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October 20, 2004 Thomas C. Lauerman, Esq. Dear Mr. Lauerman: Based on the facts and representations set forth in your letter dated September 16, 2004, we find that it is appropriate in the public interest and consistent with the protection of investors to grant, and hereby grant, to The Equitable Life Assurance Society of the United States, and its affiliate, AXA Advisors, LLC (together, the "Applicants"), a limited exemption, pursuant to Rule 10b-10(f) under the Securities Exchange Act of 1934, from the immediate confirmation requirements set forth in paragraph (a) of the Rule, in the circumstances described in your letter. In lieu of sending an immediate confirmation, the Applicants will send quarterly statements, as described in your letter. This exemption is based solely upon the representations you have made and is limited strictly to the facts and conditions described in your letter. Any different facts or circumstances may require a different response. We express no view with respect to other questions the proposed activities of the Applicants relying on this relief may raise, including the applicability of any other federal or state laws or the applicability of self-regulatory organization rules concerning customer account statements or confirmations. For the Commission, by the Division of Market Regulation, Brian A. Bussey Endnotes
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Re: |
Request for Exemption Pursuant to Rule 10b-10(f) under the Securities Exchange Act of 1934 |
Dear Ms. McGuire:
On behalf of The Equitable Life Assurance Society of the United States ("Equitable") and its affiliate AXA Advisors, LLC (the "Distributor"), we are writing to request an exemption pursuant to paragraph (f) of Rule 10b-10 (the "Rule") under the Securities Exchange Act of 1934 (the "Exchange Act"). The requested exemption is from paragraph (a) of the Rule and is based on alternative procedures described herein that Equitable and the Distributor ("Applicants") will follow. Applicants believe those alternative procedures will carry out the purposes of the Rule in connection with the transactions to which this application relates.
The relief that Applicants request is very well precedented, as the Commission has granted numerous similar exemptions in the past.1 The exemptions that the Commission has granted differ somewhat among themselves as to the exact nature of the alternative confirmation procedures that have been permitted, as well as other terms and conditions. In at least one case, however, the Commission has granted relief that is almost identical to that requested hereby.2
As discussed in IV. below, the procedures proposed herein are expected to result in very substantial ongoing cost savings for Applicants, as well as, ultimately, investors.
Equitable is a stock life insurance company organized under the laws of the State of New York. For over 100 years Equitable has been one of the largest insurance companies in the United States. Equitable is licensed to sell life insurance and annuities in all fifty states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
The insurance products that Equitable offers include certain "combination" fixed and variable annuity contracts that Equitable has offered and sold under the names "Momentumsm" and "Momentum Plussm". These are hereinafter referred to collectively as the "Contracts." The Contracts are referred to as "combination" contracts, because (subject to certain limits) premiums that are paid into the Contracts may be allocated to any "combination" of the "variable" and "fixed" return investment options offered under the Contracts.
The assets that support the "variable" component of the Contracts are held in a separate investment account that Equitable has established under New York law ("Separate Account A"). Separate Account A is registered on Form N-4 as a unit investment trust-type of investment company under the Investment Company Act of 1940 (the "1940 Act").3 All interests that investors have in Separate Account A through their ownership of Contracts have been (and continue to be) offered and sold pursuant to effective registration statements (also on Form N-44) pursuant to the Securities Act of 1933 (the "Securities Act").
Each variable investment option under the Contracts is a subaccount of Separate Account A, and each such subaccount invests its assets solely in a corresponding securities portfolio. Each currently available portfolio is a separate series of one of the following four series-type funds, which are registered as management investment companies under the 1940 Act:
The investment results that are credited to amounts that are allocated to a variable investment option under a Contract will depend on, among other things, the investment performance of the related portfolio.
