[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Notices]
[Pages 12117-12119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7156]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21831; File No. 812-9784]
Princor Balanced Fund, Inc., et al.
March 19, 1996.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Emerging Growth Fund,
Inc., Princor Growth Fund, Inc., Princor World Fund, Inc., Princor Bond
Fund, Inc., Princor Cash Management Fund, Inc., Princor Government
Securities Income Fund, Inc., Princor High Yield Fund, Inc., Princor
Utilities Fund, Inc. (collectively, the ``Funds''), Princor Financial
Services Corporation (``Princor'') and Principal Mutual Life Insurance
Company (``Principal Mutual'').
RELEVANT 1940 ACT SECTIONS: An order of the Commission is requested
under Section 11(a) of the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order approving the terms of
an offer of exchange by the Funds and Princor to certain holders of
participation certificates under variable annuity contracts (the
``Contracts'') issued by Separate Account B (``Account B'') and
Separate Account C (``Account C,'' and together with Account B, the
``Accounts'') of Principal Mutual.
FILING DATE: The application was filed on September 27, 1995, and
amended on March 13, 1996.
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 Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on April 15, 1996, 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 requester'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 Commission.
ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549.
Applicants, Michael D. Roughton, Esq., The Principal Financial Group,
Des Moines, Iowa 50392-0300.
FOR FURTHER INFORMATION CONTACT: Mark C. Amorosi, Attorney, or Patrice
M. Pitts, Special Counsel, Office of Insurance Products (Division of
Investment Management), at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application is available for a fee from the Public
Reference Branch of the Commission.
Applicants' Representations
1. Each Fund was organized by Principal Mutual as a Maryland
corporation and is registered under the 1940 Act as an open-end,
diversified, management investment company. Each Fund has two classes
of shares, ``A Shares'' (which are sold with a front-end sales load of
up to 4.75%) and ``B Shares'' (which, for the Funds other than the
Princor Cash Management Fund, are sold with a deferred sales load of up
to 4% that declines to 0% after the sixth year). The Funds have a wide
range of investment objectives.
[[Page 12118]]
2. Princor is an indirect, wholly-owned subsidiary of Principal
Mutual. Princor is registered with the Commission as a broker-dealer
and is a member of the NASD. Princor is the principal underwriter for
each of the Funds and for the variable annuity contracts issued by the
Accounts.
3. The investment adviser of each of the Funds is Princor
Management Corporation (``PMC''), an indirect wholly-owned subsidiary
of Principal Mutual. The investment sub-adviser of each Fund other than
the Princor Bond Fund, the Princor Cash Management Fund and the Princor
High Yield Fund is Invista Capital Management, Inc., which is also an
indirect wholly-owned subsidiary of Principal Mutual.
4. The Funds' expense ratios for their last fiscal year ranged from
a low of 0.70% \1\ for the Princor Cash Management Fund to a high of
1.74% for the Princor Emerging Growth Fund and the Princor World Fund.
\1\ Applicants state that this ratio reflects the impact of a
voluntary waiver of advisory fees by PMC. The expense ratio without
that waiver during the last fiscal year would have been 0.90%.
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5. The Contracts are group variable annuity contracts issued by
Account B and Account C of Principal Mutual, a mutual life insurance
company. The Contracts issued by Account B are designed for use in
connection with tax-deferred retirement plans, including plans or
programs adopted by public school systems or other agencies of a state
or its subdivisions or certain tax exempt organizations pursuant to
Section 403(b) of the Internal Revenue Code of 1986, as amended (the
``Code''), and individual retirement annuity plans or programs adopted
pursuant to Section 408 of the Code. The Contracts issued by Account C
are designed for use in conjunction with qualified plans adopted
pursuant to Section 401(a) of the Code. Applicants state that the
Contracts are not being offered to new groups but continue to be
offered to participants in existing group contracts, including new
participants.
6. The Contracts have a contingent deferred sales load (``CDSL'')
that declines from 7% to 0% of the amount withdrawn over a period of
ten years. In no case will the CDSL exceed 9% of payments relating to
the amounts withdrawn.
7. Applicants state that the Contracts have an administration
charge of $25 per year for each participant and an asset-based
administrative charge. That asset-based administrative charge is 0.50%
of the first $50,000 of Contract value of a participant. If payments
for a participant under a Contract are made as part of a retirement
plan sponsored by, or program of, the employer of a participant and
Principal Mutual receives all of that portion of the payments under
such a plan or program which is directed to annuity contracts for all
employees participating in the plan or program, then the percentage of
the asset-based administration charge will be computed by dividing
0.50% of the first $50,000 of Contract value of a participant by the
total Contract value of all that employer's participants. In some
cases, employers pay all or a portion of those administration charges
for their participants.
8. A mortality and expense risk charge of up to 2.00% of the assets
of the issuing Account may be deducted under the Contracts. Currently,
Applicants state that this charge is 1.4965% (1.0001% for a rollover
individual retirement annuity). An increase to more than 1.75% would
require approval of the Commission.
9. There is no charge for transfers under the Contracts, but such
transfers are limited to two per twelve month period, absent consent of
Principal Mutual. State premium taxes are deducted at annuitization or
from payments, in accordance with applicable state laws.
10. The expense ratios of the three underlying funds which serve as
the investment vehicle for the Accounts were 0.51%, 0.55% and 0.60% on
an annual basis in their last fiscal year. Applicants state that when
the underlying fund expenses are added to the 1.4965% current mortality
and expense risk charge of the Contract, the ongoing expense of the
Contracts ranges from 2.0065% to 2.0965%, excluding the $25 per year
administration fee and any applicable asset-based administration
charges, and disregarding the possibility of an increase in the
mortality and expense risk charge to 1.75% without Commission approval
or to 2.00% with Commission approval. For Contracts sold as rollover
individual retirement annuities, the range of such expenses is 1.5101%
to 1.6001%, also excluding administration charges and disregarding the
possibility of increases in the mortality and expense risk charge.
