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Mr. GILBERTSON. I could make a brief statement but I would like to have an opportunity to submit a statement for the record.
Mr. ABERNETHY. Would you identify yourself, sir?
STATEMENT OF LARRY D. GILBERTSON, VICE PRESIDENT AND
GENERAL COUNSEL, VARIABLE ANNUITY LIFE INSURANCE CO., WASHINGTON, D.C.
Mr. GILBERTSON. My name is Larry Gilbertson.
I am the general counsel of Variable Annuity Life Insurance Co., probably the only company immediately that would be affected by the first amendment which was recommended by the representative of the investment bankers.
Mr. ABERNETHY. If you wish to make a statement, we are going to
Mr. GILBERTSON. First I would like to say it has not been made definitely clear that under the Uniform Securities Act a definite provision has been incorporated to provide for the situation where a State, as the District of Columbia is here, feels that the sale of variable annuities are adequately regulated by the insurance department.
I think the law as drafted definitely recognizes the format of the Uniform Securities Act and they are justified where they have made such a finding, which this committee has done, to so exempt the variable annuity from such sales.
I think it should be of interest to the committee here that a Governor's commission to study the “blue sky” laws in Maryland, in which I believe they spent some 2 years on this subject, when they last year passed the “blue sky” law in Maryland, included this exemption, that the variable annuities, once they are permitted to be written in the State of Maryland, would not be subject to the Securities and Exchange regulation.
I think it is also interesting to know that though the Supreme Court has determined that the variable annuity is not insurance, this view is not shared by even representatives of the Securities and Exchange Commission.
I would like to introduce in the record with my statement a copy of a statement made by Allan Conwill in which he states, and I might say I am taking this out of context, in his discussion of the variable annuity as to its insurance features and its investment features, he states on page
4 of this statement: May we examine for a moment the clear insurance elements.
Then he goes on in this statement to describe the definite and clear insurance elements that are contained in our contracts.
Congress, too, of course, has acted in the area of variable annuity on many occasions, as recently as September of last year, when they amended the provisions relating to the taxation of life insurance companies.
The statement was made in the Senate Committee Report No. 2109 that variable annuities differ from ordinary or fixed-dollar annuities in that the variable annuity benefits payable under them vary with the investment companies' experience.
The fixed-dollar annuity, on the other hand, guarantees the payment of a specified amount irrespective of actual investment earnings.
Both the fixed-dollar annuities and the variable annuities, however, are based on the principle of paying out either specified amounts or specified units with values which vary with the investment experience over the life of each member of an annuitant group.
Mr. ABERNETHY. I believe you requested permission to insert some statement in the record, right?
Mr. GILBERTSON. Right.
my statement. Mr. ABERNETHY. You will leave those with the reporter, please. (The documents referred to are as follows:)
STATEMENT OF LARRY D. GILBERTSON, VICE PRESIDENT AND GENERAL COUNSEL OF
VARIABLE ANNUITY LIFE INSURANCE CO. OF AMERICA Mr. Chairman and members of the committee, my name is Larry D. Gilbertson and I am vice president and general counsel of the Variable Annuity Life Insurance Co. of America in Washington, D.C. We wish to be recorded as speaking in support of H.R. 4200. This bill, as has been pointed out, is modeled after the Uniform Securities Act. We would like, however, to comment on one of the proposed amendments to H.R. 4200 which was brought to the attention of the committee for the first time during this hearing; namely, recommendation No. 1 in which it is recommended that the exclusion of the variable annuity contracts from the definition of "security" be eliminated. Referring back to the Uniform State Securities Act, I think it is important to point out that the commen on the Uniform Securities Act recognized the problem of dual jurisdiction over the variable annuity, and has suggested language which is essentially the equivalent of that which is now contained in H.R. 4200. This note provides that when the legislature finds that variable annuities issued by insurance companies are "sufficiently regulated by the insurance authorities” that variable annuities can be eliminated from the definition of "securities."
Contrary to the statement made by the IBA, the Supreme Court did not hold that variable annuities were not "insurance” as they have stated in the memorandum. On the contrary, the Supreme Court held that variable annuities contain both investment and insurance elements and that they were a nonexempt security under the act. In fact, to quote Allan F. Conwill, the Director of the Division of Corporate Regulation of the Securities and Exchange Commission, in a statement made by him before the National Association of Insurance Commissioners in June of 1962, wherein he said, “We fully accept his (referring to Justice Brennan's opinion in the Valic case) further observation that these contracts contain certain obvious elements of conventional insurance as well as plain elements of the traditional investment company.”
Congress too, as recently as 1962, in the immediate past session of Congress, recognized the variable annuity as definitely an insurance contract in passing the amendments to the Life Insurance Act.
