes not carry over. to the fund.- Furthermore, that Pra

dential may in the same ¢ ontract also make, én i1< own Name

and backed by its own asset. certain insnr ane OF ANTS

promises ie also irrelevant. Valic held that such promise -

do not make the contract asa Whole exempt as *ipsymane *

‘though made by the sate entity and backed by the same

assvt~.,

Senate Hearings before the Subeomuy

tens cit Thier -€ Opt hee

, s sa - “ +4 - °

gon Banking anf Currenes’ on ~ 258 F5tkh Conv... ord Sess

(1940) 33 oe

= Sections Jia (1). Lia, ae

. e af

: tsa _

. : . é :

We hext reach Pradential’s alternative applieatian whieh

is a request for exemption of this relulionship from cer-

tuin provisions of the Act. The interrelationship betweers

the scope of the Net and the requirement= imposed on

these it covers lead= Us veneraty te depy the requested

exemptions essentially those concerning-the control of con

ty act holder (directly or through representatives of their

own choosing) over the policy antl management. of their

Yunds. “These provisions arecat, the cofecof the entire pir

pose and se heme of the protections intended by the Act.

Their objective is not ace corplisk ed by insuratte: ‘regulation |

or other outside supervision. The ¢ jn of these exegys-

tion~ would come elo-e to regersing our holding on the

princips! application. — - :

Our decision bere is not many -en-e or by any 6: tension

a prohibition of the issuance of varialle annnities by ans

organization. We reject Prudential’s statement that ‘tthe

basic issue posed by the alternative application (isi-—shall.’

existing life*insurance companies be denied the’ right to

offer and eell variable contracts ts the — " Whatever

mas be the problems of a company ofan lized ina Special

manner, offering.a contract in the sarGendes form it eieeted

lowrite, Under a statute newly-arended tm erms it assisted

in drafting, there can be ne fssumpiion tha’ such problem

will confront other life gusurance companies offering othe:

availabie form~ of contracts if) other state- under other

~latutes now or it here after inelfect, Indeed, it ~eens hiighfy

ailikely that any state/inciucdine New Jerses, would be fe

‘

luctamt ty jou: with the largest insurance company. uy i

jurisdiction to, provide tor aclegitamate expansion of |

Pisimess Hs amendime its insurance code.

Th: essebliga problen papeesergyterc! 3} ~ the Prapey e2ccon:

modation of two- schemes ‘ot *reenlation— Instrunes anid

mvestmen? company. ‘| he two ar different! in Objective,

admiittistration, aml ampact an the atfeeted public: neither

1a” er

parports to de the joh or the other.) The variable arity

does het require ainl cannot justify the subordination of

either patter of reguiation to the other, Whether variable

annuities require stufe insurance regulation, and bow, that

Ws to be appried, are matters for ytate insurance authorities

to detgrimine. ‘This Commission has net the qualification,

much jess anv desire, to become involved im matters of

insurance regilation. By the same token, however, state

insurance regulation is nota substitute for the application

ot the 1440 Act. The two schemes need not contiet in ther

appheation to the variable anntits ‘if each ts apple te it-

tnnetionally appropriate spheres. We are conyineed, on

the basis of a, study of the problem over a considerable

period of time in our general administrative capacity, that

accommodation-is possible through several possible terms.

by, this acconfodation, a “involved must take realistye ae

count of the fundamental legal policies involved and must

copeern themeaelves with the snbstantive relationship

‘ @ “

ereated,

Dheedistribation of variabie annuity contract- hy an

SUTANee COMPAS rest iit the creation oF righi~, obi

vations. and benefit-. both surance and investment a

nature. These are severable: itsuranes promises are mad

~eohard’ hy the pistiipanee COnmitalss anid Supported hv gts asset-

(net ineindine the imvestinent Timed t. ivestment partie!

pataen<are measured solely by the investment fumed (separ

< . . * , .

ty) Pyne: the tistitavies compat < jinmetead.- Lhii- ehintinhe

Pitit

tou i interests is recechized by Une ae ligt Of severni stat:

‘| 4 stern ! ‘ ! gediere Pree T Were? tl ™ Type ¢

. ee a!

; ' lig tee f roargel tu Supra. i wt

bra it istsatit Case. Vrudentia! that is the ebliger of t

misfifaiice Promises, si Qhier Crbtazact sergn Veo teas Tae contractya.

taivinenis Without regard te the muevtant rate actualiy ex pes nce

Adigation of the Pr wietagiab and net of the Jnvestment un

™ ect <

. * °

got tl Variable Contre Aeoummet, the entire generat surplus of the

company is committed te the Sulfiliment 0, this guarantes: Pre

devitial bret, ge.

hati ly SAE ae

« a ©

. 2s ra

. - 7

20a

legislatures requiring that the invéstment funds under

variable annuity contract= be maintained in an aecoum

legally eeparate from the. other assets amd Habilities of

the Insurance’ company, to the exelusive benetit’ and risk

of the varialfe’ annuibants, nnd thus separate from stoek-

holders and other poiie) Vholders.” The mortality guarantee

and other insurance’ promises, and the management of and

Intefest Ut the assets behind them, are the business of the

Iisurance company. its stockholders and polievpolders, as

such. “The assets of the investment fund, on the other hand,

being reserved exelusive ‘iy to the variable contract holders,

are not gissets of the « ompany, and the business of the fund

is not the business of the stockholders on other: poliey-.

holder: x. ’

Some exangples w iH pe rhaps highlight - the foreroing’:

An insnratee COM PAAN might form a registered. investme ni

company under the Act and sell its ‘shares. This company

might offer, asa package, shares in this fund and insurance

er annuity policies in itself? Further, am insurance com

puny might offer a variable annuity; the value of each

‘annuity payment to be measnred by the then valne of sitares

ot an existing (and unrehated) investment company, Alter.

Nalive:y, at. existing investment eompany might offer te

holders of its shares a pian for the distribution of shares

to the holder on an annuity basi< (with or without mor-

talit, uarantees). a :

‘Tn the foregoing examples, the insurance com prin ans

the investment company would each continue as such am!

“Hill embody a reiationship subyet te ite applicable law, -

" 18 See, eg, D.C. Cope tit 35-04] (a) (1960): Fis. Spar. Avs :

£ 627.0976 (1961) ae y =; *

ce On Securities Act. Rel: ase No. 3480) ¢ Mas Je, A9GS dealing

with the sale of mutital Tunedshares which are collateralized 10 pur.

chase bite insurance: ;

Johnson. The Vertahl Annurty-——dInsuranes. Investmen?,

or Both? 48 lieo LL. 1. G4. 61960

ela

, h , Fe °

Since the substantive relations’ lips survive, the legal re-

‘sults should not ehange because a viven company writes

and sells a contract ee eto combine them. Tf an

investment fund is involved or creeted, the federal law

apples, “If an‘insurance paras ix evolved, or promises

are made which fall within the detinition of insuranee/ these

may be subject to state instyance law as cetermined by the

appropriate stat anthoritms. Thus, they will decide’

whether to probibit the sale of variable annuities or to |

apply additiongl (a+ opposed te confitetine) requirements,

There need be no confitet of regulation. Each law applic -

where relevant: the federaltlaw to investment risk; state

insurance law-to the application of actuarial methods and

~ the performance of promises of tited amount (whe ther itt

numbers of dollars or of units or of shares).

