[Federal Register Volume 61, Number 77 (Friday, April 19, 1996)]
[Notices]
[Pages 17330-17333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9695]



=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21894; File No. 812-9970]


Equitable Life Insurance Company of Iowa, et al.

April 15, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

-----------------------------------------------------------------------

APPLICANTS: Equitable Life Insurance Company of Iowa (``Equitable'') 
and Equitable Life Insurance Company of Iowa Separate Account A (the 
``Account'').

RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 26(b) 
of the 1940 Act approving the proposed substitution of securities and 
pursuant to Section 17(b) of the 1940 Act exempting the proposed 
transaction from the provisions of Section 17(a) of the 1940 Act.


[[Page 17331]]


SUMMARY OF THE APPLICATION: Applicants seek an order approving the 
proposed substitution of shares of the Advantage Portfolio of the Equi-
Select Series Trust (the ``Trust'') for shares of the Government 
Securities Portfolio (the ``GS Portfolio'') and the Short-Term Bond 
Portfolio (the ``STB Portfolio'') (collectively, with the Advantage 
Portfolio and the GS Portfolio, the ``Portfolios'') of the Trust. 
Applicants also seek an order exempting them from Section 17(a) of the 
1940 Act to the extent necessary to permit Applicants to carry out the 
above-referenced substitution by redeeming shares of the GS Portfolio 
and of the STB Portfolio in kind or partly in kind and using the 
redemption proceeds to purchase shares of the Advantage Portfolio.

FILING DATE: The application was filed on January 31, 1996. Applicants 
represent that an amendment to the application will be filed during the 
notice period and that such amendment will include the representations 
as contained herein.

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 May 10, 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 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 Fifth Street, NW., Washington, DC 20549. 
Applicants, John A. Merriman, General Counsel, Equitable Life Insurance 
Company of Iowa, 604 Locust Street, Des Moines, Iowa 50309.

FOR FURTHER INFORMATION CONTACT:
Barbara J. Whisler, Senior Counsel, Wendy Finck Friedlander, Deputy 
Chief, 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.
    1. Applicants' Representations
    Equitable, a stock life insurance company organized under Iowa law 
in 1867, serves as the sponsor and the depositor of the Account. 
Equitable is a wholly-owned subsidiary of Equitable of Iowa Companies, 
a publicly held company.
    2. The Account, established by Equitable under Iowa law on January 
24, 1994, is registered with the Commission as a unit investment trust. 
The Account funds certain individual flexible purchase payment deferred 
variable annuity contracts issued by Equitable (the ``Contracts''). The 
Account currently has fourteen subaccounts, each of which invests in 
and reflects the performance of a corresponding series of the Trust or 
of another underlying mutual fund. The Trust is registered with the 
Commission as an open-end management investment company.
    3. The GS Portfolio seeks total return by investing for a high 
level of current income with a moderate degree of share-price 
fluctuation. During normal market conditions, the GS Portfolio invests 
at least 80% of its total assets in U.S. government securities. The STB 
Portfolio seeks total return by investing for a high level of current 
income with a low degree of share-price fluctuation. The STB Portfolio 
invests primarily in short and intermediate term investment grade debt 
obligations. The Advantage Portfolio seeks current income with a very 
low degree of share-price fluctuation. The Advantage Portfolio invests 
primarily in short-term investment grade obligations. Shares of the GS 
Portfolio and the STB Portfolio are purchased without sales charge by 
separate subaccounts of the Account at the net asset value next 
determined following receipt of a purchase payment by the respective 
subaccount. Applicants state that any dividend or capital gain 
distributions received from the Portfolios are reinvested in additional 
shares of the Portfolios and retained as assets of the applicable 
subaccounts. Shares of the Portfolios are redeemed without charge to 
the extent necessary for Equitable to make annuity or other payments 
under the Contracts.
    4. Equitable Investment Services, Inc. (``EISI''), the investment 
adviser to the Trust, is a registered investment adviser, a wholly 
owned subsidiary of Equitable of Iowa Companies and an affiliate of 
Equitable. As investment adviser to the Trust, EISI provides overall 
management of the investment strategies and policies of the Portfolios. 
EISI entered into a subadvisory agreement with Strong Capital 
Management, Inc. (``Strong'') pursuant to which Strong served as 
subadvisor to the Portfolios. Strong is not affiliated with Equitable. 
Applicants state that, effective April 1, 1996, the subadvisroy 
agreement terminated and EISI assumed the portfolio management 
functions for the Portfolios. Upon termination of the subadvisory 
agreement, Applicants state that the fees payable to EISI from the 
Portfolios did not change.
    5. Prior to October 6, 1995, EISI and Strong waived the advisory 
fees for each of the Portfolios. EISI also undertook to bear all 
operating expenses of each of the Portfolios in excess of .75% of each 
Portfolio's average daily net assets, excluding the advisory fees 
payable to EISI. Beginning October 6, 1995, EISI and Strong began to 
accrue advisory fees from the Portfolios. EISI did undertake, however, 
to reimburse the Advantage Portfolio, the STB Portfolio and the GS 
Portfolio for all operating expenses, excluding advisory fees, in 
excess of .30%, .30% and .50% respectively, of each Portfolio's average 
daily net assets. This undertaking may terminate at any time, without 
notice to the Portfolios' shareholders. For the year ended December 31, 
1995, Applicants state that the advisory fee waivers attributed to the 
Portfolios amounted to $33,430 and EISI had reimbursed the Trust 
$175,284 for the Portfolios' expenses in excess of the then current 
expense limitations.
    6. Applicants propose to substitute shares of the Advantage 
Portfolio for all shares of the GS Portfolio and the STB Portfolio 
attributable to the Contracts (the ``Removed Funds''). The application 
states that, soon after its filing, Equitable will supplement the 
prospectus for the Account to reflect the proposed substitution. The 
application further states that the substitution will occur as soon as 
practicable after receipt of the order requested in the application.

