[Federal Register Volume 61, Number 182 (Wednesday, September 18, 1996)]
[Notices]
[Pages 49178-49181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23836]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22217; File No. 812-10110]
Allianz Life Insurance Company of North America, et al.
September 11, 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'').
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APPLICANTS: Allianz Life Insurance Company of North America
(``Allianz''), Allianz Life Variable Account A (``Account A''), Allianz
Life Variable Account B (``Account B''), Preferred Life Insurance
Company of New York (``Preferred'') and Preferred Life Variable Account
C (``Account C,'' together with Account A and Account B, the
``Accounts'').
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) or, in the alternative, Section 6(c) of the
1940 Act, exempting the proposed transactions from the provisions of
Section 17(a) of the 1940 Act.
SUMMARY OF THE APPLICATION: Applicants request an order of the
Commission pursuant to Section 26(b) of the 1940 Act approving the
substitution of shares of the U.S. Government Securities Fund
(``Government Fund'') of the Franklin Valuemark Funds (the ``Trust'')
for shares of the Adjustable U.S. Government Fund (``Adjustable Fund'')
and the investment Grade Intermediate Bond Fund (``Bond Fund'') of the
Trust held by the Accounts. Applicants also request an order pursuant
to Section 17(b) or, in the alternative, pursuant to Section 6(c) of
the 1940 Act, granting exemptions from the provisions of Section 17(a)
of the 1940 Act to the extent necessary to permit certain purchase and
sale transactions between affiliates in connection with the
substitution.
FILING DATE: The application was filed on April 26, 1996.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request
[[Page 49179]]
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 October
7, 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 Fifth Street, N.W., Washington, D.C.
20549. Applicants, c/o Joan E. Boros, Esq., Katten Muchin & Zavis, 1025
Thomas Jefferson Street, N.W., Suite 700, East Lobby, Washington, D.C.
20007.
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. Allianz, a stock life insurance company formerly known as North
American Life and Casualty Company, is a wholly-owned subsidiary of
Allianz of America, Inc., a majority-owned subsidiary of Allianz
Versicherungs-AG Holding, which is headquartered in Munich, Germany.
Allianz writes individual and group fixed and variable immediate and
deferred annuity contracts on a non-participating basis, and single
premium and flexible premium variable life insurance policies. Allianz
is the sponsor and depositor of Account A and Account B.
2. Preferred, a stock life insurance company incorporated in New
York in 1982, is a wholly-owned subsidiary of Allianz. Preferred offers
group life, group accident, and health insurance, and variable annuity
contracts. Preferred is the sponsor and depositor of Account C.
3. Each of the Accounts is registered under the 1940 Act as a unit
investment trust. The assets of each Account support either variable
annuity contracts or variable life insurance polices (together, the
``Contracts''). Interests in each of the Accounts offered through such
Contracts have been registered under the Securities Act of 1933 on
either Form S-6 or Form N-4. Each Account is divided into sub-accounts
(``Subaccounts'') that correspond to the portfolios of the Trust,
including the Adjustable Fund the Bond Fund and the Government Fund.
4. The Trust was organized as a Massachusetts Business Trust on
April 26, 1988, and is registered under the 1940 Act as an open-end
management investment company. The Trust is a series investment company
that currently has twenty-one investment portfolios (``Funds,'' and
individually, ``Fund''). Shares of the Funds currently are sold only to
separate accounts of Allianz and its affiliates to fund variable life
insurance policies or variable annuity contracts. Franklin Advisers,
Inc. (``Adviser'') is the investment adviser to the Funds that are the
subject of this application.
5. The investment objective of the Adjustable Fund is to seek a
high level of current income, consistent with lower volatility of
principal, by investing primarily in adjustable rate securities which
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The investment objective of the Bond Fund is to seek
current income, consistent with preservation of capital, primarily
through investment in intermediate-term, investment grade corporate
obligations and in U.S. government securities. The investment objective
of the Government Fund is to seek current income and safety of capital
by investing exclusively in obligations issued or guaranteed by the
U.S. government or its agencies or instrumentalities.
