[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1715]


[[Page Unknown]]

[Federal Register: January 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20025; No. 812-8650]

 

Equitable Variable Life Insurance Co., et al.; Application for 
Order

January 19, 1994.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: Equitable Variable Life Insurance Company (``Equitable 
Variable''), Separate Account I (``SA-1'') and Separate Account FP 
(``SA-FP'') of Equitable (together, ``Separate Accounts''), and The 
Hudson River Trust (``Hudson Trust'').

RELEVANT 1940 ACT SECTIONS: Exemption requested under section 17(b) 
from section 17(a) of the 1940 Act and approval requested under section 
26(b) of the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order of the Commission to 
permit the substitution of shares (``Substitution'') of the Hudson 
Trust's Intermediate Government Securities Portfolio (``Government 
Securities Portfolio'') for shares of the Hudson Trust's Short-Term 
World Income Portfolio (``World Income Portfolio'') (together, 
``Affected Portfolios'').

FILING DATE: The application was filed on October 14 1993, and a First 
Amended and Restated Application was filed on January 7, 1994.

HEARING OR NOTIFICATION OF HEARING: If no hearing is ordered, the 
application will be granted. Any interested person may request a 
hearing on this application, or ask to be notified if a hearing is 
ordered. Any requests must be received by the Commission by 5:30 p.m. 
on February 14, 1994. Request a hearing in writing, giving the nature 
of your interest, the reason for the request and the issues you 
contest. Serve the Applicant with the request, either personally or by 
mail, and also send it to the Secretary of the Commission, along with 
proof of service by affidavit, or for lawyers, by certificate. Request 
notification of the date of a hearing by writing to the Secretary of 
the Commission.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Equitable Variable Life Insurance Co., 787 Seventh Avenue, New York, 
New York 10019.

FOR FURTHER INFORMATION CONTACT:
Yvonne Hunold, Senior Counsel (202) 272-2676, or Michael Wible, Special 
Counsel (202) 272-2060, Office of Insurance Products (Division of 
Investment Management).

SUPPLEMENTARY INFORMATION: Following is a summary of the application; 
the complete application is available for a fee from the Commission's 
Public Reference Branch.

Applicants' Representations

    1. Equitable Variable is a wholly-owned subsidiary of the Equitable 
Life Assurance Society of the United States (``Equitable Life''). Both 
companies are licensed to conduct business in all fifty states, Puerto 
Rico, the Virgin Islands and the District of Columbia.
    2. SA-1 and SA-FP are registered unit investment trusts under the 
1940 Act. SA-1 funds Equitable's scheduled premium variable life 
insurance contracts and SA-FP funds Equitable's flexible premium 
variable life insurance contracts (``Equitable Variable Contracts''). 
The Equitable Variable Contracts are registered under the Securities 
Act of 1933 (``1933 Act''). SA-1 has seven investment divisions (``SA-1 
Divisions'') and SA-FP has ten divisions (``SA-FP Divisions''). Each 
Division invests in shares of a corresponding portfolio of the Hudson 
Trust. Therefore, SA-1 and SA-FP each have a Short-Term World Income 
Division (``World Income Division''), that invests exclusively in 
shares of the World Income Portfolio, and an Intermediate Government 
Securities Division (``Government Securities Division''), that invests 
exclusively in shares of the Government Securities Portfolio.
    3. The Hudson Trust is an open-end management investment company of 
the series type as described in Rule 18f-2 under the 1940 Act and has 
filed a registration statement under the 1933 Act and the 1940 Act, 
which became effective March 26, 1985. The Hudson Trust has twelve 
different portfolios (``Hudson Trust Portfolios'') that are used by the 
corresponding SA-1 and SA-FP Divisions as investment vehicles in 
connection with the Contracts. The Hudson Trust Portfolios are managed 
by Alliance Capital Management L.P. (``Alliance''), a subsidiary of 
ACMC, Inc., a wholly owned subsidiary of Equitable.
    4. All shares of the World Income Portfolio currently are owned by 
the Separate Accounts. Of these shares, approximately 50% were acquired 
by Equitable Variable's general account in exchange for ``seed money'' 
contributed upon commencement of the World Income Portfolio's 
operations on April 1, 1991. All other shares of this Portfolio are 
attributable to Equitable Variable Contracts and are, thus, owned by 
the Separate Accounts.
    5. The fundamental investment objective of each of the World Income 
Portfolio and the Government Securities Portfolio is high current 
income consistent with relative stability of principal through 
investment primarily in fixed income securities. The World Income 
Portfolio invests in high quality short-term fixed income instruments 
denominated in a variety of currencies, with at least 20% of its 
invested assets in U.S. dollar-denominated instruments. The Government 
Securities Portfolio invests primarily in U.S. Government debt 
securities with secondary investments in repurchase agreements and 
forward commitments related to U.S. Government Securities.
    6. Total net assets as of June 30, 1993 were $289.3 million for the 
Government Securities Portfolio and $10.4 million for the World Income 
Portfolio. There were 2,442 Contractowners participating in the World 
Income Divisions of the Separate Accounts.
    7. The Hudson Trust pays Alliance an investment advisory fee at the 
following annual percentages of the value of each Affected Portfolio's 
daily net assets:

