Union Central Life Insurance Company
January 19, 2004
Mr. Jonathan G. Katz
Re: Release No. IC-26288; File No. S7-27-03
Dear Mr. Katz:
The Union Central Life Insurance Company is a mutual life insurance company headquartered in Cincinnati, Ohio. We offer a broad product line of life, annuity and disability insurance products, and currently we have approximately 1.5 billion dollars in retirement plan assets, which represents service to 2300 employers and 64,000 plan participants. While we are not a major player in the retirement plans industry, it is a major line of business for us, and we have been selling and servicing retirement plans for over 25 years. We offer an exempt group variable annuity product which provides our clients investment options in retail and insurance mutual fund portfolios through exempt separate accounts. We serve primarily small businesses in the employee benefit plan market, and our plan designs include pension and profit-sharing plans (including 401(k) plans) and other tax-qualified retirement plans. We write this letter to provide comments on your proposed amendments to Rule 22c-1 of the Investment Company Act of 1940 (the "forward pricing" rule).
You specifically requested comment on the costs involved for us to convert our transaction processing to meet a firm 4:00 p.m. deadline for providing transaction information to our fund families or their designated transfer agent. We believe you have underestimated the costs involved in adapting to this deadline.
Our costs can be divided into several categories: (a) costs associated with purchasing computer programs that will enable us to run a "batch" for retirement plan transactions during the business day prior to 4:00 p.m. or, in the alternative, purchasing computer programs that will connect us to NSCC or another vendor of real time transaction processing, either of which will amount to approximately $3,000,000.00; (b) costs associated with retirement plan and information systems "downtime" occurring during the middle of the business day, when employees who work in the computer systems that support retirement plans may be unable to process certain types of work while the mid-day batch runs. The overnight processing of transactions has been efficient from a labor cost viewpoint. Any new system will not be as efficient; (c) costs associated with losing sales opportunities because we will be unable to compete with larger insurance companies and fund complexes that will offer later transaction cutoffs than we can manage, and will use that differentiator to attract plan clients, even if the plan participants are as unconcerned about the timing of their transactions as you assume they will be. These losses are impossible to quantify because they are speculative, but they could run as high as millions of dollars of assets for our company; (d) costs associated with being perceived as reducing our service level to our existing plan participant customers, who will no longer be able to complete a transfer of funds among investment options on one business day and won't understand why we have gone to a multiple-day transaction methodology. These costs are difficult to quantify but will likely lead to a loss of existing plans and their assets as disgruntled clients, who have chosen our company over our competitors because of our service focus, move to a competitor. We are fairly certain that, without regard to whether most retirement plan participants track their contributions and transfer requests on a daily basis, plan sponsors who make the decisions about what plan provider to use are sophisticated about transaction processing and accustomed to overnight trading and will consider any multi-day transaction processing requirement to be an unacceptable reduction in service; and (e) costs associated with scrapping existing computer software programs which no longer function in compliance with the regulatory environment. These costs could also add up to hundreds of thousands of dollars.
All of these costs will have to be passed on to the plans.
We feel it would be appropriate and feasible to implement the procedures you outlined in your release concerning time stamping, certifying annually to the funds that we made no late trades, and submitting to an annual audit of our controls by an independent public accountant. (We, like most retirement plan providers, currently participate in an annual audit by outside accountants who create a SAS-70 report, which we furnish to plan sponsors in order to help them fulfill their own SAS-70 audit requirements. This annual audit could be expanded in scope, or another targeted solely at trading deadlines could be instituted.) We would incur costs to comply with these measures, but they would be relatively small (we expect a one-time cost of approximately $100,000 for time stamping equipment and creating and implementing heightened procedures for trade processing, and then several thousand per year thereafter for the audit). We feel that compliance with these procedures should qualify us for an exemption from the 4:00 pm hard close so that we can continue to process transactions overnight, providing the same high level of service to our customers that they have come to expect.
We feel that functionally we are the equivalent of the "conduit" funds you exempt from compliance, because we are also separate accounts that invest solely in other mutual funds. The only difference is that we are exempt from registration under the Securities Act of 1933. Your concern that you have no authority to regulate our separate accounts could be addressed by: (i) using your rulemaking authority to narrow the exemptions under Section 3(a)(2) of the Securities Act of 1933 and Section 3(c)(11) of the Investment Company Act of 1940, requiring filing of certification forms by unregistered separate accounts concerning trading practices and extending the right of the Commission to audit for compliance with the requirements articulated in those forms; or (ii) forming a self-regulatory organization that would be supported by fees from its members, which could include any intermediary that processes transactions for retirement plans with mutual funds, thereby extending your oversight reach to all third party administrators, many of whom are not regulated by the Commission currently because they are not broker-dealers, issuers of securities or investment advisers. This SRO could create a framework for compliance with trading rules that exist currently, as well as a framework for detection and monitoring for market timing activity, and then audit its members to ensure that they operate accordingly.
We believe that the consequences of your enacting these amendments to Rule 22c-1 in their current form, to us as a small retirement plan provider, will be catastrophic. Your efforts to tighten this already-clear regulation about forward pricing will likely force companies like ours out of this market, companies that have operated for decades in partnership with fund families to serve retirement plan participants in a manner that has resulted in no known violations of Rule 22c-1. We do not believe that you have made the public interest case for driving providers like us out of business, since small providers like ourselves are not placing the public at risk like the entities you have recently found to be breaking existing laws and regulations. We have not read about forward pricing violations involving small mutual life insurance companies processing retirement plan transactions with their fund family partners.
In conclusion, we respectfully request that, if you feel you must amend Rule 22c-1, you implement the least restrictive additional regulations possible. The likely consequences of going forward as proposed in your release are more serious than you seem to have contemplated.