6. The Adjustable Fund and the Bond Fund as individual investment
alternatives have not generated substantial interest of Contract owners
(the ``Owners'') in recent years. Overall variable product sales by
Allianz and Preferred are made primarily to person interested in
retirement-planning and increasingly preferring long-term, growth
oriented investments. On December 31, 1995, the adjustable Fund had
$190 million in assets, compared to $303.4 million at the end of 1993,
a decrease of 37.37%. Bond Fund assets increase 34.52% from 1993 to
1995 (from $123.4 million to $166 million), but increased only 7.17%
from 1994 to 1995 (from $154.9 million to $166 million).
7. The Government Fund, with assets of $643.3 million on December
31, 1995, offers Owners a larger fund with similar investment policies,
providing a potential for economies of scale. In addition, the
elimination of two funding options under the Contracts will facilitate
the Trust's organization of two new portfolios currently in
registration which invest primarily in equity securities and are more
responsive to demonstrated preferences of Contract purchasers. The
substitution of Government Fund shares for all Adjustable Fund and Bond
Fund share attributable to the Contracts will avoid increasing the
total number of portfolios to be administered under the Contracts. If
Applicants can better serve the interests of Owners by using the
Government Fund and adding new investment alternatives that they
believe may be better suited to the needs and interests of Owners, it
is not in the public interest to continue to use the Adjustable Fund
and the Bond Fund as funding vehicles for the Contracts.
The Proposed Transactions
1. Allianz and Preferred propose to effect a substitution (the
``Substitution'') of shares of the Government Fund for all shares of
the Adjustable Fund and all shares of the Bond Fund attributable to the
Contracts. Applicants represent that Allianz and Preferred will pay all
expenses and transaction costs associated with the Substitution,
including any applicable brokerage commissions. Applicants have filed
with the Commission amended prospectuses for the Accounts which will
provide Owners with information concerning the proposed Substitution.
2. Within five days after the Substitution, Allianz and Preferred
will send to Owners written notice (``Notice'') of the Substitution
that identifies the shares of the Adjustable Fund and the Bond Fund
that have been eliminated and the shares of the Government Fund that
have been substituted. Owners will be advised in the Notice that for a
period of thirty days from the mailing of the Notice, Owners may
transfer all assets, as substituted, to any other available Subaccount,
without limitation and without charge. Moreover, any Owner-initiated
transfers of all available assets from the Subaccount investing in the
Government Fund to a Subaccount investing in any other Fund of the
Trust from the date of the Notice to thirty days thereafter (the ``Free
Transfer Period'') will not be counted as transfer requests under any
contractual provisions of the Contracts that limit the number of
allowable transfers.
3. At the close of business on the effective date of the
Substitution, Allianz and Preferred each will redeem all shares of the
Adjustable Fund and the Bond Fund currently held on behalf of the
Accounts. Simultaneously with the redemption request, Allianz and
Preferred will place a purchase order with the Government Fund so that
[[Page 49180]]
purchases will be for the exact amount of the redemption proceeds. As a
result, at all times, monies attributable to Owners currently invested
in the Adjustable Fund and the Bond Fund will remain fully invested.
4. The Adjustable Fund and the Bond Fund are likely to incur
brokerage fees and expenses in connection with the redemption of all
shares of those Funds by Allianz and Preferred. To alleviate the
potential impact of such fees and expenses on the Adjustable Fund and
the Bond Fund, the redemption of shares of the Adjustable Fund and the
Bond Fund will be effected partly for cash and partly for portfolio
securities redeemed in-kind. By this procedure, at the effective date
of the Substitution, the Adjustable Fund and the Bond Fund will
transfer to the Government Fund cash proceeds and/or portfolio
securities held by the Adjustable Fund and the Bond Fund. Allianz and
Preferred will use such cash proceeds and/or portfolio securities to
purchase shares of the Government Fund.