11. Class A Shares of the Funds will be offered to holders of
participation certificates issued under the Contracts. Any exchange
pursuant to the offer will be at relative net asset value (i.e.,
immediately after an exchange, the aggregate value of the shares of the
Fund or Funds acquired will be identical to the participant's cash
value under the Contract immediately prior to the exchange). Applicants
state that no administrative fee or any other charge will be imposed
for effecting the exchange. However, Principal Mutual reserves the
right to deduct the annual $25 Contract administration fee due at the
time an exchange is effected. The CDSL on the Contracts exchanged for
Fund shares will not be imposed, and no front-end load of a Fund will
be deducted from the proceeds exchanged for Fund shares.
12. Applicants state that the exchange offer will be conveyed to
offerees by written materials and by telephone contact by registered
representatives of Princor. Each offeree who expresses interest in the
exchange offer will be mailed a combined prospectus for the Funds.
Accompanying the prospectus will be sales literature that has been
approved by the NASD and a cover letter. The sales literature and cover
letter will highlight the differences between the Principal Mutual
Contracts and shares of the Funds and the terms of the exchange offer.
Interested offerees will then be contacted again by telephone by
registered representatives of Princor who will be compensated by a
payment of 1% of the amounts exchanged, but that compensation will be
paid entirely by Princor and not by any holder of a Contract who
accepts the exchange offer.
13. The exchanges will be effected as direct transfers and direct
rollovers and will not have adverse tax consequences for offerees who
accept the exchange offer.
Applicants' Legal Analysis
1. Section 11(a) of the 1940 Act makes it unlawful for a registered
open-end investment company or any principal underwriter for such a
company to make or cause to be made 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, unless the terms of the offer
have first been submitted to and approved by the Commission or are in
accordance with such rules and regulations as the Commission may have
prescribed in respect of such offers which are in effect at the time
such offer is made.
2. Section 11(c) of the 1940 Act provides that, irrespective of the
basis of exchange, subsection (a) shall be applicable to any type of
offer of exchange of the securities of registered unit investment
trusts for the securities of any other investment company.
3. Applicants maintain, for the reasons set forth below, that the
terms
[[Page 12119]]
of the proposed offer of exchange do not involve any of the
``switching'' (i.e., offer of exchange made solely for the purpose of
assessing additional selling charges) abuses that led to the adoption
of Section 11 of the 1940 Act.
4. Applicants state that the exchange will be made on the basis of
relative net asset value (i.e., immediately after an exchange, the cash
value of the Fund shares acquired will be identical to the
participant's cash value under the Contract immediately prior to the
exchange). Further, no CDSL will be applicable to Fund shares acquired
as part of the exchange, and no administrative fee or sales load will
be deducted at the time of the exchange. Applicants state that the
exchanges will not have adverse tax consequences for offerees who
accept the exchange offer because the exchanges proposed would be made
as direct rollovers or direct transfers.
5. Applicants state that Funds with investment objectives
comparable to those of the investment options under the Contracts will
be available through the exchange offer. In addition, Funds with a much
wider variety of investment objectives will be available through the
exchange offer than are currently available under the Contracts.
Furthermore, Applicants state that the expenses of the Funds are
generally lower than the combined expenses and fees of the Accounts and
the investment companies in which the Accounts invest. Accordingly,
those who accept the exchange offer should incur lower expenses as Fund
shareholders than as Contract participants.
6. Applicants assert that compensation by Princor to its registered
representatives for successfully soliciting exchanges under the terms
and circumstances, which includes no payment of additional sales loads
or charges by those accepting the exchange offer, does not adversely
affect the public interest or impair investor protection in any way.
7. Applicants have consented to the following conditions:
(a) No redemption or administrative fee will be imposed in
connection with the proposed exchanges unless the fee would be
permissible under Rules 11a-2 and 11a-3 for exchanges authorized by
these Rules.
(b) At the commencement of the exchange offer, and at all times
thereafter, the prospectus or the statement of additional information,
as appropriate, of the offering Fund will disclose:
(i) The amount of any administrative or redemption fee, if any,
imposed in connection with the exchange transaction; and
(ii) that the exchange offer is subject to termination and its
terms are subject to change.
(c) Whenever the exchange offer is to be terminated or its terms
are to be amended materially, any holder of a security subject to that
offer shall be given prominent notice of the impending termination or
amendment at least 60 days prior to the date of termination or the
effective date of the amendment, provided that no notice need be given
if, under extraordinary circumstances, either:
(i) there is either a suspension of the redemption of the exchanged
security under Section 22(e) of the 1940 Act and the rules and
regulations thereunder, or
(ii) the offering Fund temporarily delays or ceases the sale of the
security to be acquired because it is unable to invest amounts
effectively in accordance with applicable investment objectives,
policies and restrictions.
Other than in the circumstances set forth in (c)(i) and (c)(ii)
above, Applicants will dispense with the 60 days notice requirement
only upon obtaining further relief from the Commission authorizing them
to do so.
Conclusion
For the reasons set forth above, Applicants submit that the
proposed offer of exchange is consistent with the intent and purpose of
Section 11 of the 1940 Act, and that none of the abuses which Section
11 was enacted to prevent are present.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7156 Filed 3-22-96; 8:45 am]
BILLING CODE 8010-01-M