The Proposed Substitution

    1. Applicants state that, upon receipt of the order requested in 
the application, Equitable will redeem shares of each of the Removed 
Funds. Simultaneously, Equitable will use the proceeds of the 
redemption to purchase the applicable number of shares of the Advantage 
Portfolio. Applicants state that the substitution will occur at 
relative net asset values of the Portfolios with no change in the 
amount of any Contract owner's Contract value. Further, there will be 
no imposition of a transfer or similar charge.
    2. Applicants note that, in connection with the proposed redemption 
by Equitable of the Removed Funds, certain brokerage fees and expenses 
will be incurred. The expenses will be charged to the appropriate 
Portfolio but borne by Equitable as described in the application. To 
alleviate the impact of the brokerage fees and expenses upon the 
Removed Funds and ultimately

[[Page 17332]]

upon Equitable, the Trust and EISI propose that the redemption of the 
Removed Funds be accomplished, in part, by in kind payments.
    3. Applicants state that, on the date of the substitution, the 
Trust will transfer to Equitable cash and/or securities held by the 
Removed Funds. Equitable will then use such cash and/or securities to 
purchase shares of the Advantage Portfolio. Applicants state that the 
valuation of any in kind transfers will be on a basis consistent with 
the valuation procedures for the assets of the Removed Funds and for 
the Advantage Portfolio.
    4. Applicants state that all expenses and transaction costs 
incurred in connection with the proposed substitution, including legal 
and accounting fees and brokerage commissions, will be paid by 
Equitable. Applicants also state that the proposed substitution will 
not alter the tax or insurance benefits available to owners under the 
Contracts. Furthermore, the proposed substitution will not alter the 
contractual obligations of Equitable.
    5. In addition to the prospectus supplements distributed to 
Contract owners, Applicants represent that, within 5 days after the 
proposed substitution, Equitable will send to the Contract owners a 
written notice (the ``Notice'') informing them that shares of the 
Removed Funds have been eliminated and that shares of the Advantage 
Portfolio have been substituted. With the Notice, Equitable will 
include the prospectus supplement of the Account which describes the 
substitution. The Notice will advise owners of the Contracts that, for 
a period of thirty days from the mailing date of the Notice, they may 
transfer all assets, as substituted, to any other available subaccount 
of the Account. This transfer may be made without limitation and 
without charge. Applicants represent that after the substitution, 
Contract owners will be afforded the same Contract rights, including 
those of surrender and transfer, that the owners currently have. At 
present, there are no surrender fees or redemption charges imposed 
under the Contracts; however, applicable deferred sales charges are 
imposed. These charges will remain after the substitution.

Applicants' Legal Analysis

Request for an Order Under Section 26(b)

