contract holder's interest in the separate account at the time the request for withdrawal or transfer is made is in excess of $20 million, at least 5 percent of the value of that interest.

The proposed rule also provides that no surrender charge in excess of 2 percent may be made in connection with any such withdrawal or transfer. Many contracts employed for the purpose of funding pension and profit-sharing plans impose no sales load at all in connection with purchase payments but do impose what would be the equivalent of a sales load in connection with withdrawals or the payment of benefits. In order to accommodate these arrangements, subparagraph (c)(2) permits a surrender charge in excess of 2 percent but only if the sales load and the surrender charge under the contract in the aggregate do not exceed 6 percent. Section 6(c) of the Investment Company Act provides that the Commission by rule, regulation or order may conditionally or unconditionally exempt any person, security, or transaction, or any class of persons, securities, or transactions, from any provision or provisions of the Investment Company Act, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Investment Company Act. Section 6(e) of the Investment Company Act provides that if, in connection with any rule, regulation or order under Section 6 exempting any investment company from any provision of Section 7, the Commission deems it necessary or appropriate in the public interest or necessary for the protection of investors that certain specified provisions of the Investment Company Act shall be applicable in respect to such company, the provisions so specified shall apply to such company and to other persons in their transactions and relations with such company, as though such company were a registered investment company. Section 38(a) of the Investment Company Act authorizes the Commission to issue rules necessary or appropriate to the exercise of the powers conferred upon the Commission in the Investment Company Act.

Rule 156

Rule 156 under the Securities Act, as presently in force, defines as "transactions by an issuer not involving any public offering" in section 4(2) of that act transactions which are exempted from the Investment Company Act by Rule 3c-3 provided that certain additional conditions are met.

In connection with its proposal to adopt Rule 6e-1 the Commission also proposes to amend Rule 156. Paragraph (a) generally follows the present Rule but would cover transactions involving contracts which relate to separate accounts claiming exemption either under Rule 3c-3 or Rule 6e-1, instead of only under Rule 3c-3. This paragraph continues to cover only transactions with employers and has no applicability to any transaction whereby an employee acquires an interest in a separate account.

The present Rule 156 is applicable only to contracts which are negotiated with an employer for the benefit of at least 25 employees because this is one of the conditions for exemption under Rule 3c-3. Since the proposed Rule 6e-1 would not have any such condition, it is proposed to make such a requirement an explicit condition in subparagraph (a)(1) of the amended Rule 156.

The term "employer" is defined, as it is in the present Rule 156, to mean "an employer, employers or persons acting on their behalf." This would include within the definition of transactions not involving any public offering, the sale of group contracts to trustees or associations representing several employers in a single industry. In several industries, pension and profit-sharing plans are established in connection with collective bargaining between industry-wide management representatives and unions, and these plans permit covered employees to change from one employer to another while remaining eligible for benefits under the plan. A group annuity contract issued for the purpose of funding such a plan would not, under the amended rule, as it does not now under the present rule, have to be registered under the Securities Act, if the other conditions of the rule are met. A different test would apply, however, to contracts issued for the purpose of funding Smathers-Keogh plans. Where a contract is to cover a sole proprietorship or a partnership involving 25 or more employees, the transaction would be regarded under the rule as a transaction not involving a public offering. But where a contract is issued covering the employees of several separate enterprises, as would be the case with a contract issued to a bar or medical association permitting participation thereunder by members of the association, this would be regarded as constituting a public offering if any member of the association employed less

than 25 persons. As a practical matter it would therefore appear that virtually all Smathers-Keogh contracts would be subject to the registration requirements of the Securities Act.

Paragraph (b) of the proposed amendment to Rule 156 is new. Since Rule 3c-3 provides an exemption from the Investment Company Act only for transactions involving contracts which prohibit the allocation of employee contributions to a separate account, paragraph (b) would be applicable only where allocations of employee contributions are made to a separate account which is entitled to exemption under Rule 6e-1, as part of a transaction that is regarded as not involving a public offering under Rule 156(a).

Subparagraph (b) provides that no sale or offer shall be deemed to be involved where employee contributions are allocated to a separate account under the foregoing circumstances if two conditions are met. First, there must not be any individual solicitation of employees either to participate in the plan or to elect to participate in the portion that utilizes the separate account rather than in other aspects of the plan. Second, the employer must make a "substantial contribution" to the overall pension and profit-sharing program of which the contract participating in the separate account is a part. Each of these conditions is described more fully below.

