[Federal Register Volume 68, Number 199 (Wednesday, October 15, 2003)]
[Notices]
[Pages 59432-59435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26040]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-26204; File No. 812-12722]
The Lincoln National Life Insurance Company, et al.; Notice of
Application
October 8, 2003.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order pursuant to Section 11(a) of
the Investment Company Act of 1940 (the ``Act'') approving the terms of
an exchange offer to issued and outstanding variable annuity contracts.
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Applicants: The Lincoln National Life Insurance Company (``Lincoln
Life'') and Lincoln National Variable Annuity Account C (``Account
C'').
Filing Date: The application was filed on December 13, 2001, and
amended and restated on September 22, 2003.
Summary of Application: Applicants request an order approving the terms
of a proposed offer of exchange of MultiFund[reg] 5 (with contract
value death benefit), an existing variable annuity contract issued by
Lincoln Life and made available through Variable Annuity Account C
(``New Contract''), for MultiFund[reg] 2, 3, and 4 (with contract value
death benefit), outstanding annuity contracts issued by Lincoln Life
and made available through Variable Annuity Account C (``Old
Contracts'').
Hearing or Notification of Hearing: An order granting the amended and
restated 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 must be received by
the Commission by 5:30 p.m. on November 3, 2003, 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 requester'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, NW., Washington, DC 20549-0609. Applicants, c/o Mary Jo
Ardington, Esq., Counsel, The Lincoln National Life Insurance Company,
1300 S. Clinton Street, P.O. Box 1110, Fort Wayne, Indiana 46801-1110.
Copy to Judith A. Hasenauer, Esq., Blazzard, Grodd & Hasenauer, P.C.,
Federal Tower, Suite 500, 1600 S. Federal Highway, Pompano Beach,
Florida 33062.
FOR FURTHER INFORMATION CONTACT: Ellen J. Sazzman, Senior Counsel, or
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division
of Investment Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the Public Reference Branch of the Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. Lincoln Life is a stock life insurance company that was founded
in 1905 under Indiana law, and is a wholly-owned subsidiary of Lincoln
National Corporation (``LNC''), which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services.
Lincoln Life is Account C's depositor within the meaning of the Act.
2. Lincoln Life is the principal underwriter of the contracts
issued by Lincoln Life through Account C. Lincoln Life is registered as
a broker-dealer under the Securities Exchange Act of 1934.
3. Account C was established on June 3, 1981, as an insurance
company separate account under Indiana law. Account C is a segregated
investment account and, as such, its assets may not be charged with
liabilities resulting from any other business that Lincoln Life may
conduct. Income, gains, and losses, whether realized or not, from
assets allocated to Account C are, in accordance with applicable
annuity contracts, credited to or charged against Account C, and
without regard to any other income, gains, or losses of Lincoln Life.
Account C satisfies the definition of a separate account under the
federal securities law. Account C is registered on Form N-4 under the
Act as a unit investment trust (File No. 811-3214).
4. Account C funds the MultiFund[reg] Series of Variable Annuity
Contracts including the MultiFund[reg] 2, 3, 4, and 5 Contracts
(``MultiFund[reg] Contracts''). Certain MultiFund[reg] Contracts have
been offered and sold for a number of years.
5. There are four MultiFund[reg] Contracts which are the subject of
this Application: MultiFund[reg] 2, MultiFund[reg] 3, MultiFund[reg] 4
and MultiFund[reg] 5, all with the contract value death benefit. The
MultiFund[reg] 2, 3, and 4 Contracts issued through Account C have been
registered under the Securities Act of 1933 pursuant to a registration
statement on Form N-4 (File No. 33-25990). The MultiFund[reg] 5
Contract issued through Account C has been registered under the
Securities Act of 1933 pursuant to a registration statement on Form N-4
(File No. 333-68842).
6. The MultiFund[reg] Contracts are flexible premium deferred
annuity contracts under which contract owners may make one or more
purchase payments over a period of time (called the ``accumulation
period''). During the accumulation period, based upon the contract
owner's instructions, such purchase payments are allocated to the
selected subaccounts of Account C and/or Lincoln Life's general
account. To the extent that an owner selects one or more subaccounts,
his or her investment in the contract will vary with the investment
performance of the selected subaccounts. To the extent that an owner
selects the general account, Lincoln Life guarantees that the amount
allocated to the general account will be credited with a minimum
interest rate and Lincoln Life may credit additional interest that it
may declare from time to time.
