[Federal Register Volume 59, Number 200 (Tuesday, October 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25728]


[[Page Unknown]]

[Federal Register: October 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20613; File No. 812-8382]

 

Pacific Select Fund, et al.

October 12, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the 
``Commission'').

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

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APPLICANTS: Pacific Select Fund (``Select Fund`') and Pacific 
Corinthian Variable Fund (``Variable Fund''), referred to collectively 
as the ``Applicants.''

RELEVANT 1940 ACT SECTIONS: Order requested under Section 17(b) of the 
1940 Act for exemption from Section 17(a) thereof.

SUMMARY OF APPLICATION: Applicants seek an order that would permit the 
assets of Variable Fund to be transferred to and combined with the 
assets of Select Fund in exchange for shares of Select Fund. (The 
transfer and combination of assets in exchange for such shares is 
referred to herein as the ``Reorganization.'')

FILING DATES: The original application was filed on May 4, 1993. An 
amended and restated application was filed on July 8, 1994.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving the 
Applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on November 6, 
1994, and should be accompanied by proof of service on the 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 SEC.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants, c/o Sharon A Cheever, Esq., Pacific Mutual Life 
Insurance Company, 700 Newport Center Drive, Newport Beach, CA 92660.

FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, Division of Investment Management, Office 
of Insurance Products, at (202) 942-0679.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the SEC.

