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Notice

Hartford Life Insurance Company, et al.

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Start Preamble September 11, 2000.

AGENCY:

Securities and Exchange Commission (“SEC” or “Commission”).

ACTION:

Notice of application for an order pursuant to section 6(c) of the Investment Company Act of 1940 (“1940 Act” or “Act”) granting exemptions from sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder.

Applicants

Hartford Life Insurance Company (“Hartford Life”), Hartford Life and Annuity Insurance Company (“Hartford L&A”), Hartford Life Insurance Start Printed Page 56348Company Separate Account Two (“HLA Account Two”), Hartford Life Insurance Company Separate Account Seven (“HL Account Seven”) Putnam Capital Manager Trust Separate Account (“Putnam Account”), Hartford Life and Annuity Insurance Company Separate Account One (“HLA Account One”), Hartford Life and Annuity Insurance Company Separate Account Seven (“HL Account Seven”), Putnam Capital Manager Trust Separate Account Two (“Putnam Account Two”) and Hartford Securities Distribution Company, Inc. (“HSDCI”).

Summary of Application

Applicants seek an order of the Commission, pursuant to section 6(c) of the Act, exempting them from sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent necessary to permit the recapture of certain credits applied to premium payments made in consideration of: (1) Certain deferred variable annuity contracts, described herein, that Hartford Life or Hartford L&A plans to issue (the “Contracts”), or (2) variable annuity contracts that are substantially similar to the Contracts in all material respects that either may issue in the future (“Future Contracts”). Applicants also seek an order exempting (1) variable annuity separate accounts, other than HL Account Two, HL Account Seven, HLA Account One, HLA Account Seven, Putnam Account and Putnam Account Two (together, the “Accounts”), that Hartford Life or Hartford L&A has established or may establish in the future (“Future Accounts”), and (2) principal underwriters for such Future Accounts that are currently under common control with Hartford Life or Hartford L&A (“Future Underwriters”), and principal underwriters for such Future Accounts (whether currently in existence or created in the future) that in the future may come under common control with Hartford Life and Hartford L&A (also, “Future Underwriters”), from Sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent necessary to permit the recapture of certain credits applied to premium payments made in consideration of variable annvity contracts issued in the future by Hartford Life or Hartford L&A through a Future Account that are substantially similar in all material respects to the Contracts (also, “Future Contracts”).

Filing Date

The application was filed on December 3, 1999, and amended and restated on February 15, 2000. A second amended and restated application was filed on May 4, 2000, and a third amended and restated application was filed on August 31, 2000.

Hearing or Notification of Hearing

An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Secretary of the Commission and serving Applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on October 6, 2000, and should be accompanied by proof of service on Applicants in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons may request notification of a hearing by writing to the Secretary of the Commission.

ADDRESSES:

Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Applicants, c/o Marianne O'Doherty, Esq., Hartford Life and Annuity Insurance Company, 200 Hopmeadow Street, Simsbury, CT 06089.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Jane Heinrichs, Senior Counsel, at (202) 942-0699, or Keith Carpenter, Branch Chief, at (202) 942-0679, Office of Insurance Products, Division of Investment Management.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

The following is a summary of the application. The complete application is available for a fee from the Commission's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

1. Hartford Life is a stock life insurance company engaged in the business of writing life insurance and annuities, both individual and group, in all states and the District of Columbia. Hartford Life is ultimately controlled by Hartford Financial Services Group, Inc., a Delaware corporation whose stock is traded on the New York Stock Exchange. Hartford Life is the depositor and sponsor of HL Account Two, HL Account Seven and the Putnam Account.

2. Hartford L&A is a stock life insurance company engaged in the business of writing individual and group life insurance and annuity contracts in the District of Columbia and all states but New York. Hartford L&A is ultimately controlled by Hartford Financial Services Group, Inc., a Delaware corporation whose stock is traded on the New York Stock Exchange. Hartford L&A is the depositor and sponsor of HLA Account One, HLA Account Seven and Putnam Account Two.