7. A contract owner can elect to receive annuity payments under his
or her contract. Under a contract, annuity payments are based upon the
life of an annuitant and in some cases the lives of two (or joint)
annuitants. Annuity options are available on a variable basis (i.e.,
funded by Account C) and/or on a fixed basis (i.e., funded through
Lincoln Life's general account). The contracts incorporate other
features, some of which are described more fully below under the
discussion of the specific contract.
8. The minimum purchase payment for MultiFund[reg] 2, 3, and 4
Contracts is $3000 for nonqualified contracts and $1000 for qualified
contracts. The MultiFund[reg] 2, 3 and 4 Contracts impose a surrender
charge of up to 7% of any amount by which purchase payments withdrawn
in any year exceed 15% of purchase payments. (However, this 15%
withdrawal exception does not apply to a surrender of a contract.) The
surrender charge associated with each
[[Page 59433]]
purchase payment declines 1% each year until it is 0% beginning after
the seventh year after the payment was made.
9. The MultiFund[reg] 2, 3 and 4 Contracts also impose the
following charges: (a) A daily mortality and expense risk charge for
contracts with the contract value death benefit at an annual rate of
1.002% of the daily net asset value of Account C; (b) an annual
contract maintenance charge of $25 (for MultiFund[reg] 2 only); (c) a
charge corresponding to any applicable state premium tax or other tax
levied by any governmental entity; and (d) fees and charges paid out of
the assets of the underlying funds.
10. The minimum purchase payment for the MultiFund[reg] 5 Contract
is $25,000. This minimum payment restriction will be waived for
participants in the exchange offer. The MultiFund[reg] 5 Contract also
imposes a surrender charge of up to 7% of any amount by which purchase
payments withdrawn in any year exceed 15% of purchase payments.
(However, this 15% withdrawal exception does not apply to a surrender
of a contract.) The surrender charge associated with each purchase
payment declines 1% each year until it is 0% beginning after the
seventh year after the payment was made.
11. MultiFund[reg] 5 has four contract options with various death
benefits. Only the contract value death benefit option is part of the
exchange offer. In addition to the surrender charge, the MultiFund[reg]
5 Contract option that is part of the exchange offer imposes the
following charges: (a) A daily mortality and expense risk and
administrative charge at an annual rate of 1.00% of the daily net asset
value of Account C; (b) a charge corresponding to any applicable state
premium tax or other tax levied by any governmental entity; and (c)
fees and charges paid out of the assets of the underlying funds.
12. Under both the MultiFund[reg] 2, 3, and 4 Contracts and the
MultiFund[reg] 5 Contract, if the contract value death benefit option
is in effect, the death benefit is equal to the current value of the
contract as of the day Lincoln Life approves the claim for payment.
However under the MultiFund[reg] 5 Contract, the death benefit would be
payable on the death of the owner, joint owner, or, in certain
circumstances, the annuitant, and not just on the death of the
annuitant as under the MultiFund[reg] 2, 3, and 4 Contracts.
13. Under the MultiFund[reg] 2, 3, and 4 Contracts, Lincoln Life
limits transfers to no more than six per contract year although Lincoln
Life reserves the right to waive this restriction and current practice
is to allow up to 12 transfers per contract year. Transfers between
subaccounts are restricted to once every 30 days, although Lincoln Life
may waive this requirement. The minimum amount which may be transferred
is $500 (or the entire subaccount amount if less than $500). The
MultiFund[reg] 5 Contract has the same transfer provisions as the
MultiFund[reg] 2, 3, and 4 Contracts except that the MultiFund[reg] 5
Contract contractually allows up to twelve transfers per year during
the accumulation phase, and these transfers are not limited to once
every thirty days.
14. The MultiFund[reg] 5 Contract has a lower guaranteed minimum
interest rate payable on the fixed account than the MultiFund[reg] 2,
3, and 4 Contracts. The MultiFund[reg] 2 and 3 Contracts provide that
for contract years 6-10, the guaranteed minimum interest rate is 4% and
for years 10 and later, the guaranteed minimum interest rate is 3.5%.
The MultiFund[reg] 4 Contract provides for a guaranteed minimum
interest rate of 3% in all years. After June 2, 2003, the
MultiFund[reg] 5 Contract provides for a guaranteed minimum interest
rate of 1.5% for the contract life in some states and 3% for the
contract life in the remaining states.
15. Lincoln Life now proposes to make an exchange offer to
MultiFund[reg] 2, 3, and 4 contract owners with the contract value
death benefit option whose contracts have a contract value of at least
$5000 and who have remaining surrender charges equal to 2% or less of
their current contract value. Under the exchange offer, eligible
contract owners can elect to exchange their existing MultiFund[reg] 2,
3, or 4 Contracts for a MultiFund[reg] 5 Contract. An immediate bonus
credit of 2% of the contract value will be credited to the contract
owner's contract on the issue date of the MultiFund[reg] 5 Contract.