Applicants' Representations

    1. Select Fund is a diversified, open-end management investment 
company, organized under the laws of the Commonwealth of Massachusetts.
    2. Select Fund consists of ten investment series: (i) The Money 
Market Series; (ii) The Managed Bond Series; (iii) The Government 
Securities Series; (iv) The High Yield Bond Series; (v) The Growth 
Series; (vi) The Growth LT Series; (vii) The Equity Income Series; 
(viii) The Multi-Strategy Series; (ix) The Equity Index Series; and (x) 
The International Series. It is presently contemplated that two new 
series of Select Fund--the Equity Series and the Bond and Income 
Series--will be organized. Shares of each series of Select Fund are 
currently offered only for purchase by separate accounts of Pacific 
Mutual Life Insurance Company (``Pacific Mutual'') to serve as an 
investment medium for annuity contracts and for variable life insurance 
policies issued by Pacific Mutual. Pacific Mutual serves as investment 
adviser to each series of Select Fund. Pacific Mutual and three of its 
separate accounts (the ``Pacific Select Separate Accounts'') currently 
own all of the outstanding shares of Select Fund.
    3. Pacific Mutual and the Insurance Commissioner of the State of 
California, as conservator of First Capital Life Insurance Company--In 
Conservation (``First Capital''), entered into an agreement regarding 
the rehabilitation of First Capital (the ``Rehabilitation Plan''). In 
connection with the Rehabilitation Plan, Pacific Mutual established a 
wholly-owned subsidiary, Pacific Corinthian Life Insurance Company 
(``Pacific Corinthian''), as a stock life insurance company 
incorporated under the laws of the State of California.
    4. As part of the Rehabilitation Plan, Pacific Corinthian assumed, 
among other things, the life insurance policies and annuity contracts 
issued by First Capital, including certain flexible premium deferred 
annuity and variable accumulation contracts (the ``Variable 
Contracts'') for which the Variable Fund serves as investment medium. 
Also pursuant to the Rehabilitation Plan, the assets of a separate 
account of First Capital that had funded the variable accumulation 
option under the Variable Contracts were transferred intact to a 
separate account designated as the Pacific Corinthian Variable Separate 
Account.
    5. The Pacific Corinthian Variable Separate Account funds 
individual flexible premium deferred annuity and variable accumulation 
contracts, formerly offered by First Capital, which were assumed by 
Pacific Corinthian pursuant to the Rehabilitation Plan. The Pacific 
Corinthian Variable Separate Account invests exclusively in Variable 
Fund; each of the eight subaccounts of the Pacific Corinthian Variable 
Separate Account invests in a distinct series of Variable Fund. Pacific 
Corinthian Variable Separate Account owns all of the outstanding shares 
of Variable Fund.
    6. Variable Fund--formerly, Shearson VIP Fund--is incorporated 
under the laws of the State of California. Variable Fund consists of 
eight series: (i) The Money Market Series: (ii) The Equity Series; 
(iii) The Bond and Income Series; (iv) The Government Securities 
Series; (v) The Directions Value Series; (vi) The Equity Income Series; 
(vii) The Diversified Low P/E Series; and (viii) The Balanced Series. 
Pacific Mutual currently serves as investment adviser to each series of 
Variable Fund.
    7. Pacific Mutual and the Pacific Select Separate Accounts 
currently own 100 percent of the outstanding shares of Select Fund. 
Pacific Mutual also owns 100 Percent of the outstanding shares of 
Pacific Corinthian. Pacific Corinthian is the depositor of the Pacific 
Corinthian Variable Separate Account, the sole shareholder of Variable 
Fund. As a result of these relationships, Select Fund and Variable Fund 
may be deemed to be under the common control of Pacific Mutual. In 
addition, the Applicants may be deemed to be affiliates of an 
affiliated person (i.e., Pacific Mutual).
    8. Under the Reorganization, Variable Fund will convey, transfer, 
and deliver to Select Fund all of the existing assets of each series of 
Variable Fund. In consideration thereof, Select Fund will agree: (i) To 
assume and pay certain liabilities of Variable Funds; and (ii) to 
deliver to Variable Fund full and fractional share of beneficial 
interest of Select Fund having an aggregate net asset value equal to 
the aggregate value of the net assets of the Variable Fund series 
exchanged therefor.
    9. The Reorganization will be performed in such a manner that the 
assets and certain liabilities of The Money Market Series of Variable 
Fund become the assets and liabilities of The Money Market Series of 
Select Fund; the assets and certain liabilities of The Equity Series of 
Variable Fund become those of the proposed Equity Series of Select 
Fund; the assets and certain liabilities of The Bond and Income Series 
of Variable Fund become the assets and liabilities of the proposed Bond 
and Income Series of Select Fund; the assets and certain liabilities of 
The Government Securities Series of Variable Fund become the assets and 
liabilities of The Government Securities Series of Select Fund; the 
assets and certain liabilities of The Directions Value Series, The 
Diversified Low P/E Series, and The Equity Income Series of Variable 
Fund become the assets and liabilities of The Equity Income Series of 
Select Fund; and the assets and certain liabilities of The Balanced 
Series of Variable Fund become the assets and liabilities of The Multi-
Strategy Series of Select Fund.
    10. The rate of exchange will be determined based on the relative 
net asset value per share of each Variable Fund series compared to the 
net asset value of the corresponding Select Fund series as of the close 
of business on the day immediately proceeding the effective date of the 
proposed Reorganization. For the recently created Select Fund series 
(i.e., the Bond and Income Series and the Equity Series), the net asset 
value per share will be established as an amount equal to the net asset 
value per share for the Variable Fund Bond and Income Series and Equity 
Series as of the close of business on the business day immediately 
preceding the effective date of the Reorganization. Thus, the rate of 
exchange will be on a one-to-one basis. However, it is possible that 