5. The Trust will effect the redemptions-in-kind and the transfers
of portfolio securities in a manner that is consistent with the
investment objectives and policies and diversification requirements
applicable to the Government Fund. Allianz and Preferred each will take
steps to assure that the portfolio securities selected by the Adviser
for redemptions-in-kind are suitable investments for the Government
Fund.
6. Partially effecting the redemption of shares of the Adjustable
Fund and the Bond Fund in-kind is appropriate, based on the current
similarity of certain of the portfolio investments of the Adjustable
Fund and the Bond Fund to those of the Government Fund. The valuation
of any in-kind redemptions will be made on a basis consistent with the
normal valuation procedures of the Adjustable Fund and the Bond Fund
and the normal valuation procedures of the Government Fund.
7. The full net asset value of the redeemed shares held by the
Accounts will be reflected in the Owners' unit values following the
Substitution. Allianz and Preferred have undertaken to assume all
transaction costs and expenses relating to the Substitution, including
any direct or indirect costs of liquidating the assets of the
Adjustable Fund and the Bond Fund, so that the full net asset value of
redeemed shares of the Adjustable Fund and the Bond Fund held by the
Accounts will be reflected in the Owners' unit values.
8. The Adviser has been fully apprised of the terms of the
Substitution. Allianz and Preferred anticipate that the Adviser, to the
extent appropriate, will conduct the trading of portfolio securities in
a manner that provides for the anticipated redemptions of shares held
by the Accounts.
9. Immediately following the Substitution, Allianz and Preferred,
as appropriate, will combine the Subaccount invested in the Adjustable
Fund and the Subaccount invested in the Bond Fund with the continuing
Subaccount invested in the Government Fund. Allianz and Preferred each
will reflect this treatment in disclosure documents for their
respective Accounts, the financial statements of their respective
Accounts and the Form N-SAR annual reports filed by their respective
Accounts.
10. Following the Substitution, Owners will be afforded the same
contract rights as they currently have, including surrender and other
transfer rights with regard to amounts invested under the Contracts.
Applicants' Legal Analysis
Request for an Order Pursuant to 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 unscrutinized substitutions which
might, 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 proceeds, an additional
sales load upon reinvestment of the redemption proceeds, or both.
Section 26(b) affords this 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 maintain that the purposes, terms and conditions of
the Substitution are consistent with the principles and purposes of
Section 26(b). Applicants assert that the Substitution will not result
in the type of costly forced redemptions that Section 26(b) was
intended to guard against and is consistent with the protection of
investors and the purposes fairly intended by the 1940 Act for the
following reasons:
(a) The Substitution is of shares of a substitute fund whose
objectives, policies and restrictions are sufficiently similar to
the objectives of the Funds to be eliminated so as to continue
fulfilling the Owners' objectives and risk expectations.
(b) The Substitution, in all cases, will be at the net asset
value of the respective shares, without the imposition of any
transfer or similar charge.
(c) Allianz and Preferred have undertaken to assume the expenses
and transaction costs, including among others, legal and accounting
fees and any brokerage commissions, relating to the Substitution.
The partial redemptions-in-kind contemplated for appropriate
portfolio securities of the Adjustable Fund and the Bond Fund are
expected to contribute to the reduction of such costs.
(d) Within five (5) days after the Substitution, Allianz and
Preferred will send to Owners written notice of the Substitution
that identifies the shares of the Adjustable Fund and the Bond Fund
that have been eliminated and the shares of the Government Fund that
have been substituted.
(e) If an Owner so requests, during the Free Transfer Period,
assets will be reallocated for investment in an Owner-selected
Subaccount and related Fund. The Free Transfer Period is sufficient
time for Owners to reconsider the Substitution.
(f) The Substitution will not be counted as a transfer under any
contractual provisions of the Policies or Contracts that limit the
number of allowable free transfers.
(g) The Substitution in no way will alter the insurance benefits
to Owners or the contractual obligations of Allianz and Preferred.