These broad principles tlow: from-the decision of the

Supreme Court im the Valic ease. In Valic, the Supreme

Court decided that the variabte annuity contracts were

securities, ~, not exempt as insurance’. and that the Invest

meni Company Actimust be complied with, despite the fact

that the company whieh sold the contract= was formed and

regulated as an insurance company. Trne enough, in that

case the’company invelved was selling principally ‘variable

annnity contracts and had relatively littl standard imsur-

anee business. The substantial difference in the present

proceeding is that Pridential has a large and erin

liskev) busines in standard insurance, whieh will be greater.

than its proposed business in variable annuities. Pradentia:

maintains thaf thie distinguishes VoJie.. To us it is quite:

clear that if does not end cannot. The basis of the Court’

decision nf’ Valic and the subseer ot neti ty throughout beth

that option and our subseqaent opinion dealing with ex

emiption request!" is solely the varlable anntity contract,

§ Th, Variable Annutty Litt besuranes Co of. America, Vives

. * .

ment Company Act Releas: Noo 2004 Pebruary 25, 1960

its provisions, its impact, and the relation: hip of the holders

of such contracts‘to the furd. There was no reference to

any other business of the company, now er hereafter, nor

any suggestion, tat sueh other business would be in any

way relevant. Tt would be strange indeed tha’ the jucy

ment should lose all effect in the foreseeable event that the

company should sell more regular insurance policies than’

variable annuities, Such a conehusion would make mean-

iailess the opinions" careful fowus ou the effects of the

variable annuity contracts upon their holders,

bry tie Vulic case as here, woreaver, the contract) in

clided mortakty guarantees uvocrtalen by tie compan

itself, backed by its own aedets and therefore aTecting it~

stockholders ami polievholders. Bat neither fhe guarabtee’s,

;

hhor the preosition of Tiaras person ~ Were cheeeprpene! rele ys?

On the contrary, the bast- for the decision Wit the <“bstar

tial antl severable interes? of the yariable ANNNIEY contraet

holders in- the divestment Fand on ty. distinet from stock’

holders and other polevhol fers, and distinet also from ther

own interest un the EDspans a~ polievholders in regard to.

the mortality SUArAlIees

The holding in Valte then ix that it-is the‘ ulterest atid

risk of the variable contract holdér= in the investuent fund,

nei other asnect~ of the Gontract< oar of the companys which

sells them, which requiré subjection -to theeAet. In the

special ee of the companys an Vatic, the meaus

chesen for eomplianes with the mandate? was by registra-

fron of the company itself. For Prudential this meats is

neither desirable nor pernsil Ne. But the relevant relation

shipis identical and the mandate <tands:- The ditferpies 7

“the present case trom Valic, therefore, is not in the sub

stantive applicability, of the Vet. but only that a ditterént

tiode of compiiagee must be sought. : :

ak °

~ iy ;

As to tiie applicability of the Act, Prudettial’s batic

argument here narrows dawn to ae eas assertion that

a status subject to the Act eanot be eres ited by a contratt ”

written and mold by an otherwise exempt « entity nnd con

taining other provisions, or relationships not subjeet to the

Act. We have already indioated why suc hoa proposition i

palently untenable in substances “and effect. "We deal now

with Prudential’s more technical arguments,

Prodential matutains flath that the Act coverns only

relatiousiiy < initially organized in the forni of, some’ recog,

nize’ leonl entity. Beside malting the statute easy toe vale.

this proposition flies in the face of it< explicit proyisions.

The Act's defini

fund, or any organized croup of persons whether Incorpo.

rated or not... °°" The contract cteate a t*trust’? in the

hands of Prmaential for the contract hulders. Moreover,

they reqnire and result in ac'fand. °° Prudential maintain-

fof company includes *. 0. a trusts a

that this fand ‘tis a lifeles- thine incapable of action" ane

that the term: a-~ tiseed in the Net must therefore, have a

tnere speetic meaning. But it is. of coprse, a ceniral pur

pose of the Act to require tha! ati investment fund wot be

a lifeless thing. that if mast be given the caymeity Tor cer

‘ai actions. “Tie foregoing conelu- janes “apply quite irre.

speetive of sate legislative detion seqregating the Vest

ment fugid, theugh such Jegislation highliuchts the anpiin |

The contracts al-o constitute the holders an ‘torganized.

rreue of persons,” Prudential states that the hoider= are

“merely scattered individuals and companies who happer

to have purchased variable anauity centraet=. They hin

fostied no organization amote Wiemiselves, thes take part

it) Te jount wctivity ofan. Kind. and they have assumed he

responsibilit. toward each other.” Phat this is te argue that

. - 24a

° .

a-gtotp is not a group Becayse it was som other persone

Who brought it together. It is a: princapal purpose of the

Act to require that a group such. as this fare 4 certain role

- and take part.in certain responsibilities; it doe< not leave

these matters to contractual whim.” a

Prudential argues that it, not any ‘*snborginate”™

‘Tlesser’ or “component” entity, is-the ‘tissner."’ This t-

a misconception of the obvious and aeecessary meaning of ,

ti word ‘issuer’? in the 1940 Net. It confuses the coneept

of ‘issuer’’ with the functions of the organizer, depositor,

promoter, or seller For purposes of the 1940 Act, the

+ term ‘tissuer’’ is defined fs ‘tevery person who issues or

proposes to issie any security or has outstanding any

secuaty which it has issned.°°* Prudeatial would tm fac

‘we the-writer of the confgacts—the insurance and annuity

promises and the obligation to set up the iivestment fund,

jut the investment fund, the ‘company ’’ te which the in-

-- -Vestment interests relate, i+ the ‘issuer’ of thoxe interests.

Prudential also argues ‘that the Act applies only te

‘companies’ rather than “aelivities,”” and that the opera

* tion of the variable angaity contracts and the investment

fund thereunder .4< merely w minor ‘tactivity’’ of Pru-

denial, This is a misconception analavous to that just

mentioned, One must first lecate the company: ‘com.

pany’ is aned mstisa oe detined in terms of unity of interest

and partieipation. -It is true that a ‘‘company’” (in thi-

s¢lse}e may engage Ui invostiment activities to some extent

° ,

- -

- . .

* tae The. Varialil: Annuty Life Insuzance Co. of America,

investment Corr iny Act Release No. 2074 (February 25. 16) a.

lo, Where we he@d, with respect to similar-variable anauity con

tracts, that the holders, together with the proveeds-of their pas

ments, constituted a i*tenst."! a ‘fund’ and an ‘‘orgasiized group -

of persons” within the ineaning of the “Ae ; ‘.

ll | oipafre Section-? 1. Securities Act Of 193.5 : -

“* Section 21a) (21).

e | .

—_

—or primarily if im ary Oxee pte category -withont becom.

ing .ti investment company sabject to the Aet. Tt is equally

apparent, however, that any COMPANY may create at invest-

ment fund and sell intérests init. Tn'this-event the separate

fund is ne fonger incany real sense an ‘aetivity’ of thie’

first company, but another and different ‘company. ee

contrary conclusion, as urged by Prudential on thi= tits =le

point, could drastically lirnit the Act's inte neled scope.

