[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] ----------------------------------------------------------------------- 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''). ----------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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