16. Contract owners who elect the 2% Bonus Exchange Offer will be
issued a new MultiFund[reg] 5 Contract with the Contract Value Death
Benefit. The current contract value will be withdrawn from the old
contract and re-deposited into a MultiFund[reg] 5 Contract based on the
then current allocation of contract value. Contract owners will hold
the same share class in MultiFund[reg] 5 as in their original contract.
Four of the existing underlying funds for MultiFund[reg] 2, 3, and 4
Contracts are not available under the MultiFund[reg] 5 Contract.
However, ten new fund choices are available under the MultiFund[reg] 5
Contract that are not available under the MultiFund[reg] 2, 3, and 4
Contracts. If a contract owner has allocated payments to one of the
four subaccounts not available under the MultiFund[reg] 5 Contract, the
contract owner will be required to establish a new allocation among
subaccounts available under the MultiFund 5[reg] Contract. All contract
owners who have accepted the exchange offer will be given the
opportunity to change their allocations at the time of the exchange to
any of the subaccounts available under the MultiFund[reg] 5 Contract.
These changes in allocations do not count as transfers.
17. The entire contract value of the new MultiFund[reg] 5 Contract
(excluding the 2% bonus credit) will be subject to surrender charges
under the New Contract as of the date the contract becomes effective.
For purposes of calculating surrender charges, the contract value of
the Old Contract (excluding the bonus credit) will be treated as a
purchase payment. Any remaining surrender charges on the contract
owner's MultiFund[reg] 2, 3, or 4 Contract existing prior to the time
of the election of the exchange will be waived. All other charges of
the new MultiFund[reg] 5 Contract will also apply.
18. As of the effective date of the exchange offer, contract owners
who have accepted the exchange offer will pay the MultiFund[reg] 5
Contract charges. After the exchange, the contract owner will be
governed by the terms of the New Contract, effective on the date the
exchange offer is processed.
19. The exchange offer is only available to nonqualified, IRA and
Roth IRA annuity contracts, with at least $5000 in contract value, in
which the named contract owner, joint owner, and annuitant are under
age 76, and the remaining surrender charge, as a percent of the current
contract value, is 2% or less. The exchange offer will not be made to
contract owners who are not eligible to participate.
20. Contract owners may cancel the new MultiFund[reg] 5 Contract
for any reason within ten days (in some states longer) of the date of
receipt of the new contract in accordance with the terms of the Right
to Examine provision of the contract. No surrender charges will be
assessed upon exercise of the Right to Examine provision or upon
cancellation. Upon cancellation, Lincoln Life will return the contract
value to the applicable MultiFund[reg] 2, 3, or 4 Contract. Any
surrender charges previously waived on the MultiFund[reg] 2, 3, or 4
Contract will be reinstated as of the date the MultiFund[reg] 2, 3, or
4 Contract was surrendered. Lincoln Life will revoke any bonus credits
credited to the contract value. However, Lincoln Life will assume the
risk of investment loss on the bonus credits. In other words, the
contract owner will be put
[[Page 59434]]
back into the same position as if he or she had never elected the 2%
Bonus Exchange Offer (except for market gain or loss on contract
value). There will be no recapture of the bonus credit upon withdrawal
or surrender except under the Right to Examine provision. The election
of the 2% Bonus Exchange Offer will have no adverse tax consequences to
the contract owner.
21. Applicants represent that the exchange offer is designed to
encourage existing contract owners to remain with Lincoln Life rather
than surrender their contracts in exchange for a competitor's product
offering similar benefits.
22. Applicants propose to make the exchange offer by providing
eligible contract owners with an Offering Document mailed directly from
Lincoln Life. Eligible contract owners will also receive a MultiFund 5
prospectus. The MultiFund[reg] 5 prospectus will be supplemented to
provide disclosure specifically related to the 2% Bonus Exchange Offer.
Eligible MultiFund[reg] 2, 3, and 4 contract owners who express an
interest in learning the details of the offer can contact either
Lincoln Life or their registered representative for further
information.
23. Registered representatives who are responsible for a contract
owner accepting the exchange offer will be paid a commission. The
commission is less than what the registered representative would
receive on the sale of a new MultiFund[reg] 5 Contract.