In this connection. - although’ $ Section Bey: 3) of the «Act.

categorically excepts *tany bank or surance company”

from status as an investment company, it goe~ on further

to exclude commen trust funds and similar collective in-

vestment funds one Inv anid gest by a bank m a

fiduciary capacity"! Obviou ly. if as Pradential argues,

the exemption of banks and iNsurance COPE Oat be had been

intended to inglude an exersption of tun ds set up be-sue..

companies, there would have been to need t o provide for

the additional specific exemption of fur.d< se tuyq tn bank.

Congress thus viewed sech funds. Ovaggathouch usualiy

maintained asx departments of*the bank, c- separate from.

the barking business. It rested this exemption on the °

special consiferations: tht the fund= were used fo. bona

‘fide fiduciary purposes rather than a- medium for general

ecm e

24 Thy bank funds excerpted iider Sect ios ote i (3) are an, ary

common trust fund or similar fund maintained by a bank exel

sively for the collective investiuent and reinvestment of moneys

contributed thereto by the bank in its capacity asa trustee, executor,

administrator, or guardian. or any colnmon tri..t funda ar simular

130 bs a eerperation Whiel is supet¥ised or examined by Staté

Eternal authority bhaymnge supervision over bafibs iy a majority

. .- . . ‘ 9 .

aot The Binhits oO} benetiegal ititerest in sireh tum’, olber fhan units

owned by charitable or ecueational iistitutiotis, ate hel! ander

3 v9 , :

iistriment= providing tor pavinent OF ject. to Ob Or nore

¢ .

persons ang of principal te another or others

= Oe FT

ie ake aa lee °

pubhe investment and had only a limited impact in the’

invest nent fund picture.” si ee ee or

Po adential argues that tt is essential to find a **see writs”

which can be identified as ‘precisely deseribed." and, to

identify. the ‘sowner”’ of euch of these securities. Tt further’

points out that the proposed contract contains a number

of cugrantees ‘uel obligations whieh are not-seeurities of

the investment < Fand, and that during the pay- “ont period

eo one annuitant can be designated the “owner * of any

spec ifie number of units.” Prudential sug¢est~ that the con

tract is‘fsimply not divisible.’ We disagrees imleed, divi

¢¥ . ‘

om e > a ~

‘ ~ -

~ ‘

Seo 1. Doe, 476, 76th Cong. (1939) (Report 6f the Con

sion? on Common Trust) Funds iM). 4-6. Regulation Fo of 1 =

Federal Reserve Boatd. which ge werned common trust funds. stated

ops the use of the common trust fund was fo ‘. the purpose Of the

‘investment. of funds “bel: d/fer true fiduciary purposes: and_ the :

operation of such Commory Trust Funds as ‘investment trusts ‘for

other than strict! Hiducjary prrposes: iS Sereby prohibited.” Id

at 27. : -

Prndential has also potted to certain deci ‘isions by es whe rem

grant ed exemption from provisions of the Act fo companies engaged

in insurance and real estate busii®sses whieh had outstandins face

‘amount & rtificates, (The Great American Lite Underwriters, Pay ,

= dnvestment Companys. Net Release No. 8070 (July 15. 19605: Amer:

‘con Annyity Savings Assoc ation, BASEL GV! (D954). Collate rig

Investment Comymiy, VOSA Jioss8 (49420) Tt argues that

failure to find that those companies nad component tace-amonnt

*certiticnte inves ment COMPA es 1s A precedent for not holding that

the fund has to be an investisent comipaty separate from P radensia!

_otever, i theses the issuance of such certifieates had , Aneer:

alisconginued aid was not to be resumed, and ne other inves me nt

fund interestd had been or Were to-be jawter % We dete rmined that

under the eiteumstauves exemption from the Aet could be granted,

subject. te appropriate conditions. dufing the period the gemain-

ing face-amount certificates were being liqthielated, Thos - deter

ninations afford no bagis for holding thar the propose | isxuianee of

the variable annuity contracts will Net wive Tise 10 an. investment

COOMDANY requsrine the protections oF the Act. - :

| +

‘s

; Png.

Soe

+ ,

PERE a

sen of its eleme nth Hite invesigpent and imsurcnee com — +

‘ponents bs specail ke it~ pre rornanee and to its ecomfire

bension, dust as the fand lias beet ‘identified a< the jssttel

of the unit sole thre igh the medium Of the. contract, so.

LP yreneherst tae! should bes identified was the obligor of certain’

promises mad, in the dpntract. “Ip effect, ¥ ruderitial® ~ baste’,

unedertakitic t= that the number of annual uh its ulloeated to,

at annuitant (whatever their value) will not be affected by

mortality exper jenee; it will make up gris inadoeuites TOA

oh He own assets. “The unit is the relevant security any!

ust be located, despite auy difficulty in the wording of

particular form of contra This is further tlustrated bs

the fact that daring: the pay in period the contract hicks ler

may elect te redeem (in) effect, sell) lis indivtdnal. an

ferest ia’ the. investine nt fundsat it< then valnes, In thi-

respect, the olde Y's ywos ition t~ pdentic caftothat os a mitittia!

fumed shareholder. Difring the pay ont period, individrs!

interests cannot be xo identified or sokly But it 18 clear that

fhe investment result- of the fund affect the amountoef -.

each of fhe‘payinent= in thi period am! therefore the sub

stantive reasons Bor the apyelie ute roof The Net cor tiriie.

Prudential has also argned that. if. the Net meant to

regulate investment funds snanaged by inssranee comm

26 11 ahlitgon. Prudential, fot the fumed. is alx, the obliger of

otter promises in tie contrart. sti ae thet fer gssuine 4 tives]

egiigr annuity pr CNesanee for ‘the vatiable payiient=. eo 3

- , ; 4

But the individual paviuent is Still a Savimesit measured

*hasivalls cee the sate Wat an etree s pte resd Ih ar prvestinehl [rts

ic meastred. Amd ina very real sens the invester iS more witalhy *

“gntérested in thy Investinent: e\qertenes the company at tats

perio? thas be ewer Was fn the pee din pene 1 god in a “wat morte

vitally ther ars, holder of an opencend investment company cet

“tifieate. or share tn a publieto? trade) closed-emd compan) ever, is

dhe has become completely ‘boeks 1m 4 Valic, supra, at 5.

lconeurriiy opinion. a Ps

4 e ee ° m . =

* ¢ o

e *

. . 2 d ees 6 , - ’ K ton

o by \

pag niie ~. fire. ingurance companies would have been excluded

from the yysurance exe my tion shee auwe was known that

pepe etry derived their “ined primarily from in

ves yes in dquity securities rather than from fire ker.

~ \ wyting oPrations. “It is a wothe lent, awe | that the Act

sempts the Igtter, bat not the former. That is the selegtion

qre form primarily to Jinstgre and underwfite risks from

. >, fire. ‘and Similar byents and theer invested thehds are avail-

able for sueli: parposes The fund with which we are con-

cerned here is not ar iysarane vommpanv: it is te éngage

» exclusively un ‘i abies nt ‘and imo be advertised as sneh.

