Before STALEY and GANEY, Circuit Judges, and NEALON, District Judge.
The narrow but provocative question posed by this case is whether the Investment Company Act of 1940, 15 U.S.C. § 80a applies to the Investment Fund resulting from the sale of variable annuity contracts to members of the public by The Prudential Insurance Company of America. The Securities and Exchange Commission answered this question in the affirmative, rejecting the view of Prudential that the Act exempts such a program because the contracts are offered and sold by an insurance company. The case is before us on the petition of Prudential for review of the order of the Commission entered pursuant to that determination.
Though there are variations in the form of the variable annuities which Prudential proposes to sell*fn1, their salient characteristics are not disputed and their nature has been concisely summarized by the Commission in its opinion in this case:
"In substance, the variable annuity contracts which Prudential proposes to sell to individuals provide that the purchaser will make monthly purchase payments of fixed amounts over a period of years (the 'pay-in' period), the proceeds of which, after certain deductions, will be invested in a portfolio of securities. The purchaser will be credited monthly with 'units' representing his proportionate interest in this fund. The value of these units will fluctuate, essentially depending upon the investment results of the fund. During the annuity, or 'pay-out' period, Prudential guarantees that the purchaser will receive in cash the varying value of a fixed number of units as monthly annuity payments.
"Specifically the payments made by the purchasers will be placed in a 'Variable Contract Account' which will be managed by Prudential and be subdivided into two accounts. The first, the 'Investment Fund' account, will have its assets invested primarily in common stocks and will constitute the fund in which the purchasers hold units; this account will be dedicated solely to the variable annuity contract holders and its assets will not be subject to claims of any other contract or policyholder of the company. The second, the 'Other Assets' account, an administration account, will receive the amounts deducted from the purchase payments to cover administration expenses, sales commissions, and certain taxes, and to provide a surplus or reserve for the obligations to purchasers contained in the contracts. Transfers will be made periodically from the Other Assets account to the Investment Fund account to meet the contractual requirements that the assets of the latter be equal to the company's existing obligations under the variable contracts. Any excess over the amounts estimated to be needed for the foregoing purposes may be declared as so-called 'dividends' which will provide additional fund units or cash payments for the contract holders; it will also be available to support the guarantees on contracts administered by Prudential's other operations. Any deficiency resulting from lower mortality than assumed, for example, will be met out of the general surplus of Prudential.
"During the pay-in period a purchaser will have the right to terminate the contract and receive the value of all units credited to his account, less certain termination charges. If a purchaser should die during the pay-in period, the contract is automatically terminated and his beneficiary is paid the greater of (i) the value of all units credited to the purchaser's account or (ii) an amount equal to the total of all purchase payments made.
"Absent death or redemption, the pay-in period normally runs for at least 15 years. Thereafter, during the pay-out period, the variable annuitant is entitled to receive each month the current value of a fixed number of units determined at the end of the pay-in period. This number of units is calculated on the basis of the number of units accumulated by the purchaser during the pay-in period, an assumed annual investment increment of 2 1/2% from dividend and interest income, and actuarial computations which take into account the length of the pay-out period anticipated in light of the age and sex of the purchaser and any co-annuitant. The value of the variable unit during the pay-in and pay-out periods will be determined at the end of each month and will reflect the changes in the market value of the securities in the Investment Fund account, realized gains and losses, and dividend or interest income. Deductions will be made for investment advisory and other expenses in an amount equal to 0.6% per annum of the value of the fund's assets and for taxes."
Prudential concedes that such contracts have been held to be "securities" within the meaning of the Securities Act of 1933, Securities and Exchange Commission v. Variable Annuity Life Insurance Co. [hereinafter called "VALIC"], 359 U.S. 65, 79 S. Ct. 618, 3 L. Ed. 2d 640 (1959), and it is willing to register them under that Act. Prudential argues, however, that the Investment Company Act of 1940 specifically excludes insurance companies from its scope*fn2 The Commission acknowledged that Prudential is excluded from the Act, but held that the fund created by the sale of the contracts, which is to be used for investment purposes, gives rise to a separate investment company within the coverage of the statute. The Commission concluded that Prudential is not itself an investment company but is the creator of one, and proposes to be its investment adviser and principal underwriter*fn3
In this court, Prudential, premising its argument on the insurance company exclusion, asserts that this construction of the statute is inordinately complicated, abstruse, and without basis in law. It asserts that the statute is plain and forecloses Commission jurisdiction in this case. However, since it is conceded that Prudential is excluded from the Act, the issue is narrowed to the question of whether the Commission made a permissible interpretation in concluding that the variable annuity program results in the creation of a separate, non-exempt investment company.
Of course, in resolving this issue we start with the premise that securities legislation must be broadly construed in order to insure the investing public a full measure of protection. Securities and Exchange Commission v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S. Ct. 275, 11 L. Ed. 2d 237 (Dec. 9, 1963); Securities and Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 73 S. Ct. 981, 97 L. Ed. 1494 (1953); Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946). The parties agree that the statutory definitions contained in the Investment Company Act of 1940 are cast in broad terms. The critical term is "company", which, so far as relevant to our discussion, is defined as "a trust, a fund, or any organized group of persons whether incorporated or not." 15 U.S.C. § 80a-2(a) (8).
The Commission determined that the variable annuity contracts constitute the purchasers an "organized group of persons"; that they create a "trust" held by Prudential for these purchasers; and, more importantly, that the separate Investment Fund resulting from the sale of the variable annuity contracts is a "fund" within the statutory definition. Based upon this last decisive holding, the Commission then concluded that the Investment Fund is the "issuer" of the variable annuity securities, and that it is an "investment company" subject to the Act*fn4
On this score Prudential argues that the Act regulates only identifiable business entities with some sort of internal organization, and that it is the only such entity involved in this program. Thus, it is asserted that the purchasers cannot be described as an "organized group of persons"; that the plan has no elements of a common-law trust; and that the "fund" referred to in the Act means a mutual fund or any other similar entity, but not Prudential's Investment Fund. But, as Mr. Justice Brennan has cogently observed, the regulatory provisions of the Act "are of particular relevance to situations where the investor is committing his funds to the hands of others on an equity basis, with the view that the funds will be invested in securities and his fortunes will depend on the success of the investment." VALIC, 359 U.S. at 79, 79 S. Ct. at 626, 3 L. Ed. 2d 640 (concurring opinion). Furthermore, a study of the legislative history of the Act shows that Congress intentionally drafted the statutory definitions in general terms in order to control such situations regardless of the legal form or structure of the investment enterprise.
Initially, it must be noted that the Committee reports of both the House and the Senate state that the legislation was drafted principally on the basis of reports submitted by the Securities and Exchange Commission following an extensive study of investment trusts and investment companies undertaken at the direction of Congress. H.R.Rep.No.2639, 76th Cong., 3rd Sess. 5-6 (1940); S.Rep.No. 1775, 76th Cong., 3rd Sess. 1, 5 (1940). The Act itself contains a similar acknowledgment. 15 U.S.C. § 80a-1. The significance of such reports in ascertaining the intent of Congress in enacting securities legislation was recently ...