Alternatively, in order to provide a fixed return, a "guaranteed interest option" is also available under the Contracts. Equitable periodically declares the rate of interest that will be credited to amounts allocated to that option, which is guaranteed not to be less than a minimum percentage rate specified in the applicable Contract. The assets that Equitable holds to support its obligations under the guaranteed interest option are held as part of Equitable's general assets (rather than in a separate investment account such as Separate Account A).
The guaranteed interest option does not give rise to any "securities" for federal securities law purposes.5 Therefore, transactions in such interests are not subject to the confirmation requirements in Rule 10b-10, and this letter does not request any relief in respect of transactions pertaining to such guaranteed interest options.
All of the Contracts are "group" contracts, under which (except in the one case described in the paragraph that immediately follows this one) the owner of the Contract is either (a) an employer, who owns the Contract to fund a pension or profit sharing plan that qualifies for the favorable tax treatment under Sections 401(a) or (k) of the Internal Revenue Code of 1986 or (b) a trustee in connection with such a plan. These owners of the Contracts hold the Contracts to support benefits owed to employees and former employees who are covered under the Section 401(a) or (k) plans in connection with which the Contract has been purchased.
The procedures for holding a Contract differ somewhat, however, for employees of public institutions of higher education in the state of Ohio who participate in the Ohio Alternative Retirement Program (the "Ohio ARP"). Ohio law precludes the State of Ohio from being the owner of Contracts purchased in whole or in part with contributions to such an alternative retirement plan. Therefore, although the Contracts issued in connection with the Ohio ARP are the same "group" contracts that are issued for other plans, a separate Contract is issued for each employee that participates in the Ohio ARP and chooses to use Equitable's Contract, with each such employee being the owner of his or her Contract. Because, therefore, each "group" in that case has only one participating employee, the effect is similar to issuing an individual (rather than group) contract to each participating Ohio ARP employee. Notwithstanding this ownership structure, the operation of payroll deductions and remittances to Equitable on behalf of these employees is the same as that described herein for all other employee participants.
In many cases, employee participants ("participants") in the Section 401(a) or (k) plans funded by Contracts make contributions that are automatically taken from periodic compensation payments that the participants otherwise would receive from the employer. (These are commonly referred to by such terms as "payroll deduction" or "salary reduction" payments. For convenience, this letter refers to all of these as "payroll deductions".) Any such payroll deductions are forwarded by the employer6 as premium payments to a Contract for the benefit of the affected participants. Such payroll deduction arrangements are on terms agreed to in advance between the employer and each affected participant. In some cases, in addition to payroll deduction payments, the employer makes contributions to the Contract for the benefit of participants out of the employer's other resources. The procedure for these "employer contributions" is substantially the same as for payroll deduction contributions, except for the source of the funds that the employer uses to make the contributions.
The owner of a Contract determines which of the numerous investment options offered by Equitable will actually be used in connection with a given plan. Depending on the terms of the relevant Section 401(a) or (k) plan and/or trust documents, a participant may have discretion to choose to which of the available investment option(s) his or her payroll deduction or employer contributions will be allocated. Otherwise, the employer or trustee would exercise such discretion as Contract owner (again, subject to the relevant plan or trust documents).7
Equitable maintains records for each participant in a plan that show, among other things, the amount held for the benefit of that participant and the portion of such amount that is allocated to each available investment option for the benefit of that participant. Accordingly, when an employer forwards a contribution to Equitable, Equitable requires that the employer also forward instructions as to how much of that payment is for the benefit of each participant and to which investment options such amounts should be allocated, unless Equitable is to allocate such payments among investment options pursuant to valid continuing allocation instructions that Equitable already has on file with respect to the participant in question.
AXA Advisors, LLC is the Distributor of the Contracts and the principal underwriter of Separate Account A. The Distributor is registered as a broker-dealer under the Exchange Act and is a member of the National Association of Securities Dealers, Inc. The Distributor has responsibility for the sales and marketing functions for the Contracts.
Historically, in order to ensure compliance with Rule 10b-10, the Distributor has individually confirmed each acquisition of Separate Account A interests for all Contracts.