3. Each Account was established either by Hartford Life or Hartford L&A as a separate account and is registered under the Act as a unit investment trust on Form N-4. Each Account is divided into a number of subaccounts that invest exclusively in shares representing an interest in a separate corresponding investment portfolio (each, a “Portfolio”) of one of several series-type open-end management investment companies. The assets of each Account support several varieties of variable annuity contracts, including the Contracts.

4. HSDCI is a wholly-owned subsidiary of Hartford Life. It serves as the principal underwriter of a number of Hartford Life and Hartford L&A separate accounts registered as unit investment trusts under the Act, including the Accounts, and is the distributor of the variable life insurance contracts and variable annuity contracts issued through such separate accounts, including the Contracts. HSDCI is registered as a broker-dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. (the “NASD”). In addition, each Future Underwriter will be registered as a broker-dealer under the Securities Exchange Act of 1934 and a member of the NASD.

5. The Contracts are flexible premium variable annuity contracts that Hartford Life or Hartford L&A may issue to individuals or groups on a “non-qualified” basis or in connection with employee benefit plans that receive favorable federal income tax treatment under Sections 401, 403(b), 408, 408A or 457 of the Internal Revenue Code of 1986, as amended (the “Code”). The Contracts make available a number of subaccounts of an Account to which owners may allocate net premium payments and associated credits and to which owners may transfer contract value. The Contracts also offer fixed-interest allocation options under which Hartford Life or Hartford L&A credits guaranteed rates of interest for periods of one year or more. Transfers of contract value among and between the subaccounts and, subject to certain restrictions, among and between the subaccounts and the fixed-interest options, may be made at any time. The Contracts offer a variety of fixed and variable annuity payment options to owners. In the event of an owner's or annuitant's death prior to the annuity Start Printed Page 56349commencement date, beneficiaries may elect to receive death benefits in the form of one of the annuity payment options instead of a lump sum.

6. The Contracts generally may only be purchased with a minimum initial premium of $10,000. Hartford Life or Hartford L&A may deduct a premium tax charge from premium payments in certain states, but otherwise deducts a charge for premium taxes upon surrender or annuitization of the Contract or upon the payment of a death benefit, depending upon the jurisdiction. The Contracts provide for an annual contract maintenance fee of $30 that Hartford Life or Hartford L&A deducts on each Contract Anniversary and upon a full surrender of a Contract, a daily administrative charge deducted from the assets of each Account at an annual rate of up to 0.15% of such Accounts' average daily net assets and a daily mortality and expense risk charge deducted from the assets of each Account at annual rates ranging from 1.45% to 1.60% of such Accounts' average daily net assets. The Contracts also provide for a charge of $25 for each transfer of contract value in excess of 12 per contract year. An optional death benefit rider is available with the Contracts. If purchased, the charge for the optional death benefit is 0.15% of the applicable Account's average daily net assets.

7. The Contracts have a surrender charge in the form of a contingent deferred sales charge (“CDSC”). The CDSC is equal to the percentage of each premium payment surrendered or withdrawn as specified in the table below. The CDSC is separately calculated and applied to each premium payment at any time that the payment (or part of the payment) is surrendered or withdrawn. The CDSC applicable to each premium payment diminishes as the payment ages beyond four years. No CDSC applies to contract value representing an annual withdrawal amount or to contract value in excess of aggregate premium payments (less prior withdrawals of premium payments) (“earnings”).

Number of years since payment of each premiumCharge (In percent)
18.0
28.0
38.0
48.0
57.0
66.0
75.0
8 and over0.0

During the first seven contract years, the CDSC is calculated using the assumption that contract value is withdrawn in the following order: (1) The annual withdrawal amount for that contract year, (2) premium payments, (3) bonus credits (explained below), and (4) earnings. Starting in the eighth contract year, the CDSC is calculated using the assumption that contract value is withdrawn in the following order: (1) The annual withdrawal amount for that contract year, (2) earnings, (3) premium payments no longer subject to a CDSC, (4) bonus credits on premium payments no longer subject to a CDSC, (5) premium payments still subject to a CDSC, and (6) bonus credits on premium payments still subject to a CDSC. In all contract years, the CDSC is calculated using the assumption that premium payments are withdrawn on a first-in, first-out basis. The annual withdrawal amount is 10% of premium payments still subject to a CDSC measured at the time of withdrawal.

