[Federal Register Volume 61, Number 61 (Thursday, March 28, 1996)]
[Notices]
[Pages 13898-13901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7540]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21840; File No. 812-9942]
GNA Variable Investment Account, et al.
March 22, 1996.
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: GNA Variable Investment Account (the ``Account''), and
Great
[[Page 13899]]
Northern Insured Annuity Corporation (``GNA'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 26(b) of the
1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
substitution of certain securities held by the Account.
FILING DATE: The application was filed on January 16, 1996, and amended
on March 12, 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 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 April 16, 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 request 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, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, J. Neil McMurdie,
Esq., Associate Counsel and Assistant Vice-President, Great Northern
Insured Annuity Corporation, Two Union Square, Ste. 5600, Seattle,
Washington 98111-0490.
FOR FURTHER INFORMATION CONTACT: 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 Commission's
Public Reference Branch.
Applicant's Representations
1. GNA is a stock life insurance company organized under Washington
law 1980. GNA is a wholly-owned subsidiary of General Electric Capital
Assurance Company, a wholly-owned subsidiary of GNA Corporation, which
is a wholly-owned subsidiary of General Electric Capital Corporation.
2. GNA established the Account under Washington law in 1981 to fund
variable annuity contracts. The Account is registered with the
Commission under the 1940 Act as a unit investment trust. The assets of
the Account are divided into twelve subaccounts (each a
``Subaccount''), each of which invests in shares of one of twelve
designated portfolios of three registered open-end investment
companies. Under certain prescribed circumstances, and with notice to
Participants (defined below) and subject to regulatory approval, GNA
may transfer assets held in one Subaccount to another Subaccount.
3. There are two outstanding series of registered variable annuity
contracts (``Contracts'') participating in the Account. Each Contract
is a group allocated contract designed for use in connection with
qualified and non-qualified retirement plans. Each person or entity
participating under a contract (``Participant'') is issued a
certificate which states a Participant's rights under the Contract.
4. The Power Portfolio Variable Annuity Contract (the ``Power
Contract'') is designed for a group consisting of clients of a broker-
dealer or financial institution, or any other organized group
acceptable to GNA. Participants under this contract may allocate
certificate values among eight variable investment options: the GNA
Growth Portfolio, the GNA Value Portfolio, the GNA Government
Portfolio, and the GNA Adjustable Rate Portfolio of GNA Variable Series
Trust; and the GE Fixed Income Portfolio, the GE International Equity
Portfolio, the GE U.S. Equity Portfolio and the GE Money Market
Portfolio of Variable Investment Trust.
5. The Paragon Power Portfolio Variable Annuity Contract (``Paragon
Contract'') is designed for a group consisting of customers of banks or
bank affiliates that are subsidiaries of Premier Bancorp, Inc.
(``Premier''). The only outstanding Paragon Contract was issued to GNA
Securities, Inc. Participants under the Paragon Contract are entitled
to allocate certificate values among nine variable investment options:
the GNA Growth Portfolio, the GNA Government Portfolio and the GNA
Adjustable Rate Portfolio of GNA Variable Series Trust; the GE
International Equity Portfolio and the GE Money Market Portfolio of
Variable Investment Trust; and the Paragon Power Intermediate-Term Bond
Portfolio, the Paragon Power Value Growth Portfolio, the Paragon Power
Value Equity Income Portfolio, and the Paragon Power Gulf South Growth
Portfolio (collectively, the ``Portfolios'') of Paragon Portfolio (the
``Trust''), a registered management investment company.
6. Premier Investment advisers, L.L.C., an indirect subsidiary of
Premier, served as investment adviser of the Portfolios. On January 1,
1996, Premier merged with and into a subsidy of Banc One Corporation
(``Banc One''), an Ohio bank holding company. The merger resulted in
the automatic termination of the investment advisory arrangements
between Premier Investment Advisers L.L.C. and the Trust. In
anticipation of this effect of the merger, the trustees of the Trust
approved a new investment advisory agreement with Banc One Investment
Advisers Corporation (``BOIA''), an indirect wholly-owned subsidiary of
Banc One, on October 31, 1995. The shareholders of each portfolio of
the Trust approved the new investment advisory agreement on December
20, 1995, and the agreement took effect on January 2, 1996.
7. BOIA has notified the Trust that it does not intend to provide
investment advisory services to the Portfolios over the long term. OIA
notified GNA that the trustees of the Trust determined at their October
31, 1995 meeting that, following the merger of premier and Banc One,
the Trust would not longer offer shares of the Portfolios as funding
options for the Paragon Contract. BOIA advised GNA to take any actions
necessary to substitute alternative investment options for the
Portfolios.