the proposed Equity Series and Bond and Income Series of the Select 
Fund may offer their shares to the public prior to the effective date 
of the Reorganization, in which case the rate of exchange for these 
series will be determined in the manner described above for the 
currently operational series of Select Fund.
    11. Immediately after the Reorganization, the value of each 
Variable Contract will be equal to the value of each such Contract 
immediately before the Reorganization. Applicants represent that, apart 
from the fact that the future each value of Variable Contracts issued 
through the Pacific Corinthian Variable Separate Account will reflect 
the investment performance of a series of the Select Fund instead of a 
series of the Variable Fund, the Reorganization will have no material 
economic impact on Variable Contract values.
    12. On the effective date of the Reorganization, Variable Fund will 
close its stock transfer books permanently and distribute pro rata to 
its shareholders the Select Fund shares it received pursuant to the 
Reorganization. Thereafter, the Variable Fund will be completely 
liquidated. Such liquidation and distribution will be accompanied by 
the establishment of an open account on the share records of Select 
Fund in the name of each shareholder of Variable Fund representing the 
respective pro rata number of Select Fund shares due that shareholder, 
designated by series. Select Fund will register the shares of each of 
its series issued pursuant to the Reorganization under the Securities 
Act of 1933, using the Form N-14.
    13. Pacific Mutual, Select Fund, and Variable Fund will pay all of 
the costs of the Reorganization. Variable Fund and Select Fund shall 
bear any such expenses only to the extent that the board of director/
trustees of each fund, including a majority of the independent 
directors/trustees, determines that for the Fund to bear such expenses 
is in the best interests of its respective shareholders.\1\ Applicants 
represent that in no event will Select Fund and Variable Fund, in the 
aggregate, bear more than two-thirds of the total expenses of the 
Reorganization. The Applicants do not expect that the Reorganization 
will entail any significant liquidation expenses because the 
corresponding series of Variable Fund and Select Fund will have 
substantially identical investment policies.
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    \1\Applicants represent that no series of the Variable Fund or 
the Select Fund will bear any expenses of the Reorganization to the 
extent that the impact of such expense on the net asset value per 
share of a series equals of exceeds $0.01 per share.
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    14. A plan that sets forth the terms and conditions necessary to 
implement the Reorganization (the ``Reorganization Plan'') will be 
submitted to the board of directors of Variable Fund and the board of 
trustees of Select Fund. In deciding to approve the terms of the 
Reorganization and recommend approval of such Reorganization to 
shareholders of each Fund, the directors of Variable Fund and the 
trustees of Select Fund (including the disinterested directors and 
trustees) have made an inquiry into a number of matters and consider 
the following factors, among others: (i) The reasonableness of advisory 
fees paid to Pacific Mutual following the Reorganization; (ii) expense 
rations and published information regarding Variable Fund and Select 
Fund; (iii) the comparative investment performance of each series of 
Variable Fund and each series of Select Fund; (iv) the terms and 
conditions of the Reorganization, and whether the Reorganization will 
result in dilution of shareholder or Variable Contract owner interests; 
(v) the advantages of obtaining economies of scale, increased 
investment flexibility, and expanded allocation options resulting from 
acceptance of new premiums through the Reorganization; (vi) the 
compatibility of the investment objectives, policies and restrictions, 
and service features available to shareholders of each series of 
Variable Fund compared to the corresponding series of Select Fund; 
(vii) the costs to be incurred by Variable Fund and Select Fund as a 
result of the Reorganization; (viii) tax consequences of the 
Reorganization; and (ix) the potential for overreaching on the part of 
either Applicant or any affiliate thereof.
    15. The Reorganization Plan will be submitted to shareholders of 
both the Variable Fund and the Select Fund for approval at a special 
meeting called for that purpose. A majority of all votes of each 
operating series of Variable Fund and Select Fund entitled to be cast 
will be required to approve the Reorganization Plan and the 
Reorganization; the Reorganization Plan may be effected with respect to 
any Variable Fund or Select Fund series whose shareholders approve it. 
Variable Fund and Select Fund each will furnish to its respective 
shareholders a proxy statement/prospectus containing information 
relating to the Reorganization Plan and the Reorganization.
    16. Pacific Corinthian will vote shares of each series of the 
Variable Fund, and Pacific Mutual will vote shares of each series held 
by it and each Pacific Separate Account, in accordance with 
instructions received from Variable Contract owners and owners of 
annuity contracts and variable life insurance policies issued by 
Pacific Mutual, respectively. Shares for which no voting instructions 
are received will be voted by Pacific Corinthian or Pacific Mutual, as 
appropriate, in the same proportion as it votes shares for which voting 
instructions were received.
    17. In addition to shareholder approval, Applicants further 
condition the consummation of the Reorganization upon receipt from the 
Commission of the exemptive order requested herein, receipt of any 
necessary approval from the applicable state insurance commissions, and 
receipt by Select Fund and/or Variable Fund of a private letter ruling 
from the Internal Revenue Service or an opinion of tax counsel to the 
effect that the Reorganization will qualify as a tax-free 
reorganization under the Internal Revenue Code of 1986, as amended, and 
will not result in the recognition of any taxable gain or loss to any 
series of Select Fund or Variable Fund, or to any shareholders thereof.

