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for local sale because, by federal law they are already required to be registered under the Securities Act of 1933 and could, therefore, be registered in Maryland by coordination. Unless the General Assembly is thus inclined to permit the sale of variable annuities without any control at all by the insurance commissioner, we think it would be wise to exclude them from the definition of “security” in $ 25 (1) and also from the insurance exemption in 26(a) (5) in the Maryland Securities Act.
Attention is also invited to the fact that the insurance exemption in § 26 (a) (5) applies only to securities of insurance companies licensed to do business in Maryland. The stocks of non-licensed companies would remain subject to the Maryland Securities Act. In this connection, therefore, the General Assembly may wish to consider the advisability of repealing Article 48A, § 48 of the Annotated Code of Maryland, entitled "Blue Sky Provisions" applicable to stock companies, and § 235 entitled "Blue Sky Provisions" applicable to mutual companies. These sections are of extremely limited application anyway, because the Attorney General has ruled that they are to be invoked only with respect to the promotion of newly formed insurance companies and not to companies with an established business. See Opinion dated March 3, 1959.
(2) As mentioned previously in the Notes to 8$ 20(c) and 23 (f), the Committee proposes that the Uniform draft of g 402(b) (3) be amended by the addition of the last clause found in the attached draft of § 26 (b) (3). The purpose of this new matter is clarify the broker-dealer's status in making a market in previously registered securities which have already been sold to the public in compliance with this act. As pointed out in the Notes to the earlier sections above mentioned, we believe that once an underwriter or broker-dealer has completed the distribution of his own allotment or subscription he should be free to make a market in the securities without fear of violating this act because the effective ness of the registration statement may have terminated under § 23 (f). At this point, he should also be free to dispense with the use of a prospectus or offering circular which otherwise would be required by $$ 20(c) or 20(d). [In coordinated filings the required period for using prospectuses and offering ci culars would be controlled by federal law or regulation.] The exemption we propose in § 26(b)(3) applies only to broker-dealers in non-issuer transactions when (1) no stop order is in effect; and (2) the transaction is not a secondary distribution for the account of a person owning 10% or more of the issuer's outstanding securities; and (3) the broker-dealer is not still in a long position with respect to his allotment or subscription which he originally took down for distribution to the public.
(3) 8 26(a)(8)_extends the stock exchange exemption to the PhiladelphiaBaltimore Stock Exchange as well as the New York, American and Mid-West Exchanges.
Mr. GILBERTSON. I would also like to submit the fact that in Public Law 86–520, passed some years ago by Congress, regulatory authority was given to the insurance commissioner here specifically to authorize and regulate variable annuity contracts. For the information of the committee, I will submit with my statement a copy of this law and the regulations which have been issued by the insurance company pointing out which type of regulations are involved.
Now, I think one final statement I would like to make is that I am glad there is one member of the industry here. I think the situation involved in the sale of a variable annuity and the sale of a security is fundamentally and basically different. An agent for an insurance company is technically an agent for that company. You pay him some money, you have paid it in a sense to the company, and if he absconds with the money, I am sure you will find the insurance company will stand back of its contract and give you your money back.
I don't think you will find he needs some of the requirements embodied in this part of the bill, I am sure with this insurance salesman and a security salesman you have almost the opposition. The securities salesman is an agent for the purchaser. The insurance salesman is an agent for the company.
Where you have had adequate regulation like you do in the District of Columbia over the insurance industry, it is the banking financing of the company that will protect the public against the insurance man who will run off with a cash premium. And I might say it is unusual when an insurance company does collect a premium in cash.
In fact, our requirements are that checks be made payable to the company.
I don't believe the requirements that are set forth in H.R. 4200 are necessary to protect the public in the District of Columbia. Mr. ABERNETHY. Thank you, Mr. Gilbertson.
. Any questions? Mr. SPRINGER. No questions.
Mr. KEITH. I would like to thank him for his complimentary comments with reference to the character of the insurance agents and ask the question if brokers fall under the same regulation as agents.
Mr. GILBERTSON. Under the insurance law in the District ?
Mr. GILBERTSON. Yes; they do. Essentially the same. The relationship between the company and the broker would be somewhat different.
Mr. KEITH. Well, is he
Mr. GILBERTSON. We operate through agents who work directly for our company.
Mr. KEITH. Are the remarks you made pertinent to agents also pertinent to brokers?
Mr. GILBERTSON. Yes; essentially.
Mr. KEITH. And they are liable to the company and bonded adequately.
Mr. GILBERTSON. Right.
Mr. ABERNETHY. The subcommittee will stand in recess subject to the call of the Chair. (The following material was received by the committee:)
INVESTMENT COMPANY INSTITUTE,
New York, N.Y., May 1, 1963. Re H.R. 4200_To provide for the regulation of the business of selling securities
in the District of Columbia and for the licensing of persons engaged therein,
and for other purposes.