8. In light of the contemplated termination of the Portfolios, GNA
has restricted additional investment in the Portfolios and provided
alternative investment options to present Paragon Contract
Participants. On December 11, 1995, GNA notified those present Paragon
Contract Participants that, on or after that date: (i) The Portfolios
would cease to be investment options under the Contracts; (ii) no
purchase payments from present or future Paragon Contract Participants
could be allocated to the Portfolios; and (iii) present Paragon
Contract Participants could not transfer their account value to the
Subaccounts corresponding to the Portfolios. The notification stated
that GNA was seeking an order from the Commission to permit GNA to
substitute shares of the GE Money Market Portfolio of the Variable
Investment Trust for shares of the Portfolios. Pending receipt of the
order, transfers would be permitted from the Subaccounts corresponding
to the Portfolios at any time, without the assessment of a $25 charge
that might otherwise apply. GNA advised Paragon Contract Participants
that certificate values invested in the Portfolios before December 11,
1995, could remain so invested until the order requested herein has
been granted.
9. On December 11, 1995, GNA commenced an offer to Paragon Contract
Participants to exchange certificates under the Power Contract for
certificates
[[Page 13900]]
under the Paragon Contract.\1\ This exchange would make available to
Paragon Contract Participants three additional investment options: the
GNA Value Portfolio of GNA Variable Series Trust; and the GE Fixed
Income Portfolio and the GE U.S. Equity Portfolio of the Variable
Investment Trust. A description of the new investment options was
provided to Paragon Contract Participants by the prospectuses for the
applicable portfolios.
\1\ Applicants represent that the exchange is being made in
compliance with Rule 11a-2 under the 1940 Act.
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10. Following such an exchange, a former Paragon Contract
Participant may reallocate his or her certificate value among the
Subaccounts available to Power Contract Participants. Any such
reallocation will not be subject to any applicable transfer charge, and
any such reallocation and any transfers made under the Paragon Contract
in the certificate year prior to the exchange will not be counted as a
transfer under the Power Contract so as to limit the number of free
transfers per certificate year. Moreover, the exchange will be made
without the assessment of any withdrawal charge or market value
adjustment provided for the Power Contract, and no charge will be made
for effecting the exchange.
11. Upon receipt of SEC approval of the proposed substitution, GNA
proposes to transfer any certificate values remaining in the
Subaccounts investing in the Portfolios to the Subaccount investing in
the GE Money Market Portfolio of the Variable Investment Trust. After
that transfer by GNA, the Paragon Contract Participants may transfer
amounts allocated to the Subaccount holding shares of the GE Money
Market Portfolio to other Subaccounts to the extent permitted under the
terms of the Paragon Contract. Neither the transfer (by GNA) of
certificate value to the Subaccount investing in the GE Money Market
Portfolio, nor the first transfer of certificate value made by an
affected Participant thereafter will be subject to any applicable
transfer charge or be counted as a transfer so as to limit the number
of free transfers per certificate year.
12. The investment objective of the GE Money Market Portfolio is to
seek a high level of current income consistent with the preservation of
capital and maintenance of liquidity, by investing in a defined group
of short-term, U.S. dollar denominated money market instruments. GNA
contends that, as the most conservative investment option avalable, the
GE Money Market Portfolio is an appropriate substitute for
Participants' interests in the Portfolios until such time as those
Participants make an affirmative investment decision through the
exercise of the transfer or exchange rights available to them.
13. The expense levels of an investment in the GE Money Market
Portfolio are favorable to Participants. The GE Money Market Portfolio
pays an investment advisory fee at an annual rate of 0.25% and an
administration fee at an annual rate of 0.05%. Because of an expense
reimbursement arrangement, current total annual expenses of the GE
Money Market Portfolio amount to 0.50% of the portfolio's average net
assets. In contrast, the management fees of the Paragon Power
Intermediate-Term Bond Portfolio and the three other Portfolios are
0.50% and 0.65%, respectively, and total annual expenses were estimated
to be 0.75% and 1.00%, respectively, as a percent of average net
assets.
14. The proposed transfer of certificate values to the Subaccount
investing in the GE Money Market Portfolio will be made in the same
manner as any other transfer among Subaccounts, except that no transfer
charge otherwise applicable will be assessed. On the date of transfer,
shares remaining in the relevant Subaccounts will be redeemed and the
cash proceeds thereof will be applied to the purchase of shares of the
GE Money Market Portfolio, in each case at net asset value determined
in accordance with the requirements of Rule 22c-1 under the 1940 Act.
No costs of the substitution of shares of the GE Money Market Portfolio
for shares of the Portfolios will be borne by Participants. Moreover,
GNA opines that there will be no adverse tax consequences to
Participants as a result of the proposed transfer of certificate
values.