Applicants' Legal Analysis

    1. Under Section 2(a)(3) of the 1940 Act, one person is an 
``affiliated person'' of another person if, among other things: The 
person directly or indirectly owns, controls, or holds with power to 
vote 5% or more of the other person's outstanding voting securities; 5% 
or more of the person's outstanding voting securities are directly or 
indirectly owned, controlled, or held with power to vote by the other 
person; or the person directly or indirectly controls, is controlled 
by, or is under common control with the other person.
    2. Applicants may be deemed ``affiliated persons'' of one another 
within the meaning of Section 2(a)(3) of the 1940 Act as a result of 
their relationships to Pacific Mutual. Because of these relationships, 
the Reorganization may be deemed to violate Section 17(a) of the 1940 
Act, which, in relevant part, prohibits any affiliated person of a 
registered investment company, or any affiliated person of such a 
person, from knowingly selling to or purchasing from such investment 
company any security or other property.
    3. Section 17(b) of the 1940 Act authorizes the SEC to exempt any 
transaction from the provisions of Section 17(a) if: the terms of the 
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; the transaction is consistent with the policy of each 
registered investment company concerned; and the transaction is 
consistent with the general purposes of the 1940 Act.
    4. Applicants request an order of the Commission pursuant to 
Section 17(b) of the 1940 Act exempting the Reorganization from the 
provisions of Section 17(a) of the 1940 Act to the extent necessary to 
permit the various series of Select Fund to acquire the assets of the 
corresponding series of Variable Fund in exchange for shares of the 
Select Fund series.\2\
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    \2\Applicants posit that Congress did not intend Section 26(b) 
of the 1940 Act to apply to transactions such as the Reorganization 
and, therefore, have requested neither a Commission order pursuant 
to Section 26(b) before proceeding with the Reorganziation, nor 
Commission approval of their decision to proceed with the 
Reorganization without a Commission order pursuant to Section 26(b).
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A. Reasonableness, Fairness, and the Absence of Overreaching