24. The Offering Document will advise eligible contract owners that
the offer is designed for those contract owners who intend to continue
to hold their contracts as long-term investments. The Offering Document
will state that the offer is not intended for all contract owners, and
that it is especially not appropriate for any contract owner who
anticipates surrendering an amount of his or her contract value in
excess of the annual free withdrawal amount (15% of purchase payments)
within the surrender charge period. In this regard, the Offering
Document will encourage contract owners to carefully evaluate their
personal financial situation when deciding whether to accept or reject
the offer. In addition, the Offering Document will explain how a
contract owner who elects to participate in the offer may avoid the
applicable surrender charge if no more than the annual free withdrawal
amount (15% of purchase payments) is surrendered, and any subsequent
purchase payments are maintained until expiration of the applicable
surrender charge period. In this regard, the Offering Document will
state in clear plain English that if the new contract is surrendered
during the initial surrender charge period: (a) The benefits of the 2%
Bonus Exchange Offer may be more than offset by the surrender charge;
and (b) a contract owner may be worse off than if he or she had
rejected the offer.
25. To accept the exchange offer, an eligible contract owner must
complete the Lincoln Life internal exchange forms, which will contain
the pertinent information so that the exchange will comply with the
requirements of Section 1035 of the Internal Revenue Code (``Section
1035''). No adverse tax consequences will be incurred by those contract
owners who accept the exchange offer. The exchanges will constitute
tax-free exchanges pursuant to Section 1035.
Applicants' Legal Analysis
1. Section 11(a) of the Act makes it unlawful for any registered
open-end company or any principal underwriter for such company, to make
or cause to be made an offer to the holder of a security of such
company, or of any other open-end investment company to exchange his
security for a security in the same or another such company on any
basis other than the relative net asset values of the respective
securities to be exchanged, unless the terms of the offer have first
been submitted to and approved by the Commission or are in accordance
with Commission rules adopted under Section 11.
2. Section 11(c) of the Act, in pertinent part, requires that any
offer of exchange of the securities of a registered unit investment
trust for the securities of any other investment company be approved by
the Commission (by order or by rule) or satisfy applicable rules
adopted under Section 11, regardless of the basis of the exchange.
3. Account C is registered under the Act as a unit investment
trust. Thus, the exchange offer constitutes an offer of exchange of two
securities, each of which is offered by a registered unit investment
trust.
4. According to the Commission, Congress enacted Section 11 of the
Act to prevent ``switching,'' the practice of inducing security holders
of one investment company to exchange their securities for those of a
different investment company solely for the purpose of exacting
additional selling charges.
5. Section 11(c) of the Act requires Commission approval (by order
or by rule) of any exchange, regardless of its basis, involving
securities issued by a unit investment trust because investors in unit
investment trusts were found by Congress to be particularly vulnerable
to switching transactions. Applicants believe that the potential for
harm to investors perceived in switching by Congress was its use to
extract additional sales charges from those investors.
6. Applicants represent that, as opposed to providing a means of
extracting additional sales charges as contemplated by the prohibitions
of Section 11, the proposed exchange offer provides enduring benefits
to the contract owners. To the extent that a contract owner ultimately
did not benefit from accepting the offer, it would be as a result of
his or her own subsequent decision to surrender the exchanged contract
in circumstances that would have been the subject of very explicit
disclosure.
7. Rule 11a-2, by its express terms, provides for Commission
approval of certain types of offers of exchange of one variable annuity
contract for another. Other than the relative net asset value
requirement, the only other part of Rule 11a-2 that would not be
satisfied by the proposed exchange offer is the requirement that
payments under the existing MultiFund[reg] 2, 3, and 4 Contracts be
treated as if they had been made under the exchanged contracts on the
dates actually made. This provision of Rule 11a-2 is often referred to
as a ``tacking'' requirement because it has the effecting of ``tacking
together'' the surrender charge expiration periods of the exchanged and
acquired contracts.
8. Applicants believe that tacking should be viewed as a useful way
to avoid the need to scrutinize the terms of an offer of exchange to
make sure that there is no abuse. Tacking is not a requirement of
Section 11. Rather, it is a creation of a rule designed to approve the
terms of an offer of exchange ``sight unseen.'' Tacking focuses on the
closest thing to multiple deduction of sales loads that is possible in
a surrender charge contract--multiple exposure to sales loads upon
surrender or redemption. If tacking and other safeguards of Rule 11a-2
are present, there is no need for the Commission or its staff to
evaluate the terms of the offer. The absence of tacking in this fully
scrutinized Section 11 application will have no import in offers made
pursuant to the rule on a ``sight unseen'' basis.