------------------------------------------------------------------------
                                 First $350     Next $400     Over $750 
           Portfolio            mil--percent  mil--percent  mil--percent
------------------------------------------------------------------------
Government Securities.........         .50          .475           .45  
World Income..................         .60          .575           .55  
------------------------------------------------------------------------

The Hudson Trust pays various fees and expenses, and Alliance pays any 
other expense not specifically assumed by the Hudson Trust. For the 
fiscal year ended December 31, 1992, and the six months ended June 30, 
1993, the Affected Portfolios' expenses were as follows:

------------------------------------------------------------------------
                                                      Percent of average
                                                          net assets    
                  Type of expense                   --------------------
                                                      World      Gov't  
                                                     income   securities
------------------------------------------------------------------------
Fiscal Year 1992:                                                       
  Investment Advisory Fee..........................     0.60       0.50 
  Other Expenses...................................     0.16       0.02 
                                                    --------------------
    Total Expenses.................................     0.76       0.52 
Six Months Ended June 30, 1993:\1\                                      
  Investment Advisory Fee..........................     0.60       0.50 
  Other Expenses...................................     0.28       0.02 
                                                    --------------------
    Total Expenses.................................     0.88       0.52 
------------------------------------------------------------------------
\1\Annualized                                                           

    Contractual provisions limiting fees and expenses to be paid under 
certain Equitable Variable Contracts existed when Equitable Variable 
reorganized its separate accounts into unit investment trust form. 
Consequently, Equitable Variable agreed to reimburse certain Divisions 
which invest in the Hudson Trust for the portion of advisory fees and 
other Trust expenses that exceed the contractual limits set forth in 
these Contracts. These reimbursements are made by Equitable Variable to 
such Divisions only in respect of owners of Equitable Variable 
Contracts that contain such contractual expense limits. Expenses of 
owners of Equitable Variable Contracts that do not contain any such 
contractual limits are not affected by the reimbursements. Because the 
reimbursements are prescribed by the relevant Contracts, Equitable 
Variable's contractual reimbursement obligations will not be altered by 
the proposed Substitution. The expenses of the Portfolios shown in the 
foregoing table are, therefore, not affected by these 
reimbursements.\1\
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    \1\The application will be amended during the notice period to 
reflect this representation.
---------------------------------------------------------------------------

    8. The yields for the 30-day period ending August 21, 1993 were 
4.79% for the World Income Portfolio and 5.80% for the Government 
Securities Portfolio. The total returns for the Affected Portfolios 
were:

------------------------------------------------------------------------
                                                     World              
                                                     income      Gov't  
                     Period                        (percent)  securities
                                                               (percent)
------------------------------------------------------------------------
Six-Month Period Ended 6/30/93 (unannualized)....       3.55       6.89 
One-Year Period Ended 12/31/92 (unannualized)....      -2.91       5.53 
Inception thru 12/31/92..........................       0.11      10.06 
------------------------------------------------------------------------

