FORM OF AGREEMENT TO PURCHASE SHARES
THIS AGREEMENT, made and entered into this the 30th day of June, 1993, and
amended as of the 15th day of March, 1995, by and between NORTHBROOK LIFE
INSURANCE COMPANY (hereinafter the "Company"), on its own behalf and on behalf
of the Northbrook Variable Annuity Account II (hereinafter the "Account"), a
separate account of the Company, and XXXX XXXXXX VARIABLE INVESTMENT SERIES, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Trust") and XXXX XXXXXX DISTRIBUTORS INC.
(hereinafter the "Distributor").
WHEREAS, by resolution of its Board of Directors on May 18, 1990, the
Company established the Account to set aside and invest assets attributable to
certain variable annuity contracts (hereinafter the "Contracts") issued by the
Company;
WHEREAS, the Company has registered the Account as a unit investment trust
under the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act");
WHEREAS, the Securities and Exchange Commission (hereinafter "S.E.C.")
declared the Account's registration statement of the Contract filed under the
Securities Act of 1933, as amended, (hereinafter the "1933 Act") effective on
September 25, 1990;
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered as such under the 1940 Act and has filed
its registration statement with the S.E.C. which declared such registration
statement effective on October 5, 1983;
WHEREAS, the Distributor is registered as a broker-dealer with the S.E.C.
under the Securities Exchange Act of 1934, as amended, (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD");
WHEREAS, the Trust is available to act as the investment vehicle for
separate accounts established for variable annuity contracts and variable life
insurance contracts offered or to be offered by insurance companies which have
entered into agreements to purchase shares or participation agreements with the
Trust and the Distributor (hereinafter "Participating Insurance Companies");
WHEREAS, the Trust has obtained an order from the S.E.C., dated November
23, 1994 (File No. 812-9128), granting Participating Insurance Companies and
variable annuity and variable life insurance separate accounts exemptions from
the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Trust to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies (hereinafter the "Shared Funding Exemptive Order");
WHEREAS, the Trust is presently comprised of eleven Portfolios designated
as the Money Market Portfolio, the Quality Income Plus Portfolio, the High Yield
Portfolio, the Utilities Portfolio, the Dividend Growth Portfolio, the Capital
Growth Portfolio, the Global Dividend Growth Portfolio, the European Growth
Portfolio, the Pacific Growth Portfolio, the Equity Portfolio and the Managed
Assets Portfolio, and other Portfolios may be subsequently established by the
Trust (hereinafter the "Portfolios");
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends by purchasing shares of the Portfolios on
behalf of the Account to fund the Contracts and the Distributor is authorized to
sell such shares to the Company for the benefit of the Account at net asset
value without the imposition of any charges;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Trust and the Distributor agree as follows:
1. PURCHASE OF SHARES. In accordance with the Trust's and the
Distributor's Distribution Agreement dated June 30, 1993, as amended as of March
15, 1995, (the "Distribution Agreement"), the Company agrees to purchase and
redeem the Trust shares of each Portfolio offered by the then current prospectus
1
of the Trust (hereinafter the "Prospectus") included in the Trust's registration
statement (hereinafter "the Registration Statement") most recently filed from
time to time with the S.E.C. and effective under the 1933 and 1940 Acts or as
the Prospectus may be amended or supplemented and filed with the S.E.C. pursuant
to the 1933 Act.
2. SALE OF SHARES. The Distributor agrees to sell shares of the Trust to
the Company for allocation to the Account as orders from the Company are
received at the next determined net asset value per share after receipt by the
Trust or its designee of the order for shares of the Trust, of the applicable
Portfolio determined as set forth in the Prospectus.
3. REDEMPTION OF SHARES. At the Company's request, the Trust agrees to
redeem for cash without charge, any full or fractional shares of the Trust held
by the Company, executing such requests on a daily basis at the net asset value
of applicable Portfolio computed after receipt of the redemption request
provided, however, that the Trust reserves the right to suspend the right of
redemption or to postpone the date of payment upon redemption of the shares of
any Portfolio under the circumstances and for the period of time specified in
the Prospectus.
4. AVAILABILITY OF SHARES. Subject to Sections 3(c) and 4(b) of the
Distribution Agreement, the terms of which are incorporated herein by reference,
the Trust agrees to make its shares available indefinitely for purchase by the
Company.