~“e@ “. wf

Fe, Finally, Pa aeutsal argues that the MGBancc ee exemption

Padi conti uns bya Wekkaeos which. revealed in the legislative

his tory, were findgmentarto th*®*Convzressional judgment

- 4o tif Vy pe Og eouipariies “which should be Txempted—a

. * primiany and a ee rant Dusinesssactivity ral and a

prior, regulation test and that it aMisties both. + W@ do.

not’ disagree with the first test as such y but, upon fTentity-

ine the finid, wechave not fond i? in th? instirance busi- ‘¢

megs, AAS tb cm second, the Supreme Court: in Valic re

— geeted the argcume nt that Congress: intended to exenipt

~ regulated” “companies from the reach ‘of the Acts the

company in that ease was subject to the jurisdietion.of loeal

insurance authorities. Ns we st: ited earlier "gem exem ps

ton of insurance Comps. ates is to be explained it {hay Sthe I-

j “wise such compahigs ‘would be covered becanse of “tei

“investme nt activities, a Necessary part ‘of th. ir insufance:

" . business, © , wey. re

; ° eae °

Pes Accordingly, we find that thf sale by Prudesitial of the

variable annuity Conk fs will result-in.a fund the Invest.

tent Mind accodnt - r on will my est, reinvest or trade i un

, 5

* . Py 2 .* ¢ °

~Valic, supra, at pp. 67575 (1959

o' See text supraln.*13.

oes made. dnany event, fire insurance companion. rs

”

* ‘eates cont pre’ Section 2(aj(Z6) of the Act? The

: : , ; me a

Rete Deere See Section Prt a), The National, Association of | Securifies

: “De alers, Ine. (** N. ASD") has» sugeested that the® Other Assets

* Lepourg. over liabys

“or in a minteor

es Je 20a

sec wiltion anil, be there fare siihjaet to the’ Acte™

the contracts which: provide for pet Pode payment, redemp-

tion and undivided interests inja unit or-fand of securities,

conie with@ the cls inition sof per jodie payment plan eer

accent BK alse a part of dhe -investmert company.” As we have

“noted, the Other Assets account —whieh may invest in securities-

is an adnuistration artount which wil#hold the payments for sales

‘and administration, expenses atid iasurance surplas, U nder the?

circaapstances, the Other Assets, ‘accotnt nea® not register under

hel In one sense it is clear that the contract holders have an

interest in the Other Assets acegunt. it is‘funds from this account

whith must be transferred to the Tavestment Find to assure thrat

the assets of the Fung shall be equal. Prudential’s total reserve—

. annuity liabilities dndér tide variablecontracts., P restimably state

Misurane? anthonities will continndusly assure that this quality

is maintained. - “Aside ‘rom the reserve liability, any e din this

tes belongsfte the coftract. holders any n then

‘as policy holders Bf a inutual company angi aot as ni-

ie . . ad

capacity

vestors an an investment ®ompany.

> Under Section’ 5.a}(h) of “the Net, the

COMPANY Since it Issttes redeemable securities.

fund is an open-end

During, the pay-out

per riod, the purchaser ’s status is Stnutar te thay. of an Investor Nh

a closed end company, exce pt. that life continge@ies afect. the.

measure and duration of his interest. Whyle the pattern oO recular

tion designed for opeli-end com, MLIIES appears most ay opiate,

as We did in thee Valie casi awe shall examin the reques NEUF

tions in light of the Aet as e whale. ° , TR

: Hy

3) Section 2(a) (20. defines “* pert “odie pavinent plan Rif ‘ate:

to inG@ude. ‘any certificate, investinen? faxvined t, or other security

ase

pee Pee . ad Ast ey

undiy nied certain specifi] securities

ind of securities pi In draised Wholly or partly wath

2 a ee. .

series of periodic payments by, the

interest 411

providing for i

representing ay

the proceeds ofesnel payment... ., humber, of regulatory

iwequences attach upon the ISSH ANC: perrodic: or plan

ey ‘ °c <

certificates, See Section: 27. ‘. )

In the report ef. this v GMMLssion relating to" Paceaneraet Spon-

3 Further,

and

‘ Ra a ;

*. . —~

a ‘

: ‘

oes

4 ” a

& 2: -

‘

t - - : ; ‘

issuer of these certificates nigh fev regarded. a as a-separate.

- HA <

2p 7 ‘ %

* t

Anvestment COMmpany, a unit evestment trust as eetinecsin

Seation 4(2) 2 but as a practical matter, this would’ be of

no consequence so long as the _ Aweré to register,

In its alternative application Prudential purperts te

‘ace ept the Hrinise that the imvesjment fund

the

< subject to

Act, but ‘Tequests an work exempting the md from

provisions of Section 7 * which in general pralibits

‘transactions by an investifent company untess registered

with ns) Thiy order would’ he conditioned: on Prudential’ S

consent to comply with all but a li nitcal number of specified

provisions .of the Act and jo a partial, cont pliance with

SOM ef the latter pursuant tothe provisions of Section

61e), ; =

Wif algsider the < ae of the application mistaken, ie

entire sehe me of the

Cts copstructed around registere Tie

——— ~~~ + 2 ee

Sorin _nstallinen laicmnaaal Moac? ; “Tnstallment Pian Re-

port’ :

, periodic payment plans were ais aw follows:

‘accontrivance. for seplliag the familiar varietie Sof investment,

trust_or. investment company sec urities. on a periodic or instal!

ment payment basis. © ertitigate s représenting participation in

the installment dnvestment plan were the ‘Seenrities’ which

Were sold directly ty the purolic. The certificate or ‘Security’

sold to the pubhe evidenced ‘the benheticial ownership of the

hols der of the: eertificaté® in an account to Which. were eredital

shares or interests in other. sec arities : underlying? the install-

ment investmetit plan. Under most of the plans these under-

Jying seeurities wére shares of another “designated investment

trust, or investment’ company tn other cases the.under

lving sequrities purchased under. “theplan were common stocks

in whisk be nettaal partic ayer s were cre vdited to the vertitic atey

holders”

bere Or area .

H.-Doe, Xo. 482, Tuth Cong, (1989) pp. 3A. Rae:

whic

tira’

indenture, contract of eustodianship or avenes or similar instri-

ment, and does not have a hoard of directors.

ed Section 4(2 defines such a trust as an investment. company

issues redeemable securities represe nting vnditided interest:

unit of specitied securities and Which is organized under a trust

» ~ ‘

Sila fat |

4, od et 9

inveatniént compation to whieh’ the specific provi isons. are’

made applicable and trom which exemptioys may, be

granted, ‘if appropriate, There is no. justification here for

reversing this scheme by oa complete” exemption aeconi-

panied by wolunt: ary consent to ce rtain of the Act’s provi-

sians, We, accordingly, ‘treat the application gis reque sting *

> exémpfion mader Seétioi H(¢) in whole.or im paftt from the

specified proyisions and shall refer to the issues presented

as iwolviy@ requests for exemptions. es

Sectio

eonditionally or nuconditionaully, from provisions of the

G(c) provides that wae may wrap)! exemptions,

Act “if and te the extent that suclr exemption is necessary,

-or appropriate in the voblic interest and consistant with

the protection of investors and the pnaposes ‘fairly intewded

by the policy and prov istons” of the Acts As wagliave noted

‘on prier 0¢ ‘asions, this section was designed for excep-

“tional Situations where compliance fs ‘fol riecessary to

accomptish the Act's objectives aml policie S qihe thority

contérred must be exereised with ahaa sag Most

importantly here, we must tread lightiv. sinec.basic to

Prudential’s present phan of ope ration is total Hon eompir-

anee with crucial s¢ctions of the. Aet, or .o-eatled com

pliange, whteh fs net such in fact, with other important

sections. It is to‘these sections ‘that\we. shall first turn our

. 4

: \

aftention.: oe :

Provisions Relating to Investor Contre]

Uftder Ney Jersey law, the holders ‘of’ the variable an-

nuity contracts. world with i ecae ‘polievboldes of

Prudential? be entitled to vote oniv-eow three matters: (1)

“approval of sam proposed merger of Peudential with

. - i

, . oy :

siloelinean: : ;

8 See The Variahle Anniwty Lafe Insurance Company, Inyest-

ment Company Act Release No S474. pe 7 (1960): The Créat

American Life i “nede rurifers, lac., Investment Companys Act Release

“No, 3070 (Juby 15.1960) ¢ American Participations, Inc, 10 SB

430, 487... 8 (1941). ee

. a . ‘ s - \ :

e ‘ .

rs .

