Draft 06/30/2004
SUMMARY OF THE REGULATORY REQUIREMENTS APPLICABLE TO
LIFE INSURANCE COMPANY SEPARATE ACCOUNTS
AND RESPONSIBILITIES FOR COMPLIANCE
This summary assumes an insurance company separate account duly established under the insurance laws of the appropriate state and registered with the SEC. Unless otherwise specified, requirements and duties of the boards apply to the
boards of directors of ABC Life Insurance Company, as the sponsor of the separate account. Not included: specific requirements of prospectus disclosure; detail of board responsibilities; specific state insurance law requirements.
Topic
Legal analysis
Establishment of the Separate
Account
Taxation of Variable Products
Page
Separate Account as Investment
Company
Financial Analysis
Accounting Records
Calculation of AUV; Reserves
Management Functions
Affiliated persons
Substitutions
Corporate Governance
Requirements
Business Continuity
Compliance
4
1
2
4
5
8
8
9
9
10
Topic
Disclosure Controls
Independent Auditors
Page
11
11
Professional Responsibility Rules for
Attorneys
Anti-Money Laundering
Privacy
Board Reports
Sales and Redemptions
Charges
Suitable Sales
Advertising
Prospectus Delivery; Confirmations
Distributor
12
13
13
13
14
16
20
21
Topic
Market Timing
Transfers and Exchange Offers
Page
22
23
Redeemability (Surrenders and
Withdrawals)
Registration and Reports
24
Formation
Registration
SEC and Contract Owner Reports
Registration Statement Forms
26
27
29
31
22
*Key to abbreviations at end of document
Line #
Source of
Requirement*
Requirement
LEGAL ANALYSIS – ESTABLISHMENT OF THE SEPARATE
ACCOUNT
AB&B, Inc. – All Rights Reserved
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 2
Line #
1
Source of
Requirement*
State insurance
law
Requirement
Each insurance company establishes its separate accounts
in accordance with the laws of its state of domicile. State
insurance law prohibits each insurance company from
charging the separate account with the liabilities of its
general business. Each insurance company credits or
charges income, gains and losses, realized or unrealized,
from assets allocated to each separate accounts against
that separate account without regard to the income, gains
or losses of the insurance company.;
The insurance company owns the amounts allocated to the
separate account. Variable contract owners neither hold
legal title to, nor have any beneficial ownership interests
in, the assets of the separate account. However, separate
account laws provide that the portion of the assets of the
separate account equal to the reserves and other liabilities
with respect to the variable contract issued through the
account will not be charged with liabilities arising out of
any other business the insurance company conducts. To
that extent, assets of separate accounts are segregated
from other assets of the insurance company that are
subject to the claims of creditors.
2
#193839 v02
Code
§72
LEGAL ANALYSIS – TAXATION OF VARIABLE PRODUCTS
Variable annuities are taxed under §72 of the Code.
Generally, any owner who is a natural person is not taxed
on increases in the value of the contract until a
distribution occurs. Distributions taken during the
accumulation period are taxed first as taxable income to
the extent that there are any previously untaxed earnings
accumulated in the contract, and as tax-free recovery of
basis only after any and all such earnings have been
included in income. When periodic annuity payments
begin, the aggregate annuity payments each year generally
are treated in part as taxable income and in part as a taxfree recovery of basis. To be eligible for treatment as an
annuity contract under federal tax law, a contract must
provide that its value will be distributed in accordance
with a prescribed timetable on the death of the owner.
These rules prevent the indefinite deferral of the taxation
of earnings accumulated in annuity contracts.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 3
Line #
3
Source of
Requirement*
Code
§7702
Code
§7702A
4
#193839 v02
Code
§817(h)
Requirement
Variable life insurance policies are taxed under §7702 of
the Code. This section is designed to ensure that a policy
provides an appropriate level of life insurance protection.
To qualify as a life insurance contract under §7702, a
contract must be treated as a life insurance contract under
applicable state insurance law and must satisfy either of
two limits on the investment emphasis of the contract: the
“cash value accumulation test” or the “guideline premium
limitation” and the “cash value corridor.” If a contract
satisfies the §7702 requirements, increases in the
contract’s cash value are not subject to current taxation
and its death benefits are tax-free to the recipient.
Distributions from life insurance contracts prior to the
death of the insured generally are treated as tax-free
recovery of basis until all of the “investment in the
contract” has been distributed. However, life insurance
contracts classified as a “modified endowment contracts”
under §7702A are treated in the same manner as deferred
annuity contracts.
Section 817(h) of the Code provides that separate account
investments underlying a variable life insurance or
annuity contact must be “adequately diversified” in
accordance with Treasury Department regulations.
Typically, these diversification requirements are met
through the investments made at the level of the mutual
fund underlying the separate account. To be eligible for
this treatment, the mutual fund generally must be
unavailable for investment except through the purchase of
a variable product. Treasury Regulations prescribe several
alternative tests for adequate diversification.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 4
Line #
5
6
Source of
Requirement*
IRS Position
1933; 1940;
Prudential Ins.
Co. v. SEC.
326 F.2d 383
(3d Cir.), cert,
denied, 377
U.S. 953
(1964)
Requirement
Investor Control. The IRS has taken the position that
owners of variable products may be considered the
owners of the assets of the separate account supporting
their contracts for federal tax purposes if they exercise
investment control over those assets. In that event,
income and gains from the separate account assets are
includible in the variable contract owner’s income. In
particular, the IRS has taken the position that if the assets
underlying a variable contract are publicly available, the
owner will be deemed to have sufficient control. The IRS
also has indicated in the past that a large number of
investment choices may provide sufficient control to the
contact owner, although more recently, the IRS does not
appear to be concerned with the number of investment
options.
LEGAL ANALYSIS – SEPARATE ACCOUNT AS AN
INVESTMENT COMPANY
While state insurance law treats a separate account as an
accounting mechanism, federal securities law treats most
separate accounts as investment companies that issue
variable contracts. As the depositor, the 1933 Act treats
the insurance company as a co-issuer or guarantor of the
contracts issued through the separate account. Both the
separate account and the insurance company must sign the
1933 Act registration statement for variable contracts and
the financial statements for each must be included in the
registration statement.
There are three exclusions from the 1940 Act definition of
an investment company that could apply to a separate
account:

§3(c)(11) – Separate accounts supporting
variable contracts issued in connection with
qualified plans;

§3(c)(1) – Private placement separate accounts
where there are no more than 100 beneficial
owners of variable contracts and there is no
public offering; and

§3(c)(7) – Private placement separate accounts
where variable contract owners are all
“qualified persons” and there is no public
offering.
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 5
Line #
Source of
Requirement*
7
1940
§31
Rules 31a-1;
31a-2
8
1940
§34(a)
9
1940
Rule 22c-1
10
1940
Rule 22c-1
#193839 v02
Requirement
FINANCIAL ANALYSIS – ACCOUNTING RECORDS
Each Separate account must maintain and keep current the
following accounts, books and documents relating to its
business that constitute the record forming the basis for
financial statements that the separate account files with
the SEC :

Journals that contain itemized daily records of
contract owner transactions related to the
separate accounts (permanently, 2 years eap);

Ledgers reflecting the various accounts
maintained by reflect the separate account’s
financial status (permanently, 2 years eap);

Monthly trial balances of the ledgers (6 years, 2
years eap);

Records of the portfolio investment transactions
(6 years, 2 years eap);

Records of who has authority to authorize the
purchase and sale of the underlying fund shares
(6 years, 2 years eap); and