8. If an owner or annuitant dies before the annuity commencement date, the Contracts provide, under most circumstances, for a death benefit payable to a beneficiary. The death benefit is the greatest of (1), (2) or (3) (or (4), if the optional death benefit rider is purchased), computed as of the date that Hartford Life or Hartford L&A receives proof of death, where:

(1) Contract value reduced by the amount of any bonus credit applied during the twelve months prior to the date of computation;

(2) Total premiums payments reduced by the amount of all withdrawals of contact value;

(3) The maximum anniversary value (as defined in the Contract), reduced by the amount of any bonus credits applied during the twelve months prior to the date of computation; or

(4) Interest accumulation value (as defined in the Contract).

9. The Contracts include a bonus payment provision pursuant to which Hartford Life or Hartford L&A credits an owner's contract value with an additional amount when a net premium payment is applied. The amount of the bonus payment is a percentage of each premium payment made by the owner. The percentage is a function of premiums received under a Contract, as shown in the following table.

Aggregate premiumsCredit (in percent)
From $10,000 to $49,9993.0
$50,000 or more4.0

If a premium payment raises the amount of aggregate payments above $49,999, then Hartford Life or Hartford L&A will add another bonus credit to the owner's contract value in an amount equal to 1% of the prior premium payments.

10. Hartford Life or Hartford L&A recaptures or retains the credited amount in the event that the owner exercises his or her cancellation right during the right to examine period. In addition the owner elects to annuitize the Contract, the amount applied to purchase any annuity payment option is the contract value less bonus credits applied during the twenty-four months prior to annuitization. Also, as indicated above, in computing death benefits, Hartford Life or Hartford L&A may “recapture” bonus credits applied within twelve months prior to the date as of which the death benefit is computed. Finally, in the event of a surrender or withdrawal of contract value where the surrender charge is waived due to the owner's or annuitant's confinement to a hospital, nursing home or other long-term care facility (as defined in the Contract), Hartford Life or Hartford L&A will “recapture” all bonus credits applied during the period of confinement (a “confinement period”).

11. As a result of the recapture provisions, increases in the value of accumulation units representing bonus credits accrue to the owner immediately, but the initial value of such units only belongs to the owner when, or to the extent that, the recapture period for the bonus payment expires and the units vest. On the other hand, decreases in the value of accumulation units representing bonus credits do not diminish the dollar amount of contract value subject to recapture. Therefore, additional units must become subject to recapture as their value decreases and the proportionate share of any owner's variable contract value (or the owner's interest in an Account) that Hartford Life or Hartford L&A can “recapture” increases as variable contract value (or the owner's interest in an Account) decreases. This dilutes the owner's interest in the Account vis-a-vis Hartford Life or Hartford L&A and in his or her variable contract value vis-a-vis Hartford Life or Hartford L&A.

12. Because it is not administratively feasible to track the value of bonus credits in an Account that have not vested, Hartford Life or Hartford L&A deducts the daily mortality and expense risk charge and the daily administrative charge from the entire net asset value of the Accounts. As a result, the daily mortality and expense risk charge and the daily administrative charge paid by any owner is greater than that which he Start Printed Page 56350or she would pay without the bonus credit.

13. Applicants request that the Commission issue an order pursuant to section 6(c) of the Act, exempting them as well as Future Accounts and Future Underwriters from the provisions of sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent necessary to permit the recapture of certain credits applied to premium payments made in consideration of the Contracts and Future Contracts.

Applicants' Legal Analysis

1. Subsection (i) of section 27 provides that section 27 does not apply to any registered separate account supporting variable annuity contracts, or to the sponsoring insurance company and principal underwriter of such account, except as provided in paragraph (2) of subsection (i). Paragraph (2) provides that it shall be unlawful for a registered separate account or sponsoring insurance company to sell a variable annuity contract supported by the separate account unless, among other things, the contract is a redeemable security. Section 2(a)(32) defines a “redeemable security” as any security, other than short-term paper, under the terms of which the holder, upon presentation to the issuer, is entitled to receive approximately his proportionate share of the issuer's current net assets, or the cash equivalent thereof.

