[Federal Register Volume 59, Number 94 (Tuesday, May 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11926]


[[Page Unknown]]

[Federal Register: May 17, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20290; File No. 812-8626]

 

The Mutual Life Insurance Company of New York, et al.

May 11, 1994.
AGENCY: Securities and Exchange Commission (the ``SEC'' or 
``Commission'').

ACTION: Notice of Application for Exemptions under the Investment 
Company Act of 1940 (the ``1940 Act'').

-----------------------------------------------------------------------

APPLICANTS: The Mutual Life Insurance Company of New York (``Mutual of 
New York'') and Keynote Series Account (the ``Variable Account'').

RELEVANT 1940 ACT SECTIONS: Exemption requested under Section 17(b) and 
Section 6(c) from Section 17(a) and approval requested under Section 
26(b).

SUMMARY OF APPLICATION: Applicants seek an order approving the 
substitution (the ``Substitution'') of beneficial interests in the 
portfolios of the Diversified Investors Portfolios (the ``Trust'') for 
shares of the portfolios of MONY Series Fund, Inc. (the ``Fund''), the 
Trust portfolios thereafter to continue serving as an eligible funding 
vehicle for the group variable annuity contracts offered by the 
Variable Account.

FILING DATES: The application was filed on October 15, 1993, and was 
amended on January 31, 1994, April 5, 1994, and April 27, 1994.

HEARING OR NOTIFICATION OF HEARINGS: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving the Applicants with a copy of the request, personally or by 
mail. Hearing requests must be received by the SEC by 5:30 p.m. on June 
6, 1994, and must be accompanied by proof of service on Applicants in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the Secretary of the 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, c/o Edward P. Bank, 
Esq., The Mutual Life Insurance Company of New York, 1740 Broadway, New 
York, New York 10019.

FOR FURTHER INFORMATION CONTACT:
C. Christopher Sprague, Senior Staff Attorney, at (202) 942-0670, or 
Michael V. Wible, Special Counsel, at (202) 942-0670, Office of 
Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The 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. Mutual of New York is a mutual life insurance company organized 
under the laws of the State of New York in 1842. Mutual of New York 
offers a wide range of insurance and pension investment products 
including group variable annuity contracts. Mutual of New York is 
licensed to do business in all states as well as in the District of 
Columbia and the Virgin Islands.
    2. The Variable Account is a segregated investment account 
registered under the 1940 Act as a unit investment trust, and funds 
certain group variable annuity contracts (the ``Contracts'') co-issued 
by Mutual of New York. The Variable Account is divided into seven sub-
accounts (the ``Subaccounts''), including six Subaccounts that invest 
in shares of a corresponding series of the Fund (i.e., the Money 
Market, Long Term Bond, Intermediate Government Bond, Diversified, 
Equity Income, and Equity Growth Portfolios of the Fund). The seventh 
Subaccount, which corresponds to the Calvert Socially Responsible 
Series (a portfolio of Acacia Capital Corporation) (the ``Calvert 
Series''), will not be affected by the Substitution, and will remain 
available for allocation of purchase payments by holders of the 
Contracts (``Contractholders''). MONY Securities Corp. serves as 
principal underwriter for the Contracts.
    3. The Fund is a diversified, open-end management investment 
company that was organized as a Maryland corporation in 1984. The Fund 
is comprised of seven series, six of which are available to holders of 
the Contracts through the Subaccounts.
    4. The Trust is a diversified, open-end management investment 
company that was organized as a trust under the laws of the State of 
New York. The Trust will be the ``hub'' in a ``hub and spoke'' 
structure in which the Variable Account will be one of the ``spokes.'' 
Hub and spoke is a registered service mark of Signature Financial 
Group, Inc. The Trust is authorized to issue shares of up to nine 
series (each such series, a ``Trust Portfolio''), six of which will be 
available to holders of the Contracts through the Subaccounts. The 
Trust was created to provide the underlying investment funds for the 
Variable Account as well as for other insurance company separate 
accounts, mutual funds, and collective trusts which restrict the 
offering of interests in such accounts, funds, and trusts to (a) 
certain employee retirement plans of for-profit and not-for-profit 
entities, including those having cash or deferred arrangements and 
those covering self-employed individuals and owner-employees (such as 
401(k) plans, money purchase plans, profit sharing plans, simplified 
employee pension plans, and Keogh Plans), and (b) qualified personal 
retirement plans such as IRAs and rollover IRAs. Each Trust Portfolio 
will be managed in compliance with the diversification requirements set 
forth under Section 817(h) of the Internal Revenue Code. Mutual of New 
York believes, based upon review of existing federal income tax laws 
and regulations and the advice of counsel, that the Substitution will 
not have a material adverse impact on the ability of the Variable 
Account to meet the diversification requirements. The Trust will offer 
and sell interests only to entities which qualify under the look-
through rule under U.S. Treasury Regulation 1.817-5(f)(2)(i).
    5. The Fund Portfolios expected to be eliminated in the 
Substitution, and the Trust Portfolios expected to be substituted as 
choices for investment of purchase payments in the Variable Account are 
as follows:

------------------------------------------------------------------------
          Fund portfolio                       Trust portfolio          
------------------------------------------------------------------------
Money Market.......................  Money Market.                      
Long Term Bond.....................  Government/Corporate Bond.         
Intermediate Government Bond.......  Intermediate Government Bond.      
Diversified........................  Balanced.                          
Equity Income......................  Equity Income.                     
Equity Growth......................  Equity Growth.                     
------------------------------------------------------------------------

    6. Mutual Of New York on its own behalf and on behalf of the 
Variable Account proposes to effect a substitution of shares of the 
Trust Portfolios for all shares of the corresponding Fund Portfolios as 
indicated above. Mutual of New York will schedule the Substitution to 
occur as soon as practicable following the issuance of the requested 
order so as to maximize the benefits to be realized from the 
Substitution. On November 15, 1993, a supplement to the prospectus for 
the Contracts was sent to Contractholders, and was attached to 
prospectuses delivered to new Contractholders. That supplement provided 
notice to Contractholders that an application seeking approval of the 
Substitution had been filed with the Commission. The supplement briefly 
described the Substitution, and identified the Portfolios of the Fund 
and the respective Portfolios of the Trust that will be substituted 
therefor. The supplement also described a transaction entered into my 
Mutual of New York and AUSA Life Insurance Company, Inc. (``AUSA''), 
pursuant to which AUSA will assume the obligations of Mutual of New 
York under the Contracts. The assumption by AUSA is the subject of a 
separate application that is pending with the Commission, and is not 
the subject of this application.
    7. Within five days after the Substitution, Mutual Of New York will 
send to Contractholders written notice of the Substitution that 
identifies the shares that have been eliminated and the shares that 
have been substituted. Mutual of New York will include in such mailing 
an updated prospectus of the Variable Account that discloses the 
completion of the Substitution and the availability of the Trust 
Portfolios. Contractholders will be advised that for a period of sixty 
days from the mailing of the notice, they may transfer all assets as 
substituted to any other available Subaccount (including the Calvert 
Series, which will not be affected by the Substitution). No transfer 
charge is currently in effect, and none will be imposed prior to the 
expiration of sixty days from the date of the mailing of the notice. 
Following the Substitution, Contractholders will be afforded the same 
contract rights, including surrender and other transfer rights with 
regard to amounts invested under the Contracts, as they have currently. 
Mutual Of New York will pay all expenses and transaction costs of the 
Substitution, including any applicable brokerage commissions.
    8. Mutual Of New York will redeem for cash and securities all 
shares of the Fund Portfolios it currently holds on behalf of the 
Variable Account at the close of business on the date selected for the 
Substitution. Mutual Of New York's redemption of shares of the Fund 
Portfolios will be partly for cash but principally for securities as a 
partial redemption in kind. The Fund will effect the redemptions in 
kind to the extent consistent with the investment objectives and 
diversification requirements applicable to the Fund Portfolios. Mutual 
Of New York will review the securities selected by the Fund for 
redemption in kind to assure that such securities are suitable 
investments for the respective Trust Portfolios. Mutual Of New York 
will also review securities selected for transfer under the redemption 
in kind to assure that such securities will not cause either the Fund 
Portfolios or the Trust Portfolios to fail to meet the diversification 
requirements of the Internal Revenue Code. Prior to effecting the 
Substitution, Mutual Of New York will take all actions necessary to 
comply with the requirements of Section 18(f) of the 1940 Act and Rule 
18f-1 thereunder. The securities redeemed in kind will be used together 
with the cash proceeds to purchase interests in the Trust Portfolios. 
In all cases, Mutual of New York will simultaneously place the 
redemption requests with the Fund and the purchase orders with the 
Trust, so that the purchases will be for the exact amounts of the 
redemption proceeds. As a result, at all times, monies attributable to 
Contractholders currently invested in all Subaccounts will be fully 
invested.
    9. Applicants have established certain procedures to ensure that 
the in kind redemptions will be effected in a fair and equitable manner 
from the perspectives of the Variable Account, the Fund, and the other 
separate accounts which presently invest in Fund Portfolios. These 
procedures, which provide that securities be distributed on a pro rata 
basis (with cash distributed in lieu of fractional interests), will 
ensure that securities held by the Fund Portfolios which are selected 
for in kind redemption will be comparable with respect to quality, 
duration, industry, and other relevant investment criteria to those 
securities which are not selected for in kind redemption. These 
procedures will be approved by the Board of Directors of the Fund, 
including the disinterested directors of the Fund voting separately as 
a group. In addition, subsequent to the in kind redemption, Applicants 
will provide a report to the Board of Directors of the Fund which 
demonstrates full compliance with such procedures. Applicants have 
determined that it is appropriate to effect the Substitution, based on 
the current similarity of the portfolio investments of the Fund 
Portfolios and the corresponding Trust Portfolios.