5. PAYMENT OF SHARES. The Company shall pay for Trust shares within five
days after it places the order for Trust shares. The Trust reserves the right
to delay issuing or transferring Trust shares and/or to delay accruing or
declaring dividends in accordance with any policy set forth in its then current
prospectus with respect to such shares until any payment check has cleared. If
the Trust or the Distributor does not receive payment within the five days
period, the Trust may, without notice, cancel the order and require the Company
to reimburse the Trust promptly for any loss the Trust suffered by reason of the
Company failing to timely pay for its shares.
6. FEE FOR SHARES. The Company shall purchase and redeem shares in the
Trust at net asset value and the Company shall not pay any commission, dealers
fee or other fee to the Distributor or any other broker dealer.
7. TRUST'S REGISTRATION STATEMENT AND PROSPECTUS. The Trust shall amend
the Registration Statement for its shares under the 1933 Act and the 1940 Act
from time to time as required in order to effect the continuous offering of its
shares and, at its own expense, shall provide the Company with as many copies of
its current prospectus as the Company may reasonably request.
8. INVESTMENT OF ASSETS. The Trust agrees to invest its assets in
accordance with the representations made to the Internal Revenue Service in
connection with the Company's request for a private letter ruling regarding the
ownership of the Trust's shares attached as Exhibit "A" and in accordance with
Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as
amended from time to time, and any Treasury interpretations thereof, relating
to the diversification requirements for variable annuity contracts and any
amendments or other modifications to such Section or Regulations.
9. ADMINISTRATION OF CONTRACTS. The Company shall be responsible for
administering the Contracts and keeping records on the Contracts.
10. STOCKHOLDER INFORMATION. The Trust shall furnish the Company copies of
its proxy material, reports to stockholders and other communication to
stockholders in such quantity as the Company shall reasonably require for
distributing to owners or participants under the Contracts. The Company will
distribute these materials to such owners or participants as required.
11. VOTING. (a) To the extent required by law, the Company shall vote
Trust shares in accordance with instructions received from contract owners. If,
however, the 1940 Act or any regulation thereunder should be amended or if the
present interpretation thereof should change, and as a result the Company
determines that it is permitted to vote the Trust's shares in its own right, it
may elect to do so. The Company shall vote shares of a Portfolio for which no
instructions have been received in the same proportion as the vote of
shareholders of such Portfolio from which instructions have been received.
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Neither the Company nor persons under its control shall recommend action in
connection with solicitation of proxies for Trust shares allocated to the
Account. The Company shall also vote shares it owns that are not attributable to
contract owners in the same proportion. Participating Insurance Companies shall
be responsible for assuring that each of their separate accounts participating
in the Trust calculates voting privileges in a manner consistent with other
Participating Insurance Companies.
(b) The Trust will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Trust will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Trust
is not one of the trusts described in Section 16(c) of that Act) as well as with
Section 16(a) and, if and when applicable, 16(b). Further, the Trust will act in
accordance with the S.E.C.'s interpretation of the requirements of Section 16(a)
with respect to periodic elections of trustees and with whatever rules the
S.E.C. may promulgate with respect thereto.
12. COMPANY APPROVAL. The Trust and the Distributor agree that the
approval of the Company will be required prior to the Trust and the Distributor
entering into any new agreements to sell shares of the Trust to other
Participating Companies.
13. TRUST'S WARRANTY. The Trust represents and warrants that Trust
shares sold pursuant to this Agreement shall be registered under the 1933 Act
and duly authorized for issuance in accordance with all applicable federal and
state laws.
14. COMPANY'S WARRANTY. The Company represents and warrants that it is an
insurance company duly organized and in good standing under Illinois law and
that it has legally and validly established the Account under Section 245.21 of
the Illinois Insurance Code and has registered the Account as a unit investment
trust in accordance with the provisions of the 1940 Act to serve as a segregated
investment account for certain Contracts. The Company further represents and
warrants that the Contracts will be registered under the 1933 Act and the
Contracts will be issued and sold in compliance with all applicable Federal and
State laws.
15. DISTRIBUTOR'S WARRANTY. The Distributor represents and warrants that
it is a member in good standing of the NASD and is registered as a broker-dealer
with the S.E.C. under the 1934 Act. The Distributor further represents that it
will sell and distribute the shares in accordance with the 1933, 1934 and 1940
Acts and will not make any representations concerning the Account except those
contained in the then current registration statement or related prospectus and
any sales literature approved by the Trust. For purposes of this paragraph,
Section 6 of the Distribution Agreement is incorporated in this Agreement.