The first condition is set forth in subparagraphs (b)(1) and (b)(2). It is recognized, of course, that employees who are offered an opportunity to make contributions under a retirement program must be told about the plan and about the terms and nature of their participation. Booklets describing the plan may be distributed by the employer or the insurance company. Regular employees of the employer, in its labor relations, personnel, or comparable divisions may meet with employees either in groups or singly, to discuss and explain the plan and to make whatever recommendations are thought appropriate. Where a pension consultant has been retained by the employer, he may participate in this activity. It is common practice, when a retirement plan is first established or a significant change made, or new features added, to provide oral explanations to groups of employees at meetings arranged for that purpose. Representatives of the insurance company or, where an independent broker has participated in the sale of the contract, representatives of the broker, may appear at and participate in such meetings. If the provisions of subparagraph (b) are to be available, these representatives must be salaried employees and may not receive commissions based upon the extent of participation under the separate account contract. Such representatives may not, however, engage in discussions with individual employees for the purpose of inducing participation in or explaining the plan. Nor may the employer engage anyone for the purpose of inducing participation.

The "substantial contribution" condition is set forth in subparagraph (b) (3). The employer must make a contribution under the program, of which the plan funded by the separate account contract is a part, that can be expected, over the life of the plan, to be at least one-half that made by the employees. Because employers enjoy considerable flexibility in determining the amount and timing of their contributions under qualified pension and profit-sharing plans, demonstration of satisfaction of this condition presents certain difficulties. For this reason the test set forth in subparagraph (b)(3) has been included.

It should be noted that the amended rule would continue to provide an exemption only from Section 5 of the Securities Act and would not, therefore, afford any exemption from the anti-fraud sections of the Securities Áct.

The text of proposed Rule 6e-1 under the Investment Company Act reads as follows:

PROPOSED RULE 6e-1. EXEMPTION FOR CERTAIN
INSURANCE COMPANIES

SEPARATE ACCOUNTS OF

(a) A separate account which issues only interests or participations in a fund of securities, pursuant to contracts made in connection with pension or profit-sharing plans which meet the requirements either for qualification under Section 401 of the Internal Revenue Code or for deduction of the employer's contributions under Section 404(a) (2) of said Code, shall, except for the following sections, be subject to all provisions of the Act as though such separate account were a registered open-end investment company:

(1) Section 7;

(2) Section 8 except to the extent made applicable by paragraph (b) of this Rule;

(3) Section 9 but only to the extent that a company shall not be subject to the restrictions of Section 9(a)(3) by virtue of the status of persons whe do not participate in any way in the operations of or sales of interests in the separate account;

(4) Section 10 but no paragraph (f) thereof;

(5) Section 13(a) provided that the Commission is notified in writing at least 60 days prior to any proposed change in investment policy, and the Commission does not in its discretion within 30 days of receipt of such notice condition or limit, in respect of the proposed change in investment policy, the exemption otherwise provided by this Rule;

(6) Section 14(a) provided the insurance company of which the separate account is a part shall have (a) a combined capital and surplus, if a stock company, or (b) an unassigned surplus, if a mutual company, of not less than $1,000,000 at the time of the filing of the notification provided for by paragraph (b) (1) hereof. (7) Section 15;

(8) Section 16;

(9) Section 17(d), to the extent necessary to permit contemporaneous purchases or contemporaneous sales on behalf of the separate account and other separate accounts and the general account of the insurance company of the same class or series of securities of the same issuer.

(10) Section 17(f);

(11) Section 18(i);

(12) Section 19;

(13) Section 20(a) and (b);

(14) Section 22 other than paragraphs (c) and (g) thereof;

(15) Section 24;

(16) Section 27(c);

(17) Sections 30 and 31(a) except as provided by paragraph (b) of this Rule; and

(18) Sections 32(a) and (b).