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act provides in pertinent part that 
``[i]t shall be unlawful for any depositor or trustee or 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 purpose of section 26(b) 
is to protect the expectation of investors in a unit investment trust 
that the unit investment trust will accumulate the shares of a 
particular issuer and to prevent unscrutinized substitutions which 
might, in effect, force shareholders dissatisfied with the substituted 
security to redeem their shares, thereby incurring either a loss of the 
sales load deducted from initial proceeds, an additional sales load 
upon reinvestment of the redemption proceeds, or both. Section 26(b) 
affords this protection to investors by preventing a depositor or 
trustee of a unit investment trust holding the shares of one issuer 
from substituting for those shares the shares of another issuer, unless 
the Commission approves that substitution.
    2. The purposes, terms, and conditions of the Substitution will not 
entail any of the abuses that Section 26(b) is designed to prevent. The 
Substitution is appropriate and consistent with Mutual of New York's 
alternative funding plans for the Contracts through the Trust 
Portfolios. The Substitution is proposed to provide a consolidation of 
assets of vehicles that currently and in the future may be expected to 
be used for pension funding to promote consistent investment 
performance and to reduce operating expenses.
    3. Applicants represent that the Substitution will not result in 
the type of costly forced redemptions that Section 26(b) was intended 
to guard against, and is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
1940 Act for the following reasons: (a) the Substitution is for shares 
of the Trust Portfolios, whose objectives, policies, and restrictions 
are sufficiently similar to those of the substituted Fund Portfolios so 
as to continue fulfilling the Contractholders' present objectives and 
expectations: (b) a Contractholder may transfer amounts credited to the 
Contract either in advance of the Substitution or following the receipt 
of notice that the Substitution has been effected, including a transfer 
to the Calvert Series; (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) Mutual of New York has undertaken to 
assume the expenses and transaction costs, including among others, 
legal and accounting fees and any brokerage commissions, relating to 
the Substitution (the partial redemptions in kind contemplated for 
appropriate securities of the Fund Portfolios are expected to reduce 
such costs); (e) the Substitution will not restrict future transfers 
under the Contracts as the Contracts neither limit allowable transfers 
nor do they currently impose a charge for transfers; (f) the 
Substitution in no way will alter the insurance benefits to 
Contractholders or the contractual obligations of Mutual Of New York; 
(g) the Substitution in no way will alter the tax benefits to Holders; 
(h) Contractholders may choose to withdraw amounts credited to them 
following the Substitution under the conditions that currently exist 
(the Contracts impose no deferred sales load, although a participant 
may be subject to restrictions under the terms of the plan through 
which such participant acquired interests in the Contract); and (i) the 
Substitution is expected to confer certain economic benefits to 
Contractholders by virtue of the enhanced asset size of the continuing 
Trust Portfolios.
    4. Applicants respectfully submit that it is in the best interests 
of Contractholders to substitute interests in the Trust Portfolios for 
corresponding shares of the Fund. The overall investment objectives of 
the Trust Portfolios are sufficiently similar to those of the 
corresponding Fund Portfolios for the substitution to be appropriate. 
The investment objectives of the Money Market, Balanced, Equity Income, 
Equity Growth, and Intermediate Government Bond portfolios of the Fund 
are substantially the same as the corresponding Portfolios of the 
Trust. The Government/Corporate Bond Portfolio has investment 
objectives that differ slightly from the Long Term Bond Portfolio of 
the Fund. Both the Trust's Government/Corporate Bond Portfolio and the 
Fund's Long Term Bond Portfolio seek to provide a high level of current 
income with an overriding concern for preservation of capital. However, 
the Trust's Portfolio will seek to accomplish this objective by 
maintaining a remaining average maturity of one to four years. The 
Fund's portfolio seeks to maintain a dollar weighted average life in 
excess of eight years. Because of the longer average maturity, the 
Fund's portfolio is more sensitive to changes in interest rates than 
should be expected from the Trust's Portfolio, with a shorter average 
maturity. However, at the present time, because of market conditions, 
no significant difference would be expected in the return expected from 
the two portfolios. Applicants believe that the investment objectives 