16. TERMINATION OF AGREEMENT. The parties may terminate this Agreement
as follows:
(1)(a) at the option of the Company or the Trust or the Distributor
upon 90 days' written notice to the other party;
(b) at the option of the Company if, for any reason, except for those
specified in Sections 3(c) and 4(b) of the Distribution Agreement, Trust shares
are not available to meet the requirements of the Contracts as determined by the
Company; or
(c) at the option of the Trust upon the NASD, the S.E.C., the Illinois
Insurance Commissioner or any other regulatory body instituting legal
proceedings against the Company regarding its duties under this Agreement.
(2) This Agreement shall automatically terminate in the event of its
assignment.
17. COMPANY'S INDEMNIFICATION AGREEMENT. (a) The Company agrees to
indemnify and hold harmless the Trust or Distributor and each of their Directors
or Trustees who is not an "interested person" of the Trust, as defined in the
1940 Act (collectively, the "Indemnified Parties" for purposes of this paragraph
17) against any losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company) or expenses or actions to
which such Indemnified Parties may become subject, under the Federal securities
laws or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements arise as a result of any
failure by the
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Company to provide the services and furnish the materials under terms of this
Agreement or which arise from erroneous instructions by the Company to the
Distributor concerning the particular Portfolio or Portfolios whose shares are
to be allocated to the Account. This indemnity agreement is in addition to any
liability which the Company may otherwise have. Provided, however, that in no
case is the indemnity of the Company in favor of the Distributor deemed to
protect the Distributor against any liability to the Trust or its shareholders
to which the Distributor would otherwise be subject by reason of its bad faith,
wilful misfeasance or negligence in the performance of its duties or by reason
of reckless disregard of its obligations and duties under this Agreement.
(b) The Company will reimburse the Indemnified Parties for any legal or
other expenses reasonably incurred by the Indemnified Parties in connection with
investigating or defending of any such loss, claim, damage, liability or action.
(c) Promptly after receipt by any of the Indemnified Parties of notice of
the commencement of any action, or the making of any claim for which indemnity
may apply under this paragraph, the Indemnified Parties will, if a claim thereof
is to be made against the Trust, notify the Company of the commencement thereof;
but the omission so to notify the Company will not relieve the Company from any
liability which it may have to the Indemnified Parties otherwise than under this
Agreement. In case any such action is brought against the Indemnified Parties,
and the Company is notified of the commencement thereof, the Company will be
entitled to participate therein and to assume the defense thereof, with counsel
satisfactory to the party named in the action, and after notice from the Company
to such party of the Company's election to assume the defense thereof, the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
18. TRUST AND DISTRIBUTOR INDEMNIFICATION AGREEMENTS. (a) The Trust and
Distributor each agree to indemnify and hold harmless the Company and each of
its Directors who is not an "interested person" of the Company, as defined in
the 1940 Act (collectively the "Company's Indemnified Parties" for purposes of
this paragraph 18) against any losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or expenses or
actions to which such Indemnified Parties may become subject, under the Federal
securities laws or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements:
(i) arise as a result of any failure by the Trust or Distributor to
provide the services and furnish the materials under the terms of this
Agreement; or
(ii) arise out of the Trust's or Distributor's failure, whether
unintentional or in good faith or otherwise, to comply with the
representations made to the Internal Revenue Service attached as Exhibit
"A" in connection with the request for a private letter ruling regarding
the ownership of Trust shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in registration statement
or prospectus or sales literature of the Trust (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this Agreement to indemnify shall not apply as to
the Company's Indemnified Parties if such statement or omission was made in
reliance upon and in conformity with information furnished to the Trust or
Distributor by or on behalf of the Company for use in the registration
statement or prospectus for the Trust or in sales literature (or any
amendment or supplement) or otherwise for use in connection with the sale
of the Contracts or Trust shares; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Trust or the Distributor in this
Agreement or arise out of or result from any other material breach of this
Agreement by the Trust or the Distributor, including a failure, whether
unintentional or in good faith or otherwise, to comply with the
requirements specified in paragraph 8 of this Agreement.
4
(b) The Trust represents and warrants that the Trust will at all times
invest its assets in such a manner as to ensure that the Contracts will be
treated as an annuity under the Internal Revenue Code and the regulations
thereunder. Without limiting the scope of the foregoing, the Trust will at all
times comply with Section 817(h) of the Code and Treas. Reg. Sec. 1.817-5, as
amended from time to time, and any Treasury interpretations thereof, relating to
the diversification requirements for variable annuity contracts and any
amendments or other modifications to such section or Regulations.
(c) Trust shares will not be sold to any person or entity that would
result in the Contracts not being treated as annuity contracts in accordance
with the statutes and regulations referred to in the preceding paragraph.