"Variable annuities differ from ordinary, or fixed-dollar annuities in that the annuity benefits payable under them vary with the insurance company's investment experience. The fixed-dollar annuity, on the other hand, guarantees the payment of a specified amount irrespective of the actual investment earnings. Both the fixed-dollar annuities and the variable annuities, however, are based upon the principle of paying out either specified amounts, or specified units with values which vary with investment experience, over the life of each member of an annuitant group. In both cases the insuring company bears the mortality risk.”
** * * These reserves, therefore, qualify as life insurance reserves and companies primarily issuing these policies qualify as life insurance companies."
In enacting Public Law 86-520, a copy of which is attached, Congress clearly gave to the insurance commissioner adequate regulatory authority to control
the sale of variable annuity contracts and the commissioner so adopted regulations to carry out this effect. Copies of both this law and the regulations are attached.
It has been mentioned in the testimony that the neighboring States of Maryland and Virginia have recently enacted blue sky laws. I think it is significant to point out that a committee was appointed by the Governor to study the blue sky laws in the State of Maryland and after nearly a year and a half of deliberation came up with a report which in essence adopted a blue sky law essentially in the form of the uniform act. They, too, excluded variable annuity contracts from the jurisdiction of the securities department. To quote this report on page 45, “* * * and in the belief that dual regulation is both unnecessary and undesirable, this committee recommends that variable annuities be left within the control of the insurance commissioner and not brought within the scope of the blue sky law."
We therefore recommend that the committee reject the proposed amendment suggested by the Investment Bankers Association as incorporated in item 1 of their recommendations contained in their statement for the reason that the Insurance Department in the District of Columbia has sufficient authority and is exercising this authority in a manner which will protect the public interest in the District, and further, that dual regulation in such case would only complicate the regulatory picture. As Chairman Cary said this morning, this bill as drafted "avoids the necessity for dual regulation and provides fair but not oppressive regulation on a local level."
A further point which is vitally significant to recognize in this regard is that the relationship between the insurance agent or broker and the public in the District of Columbia is essentially different from the relationship of the securities salesman or broker and the public. The insurance salesman or broker is an appointed and designated agent of the life insurance company. The company will stand back of and will protect without limit any individual who may purchase a contract from the possibly unscrupulous agent who may abscond with their funds. In other words, there is no possibility of the public losing any funds by the illegal acts of an insurance agent under the present regulatory system of the District of Columbia. The insurance agent is basically and actually the agent of the company whereas a securities salesman or dealer is an agent for the purchaser and acts for him. The insurance agent accepts the funds on behalf of the company as a payment toward an insurnce contract and as soon as the money is paid to him it is deemed received by the company itself. It is a rare exception when such payments are made other than by check and, as I stated previously, in the event that such funds were in any way misused by the agent, the company would be responsible. We believe it is important to recognize this definite distinction in the relationship of the public to the insurance salesman or broker in the consideration of H.R. 4200 and request and respectfully submit that the committee reject amendment 1 as submitted by the Investment Bankers Association.
We appreciate the opportunity which you have furnished us to present this statement and will be happy to furnish any additional informtaion based on our experience which might in any way be helpful to the committee.
(From Commerce Clearing House, Inc., 1958)
Securities Regulation (1951 with 1955 Supp.), p. 312, n. 31.
Last sentence: The last sentence has been explicitly phrased so as not to exclude from the definition the so-called variable annuities which have recently been developed. See also the comment under $ 402(a) (5). If it is desired to exclude variable annuities along with orthodox annuities on the ground that the former are sufficiently regulated by the insurance authorities in the particular state, the bracketed language should be deleted.
[EXEMPTIONS] SEC. 402. (a) The following securities are exempted from sections 301 and
(1) any security (including a revenue obligation) issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency
or corporate or other instrumentality of one or more of the foregoing; or any certificate of deposit for any of the foregoing;
(2) any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency or corporate or other instrumentality of one or more of the foregoing, for any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor;
(3) any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state;
(4) any security issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state;
(5) any security issued by and representing an interest in or a debt of, or guaranteed by, any insurance company organized under the laws of any state and authorized to do business in this state; [but this exemption does not apply to an annuity contract, investment contract, or similar security under which the promised payments are not fixed in dollars but are substantially dependent upon the investment results of a segregated fund or account invested in securities ;] (Clause (5), as amended by the Conference, August 23, 1958.)
