[Federal Register Volume 60, Number 235 (Thursday, December 7, 1995)]
[Notices]
[Pages 62904-62906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29831]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21559; File No. 812-9706]


PaineWebber Life Insurance Company, et al.

November 30, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

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

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APPLICANTS: PaineWebber Life Insurance Company (``PaineWebber Life''), 
and PaineWebber Variable Annuity Account (the ``Account'').

RELEVANT 1940 ACT SECTIONS: Approval requested under Section 26(b) of 
the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section 
26(b) of the 1940 Act approving the substitution of shares of the 
Balanced Portfolio (``BP'') of the PaineWebber Series Trust (``Trust'') 
for the shares of the Asset Allocation Portfolio (``AAP'') of the 
Trust.

FILING DATE: The application was filed on August 4, 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 December 26, 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, N.W., Washington, D.C. 20549. Applicants, Mr. Richard J. 
Tucker, PaineWebber Life Insurance Company, 1200 Harbor Boulevard, 
Weehawken, New Jersey 07087.

FOR FURTHER INFORMATION CONTACT: Joseph G. Mari, Senior Special 
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.

Applicants' Representations

    1. PaineWebber Life is a stock life insurance company organized 
under California law in 1956. PaineWebber Holdings, Inc., a wholly-
owned subsidiary of PaineWebber Group, Inc., owns 100 percent of the 
stock of PaineWebber Life. The Account, established by PaineWebber Life 
to fund variable annuity contracts (``Contracts'') on December 31, 
1992, pursuant to California law, is registered with the Commission as 
a unit investment trust. The assets of the Account are divided among 
ten investment divisions (``Divisions''), each of which invests in 
shares of one of the ten designated portfolios of the Trust, including 
the BP and AAP, each with its own investment objectives and investment 
portfolio. The Trust is an open-end diversified management investment 
company registered under the 1940 Act.\1\ Mitchell Hutchins Asset 
Management, Inc. (``Mitchell Hutchins''), a registered investment 
adviser under the Investment Advisers Act of 1940, is the investment 
adviser and administrator for the Trust.

    \1\The Trust was established in November 1986 to function as the 
underlying investment medium for the separate account of an 
otherwise unaffiliated insurance company and subsequently of a 
separate account of an affiliate of that insurance company. Those 
two separate accounts, together with the Account, are the only 
separate accounts invested in the Trust. The unaffiliated insurance 
company separate accounts hold shares in all the Portfolios of the 
Trust except the BP, Fixed Income and Aggressive Growth Portfolios.
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    2. PaineWebber Incorporated (``PWI''), a wholly-owned subsidiary of 
PaineWebber Group, Inc., a broker-dealer registered under the 
Securities Exchange Act of 1934 and a member of the National 
Association of Securities Dealers, Inc., acts as principal underwriter 
for the Contracts.
    3. The BP seeks total return while preserving capital by investing 
in equity securities and by investing no less than 25% of its assets in 
fixed income securities. The BP pays its investment adviser an annual 
fee of .75% of average daily net assets. The total assets of the 

[[Page 62905]]
BP as of December 31, 1994, were approximately $12 million. The AAP 
seeks to provide a high total return with low volatility by allocating 
investments among equity securities, long- and mid-term debt securities 
and money market instruments. The AAP pays its investment adviser an 
annual fee of .75% of average daily net assets as compensation for its 
services. The total assets of the AAP as of December 31, 1994, were 
approximately $23.3 million.
    4. On July 20, 1995, the Board of Trustees of the Trust (``Board'') 
approved both changing the name and the investment policies of the AAP. 
The changes will cause the AAP to operate more as a balanced fund in 
that it would invest in a combination of equity securities, investment 
grade debt obligations and money market instruments. The AAP name will 
be changed to the ``Balanced Portfolio.''
    5. Also on July 20, 1995, the Board determined that it was in the 
best interest of the shareholders of the BP to terminate the sale of 
shares of that Portfolio, effective July 21, 1995. The Board based its 
decision on (a) the minimal assets of BP after almost three years of 
operations; (b) disproportionately high expenses; (c) the investment 
adviser's indication that the small size of the Portfolio, partially 
the result of the Portfolio being offered to only one separate account, 
makes it difficult to make appropriate investment decisions and comply 
with the diversification requirements applicable to variable insurance 
products under section 817(h) of the Internal Revenue Code (``Code''); 
and (d) PaineWebber Life's assertion that because the investment 
objectives and policies of the BP and the AAP, as recently changed by 
the Board, are substantially similar, the two Portfolios basically 
compete for the same investment goals of Contract purchasers. 
PaineWebber Life was notified of the Board's determination and 
discontinued accepting premium payments in the Balanced Division.
    6. PaineWebber Life proposes that shares of the AAP be substituted 
for the shares of the BP now held by the Account's Balanced Division. 
The substitution would be effected at net asset value so that the 
dollar value of the amount invested in shares of the BP would be the 
same as the amount invested in shares of the AAP after the 
substitution. Contract owners will be able to direct their interests in 
the BP among the remaining eight Portfolios of the Trust (``Remaining 
Portfolios'') if they do not want to move their interests to the AAP.
    7. On the date of the substitution, the per share values of each of 
the Portfolios will be determined in the normal course of business. The 
shares underlying the contract values in the BP will be redeemed by 
PaineWebber Life and the net asset values applied to purchase shares of 
the AAP at net asset value. The investment securities held by the BP 
will be disposed of and any expense incurred in disposing of the 
investment securities and effecting substitution will be shared by 
PaineWebber Life and Mitchell Hutchins. There will be no change in the 
amount of the Contract owner's cash value as a result of the 
substitution.
    8. The Contracts reserve to PaineWebber Life the right to replace 
the shares of the Trust held by the Separate Account with shares of 
another series or another registered investment company, subject to 
Commission approval. Contract owners were notified that shares of the 
BP were no longer available as an investment option for purchase or 
transfer under the Contracts and that PaineWebber Life intended to file 
this application with the SEC seeking an Order permitting it to 
effectuate the proposed substitution. Contract owners with allocation 
instructions on file with PaineWebber Life that currently direct net 
premiums to the BP have been notified of the discontinuance of the BP 
as an investment option.
    9. Upon receipt of SEC approval of the proposed substitution, 
Contract owners with Contract values in the BP will be provided a form 
with which they can elect to transfer their Contract values to one or 
more of the Remaining Portfolios. Contract owners will be advised that 
the AAP has an investment objective most similar to the BP in which the 
Contract owner has values invested. If no instructions are received 
within 30 days after notice of the request to elect, Contract values in 
the BP will be transferred automatically to the AAP.
    10. The Contracts provide Contract owners the right to transfer 
part or all of the Contract value from one allocation option to one or 
more of the remaining options. The Contracts also provide that each 
transfer in excess of 12 in a calendar year is subject to a $10 charge, 
which has been waived by PaineWebber Life until further notice. The 
substitution of the shares of one or more of the Remaining Portfolios 
for shares of the BP will not be considered a ``transfer'' for the 
purpose of the above limitation. Contract owners will not be subject to 
any charges or costs for the substitution.