Copies and evidence of filings made with the
SEC (most permanently, 2 years eap).
It is unlawful to destroy, mutilate or alter any book or
record required to be maintained by § 31 or 32
FINANCIAL ANALYSIS – CALCULATION OF AUV;
RESERVES
AUV must be calculated at least once each day.
Typically, net asset values are computed at the close of
regular trading (usually 4:00 p.m. Easter Time) on each
day the New York Stock Exchange is open for business.
Unit values for variable contracts are linked to the net
asset values of the underlying fund shares held by each
subaccount of the separate account. Accordingly, the
pricing process must occur at both the underlying fund
and at the variable contract levels.
Sales and redemptions must be effected at the current net
asset value next computed after receipt of an order. The
insurance company processes purchase payments,
premium payments, transfers, withdrawals, surrenders and
death benefits using the AUV next computed after receipt
of a transaction request or other triggering event.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 6
Line #
11
Source of
Requirement*
NAL
New York Life
Insurance
Company
(pub. avail.
5/7/1971)
12
1940
Rule 22c-1
13
1940
Rules 6e2(b)(12);
6e-3(T)(b)(12)
14
1940
Rule 22c-1
#193839 v02
Requirement
SEC confirms method of pricing AUVs and shares of
underlying funds serving as investment options under the
variable contracts, as of the same record date even though,
because computer processing of information regarding
purchase payments and requests for redemption could not
be completed by the insurer until after close of business of
the New York Stock Exchange, the insurer could not
transmit orders to buy or sell shares to the underlying fund
until the next business day after the record date.
Two day / five day rule: For new variable annuities,
once an insurance company receives a completed
application and an initial purchase payment, it must
process the purchase payment and issue the contract
within two business days. If an insurance company
receives an initial purchase payment and an incomplete
application, it has five business days to obtain enough
information to complete the application (and then must
apply the purchase payment within two business days).
The insurance company can hold the purchase payment
for more than five days only if the applicant specifically
consents. Otherwise, the insurance company must return
the purchase payment.
For variable life insurance policies, Rules 6e-2 and 6e3(T) provide an exemption from Rule 22c-1 to allow the
insurance company to comply with established
administrative procedures with respect to issuance,
transfers and redemptions. For example, this permits the
insurance company to underwrite the life insurance
policy. These established administrative procedures are
disclosed as an exhibit to the registration statement.
An investment company may appoint an agent to accept
orders. The board should consider whether the agent’s
internal controls are reasonably designed to prevent orders
received after the fund’s pricing cut off from being
aggregated with orders received before the cut off.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 7
Line #
15
16
#193839 v02
Source of
Requirement*
1940
Rue 22c-1
1940
Rule 22c-1
Requirement
AUVs must be computed at least once daily (and may be
calculated more often) on each day that the New York
Stock Exchange is open for trading. However, the AUV
need not be computed on: (i) any day on which no
purchase payments or orders for transfers, withdrawals,
surrenders or other transactions are received; (ii)
customary national business holidays listed in the contract
prospectus; or (iii) days on which the SEC has declared an
emergency. Rule 22c-1 also requires the insurance
company to set a time (or times) as of which it will
perform the computation and disclose this time in the
prospectus.
Emergencies: If it is impossible to price, a separate
account may subsequently calculate the price for that day
and retroactively apply it to sales and redemptions
received in the mail or otherwise on that day. Orders
must be segregated based on date of receipt. If orders
cannot be segregated, then all orders must get the next
price calculated after operations resume. Purchase and
redemption orders must be processed on the same basis.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 8
Line #
17
Source of
Requirement*
State insurance
law;
TR 1.4086(d)(4);
ICL
(10/23/1992)
18
State insurance
law
19
1940
§17
1940
§17(a)
20
21
1940
§17(c)
22
1940
§17(d)
#193839 v02
Requirement
Free Look Periods: Contract owners have the right to
review and return their contracts for a refund within a
specified time period. Depending on the applicable state
law and federal law (that applies to IRAs), the insurance
company generally must refund either the current cash
value (without deducting surrender charges) or the full
amount of the purchase payment or premium. In those
cases where the insurance company must refund the
purchase payment, the insurance company assumes the
investment risk. To protect against this risk, the insurance
company can require the contract owner to allocate the
cash value to a money market fund during the free look
period, provided this is disclosed in the contract Under
this circumstance, the amount refunded must be the
greater of purchase payments or payments (without
deduction of sales charges) plus any amount deducted
from the payment prior to its allocation to the separate
account, if the contract is canceled during the free look
period. Also, on either the 15th or 10th day after the
contact is issued (depending upon whether the contract is
mailed to the contract owner or delivered by a agent), the
cash value must be reallocated to the investment options
selected by the purchaser in the application.
Free Look Periods for Variable Life Insurance: Policy
owners have the right to review and return their policies
for a full refund of all premiums paid within the time
period specified under state insurance law.
MANAGEMENT FUNCTIONS –AFFILIATED PERSONS
In order to assure compliance with §17, procedures should
be in place to identify affiliated persons.
Affiliated transactions. An affiliate (acting as principal)
may not buy property from or sell property to an
investment company. An investment company may not
loan money or other property to an affiliate.
Section 17(a) does not apply to transactions in
merchandise in the ordinary course of business with
affiliates.
An affiliate (acting as principal) may not effect a
transaction with an investment company if the investment
company is a joint participant with the affiliate.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 9
Line #
23
Source of
Requirement*
1940
Rule 17d-1
24
1940
§17
25
1940
§26(c)
Requirement
An affiliate, or an affiliate of an affiliate, may not effect a
transaction in connection with a joint enterprise or other
joint arrangement in which an investment company is a
participant without prior SEC approval. A joint enterprise
generally requires an element of combination or profit
motive.
Procedures should be in place to review, on a periodic
basis, compliance with exemptive rules and orders that
permit affiliated transactions.
MANAGEMENT FUNCTIONS – SUBSTITUTIONS
The insurance company must apply to the SEC for
approval before substituting shares of one underlying fund
held by a separate account for shares of another
underlying fund. Variable contracts usually permit the
insurance company to make such substitutions without
contract owner approval. In those cases where they do not,
the insurance company must obtain the consent of all
contract owners since the contract cannot be amended
unless the insurance company has reserved the right to do
so.
In evaluating substitution transactions, the SEC looks at a
number of factors, including similarity of investment
objectives, the relative expenses, the relevant historical
performance of the funds involved, and the insurance
company’s interest (if any) in the substitution. In some
cases, the insurance company must cap expenses of the
new fund for a number of years, obtain contract owner
approval of the substitution, and/or make representations
regarding the level of direct and indirect benefits it is
receiving from the new fund for a prescribed time period.
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 10
Line #
26
27
#193839 v02
Source of
Requirement*
NAL
AEL (pub.
avail.
4/30/2002)
1940
§12(d)(1)(A)
and (E);
Rules 6e-2; 6e3(T)
Requirement
The SEC staff does not distinguish between “reactive”
substitutions (resulting from circumstances beyond the
control of the insurance company) and “proactive”
substitutions (resulting from the insurance company’s
initiative). However, the SEC has issued a no-action letter
permitting an insurance company to allocate monies it
received upon liquidation of an unaffiliated underlying
fund to a subaccount investing in an affiliated money
market fund (with a 12b-1 fee) without obtaining a §26
order. The insurance company must give contract owners
advance notice of the pending liquidation. Contract
owners who have money in the underlying fund to be
liquidated must be advised to transfer such money to other
investment options available under the contract and must
be notified multiple times that the insurance company will
allocate monies it receives upon liquidation of the
underlying fund to the subaccount investing in the money
market fund.
MANAGEMENT FUNCTIONS –CORPORATE GOVERNANCE
REQUIREMENTS
The corporate governance requirements of the 1940 Act
are applicable to any registered management investment
company, including funds underlying variable contracts.
They mandate that the board of directors and contract
owners approve certain matters such as investment
advisory contracts, elect the board members and ratify the
appointment of the independent public accountants.
Whenever an underlying fund solicits proxies or holds a
shareholder meeting, the insurance company must “pass
through” proxies to the variable contract owners and
solicit instructions on how to vote. The insurance
company then votes shares for which it has not received
instructions in the same proportion as the votes for which
it received instructions. The insurance company also will
vote the shares for which it has voting rights in the same