(6) any security issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state;
(7) any security issued or guaranteed by any railroad, other common carrier, public utility, or holding company which is (A) subject to the jurisdiction of the Interstate Commerce Commission; (B) a registered holding company under the Public Utility Holding Company Act of 1935 or a subsidiary of such a company within the meaning of that act; (C) regulated in respect of its rates and charges by a governmental authority of the United States or any state; or (D) regulated in respect of the issuance or guarantee of the security by a governmental authority of the United States, any state, Canada, or any Canadian province;
(8) any security listed or approved for listing upon notice of issuance on the New York Stock Exchange, the American Stock Exchange, or the Midwest Stock Exchange [, or listed on the (insert names of appropriate regional stock exchanges)]; any other security of the same issuer which is of senior or substantially equal rank; any security called for by subscription rights or warrants so listed or approved; or any warrant or right to purchase or subscribe to any of the foregoing :
(9) any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association.
[S. Rept. 2109, 87th Cong., 2d sess.)
CONSTRUCTIVE SALE PRICE FOR PURPOSES OF CERTAIN MANUFACTURERS
The Committee on Finance, to whom was referred the bill (H.R. 8952) to amend the Internal Revenue Code of 1954 with respect to the conditions under which the special constructive sale price rule is to apply for purposes of certain manufacturers excise taxes, having considered the same, report favorably thereon with amendments and recommend that the bill as amended do pass.
I. SUMMARY OF BILL
The Excise Tax Technical Changes Act of 1958 provided that in determining the base for the computation of manufacturer's excise taxes, a constructive sales price could be used where sales were made to retailers or to consumers if sales were also made at the wholesale level. However, this provision applies only if the norinal method of sales within the industry is not to sell articles at retail, to retailers, or to both. The House bill provided that this latter restriction was not to apply in the case of the manufacturer's excise taxes on refrigerators and related items, on electric, gas and oil appliances, and on radios and television sets
and related items. Your committee has amended the House bill to provide that this latter restriction is to apply in the case of none of the manufacturer's excise taxes except those relating to automobiles, trucks and buses, business machines, and matches.
1. Variable annuities and other segregated asset accounts
The first provision relating to life insurance companies added by your committee's amendments deals with variable annuities and also with segregated pension accounts.
Variable annuities differ from ordinary, or fixed dollar, annuities in that the annuity benefits payable under them vary with the insurance company's investment experience. The fixed dollar annuity, on the other hand, guarantees the payment of a specified amount irrespective of the actual investment earnings. Both the fixed dollar annuities and the variable annuities, however, are based upon the principle of paying out either specified amounts, or specified units with values which vary with investment experience, over the life of each member of an annuitant group. In both cases the insuring company bears the mortality risk.
In view of this similarity, Congress in the Life Insurance Company Income Tax Act of 1959 treated variable annuities generally like other annuities for tax purposes. It provided that variable annuity contracts using recognized mortality tables with annuity payments based on the investment experience of the company issuing the contract were to be treated as regular annuity contracts for purposes of the life insurance company tax. These reserves, therefore, qualify as life insurance reserves and companies primarily issuing these policies qualify as life insurance companies. In this case, however, the current earnings rate of the company is used in determining the portion of the investment income belonging to the policyholder, rather than to the life insurance company, except that this current earnings rate is reduced by any actuarial margin charge retained by the company under the contract. This same rate is also used as the assumed rate of interest. In the case of these variable annuity contracts, additions in reserves for tax purposes include only increases made by reason of premium receipts and investment income and decreases in these reserves take into account only benefits paid under these contracts. There is excluded from reserve additions or decreases capital gains and losses, both realized and unrealized. The unrealized gains and losses are excluded because as a general rule unrealized gains are not taken into account for tax purposes. The realized gains and losses are excluded because under present law they are taxed at a separate flat 25 percent tax rate with respect to any excess net long term capital gain over any net short-term capital loss.
Present law provides that the treatment described above for variable annuities is to terminate with respect to taxable years beginning after December 31, 1962. Your committee's amendment, with only technical modifications, continues the present treatment for these variable annuities for future years.
The variable annuity described above is one form of a segregated asset account. In addition, however, there are segregated asset accounts, primarily pension contracts, where the payments may not be based upon recognized mortality tables. The segregated asset accounts referred to are those which provide for the payment of annuities where as a result of State law or regulation the amounts received are segregated from the general asset accounts of the life insurance company and where either the amounts paid in, or the amounts paid out as annuities, vary with the investment return and the market value of the segregated asset account.
Under the Life Insurance Company Income Tax Act of 1959 Congress attempted to exclude the investment income earned in connection with reserves accumulated for qualified employer pension and profit-sharing plans from the tax base of the life insurance company. To obtain this result it provided that the amount to be attributed to the policyholders, and therefore not taxed, was to be equal to the current earnings rate of the life insurance company multiplied by reserves held for qualified pension and profit-sharing plans. Your committee's report on that act indicated the view that this treatment was desirable