[Federal Register Volume 59, Number 173 (Thursday, September 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22054]
[[Page Unknown]]
[Federal Register: September 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20518; File No. 812-8886]
AUSA Life Insurance Company, Inc., et al.
August 31, 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'').
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APPLICANTS: AUSA Life Insurance Company, Inc. (``AUSA''), and
Diversified Investors Variable Funds of AUSA Life Insurance Company,
Inc. (the ``Diversified Account'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to (a) Section
17(b) of the 1940 Act granting an exemption from Section 17(a) of the
1940 Act, (b) Section 17(d) of the 1940 Act and Rule 17d-1 thereunder
granting an exemption from those provisions, and (c) Section 11 of the
1940 Act approving the proposed offer of exchange.
SUMMARY OF APPLICATION: Applicants seek an order approving the transfer
of assets from the Keynote Series Account of The Mutual Life Insurance
Company of New York (``MONY Keynote'') to the Diversified Account, and
approving the offer of exchange of interests in MONY Keynote for
interests in the Diversified Account through assumption reinsurance by
AUSA of group variable annuities issued by The Mutual Life Insurance
Company of New York (``MONY Keynote Contracts''), the purchase payments
for which are allocated to MONY Keynote.
FILING DATES: The application was filed on February 10, 1994 and was
amended on August 17, 1994 and August 29, 1994.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests must be received by the SEC by September 26, 1994, and
must be accompanied by proof of service on the Applicants in the form
of an affidavit or, for lawyers, a certificate of service. Hearing
requests must 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 SEC's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, 4 Manhattanville
Road, Purchase, New York 10577.
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. AUSA is a stock life insurance company organized under the laws
of the State of New York. AUSA is a wholly-owned subsidiary of First
AUSA Life Insurance Company (``First AUSA''). First AUSA is a wholly-
owned subsidiary of AEGON USA, Inc. (``AEGON''), a financial services
holding company whose primary emphasis is on life and health insurance,
annuities, and investment products. AEGON is a wholly-owned indirect
subsidiary of AEGON nv, a Netherlands corporation, which is a publicly-
traded international insurance group.
2. In 1993, AUSA formed the Diversified Account as a separate
account under New York law. The Diversified Account is divided into ten
subaccounts (the ``Subaccounts''). Eight of the ten Subaccounts will
invest in a corresponding series of the Diversified Investors
Portfolios, while the remaining two Subaccounts will invest in the
Calvert Socially Responsible Series of Acacia Capital Corporation (the
``Calvert Socially Responsible Series'') and in the International
Portfolio of Scudder Variable Life Investment Fund, respectively.
Pursuant to New York law, the income and capital gains or losses of the
Diversified Account, whether realized or not, will be credited to or
charged against the assets held in the Diversified Account, without
regard to the income or capital gains or losses of any other separate
account or of AUSA's general account. Nor will the assets of the
Diversified Account be chargeable with liabilities arising out of any
other business conducted by AUSA. However, all obligations arising out
of any variable contract issued (or assumed) by AUSA and funded by the
Diversified Account will be general corporate obligations of AUSA. A
registration statement registering the Diversified Account as a unit
investment trust under the 1940 Act and registering certain group
variable annuity contracts (the ``AUSA Diversified Contracts'') issued
by AUSA and the Diversified Account under the Securities Act of 1933
(the ``1933 Act'') has been filed with the Commission (file no. 33-
73734).
3. The Mutual Life Insurance Company of New York (``Mutual of New
York''), has registered MONY Keynote as a unit investment trust under
the 1940 Act, and has registered interests in MONY Keynote under the
1933 Act. MONY Keynote is divided into subaccounts, which invest in the
corresponding portfolios of the Diversified Investors Portfolios and in
the Calvert Socially Responsible Series.
4. On December 31, 1993, Mutual of New York entered into an
agreement (the ``Assumption Reinsurance Agreement'') with AEGON and
AUSA pursuant to which AEGON acquired the group pension operations of
Mutual of New York. In accordance with the Assumption Reinsurance
Agreement, MONY Keynote Contracts will be transferred by assumption
reinsurance to AUSA, and the assets held in MONY Keynote will be
transferred to the Diversified Account, subject to receipt of any
necessary state insurance department approvals, the consent (if
required by a state insurance department) of the holder of a MONY
Keynote Contract, and the issuance of the Order requested by
Applicants.
5. The Assumption Reinsurance Agreement provides that holders of
MONY Keynote Contracts may elect, during the period prescribed by the
law of the state in which the holder of the MONY Keynote Contract
resides, to permit their MONY Keynote Contract to be assumed by AUSA
and ``opt in,'' or elect not to do so and ``opt out.'' Pursuant to the
Assumption Reinsurance Agreement, this election will be described in a
notice of election (the ``Notice of Election''), which will be sent to
holders of MONY Keynote Contracts. The Notice of Election will be
accompanied by a prospectus for the Diversified Account which will
describe the AUSA Diversified Contracts. The Notice of Election will be
in a form approved by the New York Insurance Department and, in certain
cases, also approved by the insurance department of the state in which
the holder resides. The Notice of Election will (a) State that the
underlying assumption reinsurance transaction between MONY and AUSA has
been approved by the New York Insurance Department, (b) describe the
options available to the holder to either opt in or opt out of the
assumption reinsurance transaction and (c) enclose an ``Election Form''
to be completed and returned. The Notice of Election will explain that
the holder may opt out by so indicating on the Election Form or may opt
in by either so indicating on the Election Form or, to the extent
permitted under the insurance laws of the applicable state, by taking
no positive action to opt out.