27 @ °

. &<

ola

. -”

“another mutual iNsurance company ; (2) the amendment of

Prudential’s Charter : cand? 43) the efection of 16 directors.

Ine addition. to the 16 -elocted diréctors, the ‘board of Pru-

dential consists of Six thembers: Appointed hy the. Chie {

Justice of the Supreme Court of New Jersey and one mene.

- ber, the president of the secs rik elected by-the other direc

tors. The contract holders 4 may not nominate directors,

"since the elected directors nomin: tte their suctessors and the

appointed directors have the power to créate a gontest, i

Avlitch.case a vomifating committer appointed by the New

Jersey Commission. of Banking and Insurance submits a

slate of nominees, ” ‘Prudential will be the pertwnanent rn-

vestment adviser and “principal Underwriter to the fund.

Prudential would have ws‘find this establishments oe sis stent ”

with the Act. - a

Fi adential’s proposals clearly cé onte mplate. in effect, a

total exemption fron all’of the sections of the Aet which

together express and effectuate the poliev that these at risk

in ‘investment funds’ should have eimai voice ine their

management dnd policy. As we have indieated throughout

th@ opinion, that poliey and these seetiotfs are in large

part the very essence of the Act. To grant exemptions

34 There has never been a, contest With respect ‘to Prudential s

directors, Thereqre no quorum reqitgements or, solicitation of

-proxies, and during the vears—}94s_ and 1959) 0.003553 . and

AOE, respectively, #f Pruelential ’s policyholders: voted for the

: elec tion of-dire ctors. ¢ ‘ : oe : i.

— ® Se Presi dential message vetouig I. RL. 7842. 87th Cang., ‘Ist

Sess. 1961», which would have permitted District of Columbia life

ass companies to establish certain voting and management

procedates With respect to variable annusy contracts. The Presi-

de®@t pomnted out that ‘the purchaser of a variable anmmity depends

largely upon the efi ieney and skill of the management in select

ing and managing the underlyisg portfolio securities for the teturn

upen his investment. Ho stated that the bill failed to give adequate

recognition. te the basic: (pritviple. recognized in the Investngsit

Company Act, that the investor have a voiee in the contret-ef Sits

compant. THUR. Doc. No. 249 (September 26, 1964).

”

asi r °

ea F i e-

of thee

6 here oid be 1. effec. the equivalent of a total ex cemmption

and contradictory te our principal holding.

Speeitically the Act requires that those having’ funds at”

risk in the equity sec ‘uritie s of an investment*fund elect its

directors -Theldirectors, ov the holders must recur@antiy

sreview the princiypal-yatde ywritihe and investment advisory

arrangentents and have the power to change: of terminate

them.?? ‘ flolders, must pass,on changes in’ investment

poliey™ ‘and ratify the selection by the alirectors of the.

iidependent auditors of the, fund." The “percentage of di

rectors'of the fund whe may by aflitiated with the aici

ment. adviser is suNject to strict limyts.*” The ‘effect.

these: sections is not enly to plage thy power of aad in —

the holders, bus to prevent its usuppation thy any Others,

management or outside party, through jlong-term contract,

yy otherwise: The pitt pose ix vot only to secure honesty.

. 1 G

sa .

—— E : . “4 :

38 Sections 1h ian Is. : ee

pie ao

37 Section 15. It has been -held that Section M lays down a

requirement of anni! approval not merely formal, but subMtantial:

* the minimum content-of which is a matter & federal law. Brown.

“y. Bullock; 204 F. 2d 4135421. (CA. 2 4961;

" 28"Seetion, 13. :

“3° Section 32 (a

Section 10.0 One of the conditions as to which (Congress

vx presed its concern Was the management of investment companies :

in the interest-ef auavestient advisers. underwriters and other: -

- affilhated*persons rather that in the interest oD TIS ser Tite. fehl

To guard against recurrance.of this evil, a Keystone provision of

the statute reqfiges that a board of directors be so constituted as

» *to provide an inde per tdent check upon ‘Mranagement’’. Section 10

o4 the Act specities that, except for cer tain *°

‘at least) 40 per cent of the directors of a registered, investment

company must be Lena who are’ neither officers yor employees

of the compan, and are unaffiliated witlr its investment adviser.’

Fundamental Livcstors, Inc.. Investment Company Act -Release

No, 3595p. 5 (December 27, 162 ,

no load’ * companies,

;

. Ps

< ss ce

a? 3

a 4

5 . . \ : . . * :

OY tl ed Pay - ro. ‘ te

: ws ¥ > , Ste | Pe ®

i Fa we - Z = o

and objective ‘wisdom’ : jr AOD sr to make git

separately responsive to the wishes and jndgment of those

Whis «f ye nd upotw its Fesults. 9 os k

I tudential states **¢ ‘ontrol of, and responsibility. for, the

atfairs of the investment Fund ard the variable. contracts

. . e

proposed to be issued will be vested in th @ompany’s. Board,

of Directors. The-fnvestment Fund Wii not Have and conlel

not’ have a management structure apart from the com

panv’s: Accordingly, if, oe that The. directors of -the.

company may ‘be regarded asthe directors of ‘the Invest- °

_ment Fund..." It states that be contract rolders will,

as policyholders, liave ‘one vote’each for directors of Pre-

denjtral. If proposes that its directors may for-the pur--.

“ Othe’ fr sections reitffore e. ‘the’ mandat te of the Act that security’

. holder representation ahd: participation are to.be provided and safe-

guarded, Shameholder approval is required when the issuance of

additional shares might dilute the value of outstanding shares.