15. Applicants represent that, on February 22, 1996, certificate
values allocated to the Paragon Power Intermediate-Term Bond Portfolio,
the Paragon Power Value Growth Portfolio, the Paragon Power Value
Equity Income Portfolio, and the Paragon Power Gulf South Growth
Portfolio constituted 26.1%, 22.1%, and 17.6% of the total assets of
those Portfolios. Under the circumstances, Applicants anticipate that
the incidental brokerage costs necessary to effect redemptions from the
Portfolios will be insignificant.
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. Applicants submit that the proposed substitution is in the best
interests of Paragon Contract Participants. Applicants state that the
proposal is being made to protect the interests of the Participants in
light of actions beyond the control of Applicants. If Applicants do not
force Paragon Contract Participants out of the Subaccounts investing in
the Portfolios, those Subaccounts, upon the termination of the
Portfolios, will end up holding the liquidation proceeds or other
consideration that may be received as a result of such termination.
3. Applicants represent that GNA selected the GE Money Market
Portfolio as the investment option to which the involuntary transfers
should be made because of the relative safety of an investment in that
portfolio. Applicants assert that, as the most conservative investment
option available, the GE Money Market Portfolio is an appropriate
substitute for Paragon Contract Participants' interests in the
Portfolios until those Participants make an affirmative investment
decision through the exercise of the transfer or exchange rights
available to them. Moreover, applicants state that the expense levels
of an investment in the GE Money Market Portfolio are favorable to
affected Participants.
4. Applicants represent that, in connection with the proposed
substitution, GNA is offering Paragon Contract Participants a variety
of alternative investment options which are reasonably comparable to
each of the Portfolios being eliminated. In this regard, Applicants
represent that: the GNA Government Portfolio and the GNA Adjustable
Rate Portfolio, presently available to Paragon Contract Participants,
each have investment objectives similar to those of the Paragon Power
Intermediate-Term Bond Portfolio that is being eliminated; and the GNA
Growth Portfolio, presently available to Paragon Contract Participants,
has investment objectives similar to those of the Paragon Power Value
Growth Portfolio and the Paragon Power Gulf South Growth Portfolio that
are being eliminated. Applicants further represent that Participants
who opt to exchange a Paragon Contract for a Power Contract will have
available as investment options, not only the GNA Government Portfolio,
the GNA
[[Page 13901]]
Adjustable Rate Portfolio, and the GNA Growth noted above, but also the
GE Fixed Income Portfolio, the GNA Value Portfolio, and the GE U.S.
Equity Portfolio, which have investment objectives similar to the
Portfolios being eliminated.
5. Applicants assert that, notwithstanding the availability of
investment options with more comparable investment objectives than the
GE Money Market Portfolio, GNA takes the position that it is preferable
to have Paragon Contract Participants make an affirmative election of
the investment options funding their certificate values rather than
have GNA make that election for them.
6. Applicants also assert that, even where the investment
objectives of alternative investment options are reasonably comparable,
differences in the level of portfolio operating expenses may make the
choice among available investment options less than clear-cut.
Applicants submit that Paragon Contract Participants with certificate
values invested in the Paragon Power Value Growth Portfolio, the
Paragon Power Value Equity Income Portfolio, or the Paragon Power Gulf
South Growth Portfolio could choose among other growth portfolios with
either higher (in the case of the GNA Growth Portfolio or the GNA Value
Portfolio) or lower (in the case of the GE U.S. Equity Portfolio)
estimated operated expenses. Likewise, Paragon Contract Participants
with certificate values invested in the Paragon Power Intermediate-Term
Bond Portfolio may choose among income portfolios with higher (in the
case of GNA Government Portfolio), the same (in the case of GE Fixed
Income Portfolio), or lower (in the case of GNA Adjustable Rate
Portfolio) estimated operating expenses. Applicants submit that a
choice among investment options with varying expense levels is more
appropriately made by the affected Paragon Contract Participants than
by GNA.
7. Applicants submit that Section 26(b) of the 1940 Act was
intended to provide for Commission scrutiny of proposed substitutions
which could, in effect, force shareholders dissatisfied with the
substituted security to redeem their shares, thereby possibly incurring
either a loss of the sales load deducted from initial purchase
payments, an additional sales load upon reinvestment of the proceeds of
redemption, or both. Applicants further submit that, while a Paragon
Contract Participant may be dissatisfied with the proposed forced
transfer of his or her certificate value to the GE Money Market
Portfolio Subaccount, GNA also is giving each Participant the
opportunity: to transfer Paragon Contract certificate value to any of
the four remaining investment options under the Paragon Contract; or,
by exchanging a Paragon Contract certificate for a Power Contract
certificate, to allocate certificate value among the seven investment
options available under the Power Contract. Such transfers and
allocations may occur at no cost to the Participant.
Conclusion
For the reasons discussed above, Applicants submit that the
proposed substitution of shares of the GE Money Market Portfolio of the
Variable Investment Trust for shares of the Portfolios 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.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-7540 Filed 3-27-96; 8:45 am]
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