proportion as the votes for which it received instructions.
MANAGEMENT FUNCTIONS – BUSINESS CONTINUITY
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 11
Line #
28
Source of
Requirement*
NASD
Rule 3510
(NTM 04-37)
Rule 3520
(NTM 04-37)
Requirement
Business continuity plans. All NASD members
(including distributors of investment companies) must
create and maintain a written business continuity plan.
Each plan must identify procedures relating to an
emergency or significant business disruption that are
“reasonably designed to enable the NASD member to
meet its existing obligations to customers.” Each plan
must be tailored to suit the member’s size and needs, but
Rule 3510 requires that each plan address at least 10
categories, including back-up and recovery of hard copy
(i.e. paper) and electronic data, and alternate physical
location of employees. Importantly, broker-dealers will
be allowed to rely on another entity for the identified
categories or any "mission critical system," but the plan
must address the broker-dealer's relationship with any
such entity. In addition, Rule 3510 requires a brokerdealer to disclose to its customers how its business
continuity plan addresses the possibility of a future
significant business disruption, and how the member plans
to respond to events of varying scope. The business
continuity plan must be made available promptly upon
request to the NASD staff. Rule 3510 has an effective
date of August 11, 2004 for clearing firms, and September
10, 2004 for introducing firms.
Rule 3520, which requires members to designate two
emergency contact persons and provide such information
to the NASD, has an effective date of June 14, 2004 for
all member firms.
MANAGEMENT FUNCTIONS - COMPLIANCE
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 12
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29
Source of
Requirement*
1940
Rule 38a-1
Requirement
Effective on or before October 5, 2004, a separate account
and the funds underlying variable contracts must
establish, maintain and periodically review procedures
reasonably designed to prevent violations of the federal
securities laws, to detect violations that have occurred
and to promptly correct any violations that have
occurred, and to appoint a chief compliance officer to be
responsible for administering the policies and procedures.
The separate account’s principal underwriter or depositor
must approve the policies and procedures and the chief
compliance officer and must receive annual reports from
the chief compliance officer. (At a minimum the
following should be addressed: pricing and processing of
units and mutual fund shares; identification of affiliated
persons; market timing; the accuracy of disclosures made
to contract owners and regulators; the accurate creation of
required records; processes for valuing assets and
assessing fees; safeguards for the privacy protection of
contract owner records and information; business
continuity plans; and processing of new account
applications, purchase and premium payments and
exchanges). Compliance procedures must provide for the
oversight of compliance by service providers (i.e. the
principal underwriter, insurance company depositor,
administrator or transfer agent) through which the
separate account conducts its activities.
Each insurance company depositor’s board of directors
(including a majority of disinterested directors) must
approve the investment company’s written policies and
procedures and those of its service providers.
Procedures must be reviewed at least annually by the chief
compliance officer, but not necessarily by the board.
Recordkeeping: copies of policies and procedures for 5
years (eap)
Copies of materials provided to board of the depositor and
written reports for 5 years, 2 years in eap
Records documenting annual review for 5 years, 2 years
in eap
MANAGEMENT FUNCTIONS –DISCLOSURE CONTROLS
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 13
Line #
30
Source of
Requirement*
1940
Rule 30a-3
31
1934
§10A(g)
32
1934
§10A(j)
33
1934
§10A(l)
34
Regulation
S-X
Rule
2-01(c)(8)
1934
Rules 13b-2(b)
and 13b-2(c)
35
36
#193839 v02
Regulation
S-X
Rule 2-06
Requirement
The principal executive officer and principal financial
officer are not required to make certain certifications
regarding the establishment, maintenance and periodic
evaluation of internal controls with respect to separate
accounts. Nevertheless, the SEC strongly emphasizes the
importance for all investment companies to have
disclosure controls and procedures designed to ensure
that information required to be disclosed is recorded,
processed, summarized and reported within the time
periods specified in SEC rules and forms and is
appropriately communicated to management.
MANAGEMENT FUNCTIONS –INDEPENDENT AUDITORS
Prohibition on Non-audit Services. Auditors generally
are prohibited from providing the specified types of nonaudit services to audit clients.
Audit Partner Rotation Requirement. All audit
partners must rotate off the engagement after specified
periods and maintain a required “cooling off” period.
Auditor Employment Prohibition. Members of the
audit team are prohibited from serving in certain
capacities for a period of one year after employment with
the registrant (or the sponsoring insurance company).
Restriction on Auditor Compensation. Audit partners
are prohibited from receiving compensation for selling
non-audit services.
Officers, directors and persons acting under their direction
are prohibited from improperly influencing the auditor of
a issuer’s financial statements, when the officer, director
or person acting under his or her direction know or should
have known that the action, if successful (but regardless
of whether the action is in fact successful), could result in
rendering the issuer’s financial statements materially
misleading.
Record Relevant to Audits. The accounting firms must
retain certain records relevant to separate account
financial statement audits and reviews (but not audits and
reviews of the insurance company financials) for seven
years. Records to be retained include an accounting firm's
workpapers and certain other documents that contain
conclusions, opinions, analyses, or financial data related
to the audit or review.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 14
Line #
37
Source of
Requirement*
1934
§13(b)(2)
38
17 CFR Part
205
39
Treasury
BSA, FinCen
67 Fed. Reg.
21117
40
1940
Rule 0-11
(must comply
by 10/1/2003)
41
Reg. S-P
#193839 v02
Requirement
Assessment of Accounting Support Fees. A separate
account with an average monthly market capitalization (or
net asset value) for the past calendar year of more than
$250 million appears to be subject to the requirement that
provides funding for the Public Company Accounting
Oversight Board. Although the funding rules would not
apply directly to the sponsoring insurance company, the
insurance company would pay the fee.
MANAGEMENT FUNCTIONS –PROFESSIONAL
RESPONSIBILITY RULES FOR ATTORNEYS
In-house or outside counsel retained by the insurance
company and providing advice concerning federal
securities disclosure and regulatory matters related to
separate accounts must report to the company’s chief legal
officer, or, if necessary, to the audit committee or board of
directors, evidence of material violations of the securities
laws or breach of fiduciary duty or similar violations by a
client company or its agent.
MANAGEMENT FUNCTIONS –ANTI-MONEY LAUNDERING
An open-end fund must adopt anti-money laundering
procedures. The fund must establish and implement
policies to prevent money laundering or financing terrorist
activities; provide for independent testing for compliance
by an independent party; designate a person responsible
for the program; provide ongoing training for employees.
The board must approve the plan in writing.
Every mutual fund must establish, document and maintain
a written Customer Identification Program (CIP). The
CIP must include risk-based procedures for verifying the
identity of any customer who opens an account. The
procedures must enable the fund to form a reasonable
belief that it knows the identity of the customer. Required
information includes name, date of birth, address,
identification number.
MANAGEMENT FUNCTIONS – PRIVACY
Financial institutions must have privacy policies. Nonpublic personal information may not be provided to an
unaffiliated third party unless customers are provided with
an initial and annual privacy notice providing the option
to withhold consent. The initial notice must be given
when the relationship is established. The annual notice
must be given once in each 12-month period.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 15
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42
43
#193839 v02
Source of
Requirement*
Reg. S-P
1940
Rule 6e-3(T);
Participation
Agreements
Requirement
Financial institutions must implement measures designed
to ensure the security and confidentiality of nonpublic
personal information, to protect the information against
any anticipated threats or hazards, and to protect against
unauthorized access to, or use of, the information that
could result in substantial harm or inconvenience to any
customer.
MANAGEMENT FUNCTIONS – BOARD REPORTS
When contract owners of both variable annuities and
variable life insurance policies invest in the same
underlying funds, the insurance companies issuing those
policies, , will submit to the board of the underlying fund
at least annually such reports, materials, or data as the
board reasonably may request so that the directors or
trustees of the board may make a determination regarding
whether there is a material irreconcilable conflict between
the variable annuity and variable life insurance contract
owners. Such reports, materials, and data will be
submitted more frequently if deemed appropriate by the
board.
SALES AND REDEMPTIONS – CHARGES
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 16
Line #
44
#193839 v02
Source of
Requirement*
1940
§26(f);
legislative
history
Requirement
The “Reasonableness Standard:” Aggregate fees and
charges under a variable contract must be reasonable in
relation to the services rendered, the expenses expected to
be incurred and the risks assumed by the insurance
company sponsoring the contract.