Section 23(b) (2). Compliance with our proxy pnles is reqgired

and voting trusts are prohibited wRh ” respect to an investment

company's securities. Sections 20a) Cb’: Additional provisions

. of the Act, Tor example Sections 12(d 1) and :20(¢\. and (Deo

which prohibit crosseand circular ein. are directed to rg

elimination of other devices througix’ whic ‘ho’, . . publie investors

are effectively denied, in many inafapices, any real participation

in the management of their companies." Seu.-Rep. No.-1775, 76th”

. Cong, 3rd Sess. p. 7 (140). The ** Findings and Deelaration of

Policy’ contained in Section 1(b; of the Act state that the national

— interest and. the interest of investors are adversely affeeted\

“PD

“42) when investment companies are organized, operated, managed,

or their portfalio securities are selected, in the interest of directors,

oftivers, investment. advisers, depositors, or other affiliated persons.

thereof, in the interest of underwriters, brakers, ov dealers, in the.

interest of, special: classes of their -security holders, of in the

interest of other ‘nvestment companies or persons enkaved in

other lines of business, ‘rather than in the*interest ef all classes of

such ‘companies security holders”: and ‘(4° when the’ contro)

of investment companies #8 unduly cagieentrated through pyramid-:

ing or inequitable ‘methods of control, or is inequitably distributed

sor wher investment _ companies are manage: d_ by irresponsible —

“persons.” es .

lies =

P Lal

¢ . -

.) “ qs

e: :

ee . edit ;

eae : i Sone

a pases of Section 10 he considered rae ws of the fit

It says that the fund will not fiave an independent Vest.

ment aclyi mer, but. its Bo: urd will de ‘te rniune the investine it.

poliey of the tuned. a? x Ae ;

~ substantial compliance with either the le ‘titer or the spirit of

. the Net. In effect, P rudential proposes to keep to itself the ;

- sfrower to designate, in perpetuity, the management, pohey,

and operations of the fund. ‘The vifriable Annuity ¢ontract

holders will vote’ for the Qanagers of their assets only in

-- (Snjunetion with approximately 17 million. policyholders

who do not share their Interests. Furthermore, there 1s no

“provision for the minimum “Tamber “FH unatftiliated directors

"required by SeeHon 0. These arrangements are not con-

sistent with the purposes of the Net to endow fuhd. holders

3 with the exclusive right to eleet their represents atives

through w hom their rights. ancl iiterusts c an pe pursue vl!

Moreover. the - protections: of Section 1, designed te

‘inake effective shareholder control oyer the. management of

theér investment funds and thre public distribution of shares,

are particularly greeded under the variable annuity con-

tract. = Here the vestor’ = fortunes are: ‘dependent upon,

the results of investment management not, only while be

. may redeem his interest but also during the pay-out wher

ov 7. hee Be longer free to terminate hit in vestment. ce

Tie meena heomens Pend ses. — Tos | y57 \ Where

in, denying a request for exerption from the i fay dress Sec

16 -and 1s, we note doa potential conthet of interest existed

ims

between the management and spopSor of the fund. See. also [x;

Le stors pi« rersified Services, Lue, [ive stiment om paiy ‘Ac t Release

: No. CATA April 2 27, 1962 rs ;

, 3 Seg lteariuss “befpre. aus QQ tte ha Senate (Committee og

: Banking. and Curreney on 3. 0 580, 76th Cong., Brd Sess. (19401,

pp. D533, where a ( OmmisSSION spokesman st ie. .. if the stock-

hoélders ‘or th e “hoard of direc tors are_ Jinpllinael-eiee-tho- TNR

. s —— ae oe i

ne Rt, uney ought to have a right*to terfninate the int ranagemeit

*. ‘eontract.””

i es : Aes a ; .

. ? ‘ Et.

- Prndential’s proposals on these foints-do not L approach

e .

’ £a :

ri 0,5

aad

e .

ee ae

hav

eS as

rudential would be the permanent mvestmert adviser and

principal underw riter of the fund.

It is ne answet to these - problqms that 7 “the contract

holders. are free to dispose: 6f- their dnterests and seek a

“similay investment undey adifferent manasement. So may

Any share! older of anv investment - company: Aside frem

the burden of sales loads, and Sther costs, invelved in trans:

ferring envestments,-it iclear that the Act does not regard

ailienability as 2 proper substitute for the investors right to.

a-management of hts choice, Moreover, to the varialge

anfiuity holder, this recourse is substantially limited sinep

he is locked ite his investment during the pay-out period

by the very nature of the contract.)

Finally. Prudential has argued that, under its particular

_form of organization and un aer New ‘Jersey law, it cannot

comply with these fasic sections-of the Act. It appears to

us too early td be ‘certain that ways might: not. be found to

acc complish something approachiig¢ recognition of the Act’s

policies, This Commission is not docttinaire in providing

some ‘flexibility through exemptions. futther, as earlier

noted, accommodation by the) states may in all probability

be anticipated to facilitate legitimate expansion of the busi-

ness of insuranee companies. Under any, cireumstanees dif-

ficdities under exisfing New Jersey law de not justify stich’

broad exemptions as are requested here, particularly siitee |.

they nrust be equally: available tH insurance aE EE in‘all

AU states. 2 rudéntia! doubts the-meeessity, or gre actical .

‘value, of these protision= of, the statute. We do ne

; - Saminsky Vv. Abbot, ADel Ch. September 18-1961), No, 1324. x

But in the final analysis, it-is not decisive of the issues here

that a hol ling that these contragts ate subject to. the Federal Acts

might. require; some modification in the business of issuihg ther.

Since these contracts are in fagt covered by the Acts, there can

be no reason wht their issuers should be able to carry ou the

SBvestme nt bupiness i ina Way which C OngEeSs has forbidden.” ’ Valic,..

supra, at pp. 92, 93 (eone urring opinion®

-¢ » gel Ss

ie: ‘ ‘

the dealin ations of these suggestions: but jn-any évent it t.

3ia . oa. é 2 %

. , « , a

not fer Prudential oy this Conunission to neglect polici ies SO.

‘central to” the Act.

Accordingly, we deny the specifically requested exemp-

- tions from Sections 16 and 32. We farther ‘hold that the

tums proposed form of organization conflicts withthe re-

quirements of numerous sections of the Act dealing with

investor control, ‘such ws Sections 10, 13 and b5. , Adljust-

‘more than 60" days after’ prese ntatic

nents weld have to be made so as to-render effective ‘the

rights preseribed by those sec tion’—exemptions here w ould:

aisobe inappropriate:

. . ‘ ° s

We now, turn brie fly to Cue other exemption samen

“made by P rudential. These are, of course, almost meaning--

Jess in in the context of ‘the structure presented here.” We .

shall, kaueivex , express ont: views or exereise our ower too

indicate what further compliances das be requived:-"

Provisions Rslatiog to to Redemption’ aha he "ad 152

“Prudential seek kygexemption from Section 27(¢) (1), which/

Fequires periodic payment plan. certificates to be redeem

able secprities™ and from Section 22(ey, which pret its

the postponement of payment, upol tedemption 69/ such’

‘securities for more than 7. days after tender of theAccurity

tor bare er ‘The proposed contracts limit Mdemptisn

ine a number of wavs which rin gountey to tiese prohibi-

lrons; rR NE ta noir-redeemability during’ the pay-out

period, excepms prov ide anniety “payments, and a 36-month

paarposeers process daring th pay in. ggrod. “

#9 Section 2(a) | BIL defines ‘rede emiah

security under the te ris of whach th é older is entitled, to ree eive.

‘upon presentation tothe issuey or Its dlesignees : approximate ly: his

preportionate share of the pssner 57 net assets or the eakh equivalent.

N.4J. Star. ANN. € 17354-5484 500.0 Tf the value of the units

is tes thar $1,000, paymest will b

of the comtract for redemp-

tion: ee 4

Pd o <

security’! to ine ‘vue. ‘any °

made in no’ ls than 30. nor.’

Oo ° oe Ss

osa : Biss : : : “ite oat

W ‘th reghrect to the non- otorianiliiny of She“contracts,

Under these cireumstanges.- we believe it appropriate to

‘serant the exemption fromgSection ile )(1)} for. the a: out.

period.** - .