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act prohibits the depositor or trustee 
of a registered unit investment trust holding the security of a single 
issuer from substituting another security for such security unless the 
Commission has approved the substitution. Section 26(b) provides that 
the Commission will approve a substitution if it is consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.
    2. Contract owners will not be subject to any additional fees or 
charges as a result of the substitution. The substitution will not 
affect any benefits, rights or Contract values under the Contracts nor 
will it affect the purchase payment dates under the Contracts used in 
determining the early withdrawal charge. Contract owners will be given 
notice of the substitution and an opportunity to allocate existing 
Contract values among the eight Remaining Portfolios as they wish.
    3. Since the Account can no longer purchase shares of the BP, with 
normal redemptions the BP is expected to shrink rapidly. Applicants 
state that because of the relatively minor amount of total net assets 
in the BP, the fact that only one separate account had been investing 
in the BP when the sale of shares was terminated, and the resulting 
expense level and investment limitations, PaineWebber Life believes 
investment in the BP is no longer appropriate. Applicants contend that 
combining the assets of the BP and AAP, and the investment in the 
Portfolio by three separate accounts, should enhance its asset growth 
abilities.
    4. Applicants state that the diminishing amount of assets in the BP 
makes it difficult for the investment adviser to make appropriate 
investments for the Portfolio that will meet the Code's requirement for 
diversification. Failure to meet the diversification requirement could 
result in the entire Contract being currently taxable, not just that 
portion of the Contract that is invested in the non-complying 
Portfolio. Applicants state that it was determined that it was more 
important to the interests and the benefit of Contract owners to 
preserve the tax status enjoyed by Contract owners than to maintain the 
Portfolio which is no longer available for additional purchase. 
Applicants also contend that the minimal amount of total net assets 
available for investment and the termination of the sale of shares 
diminishes investment opportunities and handicaps Mitchell Hutchins in 
its 

[[Page 62906]]
ability to invest in potentially advantageous securities.
    5. Applicants state that expenses incurred by the BP have remained 
relatively high, and a large portion of the BP's expenses is fixed. 
Applicants represent that the lack of substantial assets in the BP 
results in high operating expenses that are borne by the Contract 
owners. The BP's 1994 actual expenses of 1.56% of average total net 
assets were higher than expenses of 1.03% of average total net assets 
for the AAP. Applicants contend that in comparing the expenses of the 
BP and AAP, the asset base of the BP and the increasing asset base of 
the AAP is a relevant consideration. Applicants assert that the 
increase in total assets of the AAP resulting from the substitution 
should result in a lessening of its overall expenses.
    6. Applicants state that the AAP offers Contract owners investments 
compatible with the objectives of Contract owners investing in the BP. 
Applicants state that management of PaineWebber Life, in consultation 
with Mitchell Hutchins, studied the investment objectives, policies and 
restrictions of each of the Remaining Portfolios to form an opinion as 
to which of the Remaining Portfolios appeared most closely identified 
with the investment intent of a Contract owner invested in the BP. It 
was concluded that a Contract owner who had Contract values invested in 
the BP was primarily interested in a Portfolios with an objective of a 
stable return while preserving capital. The investment objective of the 
AAP is to seek a high total return with low volatility, and the recent 
revision of the investment policies of the BP led to the conclusion 
that the AAP most closely suits the investment intent of the Contract 
owner who now has Contract values invested in the BP.

Applicants' Conclusion

    For the reasons discussed above, applicants submit that the 
proposed substitution of shares of the AAP for shares of the BP is 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29831 Filed 12-6-95; 8:45 am]
BILLING CODE 8010-01-M