(h) The Substitution in no way will alter the tax benefits to
Owners.
(i) Owners may choose simply to withdraw amounts credited to
them following the Substitution, under the conditions that currently
exist, subject to any applicable declining sales load.
(j) The Substitution is expected to confer certain modest
economic benefits to Owners by virtue of the enhanced asset size of
the Government Fund.
Request for an Order Pursuant to 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. Applicants state that, immediately following the Substitution,
Allianz and Preferred, as appropriate, will combine: (i) The
Subaccounts in the Adjustable
[[Page 49181]]
Fund with a continuing Subaccount invested in the Government Fund; and
(ii) the Subaccounts invested in the Bond Fund with the continuing
Subaccount invested in the Government Fund. Applicants state that
Allianz and Preferred could be said to be transferring unit values
between their Subaccounts. The transfer of unit values may involve
purchase and sale transactions between Subaccounts that are affiliated
persons. Such transactions between Subaccounts may come within the
scope of Sections 17(a)(1) and 17(a)(2) of the 1940 Act. Therefore,
Applicants seek an exemption from Section 17(a) of the 1940 Act,
pursuant to Section 17(b) of the 1940 Act, or, in the alternative,
pursuant to Section 6(c) of the 1940 Act.
3. Section 17(b) of the 1940 Act provides that the Commission may
grant an order exempting the transactions 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 register investment
company concerned, as recited in its registration statement and reports
filed under 1940 Act; and (c) the proposed transaction is consistent
with the general purposes of the 1940 Act.
4. Section 6(c) of the 1940 Act authorizes the Commission, by order
upon application, to conditionally or unconditionally grant an
exemption from any provision, rule or regulation of the 1940 Act to the
extent that 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.
5. Applicants represent that the terms of the proposed transactions
are: (a) Reasonable and fair, including the consideration to be paid
and received, and do not involve overreaching; (b) are consistent with
the policies of the Funds of the Trust; and (c) are consistent with the
general purposes of the 1940 Act. Applicants state that the
transactions effecting the Substitution, including the redemption of
the shares of the Adjustable Fund and the Bond Fund and the purchase of
shares of the Government Fund, will be effected in conformity with
Section 22(c) of the 1940 Act and Rule 22c-1 thereunder. Moreover, the
partial redemptions-in-kind of portfolio securities of the Funds will
be effected in conformity with Rule 18f-1 under the 1940 Act, the
majority of the conditions of Rule 17a-7 under the 1940 Act, and the
procedures of the Trust established pursuant to Rule 17a-7. In
practical economic terms, Owner interests after the Substitution will
not differ in any measurable way such interests immediately prior to
the Substitution. In addition, Allianz and Preferred each maintain,
based on their review of existing federal income tax laws and
regulations and advice of counsel, that the Substitution will not give
rise to any taxable income for Owners.
6. Applicants also assert that the proposed transactions are
consistent with the investment policy of each investment company
concerned in that the investment objectives of the Government Fund are
sufficiently similar to the investment objectives of the Adjustable
Fund and the Bond Fund.
7. Applicants maintain that the proposed transactions are
consistent with the general purposes of the 1940 Act. Applicants state
that the proposed transactions do not present any of the issues or
abuses that the 1940 Act was designed to prevent. Moreover, Applicants
assert that the requested 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,
as required by Section 6(c) of the 1940 Act. Owners will be fully
informed of the terms of the Substitution through the amended
prospectuses and the Notice, and will have an opportunity to reallocate
investments prior to and following the Substitution.
Conclusion
For the reasons discussed above, Applicants assert that the
requested order approving the Substitution pursuant to Section 26(b) of
the 1940 Act is consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
Applicant further assert that the requested exemptions from Sections
17(a)(1) and 17(a)(2) of the 1940 Act in connection with the proposed
Substitution meet the standards of Section 17(b) of the 1940 Act and
are 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. 96-23836 Filed 9-17-96; 8:45 am]
BILLING CODE 8010-01-M