(d) The Trust and the Distributor will reimburse the Company for any legal
or other expenses reasonably incurred by the Company's Indemnified Parties in
connection with investigating or defending of any such loss, claim, damage,
liability or action.
(e) Promptly after receipt by any of the Company's Indemnified Parties of
notice of the commencement of any action, or the making of any claim for which
indemnity may apply under this paragraph, the Company's Indemnified Parties
will, if a claim in respect thereof is to be made against the Company, notify
the Trust or the Distributor of commencement thereof; but the omission so to
notify the Trust or the Distributor will not relieve the Trust or the
Distributor from any liability which it may have to the Company's Indemnified
Parties otherwise than under this Agreement. In case any such action is brought
against the Company's Indemnified Parties, and the Trust or the Distributor is
notified of the commencement thereof, the Trust or the Distributor will be
entitled to participate therein and to assume the defense thereof, with counsel
satisfactory to the party named in the action, and after notice from the Trust
or the Distributor to such party of the Trust's or the Distributor's election to
assume the defense thereof, the Trust or the Distributor will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
19. INDEMNIFICATION OF TRUST BY OR OF DISTRIBUTOR. For purposes of this
Agreement, the Trust and the Distributor shall indemnify each other according to
the terms of the Distribution Agreement the terms of which are incorporated by
reference.
20. POTENTIAL CONFLICTS. (a) The Trustees of the Trust will monitor the
operations of the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all separate accounts
investing in the Trust. An irreconcilable material conflict may arise for a
variety of reasons, including: (i) an action by any state insurance regulatory
authority; (ii) a change in applicable Federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling, no-
action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (iii) an administrative or judicial decision
in any relevant proceeding; (iv) the manner in which the investments of any
Portfolio are being managed; (v) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or
(vi) a decision by an insurer to disregard the voting instructions of contract
owners. The Trustees shall promptly inform the Company if they determine that
an irreconcilable material conflict exists and the implications thereof.
(b) The Company will report any potential or existing conflicts of which
it is aware to the Trustees of the Trust. The Company will assist the Trustees
in carrying out their responsibilities under the Shared Funding Exemptive Order,
by providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised. This includes, but is not limited to,
an obligation by the Company to inform the Trustees whenever contract owner
voting instructions are disregarded.
(c) If it is determined by a majority of the Trustees, or a majority of
the Trustees who are not parties to this Agreement or interested persons of any
such party and who have no direct or indirect financial interest in this
Agreement or any agreement related thereto (the "Independent Trustees"), that a
material irreconcilable conflict exists, the Company shall, at its expense and
to the extent reasonably practicable (as determined by a majority of the
Independent Trustees), take whatever steps are necessary to remedy or eliminate
the irreconcilable material conflict, up to and including: (i) withdrawing the
assets allocable
5
to the Account from the Trust or any Portfolio and reinvesting such assets in a
different investment medium, including (but not limited to) another Portfolio
of the Trust, or submitting the question whether such segregation should be
implemented to a vote of all affected contract owners and, as appropriate,
segregating the assets of variable annuity contract owners invested in the
Account from those of any other appropriate group (i.e., annuity contract
owners, life insurance contract owners, or variable contract owners of one or
more Participating Insurance Companies) that votes in favor of such segregation,
or offering to the contract owners the option of making such a change; and (ii)
establishing a new registered management investment company or managed separate
account.
(d) If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the Account's investment
in the Trust and terminate this Agreement; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
Independent Trustees. Any such withdrawal and termination must take place
within six (6) months after the Trust gives written notice that this provision
is being implemented, and until the end of that six month period the Distributor
and Trust shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Trust.
(e) If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six months
after the Trustees inform the Company in writing that they have determined that
such decision has created an irreconcilable material conflict; provided,
however, that such withdrawal and termination shall be limited to the extent
required by the foregoing material irreconcilable conflict as determined by a
majority of the Independent Trustees. Until the end of the foregoing six
month period, the Distributor and Trust shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares
of the Trust.
(f) For purposes of sections (c) through (f) of this paragraph, a majority
of the Independent Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event
will the Trust be required to establish a new funding medium for the
Contracts. The Company shall not be required by section (c) to establish a
new funding medium for the Contracts if an offer to do so has been declined
by vote of a majority of contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Trustees determine
that any proposed action does not adequately remedy any irreconcilable
material conflict, then the Company will withdraw the Account's investment in
the Trust and terminate this Agreement within six (6) months after the
Trustees inform the Company in writing of the foregoing determination,
provided, however, that such withdrawal and termination shall be limited to
the extent required by any such material irreconcilable conflict as
determined by a majority of the Independent Trustees.
