[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