(b) Any insurance company which maintains or proposes to maintain a separate account with respect to which exemption from registration under this Rule is claimed shall:

(1) file with the Commission, within thirty days after the effective date of this Rule or within thirty days after the establishment of such separate account, whichever is later, a notification on Form N-6E-1 which identifies such separate account,

(2) file with the Commission, a report on Form N-6E-2 within three months after filing the notification referred to above; provided that if the fiscal year of the separate account ends within this three-month period, the Form N-6E-2 report may be filed within three months after the end of such fiscal year,

(3) file with the Commission, such annual and other reports and shall maintain such records with respect to such separate accounts as the Commission shall prescribe by rules pursuant to Sections 30 and 31 of the Act as appropriate in view of the character of the separate account and its operations and as necessary or appropriate in the public interest or for the protection of investors; provided that, except as may otherwise be provided in either such rules or in this Rule or in the Forms for reports prescribed by the Commission, the provisions of Regulation 8B under the Act shall be appilcable, Records required to be maintained pursuant to such rules shall be subject to the requirements of Section 31(b) of the Act.

(4) in the case of a contract that provides for the allocation of contributions to the separate account in connection with a pension or profit-sharing plan that provides for employee benefits which may vary to reflect the investments results of the separate account, such insurance company shall deliver to every employer to which such a contract has been issued a copy of a statement in writing setting forth, to the extent applicable, (A) that the benefits to be received by the employees will not be paid in any fixed dollar amount, and will vary to reflect the investment experience of the separate account; (B) that the investments held in the separate account will include common stocks and other equity investments which may be changed from time to time; and (C) the essential features of the procedure to be followed by the insurance company in determining the dollar amount of such variable benefits. The insurance company shall recommend to the employer that such statement should be transmitted to covered employees, and file such statement with the Commission within 10 days after delivery to any employer, and

(5) file with the Commission, within 10 days after delivery to an employer, a copy of every document, or portion thereof, relating to the separate account or the

interests or patcipations therein, that has been furnished by the insurance company to an employer for transmission or which may reasonably be expected to be transmitted to employees;

(c) A separate account shall be entitled to the exemptions provided by paragraph (a) of this Rule only if:

(1) the separate account is a legally segregated asset account, the assets of which have a value at least equal to the reserves and other contract liabilities with respect to such account, and that portion of such assets, which has a value equal to the reserves and other contract liabilities of such account, is not chargeable with liabilities arising out of any other business which the insurance company may conduct; provided that this condition need not be satisfied until six months after the effective date of this rule.

(2) any contract which provides for allocation of contributions to the separate account, authorizes the contract holder to direct that assets held in the separate account applicable to the contract (other than amounts which, pursuant to the contract, have been allocated to provide retirement benefits to individual employees) be withdrawn or transferred, although such contract may (A) limit the amount that may be transferred in any one month to the greater of (i) $1,000,000 or (ii) 5% of the value of the contract holder's interest in the separate account at the time the original request for withdrawal or transfer is made and (B) impose a surrender charge not to exceed 2 percent of the amount transferred, provided that a surrender charge in excess of 2 percent of the amount transferred may be imposed if the sales load and surrender charge, in the aggregate, do not exceed 6 percent.

(d) "Separate account," as used in this Rule, shall mean a fund established and maintained by an insurance company pursuant to the law of any state or territory of the United States or the District of Columbia, under which income, gains, and losses, whether or not realized, from assets allocated to such fund, are, in accordance with the applicable contract, credited to or charged against such fund without regard to other income, gains, or losses of the insurance company. (e) "Insurance company," as used in this Rule, shall have the same meaning as that prescribed in Section 2(a) (17) of the Act.

The text of proposed amended Rule 156 under the Securities Act reads as follows:

Proposed Rule 156, as amended

PROPOSED RULE 156. DEFINITION OF "TRANSACTIONS BY AN ISSUER NOT INVOLVING ANY PUBLIC OFFERING" IN SECTION 4(2) AND OF "SALE," "OFFER," "OFFER TO SELL," AND "OFFER FOR SALE" FOR PURPOSES OF SECTION 5, IN CONNECTION WITH SEPARATE ACCOUNTS EXEMPTED BY RULE 3C-3 OR RULE 6E-1 UNDER THE INVESTMENT COMPANY ACT OF 1940

(a) The phrase "transactions by an issuer not involving any public offering" in Section 4(2) of the Act shall include any transaction with an employer, employers or persons acting on their behalf (herein called the "employer") whereby an isurance company offers, pursuant to a contract, interests or participations in a separate account, which meets the conditions and limitations set forth in Rule 3c–3 or Rule 6e-1 under the Investment Company Act of 1940, provided that:

(1) Such contract is negotiated with such employer for the benefit of at least 25 employees, provided further that, in the case of a contract which covers selfemployed individuals and owner-employees some or all of whom are employees within the meaning of Section 401 (c) of the Internal Revenue Code, each partnership or sole proprietor employs at least 25 employees including such self-employed individuals and owner-employees; and

(2) Such contract is not advertised in any written communication which, insofar as it relates to interests or participations in a separate account, does more than identify the insurance company, state that it is engaged in the business of writing such contracts, sets forth a brief description of the nature of the separate account and of the basic provisions of the contract, and invites inquiries in regard thereto. The limitations of this clause shall not apply to disclosure made in the course of direction discussion or negotiation of such contract.

(b) For purposes only of Section 5 of the Act, no "sale," "offer," "offer to sell," or "offer for sale" shall be deemed to be involved so far as an employee is concerned (whether or not there is a public offering to the employer), where allocations of employee contributions are made to a separate account entitled to the exemptions provided by Rule 6e-1 under the Investment Company Act of 1940

pursuant to a contract which meets the conditions and limitations set forth in subparagraph (1) of paragraph (a) of this Rule, provided that:

(1) The employer does not engage any person for the purpose of inducing employees to participate under such contract or in a plan based on such contract or of inducing any elections on the part of employees under such contract or in such plan; and

(2) Any solicitation of individual employees by or on behalf of the insurance company is limited to discussions with the employer and to furnishing the employer with explanatory documents as required ot contemplated by Rule 6e-1 under the Investment Company Act, or giving oral explanations, including answering of questions, at meetings of groups of employees arranged by the employer and no commissions are paid to the persons responsible for drafting the explanatory documents or for inducing any election on the part of the employee; and

(3) The employer makes a substantial contribution to the overall pension and profit-sharing program of which the contract is a part. An employer's contribution shall be deemed "substantial," as used in this Rule, if the overall pension and profit-sharing program applicable to the employees covered by the program can be reasonably expected to provide for a contribution by the employer, over a period for which the program may reasonably be expected to be in operation, which in the aggregate is at least half as much as the contributions made by the employees. The foregoing requirement shall be deemed to have been satisfied if the employer has in the preceding five fiscal years, or since the inception of the program, if less than such five years, contributed in the aggregate at least half as much under such program as have the employees and the basis for determining contributions has not been changed since such past contributions were made to reduce the employer's anticipated contributions. At the inception of a program and at any time thereafter, notwithstanding that the aggregate contributions by the employer during such five year (or shorter) period do not amount to at least half as much under such program as was contributed by the employees, or thas the basis for determining contributions has changed, a written certificate by a member of the American Academy of Actuaries, prepared in accordance with generally accepted actuarial standards, stating that the employer's contribution can reasonably be expected to be at least half as much as contributions to be made by the employees over a period for which the plan may reasonably be expected to be in operation and stating the basis thereof, shall be prima facie evidence of satisfaction of the requirement of this subparagraph at that time and for the ensuing year. A copy of each such certificate shall be filed with the Commission as an exhibit to the notification or report next following such certificate, filed pursuant to paragraph (b) of Rule 6e-1 under the Investment Company Act of 1940.

All interested persons are invited to submit views and comments on proposed Rule 6e-1 under the Investment Company Act and the proposed amendment to Rule 156 under the Securities Act. Written statements of views and comments in respect of the proposed Rule and the proposed amendment should be submitted to the Securities and Exchange Commission, Washington, D.C. 20549 on or before April 8, 1969. All such communications will be available for public inspection. By the Commission. ORVAL L. DuBois, Secretary.

The CHAIRMAN. Our next witness is Paul W. Eggers, general counsel, Department of the Treasury.

For the benefit of the record, state the name and capacity of the gentleman accompanying you.

STATEMENT OF PAUL W. EGGERS, GENERAL COUNSEL, DEPARTMENT OF THE TREASURY, ACCOMPANIED BY DEAN E. MILLER, DEPUTY COMPTROLLER OF CURRENCY

Mr. EGGERS. I am Paul W. Eggers, General Counsel for the Treasury. I have with me Dean E. Miller, Deputy Comptroller of Currency. He had the honor of testifying before this committee back in 1967. I think, for that reason, I have him with me today.