    9. The Hudson Trust's Board of Trustees and Equitable have 
determined that it is in the best interests of the shareholders of the 
World Income Portfolio, and the Contractowners who have allocated 
premiums to the World Income Divisions, to suspend operations of that 
Portfolio and the corresponding Divisions for the following reasons. 
The World Income Portfolio's expenses, as noted above, are relatively 
high. Assets are small and declining from approximately $11.3 million 
on June 30, 1992 to approximately $10.4 million on June 30, 1993, even 
though Equitable Variable has maintained its seed money investment of 
$5 million ($5.1 million as of June 30, 1993). Additionally, the World 
Income Portfolio currently is in net redemption and, consequently, 
making its investment objective more difficult to achieve. This 
Portfolio's performance relative to portfolios with similar investment 
objectives and investments has been below the median, with a recent 
ranking of eighth of eight world income funds for the one year period 
ended June 30, 1993. The proposed Substitution will, therefore, 
eliminate a Hudson Trust Portfolio that, because of its small size, is 
expected to be unable to reduce its operating expenses in the 
foreseeable future, that has not historically been able to produce 
competitive yields and returns, and that, because of those expenses and 
net redemptions, is expected to find it increasingly difficult to 
achieve competitive investment results.
    10. Equitable Variable thus proposes to substitute shares of the 
Government Securities Portfolio for shares of the World Income 
Portfolio. The Separate Accounts will redeem, partly for cash and 
partly for securities as a redemption in-kind, all shares of the World 
Income Portfolio attributable to Contractowners at the close of 
business on the date selected for the Substitution. Redemptions in-kind 
of securities held by the World Income Portfolio will be executed to 
the extent that the securities have characteristics consistent with the 
investment objectives and diversification requirements of the 
Government Securities Portfolio. Equitable Variable will request 
Alliance to review such securities selected for redemption in-kind to 
assure that such securities are suitable investments for the Government 
Securities Portfolio. Applicants have determined that effecting 
redemption of shares of the World Income Portfolio and the purchase of 
shares of the Government Securities Portfolio partially in cash and 
partially for securities is appropriate, based on the overlap between 
the U.S. dollar-denominated portfolio securities of the World Income 
Portfolio and the shorter-term securities eligible for purchase by the 
Government Securities Portfolio. Securities redeemed in-kind will be 
valued in accordance with generally accepted accounting practices and 
all applicable laws and regulations.
    The Separate Accounts will use the securities redeemed in-kind and 
the cash proceeds received on redemption of the World Income 
Portfolio's shares to purchase shares of the Government Securities 
Portfolio. The World Income Portfolio will process the redemption 
request, and the Government Securities Portfolio will process the 
purchase order, at prices based on the current net asset values next 
computed after receipt of the request and order and, therefore, in a 
manner consistent with Rule
22c-1 under the 1940 Act. Investments of Contractowners in the Separate 
Accounts will at all times be fully invested, the value of such 
investments will not be changed by the Substitution, and the investment 
by the Government Securities Divisions of the Separate Accounts will 
not be diluted. On the business day following the Substitution, or as 
soon thereafter as is consistent with the stated purposes of the 
proposed transaction, Equitable Variable will redeem entirely for cash 
shares of the World Income Portfolio constituting its seed money.
    11. Contractowners will bear none of the transaction costs 
triggered by the redemption in connection with the Substitution. The 
full net asset value of the redeemed shares held by the Separate 
Accounts will be reflected in the Contractowners' unit values following 
the Substitution. Any costs of liquidating the assets of the World 
Income Portfolio for the redemption that is part of the Substitution 
will be reflected in the next asset value at which Equitable Variable 
subsequently redeems its shares of that Portfolio. All other expenses 
of the Substitution will be borne by Equitable Variable and Alliance. 
Accordingly, the costs associated with the Substitution will not be 
borne, directly or indirectly, by the Contractowner.
    12. Contractowners will be given prior notice of the proposed 
Substitution and will have the option of transferring the portion of 
the value of their contract (``Policy Value'') allocable to the World 
Income Portfolio to any other Portfolio of the Hudson Trust, without 
charge. Otherwise, amounts allocated to the World Income Portfolio will 
be transferred to the Government Securities Portfolio, also without 
charge. All contractowners have received a prospectus describing the 
policies of the Hudson Trust and its Portfolios and have all 
information needed to make a decision with respect to reallocating the 
respective portion of their Policy Value.
    Within five (5) days after the Substitution, Equitable Variable 
also will send to Contractowners indirectly investing in the World 
Income Portfolio written notice of the Substitution indicating that 
shares of the World Income Portfolio have been eliminated and shares of 
the Government Securities Portfolio have been substituted. Equitable 
Variable will include in such mailing a supplement to the prospectus of 
the Hudson Trust that discloses the completion of the Substitution or 
an updated prospectus, as appropriate. Contractowners will be advised 
in the Second Notice that they may transfer the Policy Value allocable 
to the Government Securities Portfolio, as substituted, to any other 
available Divisions investing in the other Hudson Trust Portfolios, 
without limitation, without charge and at any time. The Substitution 
will not be counted as a transfer under any contractual provisions of 
the Equitable Variable Contracts that limit allowable transfers. 
Following the Substitution, Contractowners will be afforded the same 
contract rights that they currently have, including surrender and other 
transfer rights with regard to amounts invested under the Equitable 
Variable Contracts.