Services rendered include contract features and
other services. Contract features include all
services the insurance company provides under
the contract such as transfer and withdrawal
services, death benefit options and payout
options. Other services include asset allocation
services, automatic rebalancing, automated
telephone services and accommodation of
qualified plans.

Expenses expected to be incurred generally
include external expenses, internal expenses and
contract benefits. External expenses include
any expenses the insurance company pays to
outside persons such as legal and actuarial
expenses, commissions, marketing expenses and
registration fees. Internal expenses relate to the
expense of internal company functions such as
personnel (for marketing and customer service)
and systems development. Contract benefit
expenses include the payment of benefits under
the contracts such as death benefits, lifetime
annuity or settlement benefits or cash surrender
or withdrawal values.

Risks assumed generally include mortality
risks, expense risks and other risks. Mortality
risks are the risk the insurance company
assumes from the projected lives of contract
owners, which can affect the timing of death
benefits and/or lifetime payouts. Insurance
companies are also subject to the risk that
assumptions make I the pricing of contracts will
prove inaccurate. Expense risks refer to the
discrepancies in projected and actual expenses
expected to be incurred in connection with the
contracts. Other risks assumed by the insurance
company might include risks associated with
mistakes, product failures or innovation.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 17
Line #
45
46
#193839 v02
Source of
Requirement*
SEC Report on
ICAA
1940
Rule 6c-8(b)
Requirement
The SEC has stated that it will not adopt rules governing
permissible charges unless it is demonstrated that there
have been abusive pricing practices. For this reason, there
is little guidance as to what constitutes “reasonable”
charges. However, SEC staff recommendations, which
appear in the SEC Report on the ICAA legislation,
suggest the use of a reasonableness test for overall
charges. The Report stated that a reasonableness test
would contemplate a facts and circumstances analysis.
The Report identified several relevant facts and
circumstances:

Profit. The SEC Report acknowledges that a
reasonable profit is allowable. The proposed
reasonableness test should approximate the
standard for regulating mutual fund sales
charges in §22(b) of the 1940 Act which allows
for “reasonable compensation” for sales
personnel, broker-dealers and underwriters, and
for “reasonable sales loads” to investors.

Industry Practice. The SEC Report also
expresses the Staff’s view that whether the
aggregate charges and fees are “within the range
of industry practice” would be a factor
supporting reasonableness.

Innovation. The SEC Report states that a
reasonableness test would give the insurance
industry the business flexibility to develop and
market variable contracts effectively.
In spite of the reasonableness standard, it appears that
surrender or withdrawal charges under variable annuities
continue to be subject to an overall limit of 9% of
purchase payments.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 18
Line #
47
Source of
Requirement*
1940
§26(f)
48
1933
§11
49
SEC Staff
Position
50
NASD
Rule 2310
#193839 v02
Requirement
The Reasonableness Representation. The insurance
company sponsoring the contract must expressly represent
in the contract’s registration statement that the fees and
charges deducted under the contract meet the
“Reasonableness Standard.” This reasonableness
representation must be made in all registration statements
and post-effective amendments. Since this representation
is consistently “renewed,” the insurance company has a
continuing obligation to maintain reasonable fees and
charges, even in connection with contracts that are no
longer being offered.
Directors’ Responsibility and Due Diligence. Directors
of a company issuing securities may be held personally
liable for material misstatements or omissions in a
registration statement. The insurance company
sponsoring variable contracts should document in writing
the basis for its reasonableness representation and
periodically update that written document, as necessary.
Certain members of the SEC staff have expressed the
view that underlying fund fees and expenses should be
taken into account when determining whether aggregate
contract charges are reasonable. The SEC staff also has
expressed the view that expenses of affiliated underlying
funds may be subject to greater scrutiny because of the
opportunity they provide for ‘double dipping” by the
insurance company.
SALES AND REDEMPTIONS – SUITABLE SALES
NASD Rule 2310 requires that member companies and
their registered representatives, prior to the execution of a
recommended transaction, make reasonable efforts to
obtain information concerning a customer’s financial and
tax status, investment objectives, and such other
information used or considered to be reasonable in
making recommendations to the customer.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 19
Line #
51
52
Source of
Requirement*
NASD
Rule 3010
NASD
NTM 99-35
Requirement
NASD Rule 3010 requires member companies, to adopt
and implement a supervisory system that is tailored
specifically to a member’s business. Supervisory systems
must address the activities of all of the member’s
registered representatives and associated persons and may
include components such as automated exception reports
and surveillance programs that monitor unusual activity.
Members must adopt written supervisory procedures that
document the supervisory system and that are reasonably
designed to achieve compliance with all applicable
securities laws and regulations and NASD rules.
NASD Regulation has developed the guidelines that
represent a compilation of industry practices in the
supervision of the sale of variable annuities. The
guidelines do not mandate any specific procedure. Rather,
they are designed to assist members in developing
appropriate procedures relating to variable annuity sales
practices.
These guidelines relate to:
Customer Information: When recommending a variable
annuity, the registered representative should make
reasonable efforts to obtain comprehensive customer
information, discuss all relevant facts with the customer,
and seek to ensure the application is complete and
accurate. The registered representative and registered
principal should review the customer’s investment
objectives, risk tolerance and other information to
determine the suitability of the sale.
Product Information: The registered representative
should have a thorough knowledge of the product
specifications, give a current contract prospectus to the
customer and use only approved sales material.
Liquidity And Earnings Accrual: The registered
representative should recommend a variable annuity only
if the customer has a long-term investment objective and
screen a customer whose age may make a long-term
investment inappropriate. The registered principal should
carefully review any variable annuity investment that
exceeds a stated percentage of the customer’s net worth.
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 20
Line #
Source of
Requirement*
Requirement
Investment In Tax Qualified Accounts: The registered
representative should disclose that the tax deferral
provided by the annuity is unnecessary in a tax-qualified
account. The suitability analysis must take into account a
variable annuity’s surrender charges when the taxqualified account is subject to minimum distribution
requirements.
53
NASD
NTM 00-44
Variable Annuity Replacements: An exchange or
replacement analysis document should be completed for
all variable annuity replacements and should include an
explanation of the benefits of replacing one contract for
another. The registered representative and registered
principal should determine that replacing the existing
contract is suitable for the customer. Compliance systems
should monitor and identify those registered
representatives whose clients have a particularly high rate
of variable annuity replacements.
NASD Regulation has developed guidelines that represent
a collection of industry practices regarding the supervision
of the sale of variable life insurance. Although these are
only guidelines, members are encouraged to refer to them
in developing their own policies and procedures relating
to variable life insurance sales practices.
These guidelines relate to:
Customer Information: When recommending a variable
life insurance policy, registered representatives should
make reasonable efforts to obtain comprehensive
customer information. A registered principal should
review and verify that the recommendation of both the
policy and the subaccount allocation is consistent with the
customer’s investment objectives and risk tolerance.
Review Of Customer Information: The member
company should consider whether the customer desires
and needs life insurance and whether the customer can
afford the premiums likely needed to keep the policy in
force.
Product Information: The registered representatives
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 21
Line #
Source of
Requirement*
Requirement
should be thoroughly familiar with the features and costs
associated with each recommended variable life insurance
policy and give a current policy prospectus to the
customer. A member company may wish to provide
customers with member-approved product information
brochures, in addition to any required disclosure
documents, that explain the features and principal risks
associated with variable life insurance.
Variable Life Insurance Replacements: A member
company should adopt procedures for the review of
replacement recommendations to ensure that they are
suitable. An exchange or replacement analysis document
should be completed for each replacement. In addition,
each replacement question on the application should be
answered. A member company should provide registered
representatives and registered principals with appropriate
procedures on replacements. The member company may
create a compliance system that tracks replacement
activity by each registered representative and flags
unacknowledged replacement activity.
Life Insurance Financing: A member company should
not recommend that a customer finance a variable life
insurance policy from the value of another life insurance
policy or annuity, such as through the use of loans or cash
values, unless the transaction is otherwise suitable for the
customer. When financing is recommended, a registered
representative should disclose to the policy owner the
potential consequences to both the existing and new
policy.
Advertising And Sales Literature: A member company
must have supervisory procedures in place to ensure
compliance with the rule’s filing requirements. A member
company also must ensure that all advertisements and
sales literature regarding variable life insurance are
approved in writing by a registered principal and prior to
use with the public.
Supervisory Systems And Procedures: A member
company may wish to design its own supervisory system
to monitor variable life insurance sales activities based
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 22
Line #
Source of
Requirement*
Requirement
upon the its organization and structure.
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 23
Line #
Source of
Requirement*
NASD
Proposed Rule
Requirement
The NASD has proposed for comment specific
requirements for deferred variable annuity sales. In
general, the new rule would codify and make mandatory
best-practice guidelines that NASD had previously issued.
The key requirements of the rule proposal include:
Suitability: In recommending a deferred variable annuity
transaction, a registered representative would be required
to determine that:

The customer has been informed of the unique
features of the variable annuity;

The customer has a long-term investment
objective, and

The deferred variable annuity as a whole, and its
underlying subaccounts, are suitable for the
customer, particularly with regard to risk and
liquidity.
The registered representative would be required to
document these determinations.
Disclosure and Prospectus Delivery: The firm or its
representative would be required to provide the customer
with a current prospectus and a separate, brief, “plain
English” risk disclosure document highlighting the main
features of the particular variable annuity transaction.
Principal Review: Before a registered representative
could effect any transaction in a deferred variable annuity,
a registered principal would be required to review and
approve the transaction.
Supervisory Procedures: The rule proposal would
require registered firms to establish and maintain specific,
written supervisory procedures reasonably designed to
achieve compliance with the rule’s standards.
Training: Registered firms would be required to develop
and document specific training policies or programs
designed to ensure that registered representatives and
registered principals comply with the rule’s requirements
and that they understand the unique features of deferred
variable annuities.
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 24
Line #
54
Source of
Requirement*
1933
Rule 482
4/88 letter
from the SEC
to the ICI
55
1933
Rule 135A
56
1940
Rule 34b-1
Requirement
SALES AND REDEMPTIONS – ADVERTISING
An advertisement under Rule 482 (an omitting
prospectus or a performance ad) is no longer limited to
information the substance of which is found in the
prospectus. The ad must advise an investor to consider the
investment objectives, risks, and charges and expenses of
the investment company carefully before investing;
explain that the prospectus contains this and other
information about the investment company; identify a
source from which an investor may obtain a prospectus;
state that the prospectus should be read carefully before
investing. If performance is included, it must include 1, 5
and 10-year average annual total returns. The ad must
include a legend that past performance is no guarantee of
future results; investment return and principal value will
fluctuate so that shares, when redeemed, may be worth
more or less than their original cost; that current
performance may be lower or higher than the performance
data quoted. The legend must also identify either a tollfree telephone number or a website where an investor may
obtain performance data current to the most recent monthend. The maximum sales charge must be disclosed.
Legends must be in a type size at least as large as and in a
different style from the major portion of the ad.
Rule 482 applies to automated phone systems.
Generic advertising is not considered an offer for sale.
Generic ads cannot mention an investment company by
name.
Sales literature. Sales literature must be accompanied or
preceded by a prospectus. Sales literature can include any
information that is not misleading. If performance is
included, it must include 1,5 and 10 year average annual
total return as well as the disclosures required under Rule
482.
Rule 34b-1 does not apply to performance included in
annual or semiannual reports to shareholders, provided
that the performance information covers only the period
of the report.
#193839 v02
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 25
Line #
57
58
Source of
Requirement*
10/93 letter
from the SEC
to the NASD
1940
Rule 31a-1
59
NASD
Rule 2210
60
1933
§5(b)(2);
#193839 v02
Requirement
Testimonials in fund advertisements raise serious antifraud concerns.
The following books and records must be maintained:

Advertisements, pamphlets, form letters or other
sales literature addressed to or intended for
prospective investors (6 years, 2 eap)
Under NASD Rule 2210, a member company must file
with NASD Regulation’s Advertising/Investment
Companies Regulation Department all variable life
insurance advertisements and sales literature within 10
days of first use or publication. Members are also required
to file the format for hypothetical illustrations used in the
promotion of variable life insurance policies, since these
formats qualify as sales literature. Members must have
supervisory procedures in place to ensure compliance with
the rule’s filing requirements. Members also must ensure
that all advertisements and sales literature regarding
variable life insurance are approved in writing by a
registered principal and prior to use with the public.
SALES AND REDEMPTIONS – PROSPECTUS DELIVERY;
CONFIRMATIONS
Prospectus delivery. A current prospectus must
accompany or precede any purchase of securities. This
includes the prospectus for the variable contract and the
prospectuses for the underlying funds in which the
separate account invests. The statement of additional
information must be available upon request.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 26
Line #
61
Source of
Requirement*
1934
Rule 10b-10
62
NASD
Rule 2830 (l)
63
OCC
Interagency
Statement
64
1934
§11(d)
#193839 v02
Requirement
A confirmation must be sent to the client at or before the
completion of the transaction. The confirm must include
date and time, identity, price and number of units or
principal amount, whether the broker-dealer is acting as
agent or principal; if as agent, the amount of
compensation received in connection with the transaction;
and the source and amount of any other compensation
Confirmations may be sent quarterly, instead of
immediately, for systematic purchases or redemptions if
sent within 5 days after the end of each quarterly period.
Quarterly confirms must include purchases, redemptions
and distributions; transactions in the account; total
number of units at the end of the period; compensation to
the broker-dealer.
SALES AND REDEMPTIONS – DISTRIBUTOR
Cash/non-cash compensation. Special compensation
arrangements must be disclosed in the prospectus (if not
uniformly paid to all broker-dealers). Special short-term
compensation arrangements to all broker-dealers must be
described generically in the prospectus or a prospectus
supplement.
An investment company sold by a depository institution
must include disclosure that the investment company is
not a bank deposit, is not insured by the FDIC, is not
endorsed by any bank, is not guaranteed
Broker-dealers may not extend credit (margin) to finance
the purchase of investment company shares if the brokerdealer is the fund’s distributor or has a dealer agreement
to sell investment company shares
SALES AND REDEMPTIONS - MARKET TIMING
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 27
Line #
65
Source of
Requirement*
1933, 1940
Forms N-4 and
N-6
Requirement
The SEC has adopted final amendments to Forms N-4 and
N-6 under the 1933 Act and 1940 Act to require separate
accounts and underlying funds to disclose in their
prospectuses information about the risks of, and policies
and procedures with respect to, the frequent purchase and
redemption of separate account units and fund shares.
The implementation date for the new rule is December 5,
2004. Any new product or post-effective amendment
filed after the implementation date must comply with the
new rule
66
1940
§11
67
1940
Rule 11a-2
#193839 v02
Prospectuses are required to include disclosure on the
following:

The risks that frequent transfers may present for
investors;

Whether or not policies and procedures have
been adopted with respect to frequent transfers;

If such policies and procedures have not been
adopted, a statement of the “specific basis” why
not;

A description with “specificity” of policies and
procedures for deterring frequent transfers; and