6. All holders who opt in, or are deemed to have opted in, will
receive a Certificate of Assumption evidencing the assumption of
obligations of Mutual of New York under the MONY Keynote Contracts by
AUSA. The assumption will be effected by causing all assets invested in
a particular subaccount of MONY Keynote to be transferred to the
Diversified Subaccount which invests in the same series of the
Diversified Investors Portfolios or the Calvert Socially Responsible
Series, as applicable. On and after the effective date of the
assumption of any MONY Keynote Contract, any future purchase payments
for an assumed MONY Keynote Contract will be allocated to the
Diversified Account and to the Diversified Subaccount which corresponds
to the MONY Keynote subaccount(s) most recently selected by the holder
of the MONY Keynote Contract. Under the terms of each MONY Keynote
Contract which is assumed by AUSA, transfer instructions for existing
investments and revised allocation instructions for future purchase
payments may be transmitted to AUSA subsequent to the effective date of
the assumption to permit allocations to Diversified Subaccounts for
which there was no corresponding subaccount available under the MONY
Keynote Contract.
7. In the event that a holder of a MONY Keynote Contract rejects
the assumption offer and thus opts out, the Assumption Reinsurance
Agreement provides that AUSA will indemnity reinsure, to the extent
permissible under applicable insurance laws, such MONY Keynote
Contracts. Applicants state that indemnity reinsurance will have no
effect on the rights and obligations under the MONY Keynote Contracts
as between Mutual of New York and the holder. In addition, indemnity
reinsurance will be limited only to those very narrow obligations
thereunder funded by the general account of the insurer (i.e., those
obligations of Mutual of New York under a MONY Keynote Contract funded
by assets held in MONY Keynote will not be subject to indemnity
reinsurance).
8. The terms of the MONY Keynote Contracts and of the AUSA
Diversified Contracts will be the same whether a holder opts in or opts
out, except that the insurance company responsible for providing the
benefits under the contract will be AUSA for those holders who opt in,
or are deemed to have opted in. The charges and fees under the AUSA
Diversified Contracts with respect to amounts allocated for variable
accumulation will be the same as under the MONY Keynote Contracts.
Applicants' Legal Analysis
1. Section 2(a)(3) of the 1940 Act defines ``affiliated person'' to
include any person directly or indirectly under common control with
such other person. Section 2(a)(9) of the 1940 Act defines control, as
is relevant here, as the power to exercise controlling influence over
the management or policies of a company. Section 17(a) of the 1940 Act
prohibits any affiliated person or any affiliated person of such a
person, acting as principal, from selling to or purchasing from a
registered investment company, or any company controlled by such
registered company, any security or other property. Section 17(b) of
the 1940 Act provides, however, that the Commission, upon application,
may exempt a proposed transaction from the provisions of 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 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.
2. In the event that a holder of a MONY Keynote Contract rejects
the assumption offer and opts out, the Assumption Reinsurance Agreement
provides that AUSA will indemnity reinsure such MONY Keynote Contracts.
The indemnity reinsurance has the effect of rendering AUSA ultimately
liable for the financial obligations of Mutual of New York under the
MONY Keynote Contracts. In addition, the Assumption Reinsurance
Agreement provides that the obligations of Mutual of New York under the
MONY Keynote Contracts to administer those contracts will be performed
by AUSA or by an affiliate of AUSA pursuant to an administrative
services agreement. Although Mutual of New York remains the depositor
of MONY Keynote, AUSA may be said to have the power to exercise
controlling influence over the management and policies of MONY Keynote.
As a practical matter, AUSA and the Diversified Account may exercise
some influence or control over the management of MONY Keynote after the
closing pursuant to the Assumption Reinsurance Agreement (the
``Closing''). Applicants state therefore, that it is possible that the
Diversified Account and MONY Keynote may, after the time of the
Closing, be affiliated by virtue of being under the common control of
AUSA. Accordingly, the proposed transfer of assets from MONY Keynote to
the Diversified Account with respect to MONY Keynote Contractholders
who opt in (or are deemed to have opted in) may be subject to Section
17(a) of the 1940 Act.
3. Applicants submit that the interests in MONY Keynote of holders
of MONY Keynote Contracts will not be adversely affected by the
transfer of assets and liabilities to the AUSA Diversified Account. The
proposed transfer will not result in any dilution of such
contractholders' interests, and will not result in any change in the
assets underlying the value under the Contracts allocated for variable
accumulation. Rather, the transfers will benefit such contractholders
because they will look at AUSA as depositor of the Diversified Account.