Individually confirming all purchase transactions is exceedingly costly, in view of the fact that there are currently approximately 55,500 participants for whom payroll deductions are being made. Therefore, by this letter, Applicants are requesting an exemption that they believe is necessary and appropriate to make it feasible for the Distributor to confirm such transactions quarterly, rather than immediately.
Paragraph (a) of the Rule generally requires that, immediately upon effecting a securities transaction for a customer, a broker-dealer deliver to the customer a written notification (i.e., an "immediate confirmation") that contains certain prescribed information about the transaction. Paragraph (b) of the Rule, however, permits a broker-dealer, subject to certain conditions, to send written statements "within five business days after the end of each quarterly period"8 (instead of immediately), if the transaction in question is effected pursuant to, inter alia, an "investment company plan." As pertinent here, paragraph (d)(6) of the Rule defines "investment company plan" to include:
[A] plan under which securities issued by an open-end management investment company or unit investment trust registered as such under the 1940 Act9 are purchased . . . or sold by a customer pursuant to . . . (iii) [an] arrangement involving a group of two or more customers and contemplating periodic purchases of such securities by such customers through a person10 designated by the group; provided that, such arrangement requires the registered investment company or its agent:
(Hereinafter, the foregoing requirement of paragraph (d)(6)(iii)(C) is referred to as the "Ten-Day Rule.")
Three additional requirements must also be satisfied in order for transactions pursuant to an investment company plan to be confirmed on a quarterly basis. First, paragraph (b)(2) of the Rule requires that the quarterly statements contain certain prescribed information and that any other information that would have been required to be furnished in an immediate confirmation complying with paragraph (a) of the Rule be furnished to the customer upon written request.13
Second, a parenthetical in paragraph (d)(6) of the Rule provides that payments for the purchase of securities must be made directly to, or made payable to, the investment company, or its principal underwriter, custodian, trustee or other designated agent. All premium payments under Contracts are made directly to Equitable, as the "depositor" of Separate Account A. As a unit investment trust separate account, Separate Account A can act only through the medium of its depositor. Therefore, the requirement of this parenthetical in paragraph (d)(6) is satisfied.
Third, paragraph (b)(3) of the Rule provides that customers must be given prior written notice that statements will be given or sent on a quarterly basis in lieu of the immediate confirmation of transactions required in paragraph (a) of the Rule.14
Applicants hereby request that, with respect only to Contracts under which payroll deductions are being made, the Commission grant an exemption pursuant to paragraph (f) of the Rule from the requirements of paragraph (a) thereof, to the extent necessary to permit Applicants to use quarterly statements to confirm contributions to Contracts made on behalf of participants through (1) payroll deduction arrangements and (2) employer contributions; subject, however, to the alternative procedures as well as all of the other terms and conditions set out herein.
Even if the requested relief is granted, however, the Distributor will continue to issue immediate confirmations at no additional charge, if an employer or a participant so requests, as well as for (1) transfers among the Contracts' available investment options (other than transfers made pursuant to an "investment company plan" as defined in paragraph (d)(6) of the Rule15); (2) "rollover" payments transferred from another provider; (3) any other premium payments that are not of a type for which relief is specifically sought hereunder; (4) redemptions; (5) any adjustments (e.g., corrections of errors) that have a material effect on a participant's account; (6) withdrawals from a participant's account to make a loan to the participant under the terms of the applicable pension or profit sharing plan; and (7) amounts credited back to the participant's interest in Separate Account A as a consequence of a loan repayment.
In using quarterly statements, the Applicants will adhere to all of the applicable requirements of paragraph (b) of the Rule, which permits quarterly statements in connection with an investment company plan, except the Ten-Day Rule quoted above (which appears in paragraph (d)(6)(iii)(C) of the Rule). Applicants submit, based particularly upon the alternative procedures described herein, that their proposal promotes the objectives and effectuates the purposes of the Rule, while achieving meaningful cost savings.