A description of any special arrangement for
permitting certain parties to engage in frequent
transfers (specifics of such arrangements will
go in the statement of additional information).
SALES AND REDEMPTIONS – TRANSFERS AND EXCHANGE
OFFERS
Transfers among the investment options underlying a
variable contract and offers to exchange one variable for
another are both regulated by §11 of the 1940 Act.
Transfers: Contract owners generally are permitted to
transfer cash values among the investment options
underlying their contracts.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 28
Line #
68
69
#193839 v02
Source of
Requirement*
1940
§11;
NAL
Alexander
Hamilton
Funds (pub.
avail.
7/20/1994)
1940
§11(c)
EO
SEC REL. IC25460
(3/12/2002)
Requirement
Exchange offers: §11 applies only to exchange offers of
variable contracts issued by the same insurer or affiliated
insurers. It does not cover exchange offers involving
variable contracts issued by unaffiliated insurance
companies, except in certain circumstances, such as where
unaffiliated insurance companies have agreed, formally or
informally, to offer a waiver of sales load or some other
incentive for and exchange from one to the other. §11
does not cover exchanges of fixed contracts for variable
contracts, or variable contracts for fixed contracts. §11
generally requires that those transactions coming within
its scope be effected based on relative net asset values.
In the case of separate accounts registered as unit
investment trusts, it prohibits any such transactions (even
at net asset value) unless prior approval has been obtained
from the SEC. ABC Life has received exemptive relief
permitting it to make an offer of exchange of certain older
variable annuity contracts for the Best Ever Variable
Annuity.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 29
Line #
70
Source of
Requirement*
1940
Rule 11a-2
71
1940
§11;
SEC Letter to
NAVA, IMSA
and ACLI
(6/19/2001)
72
NASD
NTM 99-35
#193839 v02
Requirement
The SEC permits certain transfers and exchange offers of
variable contracts issued by the same or affiliated
insurance companies that otherwise would be prohibited.
Specifically, transfers are permitted if they are at relative
net asset values and the only charge deducted at the time
of the transfer is an administrative charge to cover the
associated processing costs. Rule 11a-2 does not permit
sales charges to be deducted in connection with exchange
offers of one variable life insurance contract for another.
Permitted exchange offers of variable annuity contracts
under the Rule, however, must satisfy certain conditions
related to the sales loads imposed on the exchanged and
acquired contracts. For example, no deferred sales load
may be deducted from the exchanged contract at the time
of the exchange, and any deferred sales load applicable to
amounts applied from the exchanged to the acquired
variable annuity contract must be calculated based on the
issue date and relevant purchase payment dates of the
exchanged variable annuity contract so that the contract
owner is given credit for the time amounts were invested
in the exchanges variable annuity contract. Moreover, the
acquired variable annuity contract nay not assess a sales
load on any app0reication attributable to the purchase
payments made under the exchanged variable annuity
contract, and no sales load may exceed 9% of the sum of
the purchase payments made for the acquired and
exchanged contracts.
The Retail Exception. §11 does not cover “retail”
transactions that simply result from a recommendation by
a registered representative at point of sale or the contract
owner’s request to exchange one specific variable contract
for another. The SEC staff issued a letter setting forth a
number of factors it believes are relevant to determining
whether the retail exception is available, including facts
relating to communications to existing contract owners
and brokers about new contracts, the insurance company’s
intent to promote exchanges, and the compensation paid
to brokers.
Procedures must be in place to monitor for excessive
switching between variable contracts.
SALES AND REDEMPTIONS – REDEEMABILITY
(SURRENDERS AND WITHDRAWALS)
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 30
Line #
73
74
Source of
Requirement*
1940
§22(e)
1940
§22(e);
SEC Staff
Position
EOs
SEC REL.
Nos. IC 24257
(1/19/2000);
IC - 26354
(2/20/2004)
1940
Rule 6c-7
NAL
#193839 v02
Requirement
Because a variable contract is a redeemable security under
the 1940 Act, any payment by the insurance company is
considered a redemption under the 1940 Act. These
payments include surrenders, withdrawals, loans, annuity
payouts and death benefits. The insurance company
cannot suspend the right of redemption and must pay
redemption proceeds within seven days. This seven day
period includes weekends and holidays, but does not
include other periods during which the New York Stock
Exchange is closed or trading on the New York Stock
Exchange is restricted, any period during which an
emergency exists as defined by SEC rules, ad any other
periods as the SEC by order may permit.
Redeemability requirements for variable annuities:
During the accumulation phase of a variable annuity
contract, a redemption request must be honored, and
generally must be processed on a daily basis at the net
asset value next computed after receipt of the order. The
SEC staff interprets this to mean that the contract can be
surrendered at any time, and that partial withdrawals also
can be taken at any time without any restrictions except
for reasonable minimum amount requirements. The SEC
permits CDSCs and certain administrative charges to be
assessed in connection with surrenders and partial
withdrawals.
Insurance companies must obtain exemptive relief to
deduct any other charges on surrenders and partial
withdrawals, such as insurance charges or any bonus
credit recapture. ABC Life has received exemptive relief
from the SEC allowing it to recapture bonus credits under
certain variable annuity products under the following
conditions: (i) any credits applied if the owner returns the
contract for a refund during the free look period; (ii)
credits applied within twelve months preceding the date of
death that results in a lump sum death benefit; (iii) credits
applied within twelve months preceding a request for a
surrender due to the following contingent event where no
CDSC is incurred: owner or annuitant’s confinement to a
nursing home, terminal illness, disability or
unemployment; and (iv) credits applied within twelve
months preceding the owner’s settlement of the Amended
Contract under an annuity payout plan.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 31
Line #
Source of
Requirement*
ACLI (pub.
avail.
11/28/1988)
1940
Rules 22e-1;
27c-1; SEC
Staff Position
Requirement
Exceptions:
A variable annuity contract can restrict or prohibit
redemptions as necessary to comply with the Texas
Optional Retirement Program as long as disclosure
regarding the restrictions is made in the registration
statement.
A variable annuity contract issued in connection with an
IRC §403(b) plan may restrict redemptions.
75
SEC Staff
Position; 1992
Industry
Comment
Letter; NAL
Mass. Mut.
(pub. avail.
6/16/1986)
76
1940
Rules 6e2(b)(12) and
6e-3(T)(b)(12)
#193839 v02
During the payout phase of a variable annuity contract,
redemptions may be suspended, but only with respect to
variable annuity contracts under which payments are
being made based on life contingencies. For variable
annuity contracts making payouts that are not based on
any life contingency (i.e. for a period certain like Plan E),
the SEC staff has taken the position that contract owners
must be able to redeem without restriction (other than
reasonable minimum amount requirements).
Death benefit payments under variable annuities:
There is no exception to the redeemability rules for death
benefit payments under variable annuity contracts. The
SEC staff has taken the position that a contract’s cash
value must remain invested in the separate account until
the death benefit is determined (as provided for in the
contract) and be paid to the beneficiary within seven days.
In the case of multiple beneficiaries, the contract’s cash
value must remain invested in the separate account and
paid out to each beneficiary individually as payout
instructions are received.
Redeemability requirements for variable life insurance
policies: Rules 6e-2 and 6e-3(T) of the 1940 Act provide