DEAR MR. MCMILLAN: This letter is written on behalf of the Investment Company Institute to urge the committee to delete from the proposed legislation (H.R. 4200), that portion of the definition of the term "security" which would exempt so-called variable annuities, and therefore would exempt persons selling such securities from the regulatory provisions of the bill.
The institute is a voluntary association composed of 169 open-end, management-type investment companies from throughout the United States which are registered under the Federal Investment Company Act of 1940, as well as 90 investment advisers to member investment companies and 80 underwriters of the shares of member investment companies. The member investment com
panies of the institute hold assets in excess of $22 billion, and their shares are held in some 6 million shareholder accounts by an estimated 3 million individual and institutional shareholders. These companies represent approximately 94 percent of the assets of the entire investment company industry in the United States.
Persons engaged in the sale of the securities of open-end management-type investment companies would be among those regulated under the provisions of the bill. The institute supports regulation of such persons. However, persons engaged in the sale of variable annuities, which have been held to be securities by the U.S. Supreme Court (see SEC v. Variable Annuity Life Insurance Como pany of America, 359 U.S. 65, 1959), would be exempt from the provisions of this regulatory statute. The institute believes that members of the public in the District of Columbia as well as in any other jurisdiction should receive the protections afforded by securities laws with respect to variable annuities as well as other securities.
The position that variable annuities are securities and should be regulated as such has long been held by the North American Securities Administrators, an association composed of securities authorities from throughout the United States as well as Canada and Mexico. That association has stated its position as follows:
“The committee (Committee on Variable Annuities of the NASA] reaffirms the longstanding and basic position with respect to variable annuities which it has constantly sought to implement since the formation of the committee some 6 years ago, namely
“(1) that variable annuities are securities and should be regulated as such under appropriate State as well as Federal securities laws; and
“(2) that companies issuing such securities are investment companies and should be regulated as such under both State and Federal laws, in
the same manner and to the same extent as other investment companies." Moreover, another association of State securities authorities, known as the Midwest Securities Commissioners Association,' has promulgated a statement of policy holding that variable annuities should be subjected generally to the same securities regulation in the various States as are investment company securities. Attached is a copy of that statement of policy adopted on February 22, 1963.
The very wording of the Life Insurance Act in the District of Columbia, referring to variable annuities, makes it clear that the risks of investment are an inherent part of variable annuities. Section 35-541 describes variable annuities as follows: “contracts providing for payments which vary directly according to investment experience."
Among the essential factors which distinguish variable annuities from strictly insurance-type contracts is the fact that the risks placed upon the variable annuity contract holder, whereas true insurance invovles a risk on the part of the insurance company.
If persons engaged in the sale of variable annuities are to be permitted to operate outside the scope of the regulatory system proposed by H.R. 4200, the public in the District of Columbia will be deprived of all the protections set forth in the bill. Salesmen of variable annuity securities will not be required to meet the standards set forth in H.R. 4200 for qualifying on the basis of “training, experience, and knowledge of the securities business (sec. 10(a) (9) of the bill); will not be required to pass an examination which may be required by the Public Service Commission of the District of Columbia (sec. 10(b) (4) of the bill); will not be subject to the criminal penalties for willful violation of the provisions of the act or rules of the Public Service Commission thereunder provided for in section 13 (a) (b) and (c) of the bill and will not be subject to the civil liabilities imposed under section 14 of the bill. There appears to be no reason why members of the public in the District of Columbia should be denied these protections. Such a denial would be contrary to the public interest.
While insurance companies and agents may be subject to the provisions of the Life Insurance Act of the District of Columbia, that act is manifestly geared to the traditional insurance company business, while H.R. 4200 obviously is geared to the securities business. When a licensed insurance agent sells true insur
1 The following States are members of the Midwest Securities Commissioners Association: Arizona, California, Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, Wisconsin, and the Province of Saskatchewan.
ance, it must be presumed that he will be qualified under the Life Insurance Act. However, when that agent sells a variable annuity that is a security, then the public is buying an equity security under which the risk is placed upon the variable annuity holder and under which the benefits to accrue to that holder will depend on investments in securities, and the salesman should be qualified in the securities business in order that he may properly advise members of the public to whom he seeks to sell.
Accordingly, it is urged that there be deleted from the definition of "security" contained in section 2(m) of H.R. 4200, the following language appearing in brackets.
“(m) 'Security means any note, stock, treasury stock bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement; collateral-trust certificates, preorganization certificates or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under such a title or lease: or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. 'Security' does not include any insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically for life or some other specified period (or any contract issued by an insurance company pursuant to sec. 41 of ch. III of the Life Insurance Act, as added by Public Law 86-520, D.C. Code, sec. 35-5410].” Thank you for your attention to this matter. Very truly yours,
ROBERT L. AUGENBLICK, General Counsel.