9. No tacking is required when Lincoln Life's competitors offer
their variable annuity contracts to owners of the MultiFund[reg] 2, 3,
and 4 Contracts or indeed when Lincoln makes such an offer to
competitors' contract owners. In those exchanges, unlike the offer
proposed here, the exchanging contract owner actually must pay any
remaining surrender charge on the exchanged
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contract at the time of the exchange. The broker/dealers that will be
making recommendations to their customers regarding these offers are
required to satisfy the suitability requirements. Therefore, while
tacking is not present, the investor protection afforded by the
suitability requirements imposed upon the broker/dealer and the
additional disclosure will be.
10. By this Application, Applicants are seeking a ``level playing
field'' to permit Lincoln to compete with offers of competitors to its
longstanding contract owners. Absent the requested relief, there can be
no such offers, as imposition of the Rule 11a-2 tacking requirement
would make it unfeasible for the offers to be made.
11. Applicants assert that approval of the terms of the exchange
offer is warranted, among other reasons, because it will promote
competition in the variable annuity marketplace. Such approval will
foster competition by allowing Lincoln Life to make an offer to its own
contract owners that would provide an attractive additional option for
contract owners' consideration.
Applicants' Conditions
If the requested order is granted, Applicants consent to the
following conditions, which are intended to support the understanding
that the 2% Bonus Exchange Offer is being made to contract owners who
expect to persist:
1. The Offering document will contain concise, plain English
statements that:
(a) the 2% Bonus Exchange Offer is suitable only for contract
owners who expect to hold their contracts as long term investments; and
(b) if the new contract is surrendered during the initial surrender
charge period:
i. the 2% bonus may be more than offset by the surrender charge;
and
ii. the contract owner may be worse off than if he or she had
rejected the exchange offer.
2. The Offering Document will disclose in concise, plain English
each aspect of the New Contract that will be less favorable than the
Old Contract, including the fact that the MultiFund[reg] 5 Contract has
a lower, guaranteed minimum interest rate for investments in the fixed
account than the MultiFund[reg] 2, 3, and 4 Contracts.
3. Lincoln Life will send the Offering Document directly to
eligible contract owners. A contract owner choosing the exchange offer
will then complete and sign an internal exchange form, which will
prominently restate in concise, plain English the statements required
in Condition No. 1, and will return it to Lincoln Life. If the internal
exchange form is more than two pages long, the statements referred to
in Condition No. 1 will be restated in a separate document, and Lincoln
Life will obtain the contract owner's acknowledgement of receipt of
that document.
4. Lincoln Life will maintain the following separately identifiable
records in an easily accessible place, for the time periods specified
below in this Condition No. 4 for review by the Commission upon
request:
(a) Records showing the level of acceptances of the exchange offer
and how these acceptances relate to the total number of contract owners
eligible to participate in the offers (quarterly as a percentage of the
number eligible);
(b) Copies of any form of Offering Document and any other written
materials or scripts for presentations by representatives regarding the
exchange offer that Lincoln Life either prepares or approves, including
the dates that such Offering Document and materials were used;
(c) Records containing information about each exchange transaction
that occurs, including the name of the contract owner, Old and New
Contract numbers; the amount of surrender charge waived on surrender of
the Old Contract; bonus paid; the name and CRD number of the registered
representative soliciting the exchange, firm affiliation, branch office
address, telephone number, and the name of the registered
representative's broker-dealer; commission paid; the internal exchange
form (and separate acknowledgement, if any) showing the name, date of
birth, address, and telephone number of the contract owner and the date
the internal exchange form (or separate acknowledgement) was signed;
amount of contract value exchanged; and persistency information
relating to the New Contract, including the date of any subsequent
surrender and the amount of surrender charge paid on the surrender; and
(d) Logs showing a record of any contract owner complaint about the
exchange; state insurance department inquiries about the exchange; or
litigation, arbitration or other proceeding regarding any exchange. The
logs will include the date of the complaint or commencement of the
proceeding, name and address of the person making the complaint or
commencing the proceeding, nature of the complaint or proceeding, and
the persons named or involved in the complaint or proceeding.
Applicants will retain records specified in (a) and (d) for a
period of six years after the date the records are created, records
specified in (b) for a period of six years after the date of last use,
and records specified in (c) for a period of two years after the date
that the initial surrender charge period of the New Contract ends.
Conclusion
For all the reasons discussed above, Applicants submit that (1) the
2% Bonus Exchange Offer offers substantial benefits to contract owners,
will be advantageous for the great majority of owners to whom it will
be offered, and does not contravene any policy or purpose of Section
11, and (2) approval of Applicants' offer of the exchange offer as
described, and subject to the conditions set forth in this Application,
is appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies and provisions of the Act. Therefore, Applicants respectfully
submit that the Commission should grant the approval sought by this
Application.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26040 Filed 10-14-03; 8:45 am]
BILLING CODE 8010-01-P