exemptions from the redeemability provisions to the
extent necessary to comply with established
administrative procedures of the life insurance company
for redemption of the contracts, subject to a “reasonable,
fair and no discriminatory” standard. Among other
things, this allows the insurance company to process load
applications and death benefit claims for variable life
insurance policies in the same time frames that they use
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 32
Line #
Source of
Requirement*
77
NAL
78
NAL
79
1940
§7(a)
1940
§8(a)
1940
§8(b);
1933
§5
80
81
82
1940
§14(a)(1);
Rule 14a-2
83
1933
Rule 430
#193839 v02
Requirement
for traditional life insurance policies. This, for example,
permits death benefits to be computed as of the dated of
the insured’s death (i.e. before proof of death is received)
and the cash value to be moved to the insurance
company’s general account until the benefits are paid.
Automatic redemption of small accounts is permitted if
the terms are disclosed in the prospectus, shareholders
receive adequate notice, the minimum amount is
reasonable.
Telephone redemptions must be discussed in the
prospectus or SAI, including whether the privilege is
available automatically, and that the fund will use
reasonable procedures to confirm that instructions are
authentic.
REGISTRATION AND REPORTS - FORMATION
An investment company may not offer or sell securities
unless it has been registered.
An investment company must register the company with
the SEC by filing a notice on Form N-8A.
An investment company must register its securities with
the SEC by means of a registration statement that meets
the requirements of Form N-4 (variable annuities), N-6
(variable life insurance), S-1 / S-2 (market value adjusted
annuities or accounts).
Generally, an investment company must have a net worth
of at least $100,000 before offering shares to the public.
However, Rule 14a-2 provides an exemption from the
$100,000 initial net worth requirement in §14(a), provided
the sponsoring insurance company has: (i) a combined
capital and surplus, if a stock company, or (ii) an
unassigned surplus, if a mutual company, of not less than
$1,000,000 as set forth in the balance sheet of such
insurance company. This exemption also applies to an
underlying fund that has a qualifying insurance company
as its promoter.
Information may be provided to prospective investors
during the waiting period before an investment company
goes effective if the preliminary prospectus includes red
herring language. The SEC staff takes the position that
discussions about a new product in speeches, interviews
or press conferences that are then reprinted, excerpted or
used in articles or broadcasts before the effective date of a
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 33
Line #
Source of
Requirement*
84
1933
§11;
§12(a)(2)
85
1933
§17(a);
1934
Rule 10b-5
86
1933
§11
#193839 v02
Requirement
registration statement may be “gun jumping”. The staff
may decline to declare the investment company effective
and impose a “cooling off” period and require
recirculation of any preliminary prospectus.
REGISTRATION AND REPORTS - REGISTRATION
The 1933 Act imposes liability with respect to any
material misstatement or omission. These liability
provisions have the effect of requiring a registration
statement or prospectus to contain whatever information
may be necessary or appropriate to avoid liability for a
material misstatement or omission. This obligation
applies for so long as the registration statement and
prospectus is being used, ad therefore means that the
insurance company must amend or supplement (sticker)
its disclosure materials whenever necessary to ensure that
they remain accurate and complete in all material respects.
Insurance companies are strictly liable for material
misstatements or omissions and available remedies
include rescission of the transaction.
The anti-fraud provisions of the 1933 Act and the 1934
Act also have the effect of requiring a prospectus to
contain whatever information may be necessary or
appropriate to avoid liability for a material misstatement
or omission. Damages for violations of these provisions
can include rescission as well as other possible measures
of losses.
An insurance company’s directors can avoid liability
under §11 of the 1933 Act only if they can show they
conducted appropriate "due diligence" to determine that
the registration statement contained no material
misstatement or omission. The level of diligence required
to meet the "due diligence" standard as to any statement
depends on a number of factors. The due diligence
performed by an insurance company's board of directors
should focus on the separate account, its operations, and
the terms of the variable contract. The principal purpose
of the due diligence is to ensure that the registration
statement adequately describes the contract and how the
contract will be administered. Because of the technical
nature of variable contracts, it has been posited that
directors and officers should be able to rely heavily on
representations as to the accuracy and completeness of the
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 34
Line #
Source of
Requirement*
87
1933
§10(a)(3)
88
1933
Rule 485(a)
89
1933
Rule 485(b)
90
1933
Rule 497
91
1933
Rule 154
92
1940
§24(f);
Rule 24f-2
#193839 v02
Requirement
registration statement disclosure from those employees
and consultants involved in designing and administering
the product and in preparing the disclosure. This due
diligence process should continue as long as a registration
statement is required to be kept current.
A prospectus used more than 9 months after the
investment company’s effective date must contain
financial information not more than 16 months old;
this provision requires annual updating of financial
information.
If changes are non-routine, the annual update (post
effective amendment) is effective 60-80 days after filing
with the SEC.
If changes are routine, or following a Rule 485(a) filing
to include required financial statements; the annual
update (post effective amendment) is effective 0-30 days
after filing with the SEC.
The ability to make filings under Rule 485(b) may be
suspended if that section is used when not eligible.
The investment company must file a definitive copy of
the prospectus and SAI within 5 days after the effective
date.
Changes to an effective registration statement can be
made via a “sticker” or supplement to the prospectus.
Householding of prospectuses is permitted if the client
signs a written consent. Consent is implied if investors
have the same last name, the notice is sent at least 60 days
before and no objection is received. At least once a year
the company must explain to investors how to revoke
consent.
REGISTRATION AND REPORTS - SEC AND CONTRACT
OWNER REPORTS
Form 24f-2, including the filing fee for units sold during
the fiscal year, must be filed within 90 days of the end of
the fiscal year. These fees are calculated at the separate
account level and not at the underlying fund level
according to the method of calculation prescribed by the
Form.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 35
Line #
93
Source of
Requirement*
1940
§30(e); Rule
30e-2
Rule 30b2-1
94
#193839 v02
1933
§5
SEC Staff
Position
Requirement
Insurance companies must transmit semi annual and
annual report to contract owners for the funds
underlying the variable contracts. Contract owners only
need to receive reports for the underlying funds in which
they have cash values invested. Each report must be
mailed to contract owners within 60 days after the close of
the period.
Copies of the reports sent to contract owners must be filed
with the SEC.
The SEC staff has taken the position that each purchase
payment made under a variable contract constitutes the
sale of a new security. Under this interpretation, a copy of
the updated prospectus for the contract should be sent at
least annually to contract owners as long as they may
make purchase payments under the contract.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 36
Line #
95
#193839 v02
Source of
Requirement*
NAL
Great West
(pub. avail.
Oct. 23, 1990).
Requirement
Insurance companies whose separate accounts stop
offering variable life insurance and variable annuity
contracts may discontinue filing post-effective
amendments and delivering updated prospectuses to
existing contract owners provided:

There are 5,000 or fewer contract owners
invested in the contract;

The insurance company files the annual report
of the separate account on Form N-SAR in
accordance with the requirements of Section 30
of the 1940 Act;

The insurance company currently is not offering
and does not contemplate offering any new
contracts funded by the separate account, but if
the insurance company begins to offer contracts
again or make changes to existing contracts, the
company will file a post-effective amendment
relating to such contracts and will comply with
the prospectus delivery and annual updating
requirements of the 1933 Act in connection with
the public offering of such contracts;

The insurance company sends contract owners
the information required in the annual and semiannual reports of the underlying funds in which
the contract’s separate account invests in
compliance with Rule 30d-2 under the 1940 Act
as well as the current prospectuses for the
portfolios of the fund, any other periodic
reports, all proxy materials, including proxy
statements and related voting instructions, and
other shareholder materials pertaining to the
underlying fund;

The insurance company sends confirmations of
all contract owner transactions;

Within 120 days after the close of the fiscal
year, the insurance company sends contract
owners audited financial statements for the
insurance company and the separate account;
and

At least once a year, the insurance company
sends a statement of the number of units and
values in each contract owner's account. .
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 37
Line #
96
Source of
Requirement*
1940
§30(a); Rule
30a-1
97
1934
§15(d); 13(a)
98
1940
§30(g)
99
State
Insurance Law
100
1940
§33
#193839 v02
Requirement
A separate account must file an annual report on Form NSAR no later than sixty days after the end of the fiscal
year. The principal executive officer and principal
financial officer are not required to certify the financial
reports filed in connection with the separate accounts.
ABC Life sponsors market value adjusted separate
accounts. These market value adjusted accounts are
“non-unitized” separate accounts and therefore are not
considered investment companies. Upon registration of
market value adjusted contract interests with the SEC
under the 1933 Act, ABC Life became subject to the
periodic reporting requirements of Section 15(d) of the
1934 Act. Accordingly, ABC Life is required to file
annual reports on Form 10-K; quarterly reports on Form
10-Q; and current reports, as necessary, on Form 8-K
along with the required certifications of the principal
executive officer and chief financial officer and the
attestation of the registered public accountant.
Abbreviated reporting requirements are available to ABC
Life because it is an indirect subsidiaries of ABC Corp
which is a reporting company.
Any financial statements contained in annual reports to
the SEC or shareholders must be accompanied by a
certificate of the independent accountants
Insurance companies file separate financial reports for
their separate accounts in addition to the annual financial
statements required to be filed on prescribed forms with
the insurance regulatory agency in their state or other
jurisdiction of domiciles as well as the insurance
commissions of other jurisdictions.
Documents in civil actions. If an investment company is
a party to a civil action or an affiliate of a company is a
defendant to an action or claim by a company (or its
shareholders in a derivative or representative capacity)
against any officer, board member, or adviser, a copy of
all pleadings, verdicts or judgments must be filed with the
SEC. Any proposed settlement, compromise or
discontinuance must be filed within 10 days after receipt;
if filed by the company or affiliated defendant, then
within 5 days after filing.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 38
Line #
101
102
103
104
#193839 v02
Source of
Requirement*
1940
§34(b)
1940
§48
1934
Rule 14a-3;
14c-3;
1940
Rule 30e-1;
30e-2
1933
Rules 405 and
408
Requirement
It is unlawful to make any untrue statement of a material
fact in any document filed or transmitted under the 1940
Act or required to be maintained.
An investment company cannot do indirectly through
another person what it would be unlawful to do directly.
Householding of proxy statements and annual reports is
permitted if clients have consented in writing. If proxy
statements are householded, information must be included
on how to obtain additional copies, how to request
householding if getting multiple copies. At least annually
the company must explain to consenting shareholders how
they can revoke their consent.
REGISTRATION AND REPORTS - REGISTRATION
STATEMENT FORMS
In addition to the information expressly required to be
included in a registration statement, registrants must add
such further material information, if any, as is necessary
to make the required disclosures, in light of the
circumstances under which they are made, not misleading.
The term “material” means that there is a substantial
likelihood that a reasonable investor would attach
importance in determining whether to purchase the
security being offered.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 39
Line #
105
106
107
#193839 v02
Source of
Requirement*
Regulation
S-X;
1933, 1940
Forms N-4 and
N-6
1933
Rule 421;
1933, 1940
Forms N-4 and
N-6
1933, 1940
Form N-4
Requirement
The registration statement forms (i.e., Form N-4 or Form
N-6) usually modify the basic requirements for financial
statements to suit circumstances of the type of issuer
whose securities are registered under the specific form.
These requirements relate to such things as how many
years must be included, how current the financial
statements must be and the form of required auditors
opinions. These SEC regulations generally require that
financial statements be prepared in accordance with
generally accepted accounting principals (“GAAP”).
However, in some cases they permit insurance companies
to use statutory financial statements in certain
circumstances. For example, Forms N-4 and N-6 permit
the use of an insurance company’s statutory financial
statements if the company would not otherwise be
required to prepare GAAP financial statements. Form N6 expressly requires, and the SEC staff takes that position
that the N-4 instructions should be construed to provide,
that an insurance company’s financial statements be
prepared in accordance with GAAP where an insurance
company’s parent company prepares GAAP financials,
and the insurance company prepares either partial GAAP
financials statements or a GAAP reporting package to be
used by the parent.
Plain English – prospectuses must be clear, concise and
understandable; logically organized; and prepared using
certain writing standards.
Form N-4 is a three-part form with exhibits filed by the
separate accounts for variable annuity contracts. The
form requires disclosure relating to 32 specific items.
There also are 14 required exhibits that, if applicable,
must be filed with the registration statement. The form
requires specific information on fees and charges under
the contract, separate account and the underlying funds;
information on the contract features; information on the
insurance company; information on the underlying funds;
financial information; and other detailed information.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 40
Line #
108
109
#193839 v02
Source of
Requirement*
1933, 1940
Form N-6
NAL
Nationwide
(pub. avail.
3/16/ 2001)
Requirement
Form N-6 is a three-part form with exhibits filed by the
separate accounts for variable life insurance contracts.
The form requirements include a risk/benefit summary; a
detailed fee table; information on the contract features;
information on the insurance company; information on the
underlying funds; and financial information. For
insurance charges, such as the cost of insurance, that
depend on characteristics of the insured, the insurance
company must base these charges on the characteristics of
a “representative insured.” The registration statement
may include hypothetical illustrations. Form N-6 does not
propose standards for personalized illustrations. Required
exhibits include reinsurance contracts, an actuarial
opinion and sample calculations for each item illustrated
in a hypothetical illustration and a memorandum on
issuance, transfer and redemption procedures.
Condensed financial information may be moved from
the prospectus to the SAI as long as the unit values
reflecting the highest and lowest levels of expenses are set
forth in the prospectus and certain unit value information
is sent to contract owners in confirmations and quarterly
reports.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 41
Line #
110
#193839 v02
Source of
Requirement*
1933
Form S-2
Requirement
Form S-2 is an abbreviated form on which the life
insurance companies can file their market value adjusted
separate accounts. This abbreviated form may be used by
any registrant who:

Is organized under the laws of any state;

Has a class of securities registered pursuant to
Sections 12(b) or 12(g) of the 1934 Act or is
required to file reports pursuant to Section 15(d)
of the 1934 Act;

Was subject to the requirements of Section 12
or 15(d) of the 1934 Act and has filed all the
material required to be filed pursuant to
Sections 13, 14 or 15(d) for a period of at least
36 calendar months and timely filed all reports
in the last twelve calendar months; and

Neither the registrant nor any of its consolidated
or unconsolidated subsidiaries have, since the
end of their last fiscal year for which certified
financial statements of the registrants and its
consolidated subsidiaries were included in a
report filed pursuant to Section 13(a) of 15(d) of
the 1934 Act: (1) filed to pay any dividend or
sinking fund installment on preferred stock; or
(2) defaulted (i) on any installment on
indebtedness for borrowed money, or (ii) on any
rental on one or more long term leases, which
defaults in the aggregate are material to the
financial position of the registrant and its
consolidated and unconsolidated subsidiaries,
taken as a whole.
Form S-2 permits some detailed insurance company
disclosure that is filed on Form 10-K to be incorporated
by reference into the prospectus.
Area of
Responsibility
Dept/Position
Responsible
Policy &
Procedure
Audit &
Oversight
Compliance &
Gen. Counsel
Frequency
Effectiveness
Indicator
Page 42
Key to abbreviations:
AA
Advisors Act of 1940
AUV
Accumulation / Annuity Unit Value
BSA
Bank Secrecy Act
CDSC Contingent Deferred Sales Charge
CFTC
Commodity Futures Trading Commission
DEL
Delaware General Corporation Law
DIST
Fund Distribution Agreement
Eap
Easily Accessible Place
EO
SEC Exemptive Order
FCM
Foreign Custody Manager
FinCen Financial Crimes Enforcement Network (Treasury
Dept)
FOF
Fund of Funds
#193839 v02
ICAA
ICI
ICL
IMSA
IPO
IRA
IRC
MBT
MASS
NASD
NAV
NFA
NAL
Investment Company Act Amendments of 1966 (Title
II of the National Securities Markets Improvement
Act of 1966)
Investment Company Institute
Industry Comment Letter
Insurance Marketplace Standards Association
Initial Public Offering
Individual Retirement Annuity
Internal Revenue Code
Declaration of Trust for Massachusetts Business Trust
Massachusetts General Laws
National Association of Securities Dealers
Net Asset Value
National Futures Association
SEC No Action Letter
NTM
OCC
PLAN
REL
RIC
SAI
SEC
TR
UIT
1933
1934
1940
NASD Notice to Members
Office of the Comptroller of the Currency
Fund Plan and Agreement of Distribution (12b-1
Plan)
SEC Release
Regulated Investment Company (IRC)
Statement of Additional Information
Securities and Exchange Commission
Treasury Regulation
Unit Investment Trust
Securities Act of 1933
Securities Exchange Act of 1934
Investment Company Act of 1940