2. Section 22(c) of the Act authorizes the Commission to make rules and regulations applicable to registered investment companies and to principal underwriters of, and dealers in, the redeemable securities of any registered investment company. Rule 22c-1 thereunder imposes requirements with respect to both the amount payable on redemption of a redeemable security and the time as of which such amount is calculated. Specifically, Rule 22c-1, in pertinent part, prohibits a registered investment company issuing any redeemable security, a person designated in such issuer's prospectus as authorized to consummate transactions in any such security, and a principal underwriter of, or dealer in, such security from selling, redeeming or repurchasing any such security, except at a price based on the current net asset value of such security which is next computed after receipt of a tender of such security for redemption, or of an order to purchase or sell such security.

3. Section 6(c) of the Act authorizes the Commission to exempt any person, security, or transaction or any class of persons, securities, or transactions from any provision or provisions of the Act and/or any rule under it if, and to the extent that, such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.

4. Applicants assert that the requested exemptions are appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.

5. Applicants assert that the recapture of bonus credits would not, at any time, deprive an owner of his or her proportionate share of the current net assets of an Account. Until the appropriate recapture period expires, Hartford Life or Hartford L&A retains the right to and interest in each owner's contract value representing the dollar amount of any unvested bonus credits. Therefore, if Hartford Life or Hartford L&A recaptures any bonus credit or part of a bonus credit in the circumstances described above, it would merely be retrieving its own assets. Hartford Life or Hartford L&A would grant bonus credits out of its general account assets and the amount of the credits (although not the earnings on such amounts) would remain Hartford Life's or Hartford L&A's until such amounts vest with the owner. Thus, to the extent that Hartford Life or Hartford L&A may grant and recapture bonus credits in connection with variable contract value, it would not, at either time, deprive any owner of his or her then proportionate share of an Account's assets.

6. Applicants state that the nature of the bonus recapture provisions as they apply to variable contract value dictate that an owner will obtain a benefit from a bonus credit in a rising market because any earnings on the bonus credit amount will vest immediately and over time cause the owner's share of both the Contract's variable contract value and an Account's net assets to be greater on a relative basis than it would have been without the bonus credit. Conversely, in a falling market an owner will suffer a detriment from a bonus credit because losses on the bonus credit amount also will “vest” immediately and cause the owner's share of both the Contract's variable contract value and the Account's net assets to decrease on a relative basis.

7. Applicants do not believe that the dynamics of Hartford Life's and Hartford L&A's proposed bonus credit provisions violate sections 2(a)(32) or 27(i)(2)(A) of the Act. Nonetheless, in order to avoid any uncertainty as to full compliance with the Act, Applicants seek exemptions from these two sections.

8. Hartford Life's or Hartford L&A's recapture of any bonus credit could be viewed as the redemption of such an interest at a price other than net asset value. If such is the case, then the bonus credit provisions could be viewed as conflicting with section 22(c) of the Act and Rule 22c-1 thereunder. Applicants believe that the recapture of the bonus credits does not violate section 22(c) of the Act or Rule 22c-1 thereunder. Nonetheless, in order to avoid any uncertainty as to full compliance with the Act, Applicants seek exemptions from section 22(c) and Rule 22c-1.

9. Applicants argue that the bonus credit recapture provisions do not give rise to the evils that Rule 22c-1 was designated to address. The Rule was intended to eliminate or reduce, as far as was reasonably practicable, the dilution of the value of outstanding redeemable securities of registered investment companies through their redemption at a price above net asset value, or other unfair results, including speculative trading practices. The evils prompting the adoption of Rule 22c-1 were primarily the result of backward pricing, the practice of basing the price of a mutual fund share on the net asset value per share determined as of the close of the market on the previous day. Backward pricing permitted certain investors to take advantage of increases or decreases in net asset value that were not yet reflected in the price, thereby diluting the values of outstanding shares. The proposed bonus credit recapture provisions pose no such threat of dilution.