(g) If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such Rules are applicable;
and (b) paragraphs 11(a), 11(b), 20(a), 20(b), 20(c), 20(d), 20(e) and 20(f) of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such paragraphs are contained in such
Rule(s) as so amended or adopted.
21. DURATION OF THIS AGREEMENT. This Agreement, as amended, shall remain
in force until April 30, 1995 and from year to year thereafter, but only so long
as such continuance is specifically approved at least annually by the Trustees
of the Trust, or by the vote of a majority of the outstanding voting securities
of the Trust, cast in person or by proxy. This Agreement also may be terminated
in accordance with paragraph 16 hereof.
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The terms "vote of a majority of the outstanding voting
securities","assignment" and "interested person", when used in this Agreement,
shall have the respective meanings specified in the 1940 Act.
22. AMENDMENTS OF THIS AGREEMENT. This Agreement may be amended by the
parties only if such amendment is specifically approved by (i) the Trustees of
the Trust, or by the vote of a majority of outstanding voting securities of the
Trust, and (ii) a majority of those Trustees of the Trust who are not parties to
this Agreement or interested persons of any such party and who have no direct or
indirect financial interest in this Agreement or in any agreement related
thereto, cast in person at a meeting called for the purpose of voting on such
approval.
23. GOVERNING LAW. This Agreement shall be construed in accordance with
the law of the State of Illinois and the applicable provisions of the 1933,
1934 and 1940 Acts and the rules and regulations and rulings thereunder
including such exemptions from those statutes, rules and regulations as the
S.E.C. may grant and the terms hereof shall be interpreted and construed in
accordance therewith. To the extent the applicable law of the State of
Illinois, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act, the latter shall control. If any provision of
this Agreement shall be held or made invalid by a court decision, statute,
rule or otherwise the remainder of the Agreement shall not be affected
thereby.
24. PERSONAL LIABILITY. The Declaration of Trust establishing Xxxx Xxxxxx
Variable Investment Series, dated February 24, 1983, a copy of which, together
with all amendments thereto (the "Declaration"), is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the name Xxxx
Xxxxxx Variable Investment Series refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of Xxxx Xxxxxx Variable Investment
Series shall be held to any personal liability, nor shall resort be had to
their private property for the satisfaction of any obligation or claim or
otherwise, in connection with the affairs of said Xxxx Xxxxxx Variable
Investment Series, but the Trust Estate only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement, as
amended, to be duly executed as of March 15, 1995.
COMPANY:
ATTEST: NORTHBROOK LIFE INSURANCE COMPANY
/s/ By: /s/
----------------------------------- -------------------------------
TRUST:
ATTEST: XXXX XXXXXX VARIABLE INVESTMENT SERIES
/s/ By: /s/
----------------------------------- -------------------------------
DISTRIBUTOR:
ATTEST: XXXX XXXXXX DISTRIBUTORS INC.
/s/ By: /s/
----------------------------------- -------------------------------
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EXHIBIT A
INDEX NUMBER: 0061.19-00
"This document may not be used or cited as precedent. Section 6110(j)(3) of the
Internal Revenue Code."
Xx. Xxxx X. Xxxxxxxx Xx. X.X. Xxxxxxxxxx
Senior Vice President and
Chief Actuary (000) 000-0000
Northbrook Life Insurance Co.
Allstate Plaza CC:C:C:3:3--3G6488
Xxxxxxxxxx, Xxxxxxxx 00000 Dec. 01, 1983
Company = Northbrook Life Insurance Company
EIN: 00-0000000
Corp. P = Allstate Insurance Company
Corp. GP = Sears, Xxxxxxx and Co.
Corp. S-1 = Xxxx Xxxxxx Xxxxxxxx Inc.
Account S = Northbrook Variable Annuity Account
Fund F = Xxxx Xxxxxx Variable
Annuity Investment Series
Portfolio 1 = Money Market Portfolio of Fund F
Portfolio 2 = High Yield Portfolio of Fund F
Portfolio 3 = Equity Portfolio of Fund F
State X = Illinois
State Y = Massachusetts
the Contract = flexible premium, deferred, variable annuity contract,
number NLU2, to be issued by the Company
Dear Xx. Xxxxxxxx:
This is in reply to a letter dated July 25, 1983, requesting rulings
concerning the federal income tax consequences of the sale and administration of
certain annuity contracts. Additional information was submitted in letters dated
September 1 and September 9, 1983. The information submitted for our
consideration is substantially summarized below.