Applicants state that AUSA has a somewhat higher rating than Mutual of
New York from the major rating organizations, and AUSA's credit is
backed by AEGON. This benefit will be provided at no cost to
contractholders, as all of the costs of the proposed transaction will
be paid by Mutual of New York and AUSA. Accordingly, Applicants submit
that the proposed transfer of the assets and liabilities of MONY
Keynote to the AUSA Diversified Account is reasonable and fair, does
not involve overreaching, is consistent with the policy of each
registered investment company concerned, and is consistent with the
general purposes of the 1940 Act.
4. Section 17(d) and Rule 17d-1 thereunder generally prohibit joint
transactions or arrangements that involve both an investment company
and an affiliate of the investment company. Because Mutual of New York
has entered into the Assumption Reinsurance Agreement with AUSA under
which the assets of MONY Keynote will be transferred to the AUSA
Diversified Account, the assumption reinsurance transaction may be
deemed to be a joint transaction between AUSA, MONY Keynote, and the
Diversified Account. Applicants state that Section 17(d) and Rule 17d-1
were intended to prohibit conflicts of interest. The Applicants submit
that the proposed transaction does not create any conflicts of interest
among MONY Keynote, the Diversified Account, and AUSA. The Diversified
Account was specifically created for purposes of effecting the proposed
transaction. Applicants state that this is not a transaction that is
amenable to self-dealing by the affiliate of an investment company to
the detriment of the investment company, and therefore it significantly
differs from the type of ``joint transactions'' contemplated by the
drafters of Section 17(d) and of Rule 17d-1. Under the terms of the
Assumption Reinsurance Agreement, any transfer of assets between MONY
Keynote and the Diversified Account will be at the direction of the
holder of a MONY Keynote Contract (who will have received the
disclosures discussed above), thereby eliminating the abuses of self
dealing. Accordingly, Applicants assert that the transaction is
consistent with the provisions, policies, and purposes of the 1940 Act,
and respectfully request that the Commission grant an order approving
the transaction.
5. Section 11(a) of the 1940 Act makes it unlawful for a registered
open-end investment company or a principal underwriter for such a
company to make an offer to the holder of a security of such company or
of any other open-end investment company to exchange his security for a
security in the same or another such company on any basis other than
the relative net asset values of the respective securities to be
exchanged. Section 11(c) makes this prohibition applicable,
irrespective of the basis of the exchange, to any offer of exchange of
the securities of a registered unit investment trust for the securities
of any other investment company. Under the terms of the Assumption
Reinsurance Agreement, holders of MONY Keynote Contracts will be
offered the opportunity to have AUSA assume the liabilities of those
contracts. In effect, this offer amounts to an offer to exchange a
group variable annuity contract, the depositor of which is Mutual of
New York, for a group variable annuity contract, the depositor of which
is AUSA. Applicants state that they cannot rely on the exemption set
out in Rule 11a-2 under the 1940 Act to effect this exchange offer.
Thus, Applicants' proposed exchange, although it will be effected at
net asset value, must be approved by the Commission.
6. Applicants state that Section 11(a) was specifically designed to
prevent the practices of ``switching'' and ``reloading,'' whereby the
holders of securities were induced to exchange their certificates for
new certificates on which a new load would be payable. Because no
charge will be assessed in connection with the assumption reinsurance
of the MONY Keynote Contracts by AUSA, and because there are no front-
end or surrender charges under either the MONY Keynote Contracts or the
AUSA Diversified Contracts, Applicants state that the principal abuses
at which Section 11(a) is directed will not be present. As discussed
above, there will be no interruption in the underlying funds serving as
investment media for the contracts before and after the transfer. In
addition, AUSA believes, based on its review of existing federal income
tax laws and regulations and advice of counsel, that the proposed
assumption reinsurance transaction, including the proposed ``opt in/opt
out'' rights described previously, will result in no taxable income or
other adverse tax consequences to holders of MONY Keynote Contracts of
AUSA Diversified Contracts.
7. Applicants assert that if MONY Keynote and the Diversified
Account were affiliated in the manner contemplated by Rule 11a-2 under
the 1940 Act, they could effect the exchange in reliance on that rule,
notwithstanding the feature of the exchange offer under which MONY
Keynote contractholders who fail to respond to the Notice of Election
will be deemed to have opted in.
Applicants' Conclusion
Applicants submit that the exemptions requested herein satisfy the
standards of Section 17(b) of the 1940 Act, that the terms of the
proposed joint transaction meet the standards for granting an exemption
under Rule 17d-1 under the 1940 Act, and that the terms of the exchange
offer satisfy the standards of Section 11. Applicants therefore request
that the Commission issue an order granting the requested exemptions
from Sections 17(a), 17(d), and Rule 17d-1, and approving the proposed
exchange offer under Section 11.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-22054 Filed 9-7-94; 8:45 am]
BILLING CODE 8010-01-M