[Federal Register Volume 60, Number 200 (Tuesday, October 17, 1995)]
[Notices]
[Pages 53816-53818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25624]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21405; File No. 812-9458]
Franklin Life Variable Annuity Fund A, et al.
October 10, 1995.
AGENCY: Securities and Exchange Commission (the ``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: Franklin Life Variable Annuity Fund A (``Fund A''),
Franklin Life Variable Annuity Fund B (``Fund B''), Franklin Life Money
Market Variable Annuity Fund C (``Fund C'', collectively, with Fund A
and Fund B, the ``Funds''), and The Franklin Life Insurance Company
(``The Franklin'').
RELEVANT 1940 ACT SECTIONS: Conditional order requested under Section
6(c) of the 1940 Act for exemption from Section 15(a) of the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek a conditional order to permit
The Franklin to have served as investment advisor, without formal
approval by the contract owners of the Funds, pursuant to interim
investment management agreements (the ``Interim Agreements''). The
conditional order would cover the period from January 31, 1995 until
April 17, 1995 (the ``Interim Period'') and would permit The Franklin
to receive from the Funds fees earned under the Interim Agreements.
FILING DATE: The application was filed on January 31, 1995 and amended
and restated on March 16, 1995 and on August 10, 1995.
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 on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on November 6, 1995 and should 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 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, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, D.C. 20549. Applicants, Stephen P. Horvat, Jr.,
Esq., The Franklin Life Insurance Company, #1 Franklin Square,
Springfield, Illinois 62713.
FOR FURTHER INFORMATION CONTACT: Barbara J. Whisler, Senior Counsel, or
Wendy Friedlander, Deputy Chief, both at (202) 942-0670, 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.
[[Page 53817]]
Applicants' Representations
1. The Funds are registered open-end management investment
companies. The Funds serve as the funding vehicles for variable annuity
contracts issued by The Franklin. The Franklin is registered as an
investment advisor under the Investment Advisers Act of 1940, as
amended. Prior to the Interim Period, The Franklin served as the
investment advisor to the Funds and received investment advisory fees
from the Funds pursuant to investment advisory contracts (the ``Prior
Agreements'') approved by the contract owners of the Funds (the
``Owners'') in accordance with Section 15(a) of the 1940 Act.
2. On November 29, 1994, American Brands Inc. (``American Brands'')
entered into a stock purchase agreement with American General
Corporation (``American General'') which provided for the sale by
American Brands, the indirect parent corporation of The Franklin, to
American General, through its wholly owned subsidiary, AGC Life
Insurance Company, of all of the outstanding common stock of the
immediate parent corporation for The Franklin. The sale closing
occurred on January 31, 1995, and, as a result of that sale, American
General became the indirect parent corporation of The Franklin. The
change in control resulted in the assignment of the Prior Agreements,
thus terminating such agreements in accord with their terms and the
provisions of Section 15(a) of the 1940 Act.
3. Applicants state that the stock purchase agreement contemplated
that approval by the Owners of the Interim Agreements would be obtained
at the regularly scheduled annual meetings of the Owners. Applicants
state that they anticipated that state insurance department approvals
required for the closing of the sale would take sufficient time that
the Owners' vote on the Interim Agreements would occur prior to the
closing of the sale. Applicants represent that the required state
insurance department approvals were obtained in a more timely manner
than anticipated. Applicants further represent that only shortly before
the approvals were received did it become clear that such approvals
would be received prior to the end of January. Applicants filed the
application on the date of the closing of the sale, January 31, 1995.
4. On January 16, 1995, the board of directors of each of the
Funds, including a majority of the members who were not ``interested
persons'' of the Funds or of The Franklin as that term is defined in
the 1940 Act, voted to approve the Interim Agreements and to submit the
Interim Agreements to the Owners for approval. On March 3, 1995, the
boards of the Funds again considered the Interim Agreements in light of
certain changes to The Franklin's investment functions and personnel.
The boards, including a majority of the members who were not
``interested persons'' of the Funds or of The Franklin as that term is
defined in the 1940 Act, determined to continue the Interim Agreements
and to submit the Interim Agreements to the Owners for approval.
5. During the meetings of the boards held on January 16 and March 3
of 1995, Applicants represent that the boards fully evaluated, with the
advice and assistance of counsel, the Interim Agreements in accordance
with Section 15(c) of the 1940 Act. The boards considered several
factors in evaluating whether the Interim Agreements were in the best
interests of the Funds and the Owners. Applicants state that the boards
considered that the Interim Agreements contained substantially
identical terms and conditions, including identical advisory fees, as
the Prior Agreements. Further, the boards noted that the obligations
and duties of The Franklin to provide investment management and other
services to the Funds would continue unaffected by the anticipated
changes in the investment functions and personnel of The Franklin. The
boards also considered The Franklin's assurance that the Funds would
receive the same quality of advisory services under the Interim
Agreements as had been received under the Prior Agreements. The boards
further determined that the transaction which caused the assignment and
concurrent termination of the Prior Agreements would have no material
adverse effect on The Franklin's ability to provide services to the
Funds under the Interim Agreements.