Applicants' Legal Analysis--Section 26(b)

    1. The Applicants request that the Commission issue an order under 
sections 17(b) and 26(b) of the 1940 Act to the extent necessary to 
permit the substitution of shares of the Government Securities 
Portfolio for shares of the World Income Portfolio.
    Section 26(b) of the 1940 Act makes it unlawful for any depositor 
or trustee of a registered unit investment trust holding the security 
of a single issuer:

    * * * to substitute another security for such security unless 
the Commission shall have approved such substitution. The Commission 
shall issue an order approving such substitution if the evidence 
establishes that it is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of 
this title.

    3. Equitable believes the Substitution is consistent with the 
interests of the owners of the Contracts. Both Portfolios have the same 
underwriter and investment adviser. Notwithstanding investments in 
different instruments, their investment objectives are substantially 
similar in that each seeks high current income consistent with relative 
stability of principal through investment in fixed income securities. 
Additionally, management fees indirectly paid by the Contractowners 
after the Substitution will be lower than those incurred prior to the 
Substitution.
    4. Additionally, the Substitution is expected to confer economic 
benefits on Contractowners because: (a) The World Income Portfolio's 
expenses and net redemptions are expected to make it increasingly 
difficult for that Portfolio to achieve competitive results; (b) 
operation of the consolidated Affected Portfolios will result in 
economies of scale and reduced operating expenses as a result of lower 
management fees paid by the Government Securities Portfolio; and (c) 
the size of the Government Securities Portfolio, its competitive return 
and its historically higher total return and yield suggest that it will 
offer a more favorable opportunity for achieving a substantially 
similar investment objective with more competitive results that the 
World Income Portfolio has been able to achieve, relative to other 
competitive funds.
    5. The Contracts reserve to Equitable Variable the right to replace 
the shares of one Hudson Trust Portfolio held by the Separate Accounts 
with shares of another Hudson Trust Portfolio or with another 
registered investment company, subject to Commission approval. The 
substitution right is disclosed in the Separate Accounts' prospectuses.
    6. Contractowners will incur no transfer fees in connection with 
the Substitution. The Substitution will have no adverse federal income 
tax consequences for the Contractowners. Additionally, the Substitution 
will in no way alter the insurance benefits to Contractowners or the 
contractual obligations of Equitable Variable. Contractowners will 
continue to look to Equitable Variable with regard to their rights 
under the Equitable Variable Contracts.
    7. Applicants consent to the following terms of and the conditions 
to the issuance of an order granting an exemption under section 26(b):
    a. Shares of the Government Securities Portfolio will be 
substituted for shares of the World Income Portfolio, whose investment 
objective is substantially similar to the investment objective of the 
Government Securities Portfolio;
    b. If a Contractowner that has allocated premiums to the World 
Income Divisions requests a reallocation of shares before May 1, 1994, 
the Policy Value of the Contractowner's Equitable Variable Contract 
will be reallocated for investment to another Hudson Trust Portfolio 
selected by the Contractowner at no cost to the Contractowner;
    c. The Substitution will, in all cases, be at net asset value of 
the respective shares, without the imposition of any transfer or 
similar charge;
    d. Any expenses and transaction costs triggered by the redemption 
in connection with the Substitution (e.g., brokerage commissions, 
custodial fees, accounting fees, etc.) and which are reflected in the 
net asset value of the World Income Portfolio shares will be assumed by 
Equitable as the sole remaining shareholder of the World Income 
Portfolio. Equitable and Alliance will bear all other expenses of the 
Substitution, including legal and accounting fees and expenses, the 
cost of prospectus disclosure, this Application and Notices;
    e. The Substitution will not be treated as a transfer for purposes 
of any provisions of the Equitable Variable Contracts that limit 
allowable transfers;
    f. The Substitution will in no way alter the insurance benefits to 
Contractowners or the contractual obligations of Equitable Variable; 
and
    g. The Substitution will not alter the tax benefits to 
Contractowners or cause any adverse tax consequences to Contractowners.