In its release adopting the quarterly statement procedures for investment company plans, the Commission noted that such procedures would permit the use of quarterly statements "in order to reduce regulatory costs that appear to outweigh the benefits to investor protection."16 Applicants believe, however, that strict compliance with the Ten-Day Rule, in this case, would itself result in administrative burdens and costs that outweigh any benefits that would accrue to investors. In that sense, Applicants respectfully submit that their proposal is in furtherance of the principles embodied in Rule 10b-10's quarterly statement procedures.
Equitable estimates that the use of quarterly statements as proposed herein will result in net savings of approximately $90,000 each year, based on the current number of outstanding Contracts and participants therein.
Cost is an extremely significant factor to employers in the choice of a variable annuity product for their pension and profit sharing plans. In order to remain competitive with various other insurance companies, Equitable has sought and will continue to seek alternatives to lower its costs. The ability to send quarterly statements as proposed herein would be a significant step in accomplishing this goal. In making ongoing pricing decisions in this highly competitive market, Equitable is currently at a disadvantage relative to insurers that have already received relief similar to that requested hereby. In such a competitive market, moreover, it can be expected that, ultimately, participants will share the benefit of the cost savings that Applicants now seek, as those savings influence Equitable's future pricing decisions.
Because of their long experience in this market, Equitable personnel are quite familiar with the needs and preferences of employers and participants with respect to confirmation of transactions of the type covered by this letter. Because such transactions are relatively frequent and are part of a more or less regularized program for investing in a specific subaccount or subaccounts that have been previously selected, participants are not desirous of and, indeed, tend to find immediate confirmations of each individual transaction bothersome, if not confusing. Moreover, given the programmatic nature of such transactions, there is less possibility of subsequent factual disputes about what order was placed (and when) for a particular participant's plan account. This further reduces the need for immediate confirmations.
Employers, in turn, respond to the preferences of their employees (as well as to costs and other considerations). Applicants believe that, for the reasons discussed above, participants (and employers) tend to prefer not to receive immediate confirmations of transactions for the type covered by this letter. Moreover, based on its own familiarity and research in this market, Equitable believes that those insurers who have implemented quarterly statement procedures for such transactions have received negligible (if any) complaint or "push back" from participants or employers.
Accordingly, Applicants believe that the quarterly statement procedures they propose will make for a product that is not only more efficient, but one that is also more attractive and beneficial to their customers and potential customers. The Ten-Day Rule, however, stands as a substantial impediment to Applicants' achieving these favorable results.
Applicants are not aware of any insurer that has ever undertaken to rely on the quarterly statement provisions for investment company plans without obtaining significant relief from the Ten-Day Rule. In the instant case, given the large number of Contracts and participants, there are bound to be at least a few participants at any given time to whom Applicants would be temporarily sending immediate confirmations in compliance with the Ten-Day Rule. This would require either (1) manual intervention that would be extremely costly on an ongoing basis or (2) substantial systems modifications that would automate the process of shifting back and forth between quarterly and immediate statements as contemplated by the Ten-Day Rule. Either of these alternatives would, in Applicants' judgment, make it economically infeasible for them to rely on the Rule's quarterly statement procedures for investment company plans.
Finally, Applicants seriously question whether participants would derive any benefit from any temporary switch to immediate confirmations as contemplated by the Ten-Day Rule. It seems reasonable to suppose that many participants would simply be confused and/or annoyed by such changes in procedure.
The Ten-Day Rule is grounded in the belief "that investors are entitled to assurances that payments made by them or on their behalf are promptly applied to the purchase of securities.17" Applicants submit that the alternative procedures they propose to adopt will provide adequate assurances in this regard.
Applicants will send quarterly statements within five business days after the end of each quarterly period. Each such statement would include confirmations of all transactions effected during the quarterly period and that, in reliance on the relief requested hereby, were not confirmed immediately. The quarterly statement will include all of the information required under paragraph (b) of the Rule. Applicants also will comply with the requirements as to the promptness of furnishing requested information as set forth in Rule 10b-10(c).