The proposed pog pone me oll of redddiption daring the

pay-in period stands ow a different footing. During that

period only the’ accumulation of -units by the investor is

involved and the variable annuity program isnot impaired °

or altered by redemption: oQur holding in they Falic case

tality assumptions, and | podethaciugs on the part of Pru- -

GS ‘dential which would te “adversely affect ed by the unilateral

iy withdraw valof Uhliquidated units by an amuitant during the .

. ai ¥ period. Non-redeemability comes into play only

oo. after a specified interval during which redemption ix per-

ere ~ mitted aml serves to make the life-annuity feature, feasible. :

that the provision’ of Section 27(e) should be applied to”

Micky AS variable annuity gontraets is dispositive of the issue, and °

we deny the requested xe mrption. -

oe TH Division has argued that the use by redential of a W146 y

investment increment assumption in computing the-number of units

to be paid to an annuitant easy the pay-out yeriod- will result

in inequitable ard disariminatory reatment sal annuitants-and,

accordingly, urges that we adopt a ‘‘ highly restrictive approach.’

~ to thy exemption requests, The Division's argument essentially

is based on the fact that Prudential’s inivegtment. increment agsunip-

tion, which includes no assumed capital ‘gains or lesses, ouegedly

results in a continuing deferral of a siajor portion ot “eapital vains

realized by the fund with the effect tha? -an apedarit’ who dies -

. early does not réceive his fair -share of Appreciation from his”

" siiivestment. “We do not accept, the DWkion? S position “heres We

_,. dé not consider the formulagproposed to be inherently unfair ar

inequitable. To the extent that actuarial factors are involved in’

the application of the investmenLassnmption they will be subject.

to the regulatory serutind of ‘thd statp+asurance commission. More--

, over, we I” have JirisdictiQn

yo ‘ae curacy of thesdisclosures with respect to its practical impact.

“ The Variablé Annuity Life Insuraner Co. of Asteriéa, -lnvent-

*. , a4 % 4 . -

ment Company, Act Release No. 2974, ‘pp. 20-2F- (Vebruary 25,

1960). _.- Se

» consider the adequaey- and ,

% e

Ruerd rae ; <a ree -

a ‘ a : ae aia ‘ “Ae : ‘ * :

Provisions as to Offering Price --° Late aa

‘Exémyption: is sought from Section, 22¢d), which pro-

-hibits‘tHe sale of a redeemable-sceusity at & price other than:

‘the eurrént public offering price dese ‘ribed in the pros-

peckas, ‘so as to permit the sale of var Table units ata price”

_ othe? than their current Value to” ‘persons: whio have fgiled .

to make their monthivy purchase payme nts and desire to

cute the default, A monthly purchase paymeit not made

within thirty davs after its dye’ date is considered in de-

fault. The contgact holder may. resume. payments - Withiti_ .

pone year after the date. of default ‘by paying ¢ a hue San

“equal to the agrregate ‘of the defaulted payments plus‘that

- for. the current month. The number ot Wits eredited’ wili

-be* the lesser of (a) the number which could be pure shased

’

uit the current unit value or “(b) the. number Which would.

have heen credited if each payment had hee n paid. when due: .

We agree that it is appropriate fo require that the: con

tract holdar pay the current value ap the time of resumiption,

if the vaiue: of thy units has’ risen since “the det fail. To

credit him w ith muts at the lower yalue. which ‘obtained: a

the time his payntaits were originallysdue wonid dilute, he

interests of the other investors. This requirement amounts

° Jono More: than: charging the efttrent offeging prive ef the

units and does not involve uny conflict with Section, 22fd).

However, where thie valtie of the units das declined, no

dilution results from crediting the purchaser with units at

the lower value prevailing at the time of his. late payment ;

to® charge him with the higher. value which previous ly.

exish ' dw ould represent acgenaltas, We think suc ‘ha penalty,

even aside from the Tyci {iat iy partic ‘lar situations: its,

— bey sa. “Tt rs.

seen could be ve aryl wee,

asitiiineientitiatasints o Ve \- ei

wg 1 market hE coceuak 6 proyision “would baud resulted ina hol pe

who resumed “Jiayinents after default in eight mong bly. pay wients,

losing 287 of the total af such payments. Viewed us.a — load

_ the a ‘nalty in question might exceed thie maximum of 4 yre-

- > J

. *. - . 4

6 ‘ : aC aa See. Ses

not justified: by Prudential’s 5 asserted itéaiee ‘to encourage

regularity of payments and.te prevent speculation ‘in fund

units and has no reasonable relationship to services ren-

derey. °U nder these. cireumstances, we conclude that the

‘ requested exemption should, not be granted. -- * %

; -e\ ge Lae pipes

Other Requested Exemptions | i 3 =~

L. Section 30f ad ) and heute 30d-1

. OP rudential requests ‘ex cemptione from Section 30(a) and |

-* Tide 30d-1, Those provisions would require the fund to

’ fufnish to the variable eontract holders, ‘at Jeast: semi-

annuafly, a report which, among other things, contains.

staterfents in the nature of a balance sheet and income

, statement and shows changes iinet Assets, the unit ‘ales

-and dividends for the eurrent, and past three years and

_ whether thie divide nds were from’ net income or apit tal

gains,a list of securities owned and their value,-and the

> persons. |.” a ys Mea jae a

Prudential: proposes to-end annually a report conform-

ink to the abovy requirements, | in lieu ‘of a semicannual..

. report, however, Prudential proposes, as required under —

remuneration said: to directors, Officers,” and certain, other

New dersey.law, to traysmit within two months after the —

. iniversary date of eaeh contract & report containing, for

contracts imthe pay-in. period, the nunftber of units accumu-

- lated uinder the contract, including any resulting from the

; Se spree of divisible sprplus, and, the unit value as

of the antriversary date. F ‘contracts im the pay-out state,

‘the report.will show the number of ynits in each annuity

payment and the current: unit value. ;

‘Prudential argues that the semi-annual repprt would

impose unnecessary expense upon the contract holderes ie:

-_—— Or

scribed in Section 97 (a) 1), or be “ypeonscionable or ar grossly. ex-

cessive’” as- proseribed by Seetion ik gd) Construed as an admin-

istrative charge. it could ‘exceed * ‘‘reasonable amount.’” the

. standard of Section 27( ay () dD). | Spe -

-#la .: a / \

‘i

"ALISO the éther tv re ports supply the information: neces-

sary .e an inte lige at exercise of it seeurity holder’s right

: tor sell ¢ r redeem pis sec arity. ‘It further -contends. that

Rau

eat Fert would, tend to ereate thezerroneows im-

pression that thie -ariable annuity conte act is, aul appropriate -

fiedium for short ter m speculation, aS :

Section 30(d) was “designed with specific F regard to cur-,,

ine’ the evil§ thai resulted from the failure to give im +.

vestors full information”! ‘The variable’ ‘annuity. contract

holdey ts, as Was been seen, im-a similar position to, that-of

am investor in a conventional investment company and he

the. same needs for the information prescribed | by the Act’.”

and the Ruje. The legislative history indicates that there

was a balancing of these needs against the expense involved

in a semi-annual reporting rang Congress ress Ived the ques-

- tion. in favor of / requiring such rey orty. Accordingly,

we deny tlie - ich d exeniption,

‘ r

3 * .

es Sections mai B), 17(f) and 2706) ?)