The Company is a stock life insurance company organized and operated
under the laws of State X. It is a life insurance company as defined by
section 801(a) of the Internal Revenue Code. It is a wholly-owned subsidiary
of Corp. P. which, in turn, is a wholly-owned subsidiary of Corp. GP.
The Company has developed a flexible premium, deferred, "variable" annuity
contract ("the Contract") with reserves based on a separate account (Account S)
established and regulated in accordance with the insurance laws of State X.
Account S is a unit investment trust and is registered with
A-1
the Securities and Exchange Commission (SEC) under the Investment Company Act of
0000 (xxx 0000 Xxx). The Contracts provide for the allocation of all amounts
received under the Contracts to the general account of the Company, one or more
of the sub-accounts of Account S or any combination of the foregoing, in
accordance with the Contract owner's allocation specified in the contract
application or in a subsequent written notice to the Company. Account S has
been divided into three subaccounts, each of which invests solely in the shares
of a specific Portfolio of Fund F.
Fund F is a diversified, open-end management investment company organized
under the laws of State Y as a business trust and is registered with the SEC
under the 1940 Act. Fund F has three Portfolios (Portfolios 1-3) which have
different investment strategies. The investment performance of a Portfolio has
no effect on the investment performance of any other Portfolio. The manager and
investment adviser of Fund F is Corp. S-1 which is a second tier wholly-owned
subsidiary of Corp. GP. Corp. S-1 is also the distributor of the Contracts.
Corp. S-1 is registered with the SEC as an investment adviser under the
Investment Advisers Act of 1940 and is paid a management fee by Fund F.
The Contract will be issued by Company to a contract owner who may or may
not be the annuitant. The Contract will be available for purchase by
individuals covered under certain tax qualified annuity or retirement plans
(e.g. plans adopted pursuant to section 403(b) and individual retirement
annuities under section 408 of the Code), for individuals covered under
retirement plans which do not qualify for special tax treatment, and for
individuals not covered under any retirement plan.
The Contract provides for a minimum first purchase payment of at least
$5,000 unless the Contract is issued under a tax qualified annuity or retirement
plan, in which case the minimum first purchase payment must be at least $50.
Future purchase payments must be at least $50 or more. The amount of subsequent
payments are determined by the contract owner. However, the Company has the
right to limit annual payments after the first contract year to three times the
total payments made in the first contract year.
The amount of each payment, net of any taxes, will be allocated to the
general account of the Company, one or more sub-accounts of Account S, or any
combination of the above, in accordance with the contract owner's allocation (as
specified in the Contract application or subsequent written notice to the
Company).
Payments allocated to the Company's general account are applied to purchase
accumulation units in the general account (fixed accumulation units). Interest
is credited to the fixed accumulation units at a rate which may differ depending
on the date of the underlying payments. Interest will be guaranteed for at
least one year and will not be less than a minimum annual effective rate of 4
percent.
Payments allocated to a sub-account of Account S are applied to purchase
accumulation units in the sub-account (variable accumulation units). The
variable accumulation units in each sub-account of Account S represent a
proportionate interest in the net value of the assets (i.e., shares of one
series of Fund F) of the sub-account. The value of the variable accumulation
units will vary depending on the value of the Fund F stock held by the sub-
account. The value of the Fund F stock will vary depending on the investment
experience of Fund F.
Payments allocated to the Company's general account become a part of the
assets held by the general account. The general account maintains a diversified
portfolio of investments. Payments allocated to each sub-account of Account S
under the Contracts are used to purchase, at their net asset value, shares of a
Portfolio of Fund F (Portfolio 1 through Portfolio 3), each of which has its own
investment strategy. All dividends and capital gain distributions from a
Portfolio of Fund F are reinvested in shares of the distributing Portfolio at
their net asset value and such shares are credited to the appropriate sub-
account of Account S.
The Company may substitute shares of other registered open-end management
investment companies upon notice to the contract owners and, to the extent
required by the 1940 Act, upon approval by the SEC. The Company may establish
additional sub-accounts of Account S to invest in shares of other Portfolios of
Fund F that could be established in the future.
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The Company imposes certain charges with respect to the Contracts. An
annual contract maintenance charge is deducted from the value of the
accumulation units. The Company also deducts a daily mortality and expense risk
charge.
Annuity benefits begin on the "income starting date" selected by the
contract owner, which must be the first day of a calendar month and at least one
month after the issue date of the Contract. The income starting date cannot be
later than the first day of the calendar month following the annuitant's 75th
birthday. The owner may elect one of several annuity options.