The quarterly statements will be sent to each participant every quarter, regardless of whether any contributions for the benefit of that participant have been received during such quarter. Thus, the recipient of the statements will be fully apprised if no such transactions have occurred.18
Payroll deduction dates may differ, even among the employees of a single employer, because different classes of employees may receive their compensation at different intervals, and the payroll deduction pattern may differ as between different pension and profit sharing plans in which the same employer's employees are participants. Nevertheless, Equitable will attempt to ascertain from each employer appropriate payroll deduction dates for all of that employer's participants in the Contracts. Equitable will use all reasonable means to urge employers to provide this information. Such means will include communicating initially in writing with employers and following up by phone with those employers who do not respond satisfactorily.19 If Equitable still does not receive a satisfactory response, Equitable will continue to communicate further with the employer at regular intervals to urge that employer to provide Equitable with the needed information.
Where Equitable has an appropriate "date certain" (i.e., the payroll deduction date) for a payroll deduction transaction, that date will be disclosed on the quarterly statement that confirms that transaction to the participant, in addition to the transaction date (i.e., the date of receipt and application by Equitable of the payroll deduction amount). This, then, is one way that participants will be informed whether payroll deductions have been transmitted and applied on a timely basis.
However, even if the payroll deduction date is not included on the quarterly statement, employees invariably receive information about each payroll deduction from their employers that enables such employees to know when the payroll deductions are made. Typically, for example, this information is included on the "pay stub" that the employee receives in connection with each compensation payment.
Accordingly, as long as, notwithstanding Equitable's above-described efforts, Equitable does not possess precise payroll deduction dates (and is therefore unable to include "dates certain" on a quarterly statement that confirms a payroll deduction payment), Applicants will include on such quarterly statement a legend indicating that the participant should consult his or her pay stub (or other comparable document) to determine the date when the payroll deduction occurred. Such legend will continue to be included on the appropriate quarterly confirmation statements until such time as an accurate date certain can be included thereon.
Applicants respectfully submit that the foregoing procedures for providing participants with information about the payroll deduction dates that apply to them strike an appropriate balance between the potential usefulness of such information to participants and the reality that some employers may not provide such information to Equitable, at least not immediately. In this regard, we would note that the information that Equitable will request about the dates certain may need to be compiled by employers specially for this purpose. Moreover, no contractual or legal obligation binds employers to do so. Finally, because the employers are, in effect, Equitable's clients, Equitable has limited ability to bring pressure upon them to provide the requested information.
For all these reasons, therefore, Applicants believe that they should not be precluded from implementing their proposed quarterly statement procedures merely because 100% immediate compliance with Equitable's request for date certain information may be unlikely.20
As noted in III. above, recipients of quarterly statements will be permitted to request immediate confirmation of all transactions, just as if Rule 10b-10(a) fully applied. Applicants expect such requests to be extremely rare, however.
In addition, persons to whom quarterly statements are being sent may at any time request a confirmation, at no additional charge, for any transactions to date that otherwise would not be confirmed until the regular quarterly statement. Such persons will be able to request such confirmations by calling the regular toll-free numbers that Equitable makes available to them for obtaining information about the status of their accounts.
Prior to ceasing delivery of immediate confirmations of any transactions in reliance on the relief requested hereby, Equitable will notify all affected employers in writing of its plans to do so. This notification will describe the information that the planned quarterly statements will include about transactions that no longer will be confirmed immediately. These notices will also be accompanied by a sample form of the proposed quarterly statement. A comparable notice will also be delivered to each new employer at or prior to the time it commences active status as such under a Contract.
The notices referred to in the immediately proceeding paragraph will also (1) advise employers that delays in forwarding payroll deduction amounts to Equitable could violate fiduciary responsibilities that they may have and (2) urge them to forward such amounts promptly. The notice also would point out that it would generally be to the employer's advantage, by forwarding such amounts promptly, to ensure that payroll deductions are invested under the Contract for the benefit of the participants as soon as possible.