    1. Applicants assert that the terms of the proposed Reorganization 
are fair and reasonable and do not involve overreaching on the part of 
any person concerned.
    2. Applicants represent that the Reorganization will not be 
effected unless: (i) the board of directors of Variable Fund and the 
board of trustees of Select Fund--including a majority of the 
disinterested directors/trustees--separately have reviewed and approved 
the terms of the Reorganization set forth in the Reauthorization Plan, 
including consideration to be paid or received by all parties to the 
Reauthorization; and (ii) the board of directors of Variable Fund and 
the board of trustees of Select Fund independently have determined that 
the Reorganization will be in the best interests of the shareholders of 
each Fund's series, and that consummation of the Reorganization will 
not result in the dilution of the current interests of any shareholder 
or contract owner of Variable Fund or Select Fund.
    3. Applicants note that the number of shares to be issued to 
Variable Fund by Select Fund will be determined on the basis of the 
relative net asset value per share of each series proposed to be 
combined.
    4. Applicants represent that neither the board of directors of 
Variable Fund nor the board of trustees of Select Fund will make a 
recommendation to shareholders concerning the Reorganization Plan 
unless it has considered the expense ratios and published information 
regarding the fees and expenses of corresponding series of the Variable 
Fund and the Select Fund and those of similar funds, the terms and 
conditions of the Reorganization Plan, and whether the Reorganization 
Plan will result in the dilution of any shareholder interests. 
Applicants assert that no recommendation will be made unless the 
directors/trustees have considered: (i) The potential benefits of the 
Reorganization to shareholders of the series of the Variable Fund or 
the Select Fund, as appropriate, and the contract owners with contract 
values allocated to the Pacific Corinthian Variable Separate Account or 
the Pacific Select Separate Accounts, as appropriate; (ii) the 
compatibility of investment objectives, policies, restrictions, and 
investment holdings of the corresponding series of Variable Fund and 
Select Fund; (iii) the terms and conditions of the Reorganization Plan 
which might affect the price of outstanding shares of each series of 
Variable Fund or Select Fund, as appropriate, or interests of contract 
owners indirectly invested therein; and (iv) direct or indirect costs 
to be incurred by the series of Variable Fund or Select Fund, as 
appropriate, or shareholders thereof or contract owners who have 
allocated their variable contracts to separate accounts that invest in 
Variable Fund or Select Fund series.
    5. If effected according to the Reorganization Plan, the 
Reorganization should result in an increase in the asset size of the 
Select Fund. Applicants represent that the larger aggregate net assets 
of Select Fund and certain of its series should enable the combined 
entity to realize significant benefits associated with economies of 
scale.
    6. Applicants represent that, because Pacific Corinthian no longer 
accepts new premiums from existing owners of the Variable Contracts and 
no longer solicits new applications for new Variable Contracts, the 
Variable Fund faces the potential of limited (or no) growth and 
continued diminution of asset size. Consequently, the expense ratios of 
certain Variable Fund series may increase, Variable Fund series may 
experience difficulty in achieving their investment objectives, service 
providers may find it less profitable to render services to Variable 
Fund series, and it may become difficult for the Variable Fund series 
to retain qualified service providers. Applicants assert that the 
Reorganization will provide an opportunity for the owners of the 
Variable Contracts to invest in an underlying fund with greater assets 
that has the potential for growth in assets.
    7. Applicants represent that, under the advisory agreement with 
Select Fund, Pacific Mutual renders the types of advisory and non-
advisory services that are substantially similar to the types of 
advisory services currently rendered to Variable Fund by Pacific Mutual 
and the management services rendered to Variable Fund by Pacific 
Corinthian. Applicants anticipate that, after completion of the 
Reorganization, the investment advisory fees paid by the series of 
Select Fund involved in the Reorganization will be comparable to the 
advisory fees and management fees paid by the corresponding series of 
Variable Fund.
    8. Applicants represent that, generally, the expense ratios for 
Select Fund are lower than those of the corresponding series of 
Variable Fund, and the Reorganization should result in a benefit to 
contract owners in that the investment-related expenses that bear 
indirectly are likely to decrease.
    9. Applicants represent that the Reorganization will not be 
effected until the board of directors of Variable Fund: (i) Has 
considered and compared the relative investment performance of each 
series of Variable Fund and all series of Select Fund and, in the case 
of pertinent series of Select Fund for which new portfolios managers 
are proposed, investment performance for comparable portfolios managed 
by such proposed portfolio managers; and (ii) determines whether 
performance and investment flexibility may be enhanced if assets of 
Variable Fund series are combined with assets of Select Fund series in 
accordance with the Reorganization Plan.
    10. Applicants further represent that the Reorganization will not 
have adverse tax consequences for any Variable Fund or Select Fund 
shareholder.