A contract owner may surrender the Contract (in whole or in part) for the
value of the accumulation units held under the Contract at any time before the
earlier of the income starting date or the death of the annuitant. Such
withdrawals may be subject to surrender charges depending upon how long the
original payments were held by the Company.
In connection with the issuance and administration of the Contracts, the
following representations have been made:
(a) No variable annuity contract owner will have a legally binding
right to require the Company, Account S or Fund F to acquire any particular
investment item with purchase payments or other amounts paid to, or earned
by, the Company, Account S, or Fund F. Furthermore, there will be no
prearranged plan between any contract owner and the Company for the
Company, Account S, or Fund F to invest any purchase payments or other
amounts they receive in any particular investment item. However, contract
owners may be informed of the general investment strategy to be followed.
Contract owners will be permitted to choose among broad investment
strategies which initially will include stocks, bonds, and money market
instruments such as instruments of financial institutions, instruments of
government bodies, and U.S. Government securities.
(b) No contract owner will have any legal, equitable, direct,
indirect, or other interest in any specific investment item held by the
Company, Account S, or Fund F. A contract owner will have only a
contractual claim against the Company for cash as a result of purchasing an
annuity.
(c) The Company, in its general account, will maintain a diversified
portfolio of investments. Within 365 calendar days of the later of the
formation of Account S or the date of receipt of the first purchase payment
income (directly, indirectly, constructively or otherwise) by the Company
or Account S from the sale of the Contract, each Portfolio of Fund F
will diversify its respective portfolio of investments. Thereafter, each
Portfolio of Fund F will maintain a diversified portfolio of investments.
For purposes of this representation, a portfolio is diversified if:
(1) No more than 10 percent of the fair market value of the total
assets of the portfolio is invested in securities of any one issuer,
in any one real property project, or in any one commodity;
(2) investments in financial institutions are restricted, so that
no single type of portfolio investment (for example, certificates of
deposit, mortgages originating in and serviced by the financial
institution, and demand deposits) in financial institutions accounts
for more than 55 percent of the fair market value of the total assets
of the portfolio;
(3) Notwithstanding the 10 percent limitation in (1) above, the
direct and indirect investment in U.S. Treasury securities may total
but not exceed 55 percent of the fair market value of the total assets
of the portfolio;
(4) the total, direct and indirect, investment in U.S. Treasury
securities and certificates of deposit in financial institutions (that
is, savings and loan associations, banks, and savings banks) does not
exceed 65 percent of the total fair market value of the total assets
of the portfolio;
(5) the portfolio meets the requirements of (1) and through (4)
above on the last day of each calendar month.
Active business checking accounts are excluded in determining
whether there is diversification. For the first 10 working days after
receipt (including the day of receipt), newly acquired annuity
purchase payments are excluded in determining whether there is
diversification.
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For purposes of this representation, the term "security" is
defined as any certificate of deposit, mortgage, money market account,
time deposit, repurchase agreement, mortgage participation
certificate, and any item defined as a security in section 2(a)(36) of
the 1940 Act, 15 U.S.C.A. section 80a-2(a)(36).
For purposes of this representation the term "issuer" is defined
as the U.S. Treasury, an agency or instrumentality of the U.S.
Government, a State, an agency, instrumentality or political
subdivision of a State (whether incorporated or not), a foreign
government or instrumentality thereof, and any person as defined in
section 2(a)(28) of the 1940 Act.
For purposes of this representation the term "real property
project" is defined as a single, identifiable tract, group of tracts,
building, group of buildings, or combination of tracts and buildings.
For purposes of this representation the term "commodity" is
defined as any grouping of tangible personal property whose individual
elements are usually considered to be fungible. A commodity can be a
raw material, a refined material, or a manufactured product. The term
commodity includes, for example, but is not limited to, agricultural
products (including livestock), timber and timber products, gold,
silver, copper, diamonds, any foreign currency, oil, natural gas, and
all contracts involving the current or future purchase or sale of a
commodity. If an investment item is defined in this paragraph and is
also defined as a security, it will be considered to be defined only
in this paragraph.
Each Portfolio of Fund F intends to operate on a continuing
basis. There is no plan or intention for any Portfolio of Fund F to
liquidate, to transfer its assets to any individual or entity, to
merge with any entity or to otherwise cease operations.
There is no plan or intention for the Company to form any
separate account, subsidiary, or other entity; to cause any exchange,
cancellation, or modification of any annuity or insurance policy; or
to otherwise use any device to extend beyond 365 days the time in
which diversification will be obtained.