are compatible and that, on balance, the Government/Corporate Bond 
Portfolio, because of its shorter average maturity, presents less risk 
to Contractholders, and therefore, Contractholders should benefit from 
the substitution of that portfolio.
    5. Total expenses as a percentage of average net assets for 
investors in the Subaccounts are not expected to increase as a result 
of the Substitution. The investment advisor to the Trust Portfolios has 
agreed, through at least April 30, 1995, to waive its fees as 
investment advisor to, and administrator of, the Trust Portfolios so 
that total operating expenses of each Trust Portfolio are maintained at 
their current level, which is less than or equal to the total operating 
expenses of each corresponding portfolio of the Fund.
    6. Section 17(a)(1) of the 1940 Act prohibits any affiliated person 
of a registered investment company, or an affiliated person of an 
affiliated person, from selling any security or other property to such 
registered investment company. Section 17(a)(2) of the 1940 Act 
prohibits any of such affiliated persons from purchasing any security 
or other property from such registered investment company. The 
Substitution may be deemed to entail one or more purchases or sales of 
securities between and among affiliated persons as a result of the 
purchase by the Subaccounts of interests in the Trust Portfolios with 
proceeds from the sale of shares of the Fund portfolios. In addition, 
the Substitution would not be exempt from Section 17 pursuant to Rule 
17a-7 under the 1940 Act because the affiliations among the Variable 
Account, the Fund, and the trust do not solely arise by reason of 
having common investment advisers, common directors, and/or common 
officers. Applicants state that the sale and purchase transactions 
constituting the Substitution could come within the scope of Section 
17(a)(1) and 17(a)(2) of the 1940 Act, respectively. Therefore, the 
Substitution requires an exemption from Section 17(a) of the 1940 Act, 
pursuant to Section 17(b) of the 1940 Act.
    7. Section 17(b) of the 1940 Act provides that the Commission may 
grant an order exempting the transactions prohibited by Section 17(a) 
upon application 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 investment policy of each registered investment 
company concerned, as recited in its registration statement and reports 
filed under the 1940 Act; and (c) the proposed transaction is 
consistent with the general purposes of the 1940 Act. Applicants seek 
an exemption from section 17(a) under both sections 17(b) and 6(c) of 
the 1940 Act, because Section 17(b) refers to a single ``proposed 
transaction,'' while under Section 6(c), the Commission may exempt a 
series of transactions.
    8. Applicants state that for all the reasons cited in connection 
with their request for an order under Section 26(b), the Substitution 
is reasonable and fair. The transactions effecting the substitution 
including the redemption of Fund shares and the purchase of interests 
in the Trust Portfolios will be effected in conformity with Section 
22(c) of the 1940 Act and Rule 22c-1 thereunder. Moreover, the in-kind 
redemptions of Fund shares will be effected in conformity with Section 
18(f) and Rule 18f-1 thereunder, Rule 17a-7, and the Fund's established 
procedures pursuant to Rule 17a-7. Contractholder interests following 
the Substitution will not be diluted, and will not differ in any 
measurable way from such interests immediately prior to the 
Substitution in practical economic terms. Applicants state that in each 
case, the consideration to be received and paid is reasonable and fair. 
Applicants also assert that the Substitution is consistent with the 
investment policy of the Fund and the Trust in that the investment 
objectives of the substituted Trust Portfolios are substantially 
similar to the objectives of the corresponding Fund portfolios.
    9. Mutual of New York believes, based on its review of existing 
federal income tax laws and regulations and the advice of counsel, that 
the Substitution will not give rise to any taxable income for 
Contractholders.
    10. Applicants state that the Substitution is consistent with the 
general purposes of the 1940 Act. Applicants state that the 
Substitution does not present any of the investor protection concerns 
and other issues that the 1940 Act is designed to address. Applicants 
also note that Contractholders will be fully informed of the terms of 
the Substitution through the prospectus of the Variable Account and the 
notice, and will have an opportunity to reallocate investments prior to 
and following the Substitution.

Applicants' Conclusion

    For the reasons discussed above, Applicants submit that the 
requested order under section 26(b) meets the standards of that 
section, and that the requested exemption from section 17(a) meets the 
standards of section 17(b) and section 6(c).

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11926 Filed 5-16-94; 8:45 am]
BILLING CODE 8010-01-M