B. Consistency With Applicant's Policies and the General Purposes of 
the 1940 Act

    1. Applicants represent that the Reorganization will not be 
approved unless the boards of each Fund have determined that the 
investment objectives and policies of the corresponding series of 
Variable and Select Fund are compatible. Applicants assert that no 
significant differences exist between Variable Fund and Select Fund 
regarding investment policies, borrowing and lending limitations, 
permitted transactions, or quality of investments.\3\
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    \3\Applicants note that there are differences between the stated 
objectives of each Fund's Equity Income series. However, Applicants 
represent that, while the two series have investment objectives that 
are stated somewhat differently, there is a great deal of 
commonality in their stated investment policies.
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    2. Rule 17a-8 under the 1940 Act exempts from the prohibitions of 
Section 17(a) mergers, consolidations, or purchases or sales of 
substantially all of the assets involving registered investment 
companies which may be affiliated persons, or affiliated persons of an 
affiliated person, solely by reason of having a common investment 
adviser, common directors/trustees, and/or common officers. Because the 
Applicants may be affiliated with one another for reasons for reasons 
other than sharing an investment adviser, directors/trustees, and 
officers, Applicants may not be able to rely on Rule 17a-8.
    3. Applicants have agreed, nevertheless, to comply with the 
substantive requirements of the Rule 17a-8. Applicants represent that: 
(i) The directors of Variable Fund have determined that the 
Reorganization will be in the best interests of the shareholders of 
each Variable Fund series, and will not result in the dilution of the 
current interests of any such shareholder or Variable Contract owner; 
and (ii) the trustees of Select Fund have determined that the 
Reorganization will be in the best interests of the shareholders of 
each Select Fund series, and will not result in the dilution of the 
current interests of any such shareholder or contract owner having 
contract value allocated through the Pacific Select Separate Accounts.
    4. Moreover, Applicants assert that, although the nature of the 
affiliations may preclude them from relying on the exemption afforded 
by Rule 17a-8 under the 1940 Act, the directors/trustees of each fund, 
including the disinterested directors/trustees, have made the findings 
required by Rule 17a-8.
    5. Applicants also represent that the Reorganization is consistent 
with the general purposes of the 1940 Act, and does not present any of 
the conditions or abuses that the 1940 Act was designed to mitigate or 
eliminate. In particular, Section 1(b)(6) of the 1940 Act provides that 
the national public interest and the interest of investors are 
adversely affected when investment companies are recognized without the 
consent of their security holders. Applicants submit that the 
Reorganization Plan must receive the approval of shareholders of each 
series of Variable Fund and the pertinent series of Select Fund (the 
shares of both Funds being voted in proportion to the instructions 
received from contract owners having a voting interest in each series 
of each Fund). Variable Contract owners will receive a proxy statement/
prospectus containing all material disclosures, including a description 
of all material aspects of any proposed Reorganization Plan, and a copy 
thereof. Likewise, contract owners with contract value allocated to the 
variable accounts of the Pacific Select Separate Accounts that invest 
in the pertinent series of Select Fund will receive a proxy statement 
containing, among other things, information relating to the 
Reorganization Plan and the transactions contemplated therein, and will 
have an opportunity to vote on the Reorganization.

Conclusion

    Applicants request an order of the Commission pursuant to Section 
17(b) of the 1940 Act exempting the Reorganization from the provisions 
of Section 17(a) of the 1940 Act. Applicants submit that, for the 
reasons set forth above, the terms of the Reorganization, as set forth 
in the Reorganization Plan, including the consideration paid and 
received, are reasonable and fair to shareholders of each series of 
Variable Fund and Select Fund, and to contract owners invested therein, 
and do not involve overreaching on the part of any person concerned. 
Applicants further submit that the proposed Reorganization will be 
consistent with the policies of Variable Fund and Select Fund and each 
series thereof, as well as with the general purposes of the 1940 Act.

    For the Commission by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25728 Filed 10-17-94; 8:45 am]
BILLING CODE 8010-01-M