$7(a)(3) to’ permit deduction of salef loads” which differ’

proportionately in. Various periods. These differences, aé-

ordaig to Prudential, result from reductions ‘im eoritmis-/

sions to, ik selling agents after: the first vear- i ;

pereentage ‘dedueted | from each pure hase payment afte

the first year for sales ‘oad, administrative eXpenses, a

at Section 1(b) (1) recites th at ‘investors ape aiversely. -affected

_ when they “purchase, pay for, exthange, regetvy dividends wiih

_ thes. anil the cirentastances, “poligies. and finane ‘jal repsonsipil: ty 0

xbte, refrain from. voting, sell, of ‘surrender securities issued “bp

investment: companies. ‘without sien wate, accurate, and: ‘explicit, in-.

formation, fairly prese ted concerning the charagter of Ach seouri

such ¢ompantes anid their mahagement

‘Senate AMearihes Before Subecinmittee of Committee on} Banik

— dnd Curreney: on S. B50, THth Cong., 3rd Sess. (1940), pp.

302-303. . an

Exemption is rejnested from the provisions of Sectidn

‘s

- Cire ump tances ibe requested exemption should’be granted.

| 42a, fo oe

a :

a, : : = . *

ier’ taxes’ ana additions to. surplus 1 18 constant, with any

decrease in the. sales load being offset hy d corresponding °

iiérease in additions to surplis. We agree-that under the

“Hy water, We reserve jurisdiction with respect ‘to the’

reasqnab Heness of chirgeS tor administr ative expenses.

I xehiptions is also ues Wn Section: 17(f) and

Rule 17h2' wit h require that scenrities of a registered | in-s

vestment company he deposited in at bank for safekeeping

Bhd access to them be lithite d to né ore than 3 authorized

persons. Pradential pr oposes: to kee ‘p the funds securities

in its vaults and to authorize aceess by a mhaxiinim of twenty

persons ."Prude nti ‘safekeeping facilities, the procedures

for access, and the supervision. of these matters which is of

provided appeay to aiford adequate safeguards against un- os

anthorized’ remoyal of or pe qud make it- apngongate

to crant this exemption.° oe

. A further exempiien ix iS oe permit Prude ntial 1 to

hild the proceeds from the fier | ofthe variable annujty eon-

tracts instead of depositing them with a bank or etstodian

Sus required by Section 27(¢)(2). In the light of Pru-

“ef . ro ‘.8 ° » ; . : .

‘dential’s position jn relation to the contracts and the exist-

ing supervision and inspection of pts funds, we grant this

Mp0 a5 Zz ake . .

An “appropriate order will i issue,

Commissioners Woonsinr, Cones and) Warrsry join in’

this decision; C ommissioner: FREAR was absent agit did not

participate, . - Pen, *

| Orvan L. Dv Bots

Orval L. DuBois - . ¢

‘ Secretary shat Gy ;

> _»{ SEAT]

wo Sata eo

ao | °

<a 43: bd *. at

oa 2 Fs Nad

a! >

— : Declan Status and tenia jill Denying Ex smpfions

CNITED STATES OF AMERICA

BEFORE TP :

SECURITIES ANI EXCHANGE COM MISSIC.N?

. .

ey s at 2°

. ° Sanuary 22, 1963

ew . ; ral oi t

Pri, Pre ‘DENTIAI IxstRaNCcE COMPANY

AP AMERICA

ied ile. Xo, 812-1380 +.

» dnvestipen! Company Ag of 1940 ;

The” Prudential Insiiranee Company of Ameriva ‘. Pru-

de ntial’’?) having filed fn application epee tO Up. In.

cestment Company sAgt of 2940 (°° Act” requesting an

order (2) declaring that Tie proposed oiter and sale of

Prudential of certain variable Tins. « eontraets will got

resvlt imagy inve tment company subject to the Aet becaee

Prudential’ is the issuer Of sick contracts and is excepted

from the cadinetion of an investment company, or, alterna:

tively, (2) exemmpune Aa. proposed ‘nineorporated rund:

whieh will, be created jursnant to such eontracts trom

comp later with vi arious provi islOns of the Act;

Hearings having been held on said applieftion after ap:

Spropriate notice, Prypore ad findings and briefs having been

‘filed by the pa irties and participants im the proceedings, ancl

the ommission having heard oral argument, and-having |

‘this day issvied its Findings arid Qpinon, on the basis of

such KF ‘indings and Opinion; .° +. ; ‘ a

Irs oRpERRD thr it die request: ( f Prudential that it. he

declared the issuer Af. the Lean variable ¢ nity. GOn-

tracts and that ny investment company subject to the - Act

is the issuer, "be, and it hereby is, denied.

Ip is FURTHER ORDERED that the appliedbion. be, and hereby

ix, denied to the extent that exemption is sought on.

‘

“”

44a

hehalt “of the nningorporated investment fund” created ont

f the proeeeds of the sale of the proposed variable ann

“3 .

contracts from’. a Ante

ay The provisions of Sections 7(2) and 7(b) pro-,

hibitinye certain transaciions by unreggisteréd imvest-

ment COMpanies ; A ae

b) The provisions of Sections J6(a) and: 32(b),

and relating to voting rights in the eleetioti of directors + |

antl with respect toccontraets with.investment advisers

and undefvriters and the employment of independent

accountants. ;

c °) provision < cat Sections 27(e)¢1) and 27(e) in

order to permit det®rral of paytnents upon ink

igs vontraect holders Sor periods in exeess of 7 days

from presentation of the contracts for redemption dur.

ing the so-called pay-in period of the contracts.” ’

d) The provisions of. Section 2 (dL) in order. to per-'

mit charging a variable annuity contract. helder who

-has defanited in his monthly purchase payments under

the eontract with moye than the earrent value of the

units pt the investment fund when he resumes payment.

e) The provisions we Seetion 30(d) and Rule 80d-1,

requiring the submission-of semi-annual reports.

Pris FURTHER ORDERED pursuant to Seetion 6(¢) Othe

Act that.exemption be, and it hereby is, granted from

a) Sevtions 27¢¢)(1) and 22fey so as to permit fhe

o) % . ‘ ° ©

absence of a right of tedemption- during.the so-called -

pay-out period of fie proposed variable annuity con--

tracts and the payment to holders of such contracts of:

the enrrént value of their ynits during that period on

the periodi¢@ basis proposed in the contract, | :

b} Seetion 27(a}(5) so as to permit. the amounts of

sales load to be Geducted srom purchase payments made

_ . . A ‘

“

» eed

* By the Comniission. |

. °

. ? a ; sf . My .. Pe

° . ° € . 6 ‘ .

in certain periods to differ proportionately from those

deducted ix_ others, subject, however, to the condition

that management fees and admiristrative@expenses To

be charged in. connection with the-variable annuity con-

tracts shall not exceed such reasonable ajounts as this

Commission shall prescribe, jurisdiction being reserved

Yor such purpose.

c) Section 27)(2) su as to permit Prudential to,

fiold the proceeds from the sale of the variable annuity

contracts instead ef depositing them with’ a bank ‘or

epstddiag: enue

1) Seetion 17(t3 and Rule 17-2 thereunder’so as to

permit the investment fund to keep its securities in

. » ; > ‘

Prudential’s vaults and authorize access by a maximum,

of 20 persons.

yi ; ¢

* .

. os Orval bs Du Bots

c -@rval LL. Duboi=

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.