Applicants' Legal Analysis--Sections 17(a) and 17(b)

    1. Applicants also request an order of the Commission under section 
17(b) of the 1940 Act exempting them from the provisions of section 
17(a) of the 1940 Act in connection with aspects of the Substitution 
that may be deemed to be prohibited by section 17(a). Section 17(a)(1) 
of the 1940 Act prohibits any affiliated person of a registered 
investment company, or any affiliated person of such person acting as 
principal, from selling any security or other property to that company. 
Section 17(a)(2) of the 1940 Act prohibits such affiliated persons from 
purchasing any security or other property from the registered 
investment company.
    2. The Substitution may result in transactions prohibited by 
section 17(a) because of affiliations among the Government Securities 
Divisions, the World Income Divisions, and the corresponding Trust 
Portfolios. The Substitution specifically may be deemed to include one 
or more purchases or sales of securities between the World Income 
Divisions and the Government Securities Portfolio because the World 
Income Divisions will purchase shares of the Government Securities 
Portfolio with the securities received by these Divisions in connection 
with the redemption in-kind of shares of the World Income Portfolio. 
Similar issues may arise in connection with the redemption in-kind 
itself and the consolidation of the Divisions.
    3. Section 17(b) of the 1940 Act provides that the Commission 
shall, upon application, grant an order exempting a proposed 
transaction otherwise prohibited by Section 17(a) if evidence 
establishes that: (a) The terms of the proposed transaction, including 
the consideration to be paid or received, are reasonable and fair and 
do not involve overreaching on the part of any person concerned; (b) 
the proposed transaction is consistent with the policies of each 
registered investment company concerned, as recited in its registration 
statements and reports filed under the 1940 Act; and (c) the proposed 
transaction is consistent with the general purposes of the 1940 Act. 
The Applicants represent that the proposed Substitution satisfies these 
tests.
    4. First, the terms of the Substitution are reasonable and fair and 
do not involve overreaching on the part of any person concerned. The 
Substitution will be effected pursuant to the Hudson Trust's procedures 
for valuing portfolio securities and portfolio securities of the 
Affected Portfolios are and will be valued in a consistent manner.
    Rule 17a-7 under the 1940 Act permits a purchase or sale 
transaction between registered investment companies or separate series 
of registered investment companies which may be affiliated persons, or 
affiliated persons of affiliated persons, solely by reason of having a 
common investment adviser or investment advisers which are affiliated 
persons of each other, common directors and/or common officers, subject 
to certain specified conditions. However, the Substitution will involve 
the redemption by the World Income Portfolio of securities in-kind 
rather than for cash and, therefore, will not meet the requirements of 
subsection (a) of Rule 17a-7. Nevertheless, the Substitution will 
comply with subsections (b), (c) and (d) of Rule 17a-7 because the 
transactions: will be effected at the independent current market price, 
including, where appropriate, amortized cost, of the securities 
involved; is consistent with the policies of the Government Securities 
Portfolio and the Government Securities Divisions; and will not involve 
the payment of any brokerage commission, fee or other remuneration. 
Applicants believe, moreover, that the proposed transactions satisfy 
the intent of Rule 17a-7 and that, consequently, there will be no 
overreaching because all securities redeemed in-kind and used to 
purchase shares of the Government Securities Portfolio will be 
consistently valued for all purposes.
    5. Second, the proposed Substitution is consistent with the 
investment policies of both Affected Portfolios because securities 
received by the Separate Account from the World Income Portfolio from 
redemptions in-kind will be selected by Alliance to correspond to the 
investment policies of the Government Securities Portfolio.
    6. Third, the Substitution is consistent with the general purposes 
of the 1940 Act because it will provide Contractowners those economic 
and other benefits discussed herein.

Conclusion

    1. Applicants submit that the exemptive relief requested under 
section 26(b) of the 1940 Act is necessary and appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policies and provisions of the 1940 
Act.
    2. Applicants further submit that the exemptive relief requested 
under section 17(b) is appropriate because the terms of the proposed 
Substitution, including the consideration to be paid or received, are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned, the proposed transaction is consistent with the 
policy of each registered investment company concerned with the 
Substitution, as recited in their registration statements and reports 
filed under the 1940 Act, and the Substitution is consistent with the 
general purposes of the 1940 Act.
    3. Accordingly the Applicants request that the Commission grant the 
necessary exemptions and approvals pursuant to sections 17(b) and 26(b) 
of the 1940 Act permitting the Substitution.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1715 Filed 1-26-94; 8:45 am]
BILLING CODE 8010-01-M