(d) If FSLIC, FDIC or other governmental insurance is available in
connection with any investment item, it inures only to the benefit of the
Company, Account S, or Fund F and not directly to the benefit of any
individual annuity policyholder.
(e) For purposes of determining the treatment of the interest to be
credited to the fixed accumulation units under the Contract, the Contract
will be either (1) a "qualified contract" within the meaning of section
805(f) of the Code to which "qualified guaranteed interest" under section
805(e)(5) is credited or (2) a contract described in section 805(d) to
which the alternative limitation allowed by section 809(f)(2)(A) is
applicable.
Rev. Rul. 77-85, 1977-1 C.B. 12, holds that the purchaser of an
"investment" annuity contract, by means of which the purchaser selected and
controlled one or more investments in a portfolio which comprised a separate
account of the life insurance company issuing the contract, was considered the
owner of those investments for federal income tax purposes.
Rev. Rul. 80-274, 1980-2 C.B. 27, holds that the purchaser of an annuity
contract, who was able to direct the funding of his annuity by specifying the
savings and loan association and the certificates of deposit in which his
purchase payments would be invested, was considered the owner of those
certificates for federal income tax purposes.
Rev. Rul. 81-225, 1981-2 C.B. 12, clarified the applicability of the
previously cited revenue rulings to mutual fund investments by holding that the
policyholders of certain variable annuity contracts, whose purchase payments
were invested solely in publicly available mutual fund shares, would be
considered the owners of those shares for federal income tax purposes.
Situation 5 of that ruling holds that under certain circumstances the
policyholders will not be considered to be the owners of the mutual fund shares.
Rev. Rul. 82-54, 1982-1 C.B. 11, concerns an insurance company which had
funded its deferred annuity contracts through a separate account whose assets
were invested in three mutual funds, the shares
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of which were not sold to the general public. The policyholders could direct
that their annuity purchase payments be invested in shares of any or all of the
three mutual funds. Rev. Rul. 82-54 holds that the insurance company, and not
the policyholder, is the owner of the mutual fund shares for federal income tax
purposes.
Based solely on the information submitted and the representations set forth
above, and provided the conditions listed below are met, it is held as follows:
(1) For federal income tax purposes, the assets held by the Company in
its general account and/or by the Portfolios of Fund F, pursuant to the
provisions of the Contracts described above, are owned by the Company
and/or by Fund F (or the Portfolios if appropriate) and not by the contract
owners, or by any annuitant or beneficiary under the Contracts.
(2) For federal income tax purposes, any income, gain, or loss
recognized with respect to the assets held by the Company in its general
account and by Fund F (or the Portfolios if appropriate), pursuant to the
provisions of the Contracts, is includible in the computation of income of
the Company or Fund F (or the Portfolios if appropriate) respectively, and
is not the income, gain or loss of the contract owners, or of any annuitant
or beneficiary under the Contracts.
(3) For federal income tax purposes, the stock of Fund F held by the
Company (through Account S), pursuant to the provisions of the Contracts
described above, is owned by the Company and not by the contract owners, or
by any annuitant or beneficiary under the Contracts.
(4) For federal income tax purposes, any income, gain, or loss
recognized with respect to the stock of Fund F held by the Company
(through Account S), pursuant to the provisions of the Contracts, is
includible in the computation of income of the Company and is not the
income, gain, or loss of the contract owners, or of any annuitant or
beneficiary under the Contracts.
With respect to the general account of the Company the rulings above are
subject to the condition that the general account not only meets the
representations indicated but also meets the following condition:
(A) The general account must meet the diversification tests of
representation (c) above.
The diversification tests of representation (c) above apply only to
investment assets. Assets held by the general account and Fund F that are not
investment assets are excluded in making the percentage calculations.
No opinion is expressed about the tax treatment of any conditions existing
at the time of, or effects resulting from, the sale and/or administration of the
Contracts that are not specifically covered by the rulings in this letter.
This ruling letter is directed only to the taxpayer who requested it.
Section 6110(j)(3) of the Internal Revenue Code provides that it may not be used
or cited as precedent.
A copy of this letter should be attached to the federal income tax
return(s) of the taxpayer involved for the taxable year(s) in which the
Contracts are sold and/or administered.
Pursuant to the power attorney on file in this office a copy of this letter
is being sent to your authorized representative.
Sincerely yours,
Xxxxxxx Xxxxxxxxxx, Xx.
Chief, Corporation Tax Branch
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