    1. Section 26(b) of the 1940 Act provides in pertinent part that 
``[i]t shall be unlawful for any depositor or trustee of a registered 
unit investment trust holding the security of a single issuer to 
substitute another security for such security unless the Commission 
shall have approved such substitution.'' The purpose of Section 26(b) 
is to protect the expectation of investors in a unit investment trust 
that the unit investment trust will accumulate the shares of a 
particular issuer and to prevent nonscrutinized substitutions which 
might, in effect, force shareholders dissatisfied with the substituted 
security to redeem their shares, thereby incurring either a loss of the 
sales load deducted from initial proceeds, an additional sales load 
upon reinvestment of the redemption proceeds, or both. Section 26(b) 
affords protection to investors by preventing a depositor or trustee of 
a unit investment trust holding shares of one issuer from substituting 
for those shares the shares of another issuer, unless the Commission 
approves that substitution.
    2. Applicants represent that the proposed substitution is 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act. Applicants 
assert that the purposes, terms and conditions of the proposed 
substitution are consistent with the principles and purposes of Section 
26(b) and do not entail any of the abuses that the Section is designed 
to prevent. Applicants assert that the substitution is an appropriate 
solution to the limited Contract owner interest and investment in the 
Removed Funds. Applicants state that this interest is, and in the 
future can be expected to be, of insufficient size to promote 
consistent investment performance or to reduce operating expenses.
    3. Applicants state that the substitution will not result in the 
type of costly forced redemption that Section 26(b) was intended to 
guard against. Applicants note that the objectives, policies and 
restrictions of the Removed Funds are substantially similar to the 
objectives, policies and restrictions of the Advantage Portfolio, 
thereby continuing to fulfill the Contract owners' objectives and risk 
expectations. Additionally, Applicants note that the advisory fees 
incurred by the Advantage Portfolio are 33% less than those incurred by 
the GS Portfolio and 23% less than those incurred by the STB Portfolio 
with respect to the first $100 million of assets under management and 
remain lower through all breakpoints after $100 million. Finally, 
Applicants represent that the substitution is expected to confer 
certain modest economic benefits on Contract owners by virtue of 
enhanced asset size.
    4. Applicants note that the total expenses of each of the Removed 
Funds as a percentage of the net assets of each Portfolio have remained 
relatively high for these types of portfolios (4.92% for the GS 
Portfolio and 6.18% for the STB Portfolio for the year ended December 
31, 1995). Applicants state that a large portion of these expenses is 
fixed. Because the size of each of the Removed Funds is relatively 
small, and unlikely to grow significantly, Applicants note that the 
current expenses represent and may continue to represent a relatively 
large percentage of the Removed Funds' average net assets. The total 
expense ratio for the year ended December 31, 1995 for the Advantage 
Portfolio was 2.13% of average net assets. Applicants note that, 
because the Advantage Portfolio's growth would be enhanced by the 
substitution, greater economies of scale would be expected. Contract 
owners should, therefore, benefit after the substitution from the lower 
expense ratio of the Advantage Portfolio.
    5. Applicants note that the relatively small size of the Removed 
Funds hampers the ability to maintain optimal diversification. 
Applicants maintain that the larger size of the Advantage Portfolio 
lends itself to greater flexibility in purchasing attractive 
securities. Accordingly, the Advantage Portfolio can achieve greater 
diversification and more readily react to changes in market conditions. 
Further, Contract owners will benefit through the more effective 
management of a larger portfolio such as the Advantage Portfolio.

Request for an Order Under Section 17(b)

    1. Section 17(a)(1) of the 1940 Act prohibits any affiliated person 
of a registered investment company, or an affiliated person of an 
affiliated person, acting as principal, from selling any security or 
other property to such registered investment company. Section 17(a)(2) 
of the 1940 Act prohibits any of such affiliated persons, acting as 
principal, from purchasing any security or other property from such 
registered investment company.
    2. The proposed substitution may be deemed to entail one or more 
purchases or sales of securities between and among affiliated persons 
as a result of the purchase by the subaccounts of the Account of shares 
of the Advantage Portfolio with proceeds from the redemption of shares 
in kind of the Removed Funds. Applicants state that the proposed 
substitution could come within the scope of Section 17(a) of the 1940 
Act. Applicants therefore request an exemption from Section 17(a) of 
the 1940 Act under Section 17(b).

[[Page 17333]]

    3. Section 17(b) of the 1940 Act provides that the Commission may 
grant an order exempting a transaction prohibited by Section 17(a) upon 
application if evidence establishes that: (a) The terms of the proposed 
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; (b) the proposed transaction is consistent with the 
investment policy of each registered investment company concerned, as 
recited in its registration statement and reports filed under the 1940 
Act; and (c) the proposed transaction is consistent with the general 
purposes of the 1940 Act. Applicants assert that the facts and 
circumstances of the proposed substitution meet the standards set forth 
in Section 17(b).
    4. Applicants note that the Contracts reserve to Equitable the 
right to replace shares of the Portfolios held by the Account with 
shares of another portfolio if: (a) Shares of the Portfolios should no 
longer be available for investment by the Account; or (b) in 
Equitable's judgment, further investment in the Portfolios should 
become inappropriate in view of the purpose of the Contracts, provided 
any such substitution is approved by the Commission and is in 
compliance with the applicable rules and regulations. Applicants state 
that Equitable believes further investment in the Removed Funds is no 
longer appropriate in light of the Contracts' purposes.

Applicants' Conclusions

    1. Applicants assert that, for the reasons and upon the facts set 
forth in the application, the requested order approving the proposed 
substitution under Section 26(b) should be approved as consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the 1940 Act.
    2. Applicants assert that the requested order pursuant to Section 
17(b) exempting Applicants from the provisions of Section 17(a) in 
connection with the proposed substitution is appropriate because the 
terms of the proposed substitution are reasonable and fair and do not 
involve overreaching. Applicants also assert that the proposed 
substitution is consistent with the investment policy of each 
investment company concerned and with the purposes of the 1940 Act. 
Furthermore, the 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 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. 96-9695 Filed 4-18-96; 8:45 am]
BILLING CODE 8010-01-M