MIDWEST SECURITIES COMMISSIONERS ASSOCIATION
(Statement of policy regarding variable companies and trusts adopted at Phoenix,
Ariz., on February 22, 1963)
I. VARIABLE ANNUITY COMPANIES
Variable annuities companies defined.—A variable annuities company is a company engaged or proposing to engage in the business of offering for sale annuity securities in which the promised payments are not specified in fixed dollar amounts but in amounts depending upon the investment results of a fund.
Compliance with investment company regulations.-Application by variable annuities companies shall generally comply with the regulations applicable to investment companies. The investment policies shall be stated with reasonable particularity. The application shall describe the accounting principles proposeed to be followed during the accumulative period and the payout period and any other special periods, so that the proposed plan of operation will be clearly understandable. The application must show that the company appears to be able to operate fairly with respect to all proposed investors. Expenses of all sorts, including taxes, shall ordinarily be apportioned among various accounts on the basis of the respective dollar amounts in the accounts at the time of apportionment. Any mortality tables which the company proposes to use shall be adequately identified. The company shall ordinarily covenant not to change the mortality tables to be used without the prior written consent of the administrator.
Load.—The load permitted to be charged shall ordinarily not exceed the load permitted by local law with respect to investment companies. The “load," as here defined, includes all charges or payments made by the purchaser of the securities in connection with the securities, even though some of such payments may be paid to a bank or other agency for services rendered.
Equality of securities.—The securities sold by the company with respect to a particular fund, shall be of a single class. If a company proposes to operate more than one fund, appropriate measures shall be taken to insure that the rights of security holders who are issued securities dependent on such fund, are not affected by activities with respect to other funds operated by the company.
Change in securities.—No change in the form or contents of annuity securities which affect substantive rights of the annuitant, directly or indirectly, may be made without the written permission of the administrator. Any increase in fees or change in rights to receive payments shall be deemed to affect the substantive rights of the annuitant.
Distribution. --All distributions to annuitants shall be accompanied by a statement in writing disclosing the source of the funds so distributed. In case there may be doubt as to this matter, the communication may so state, in which event the necessary statement of source shall be forwarded to annuitants not later than 60 days after the close of the fiscal year in which the distribution was made.
Inspection of records.—The trust records shall be available for inspection by the securities administrator at a reasonable time and by any annuity security holder as permitted under local law, to the same extent as permitted corporate shareholders.
Fees and expenses. The fees and expenses shall not exceed those permitted by local law for investment companies.
Contracts with independent contractors.-A copy of all contracts for management, operation, or advice respecting a variable annuities company or a fund thereof, shall be filed with the administrator accompanied by satisfactory evidence that the fees and expenses therein provided are in accordance with prevailing costs. Such contracts shall ordinarily be for a period not longer than 2 years and ordinarily must be subject to renewal annually. It is considered desirable that such contracts be terminable by either party, without penalty, upon 60-day written notice.
Prohibited activities.-In addition to the activities prohibited by local law respecting investment companies, no company shall do any of the following:
(a) Invest in securities issued by another variable annuities company or trust.
(6) Directly or indirectly acquire any asset from or through, or dispose of any asset to or through, any officer, director, trustee, distributor, investment adviser, independent contractor, or employee of the company, except for the acquisition of assets at the formation of the company, or shortly thereafter, and then only if the acquisition is described in the prospectus with the profits thereon, if any, disclosed, and if moreover the acquisition price of such assets is based on an independent appraisal acceptable to the administrator, nor may any such person, directly or indirectly, receive a commission or other remuneration in connection with the acquisition or disposal of assets.
II. VARIABLE ANNUITY TRUSTS
Variable annuity trust defined.—A variable annuity trust is an unincorporated trust or association which issues or proposes to issue annuity sercurities in which the promised payments are not specified in fixed dollar amounts but are dependent upon the investment results of a fund.
Applications by variable annuities trusts.—Applications by variable annuities trusts shall, in general, set forth the material required by applications by variable annuity companies. Such trust shall meet the standards of and shall be subject to the prohibitions respecting variable annuity companies, and in addition shall comply with the following.
(a) Number of trustees : Ordinarily there shall be at least three trustees except that if one of the trustees is a corporate trustee subjeect to supervision by State or Federal banking authorities, the trust may have one or more trustees.
(6) Election of trustees : Except during the first 2 years of the trust all trustees shall be elected by the annuitants anuually for a term of not to exceed 1 year.
(c) Liability of trustees : The declaration of trust or other trust instrument shall not contain any provision relieving any trustee from liability to the trust or to security holders to which it or he might otherwise be subject by reason of acts constituting bad faith, willful misfeasance, gross negligence, or reckless disregard of duty.
(d) No personal liability of annuitants : The annuitants shall not be personally liable on account of any of the obligations of the trust. The application shall show that the annuitants will have no personal liability