10. Recaptures of bonus credits result in a redemption of Hartford Life's or Hartford L&A's interest in an owner's contract value or in an Account at a price determined on the basis of the Account's current net asset value and not at an inflated price. Moreover, Applicants represent that the amount recaptured will always equal the amount that Hartford Life or Hartford L&A paid from its general account for the credits. Similarly, although owners are entitled to retain any investment gains attributable to the bonus credits, the amount of such gains would always be computed at a price determined on the basis of net asset value.

11. Applicants assert that even if the proposed bonus credit provisions conflict with sections 2(a)(32), 22(c) or 27(i)(2)(A) of the Act or Rule 22c-1 thereunder, the Commission should grant the exemptions because the bonus credit provisions are generally favorable for prospective owners. The bonus credits are beneficial to prospective Start Printed Page 56351owners. The recapture provisions do not, on balance, diminish the overall value of the bonus credit provisions and are fully disclosed in the prospectus for the Contracts.

12. Applicants assert that the bonus credit recapture provisions are necessary if Hartford Life or Hartford L&A are to offer the bonus credits. it would be unfair to Hartford Life or Hartford L&A to permit owners to keep their bonus credits upon their exercise of the Contracts' right to examine provision. Because no CDSC applies to the exercise of the right to examine provision, the owner could obtain a quick profit in the amount of the bonus credit at Hartford Life's or Hartford L&A's expense by exercising that right. Likewise, because no additional CDSC applies upon death of an owner or annuitant or upon annuitization, and no CDSC applies during a confinement period, such a death, annuitization or confinement period surrender or withdrawal shortly after the award of bonus credits would afford an owner or a beneficiary a similar profit. In the event of such profits to owners or beneficiaries, Hartford Life and Hartford L&A could not recover the cost of granting the bonus credits. This is because Hartford Life and Hartford L&A both intend to recoup the costs of providing the bonus credits through the charges under the Contract, particularly the daily mortality and expense risk charge and the daily administrative charge. If the profits described above are permitted, certain owners could take advantage of them, greatly reducing the base from which the daily charges are deducted and greatly increasing the amount of bonus credits that Hartford Life and Hartford L&A must provide. Therefore, the recapture provisions are the price of offering the bonus credits. Hartford Life and Hartford Life and Hartford L&A simply cannot offer the proposed bonus credits without the ability to recapture those credits in the limited circumstances described herein.

13. Applicants assert that the Commission's authority under Section 6(c) of the Act to grant exemptions from various provisions of the Act and rules thereunder is broad enough to permit orders of exemption that cover classes of unidentified persons. Applicants request an order of the Commission that would exempt them, Future Accounts and Future Underwriters from the provisions of sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder. The exemption of these classes of persons is appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act because all of the potential members of the class could obtain the foregoing exemptions for themselves on the same basis as the Applicants, but only at a cost to each of them that is not justified by any public policy purpose. The Commission has previously granted exemptions to classes of similarly situated persons in various contexts and in a wide variety of circumstances, including future exemptions for recapturing bonus credits under variable annuity contracts.

14. Applicants represent that Future Contracts will be substantially similar in all material respects to the Contracts and that each factual statement and representation about the bonus credit provisions of the Contracts will be equally true of Future Contracts. Applicants also represent that each material representation made by them about Hartford Life and Hartford L&A, each Account and HSDCI will be equally true of Future Accounts and Future Underwriters, to the extent that such representations relate to the issues discussed in this application.

Conclusion

Applicants request that the Commission issue an order pursuant to section 6(c) of the Act exempting them as well as Future Accounts and Future Underwriters from the provisions of sections 2(a)(32), 22(c) and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder, to the extent necessary to permit the recapture of certain credits applied to purchase payments made in consideration of the Contracts and Future Contracts.

Applicants assert, based on the grounds summarized above, that their exemptive request meets the standards set out in section 6(c) of the 1940 Act, namely, that the exemptions requested are necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.

Start Signature

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

End Signature End Supplemental Information

[FR Doc. 00-23898 Filed 9-15-00; 8:45 am]

BILLING CODE 8010-01-M