Each employer will also be provided with, at or before the completion of the transaction for the purchase of Separate Account A interests with the proceeds of payroll deduction or employer contributions, a written notification of Equitable's receipt of the total amount of the group payment that included those proceeds.21
Prior to ceasing delivery of immediate confirmations of any transactions in reliance on the relief requested hereby, Equitable will notify all affected participants in writing of its plans to do so. This notification will describe the information that the planned quarterly statements will include about transactions that no longer will be confirmed immediately and will inform participants that they may choose to continue to receive immediate confirmations at no additional charge. These notices will also be accompanied by a sample form of the proposed quarterly statement. Comparable informational materials will also be delivered to each new participant at or prior to the time he or she commences active status as such under a Contract.22 Equitable also will disclose the quarterly confirmation procedures in all Contract prospectuses that are delivered after the procedure goes into effect (or in appropriate supplements to those prospectuses).
The notices and materials referred to in the preceding paragraph will also describe the relationship between the salary reduction date and the transaction date.
When Equitable knows the payroll deduction date, Equitable will notify the employer by telephone and will deliver a written notice to the employer if Equitable has not received the corresponding payment within a period of time that is no more than 15 days after that date. This notice will urge the employer to be more timely in its remittances. We note that this is a more strict monitoring policy than that contemplated in other applications that the Commission has granted.23
If (despite its efforts described in V.A. above) Equitable does not know the payroll deduction date, Equitable will base such delinquency notices on an "assumed" payroll deduction date, as explained further below.
For ease of administration, Equitable requires all employers to establish remittance schedules, under which Equitable expects to receive payroll deduction payments approximately on prescribed "due dates" that are spaced at regular intervals. Equitable believes that the "due dates" in the great majority of cases are the same (or approximately the same) as the payroll deduction dates (but in some cases they may differ, a fact that Equitable cannot verify with certainty unless and until the employer provides Equitable with the actual payroll deduction dates).24
For Contracts as to which Equitable does not know the payroll deduction date, Equitable will notify the employer by telephone and will send the employer the above-described written delinquency notice if Equitable does not receive proceeds from a payroll deduction within 10 days after its "assumed" payroll deduction date. For this purpose, each due date will be an assumed payroll deduction date. In addition, the few employers that have been remitting payments to Equitable on a quarterly basis will be requested to remit on a monthly basis in the future, and the last day of any month that does not otherwise include a scheduled due date will be the assumed payroll deduction date for that month.25
In certain respects, this procedure for sending "delinquency" notices to employers for whom Equitable does not know the precise payroll deduction dates will be a more rigorous monitoring procedure than contemplated by other exemptions that the Commission has granted. In the Metropolitan Life case cited in footnote 2 above, for example, delinquency notices where the insurer did not know the payroll deduction date were to be sent within 11 business days after the end of any month in which no payroll deduction had been received. That procedure, in effect, assumes that the payroll deduction date is the last day of the month. Equitable believes that its above-described "due dates" will in general serve as a more accurate "proxy" for any unknown payroll deduction dates.26 Also, Equitable's procedures will call for the delinquency notices to go out within 10 calendar days after the assumed payroll deduction date, whereas Metropolitan Life allowed itself the longer period of 11 business days for this purpose.
Applicants will, for statistical purposes, maintain for a period of three years records and copies of the delinquency notices referred to in E.1. and 2. above and will make them available for inspection by the Commission.
Please direct any communications regarding this application to the undersigned (202-295-4015) or, at Equitable, to Kirsty Lieberman (212-314-3804).
Sincerely,
Thomas C. Lauerman
cc: |
Brian A. Bussey, Assistant Chief Counsel |
http://www.sec.gov/divisions/marketreg/mr-noaction/equit102004.htm
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