6. Applicants state that the boards concluded that the payment of
investment advisory fees earned during the Interim Period would be
appropriate and fair considering that: (a) The sale arose primarily out
of business considerations unrelated to the relationship between the
Funds and The Franklin; (b) seeking the Owners' approval of the Interim
Agreements prior to the assignment of the Prior Agreements would
entail, in Applicants' estimation, considerable expense; (c) the
nonpayment of investment advisory fees during the Interim Period would
be unduly harsh in light of the services provided by The Franklin to
the Funds during the Interim Period; and (d) the investment advisory
fees to be paid pursuant to the Interim Agreements would be unchanged
from the fees paid pursuant to the Prior Agreements. Applicants also
placed the fees paid pursuant to the Interim Agreement in escrow until
approval of the Interim Agreement by the Owners.\1\
\1\On April 17, 1995, the Interim Agreements were approved by a
vote of a majority in interest of the contract owners, as defined in
the 1940 Act, of the Funds. On April 25, 1995, the fees earned under
the Interim Agreements for the period from January 31, 1995 to March
31, 1995, were released to The Franklin. Fees earned from April 1,
1995 through April 17, 1995 were paid directly to The Franklin on
May 1, 1995. Applicants acknowledge that the April 25 release and
the May 1 payment were both made in error because the Commission had
not granted the order requested in the application. On August 2,
1995, The Franklin returned to an escrow account the previously
released funds plus $63.12, an amount representing interest that
would have been earned between the dates of payment and release and
August 2, 1995. Applicants represent that the escrowed funds will
not be released until issuance by the Commission of the order
requested in the application.
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Applicants' Legal Analysis
1. Applicants request an order of the Commission pursuant to
Section 6(c) of the 1940 Act exempting them from the provisions of
Section 15(a) of the 1940 Act. The order would permit The Franklin to
have served as investment advisor, without formal approval by the
Owners, pursuant to the Interim Agreements. The order would cover the
Interim Period and would permit The Franklin to receive from the Funds
fees earned under the Interim Agreement.
2. Section 6(c) provides, in pertinent part, that the Commission
may, by order upon application, conditionally or unconditionally exempt
any person, security or transaction from any provision of the 1940 Act
if and to the extent that such exemption is necessary or appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and the provisions of the
1940 Act. Section 15(a) prohibits an investment advisor from providing
investment advisory services to an investment company except pursuant
to a written contract that has been approved by a majority of the
voting securities of such investment company. Section 15(a) further
requires that such written contract provide for its automatic
termination in the event of an assignment. Under Section 2(a)(4) of the
1940 Act, an assignment includes any direct or indirect transfer of a
contract by the assignor or any direct or indirect transfer of a
controlling block of the assignor's voting securities.
3. On January 31, 1995, pursuant to the terms of the sale, American
General became the indirect parent corporation of The Franklin. The
sale therefore resulted in an ``assignment'' of the Prior
[[Page 53818]]
Agreements within the meaning of Section 2(a)(4) of the 1940 Act. Upon
assignment, each of the Prior Agreements terminated by its own terms
and pursuant to Section 15(a).
4. Rule 15a-4 under the 1940 Act provides, in pertinent part, that
if an investment advisor's investment advisory contract is terminated
by assignment, the investment advisor may continue to act as such for
120 days at the previous compensation rate if a new contract is
approved by the board of directors of the investment company, and if
the investment advisor or a controlling person of the investment
advisor does not directly or indirectly receive money or other benefit
in connection with the assignment. Applicants concede that they may not
rely on Rule 15a-4 because American Brands, a controlling person of The
Franklin, received a benefit in connection with the assignment of the
Prior Agreements because American Brands received substantial
consideration from American General for the sale of the stock of the
indirect parent of The Franklin.
Conditions for Relief
1. Applicants represent that the Interim Agreements have
substantially identical terms and conditions, including identical
investment management fees, as the Prior Agreements.
2. Applicants represent that to mitigate the erroneous release and
payment of the escrowed funds to The Franklin following the Owners'
approval of the Interim Agreements, The Franklin repaid to an escrow
account the amount released and paid plus an amount representing
interest that would have been earned on the funds between the dates of
payment and release and the date of the funds were repaid to the escrow
account. Applicants further represent that the funds will not be
released from the escrow account until two conditions are met: approval
by the Owners of the Interim Agreements; and granting by the Commission
of the order sought in the application.
3. The Franklin will pay all costs of preparing and filing the
application and the costs of holding all annual meetings of the Owners
at which approval of the Interim Agreements was sought, including the
costs of proxy solicitation.
4. The Franklin will take all appropriate steps to ensure that the
scope and quality of advisory and other services provided to the Funds
during the Interim Period will be at least equivalent, in the judgment
of the boards of the Funds, to the scope and quality of services
previously provided. In the event of any material change during the
Interim Period in the manner of or the personnel providing services
pursuant to the Interim Agreements, The Franklin will apprise and
consult with the boards of the Funds to ensure the boards are satisfied
that the services provided will not be diminished in scope or quality.
5. Applicants represent that, pursuant to the terms of the stock
purchase agreement, American General and American Brands agreed to: (a)
Use, and to cause The Franklin to use, reasonable efforts, for a period
of three years after the sale, to have boards, 75% of which are
comprised of persons who are not ``interested persons'', within the
meaning of the 1940 Act, of The Franklin, American General or American
Brands; and (b) to refrain from any transaction that would impose an
unfair burden on the Funds.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-25624 Filed 10-16-95; 8:45 am]
BILLING CODE 8010-01-M