[Federal Register Volume 61, Number 187 (Wednesday, September 25, 1996)]
[Notices]
[Pages 50355-50357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24490]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22232; 812-9624]


Diversified Investors Strategic Variable Funds, et al.

September 19, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

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

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APPLICANTS: Diversified Investors Strategic Variable Funds (``Strategic 
Variable Funds''); Diversified Investors Variable Funds (``Diversified 
Variable Funds''); Diversified Investors Portfolios (``Diversified 
Portfolios''); AUSA Life Insurance Company, Inc. (``AUSA''), on behalf 
of itself and each future separate account (or subaccount thereof) 
established by AUSA and registered under the 1940 Act as a unit 
investment trust in connection with the offering by AUSA of group 
variable annuity contracts (``Future Separate Accounts''); Diversified 
Investment Advisors, Inc. (``Investment Advisors''), on behalf of 
itself and each open-end management investment company or series 
thereof organized in the future which becomes a member of the same 
``group of investment companies'' (as defined in Rule 11a-3 of the 1940 
Act) as, and which is the underlying investment vehicle for, a Future 
Separate Account (``Future Funds''); and Diversified Investors 
Securities Corp. (``Securities'').

Relevant Act Sections: Order requested under Section 6(c) of the 1940 
Act granting exemption from Section 12(d) of the 1940 Act, and under 
Sections 6(c) and 17(b) of the 1940 Act, granting exemption from 
Section 17(a) of the 1940 Act.

Summary of Application: The requested order would permit Applicants to 
create a ``fund of funds'' that initially would have three subaccounts. 
Each subaccount would allocate its assets to the purchase of units of 
Diversified Variable Funds or of the Future Separate Accounts 
(hereinafter the ``Underlying Spokes'') without regard to the 
percentage limitations of Section 12(d)(1) of the 1940 Act. The 
Underlying Spokes, in turn, would invest in a corresponding series of 
Diversified Portfolios or of a Future Fund (hereinafter the 
``Underlying Hubs'').

Filing Dates: The application was filed on June 12, 1995, and was 
amended and restated on September 25, 1995, January 29, 1996, July 15, 
1996, August 22, 1996, and September 9, 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 SEC's Secretary and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the SEC by 5:30 p.m. on October 
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 requestor'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, NW., Washington, DC 20549. Applicants, 4 Manhattanville Road, 
Purchase, New York 10577.

FOR FURTHER INFORMATION CONTACT:
Pamela K. Ellis, Senior Counsel, at (202) 942-0670, Office of Insurance 
Products (Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. AUSA is a New York stock life insurance company, and a wholly 
owned indirect subsidiary of AEGON nv, a Netherlands corporation which 
is a publicly traded international insurance group.
    2. Strategic Variable Funds is a separate account of AUSA, and is 
registered under the 1940 Act as an open-end management investment 
company.
    3. Diversified Variable Funds is a separate account of AUSA and a 
unit investment trust registered under the 1940 Act. Diversified 
Variable Funds consists of fourteen separate subaccounts. Of these 
subaccounts, twelve invest in Diversified Portfolios, and eleven may 
serve as Underlying Spokes. Applicants state that each of the Future 
Separate Accounts (which will become Underlying Spokes) will be 
separate accounts (or subaccounts thereof) of AUSA, and will be 
registered under the 1940 Act as unit investment trusts.
    4. Diversified Portfolios is organized as a trust under the laws of 
the State of New York, and is registered as an open-end management 
investment company under the 1940 Act. Diversified Portfolios consists 
of twelve separate series, eleven of which constitute the existing 
Underlying Hubs. Applicants state that each of the Future Funds (which 
will become Underlying Hubs) will be registered under the 1940 Act as 
open-end management investment companies (or will be a series of such a 
company).
    5. Investment Advisors is a registered investment adviser under the 
Investment Advisers Act of 1940, and

[[Page 50356]]

also is an indirect wholly owned subsidiary of AEGON nv. Investment 
Advisors is the investment manager for Diversified Portfolios.
    6. Securities, a Delaware corporation, is registered as a broker-
dealer under the Securities Exchange Act of 1934, and is a member of 
the National Association of Securities Dealers, Inc. Securities acts as 
distributor for group variable contracts issued by AUSA.
    7. Applicants organized Strategic Variable Funds to operate as a 
``fund of funds.'' Strategic Variable Funds will be one of the 
available investment vehicles underlying group variable annuity 
contracts offered by AUSA (``Variable Contracts''). Strategic Variable 
Funds initially will have three subaccounts (``Subaccounts''). Each 
Subaccount will invest all of its assets in units of the Underlying 
Spokes, and will allocate and reallocate its assets among the 
Underlying Spokes.
    8. The Underlying Spokes are, or will be, ``feeder'' (or ``spoke'') 
funds in a ``master-feeder'' (or ``Hub and Spoke'') \1\ 
structure in which there are other feeders investing in the master 
funds. Each of the existing Underlying Spokes invests, and each future 
Underlying Spoke will invest, all of its assets in an Underlying Hub 
having the same investment objective and policies as the Underlying 
Spoke. Each existing Underlying Hub is advised by Investment Advisors 
and has one or more sub-advisers who are responsible for its day-to-day 
investment selections. In addition to the Underlying Spokes, each of 
the existing Underlying Hubs has, and each future Underlying Hub is 
expected to have, a number of additional ``spokes,'' including a mutual 
fund, a bank sponsored collective trust, and non-registered insurance 
company separate accounts. In the future, each Underlying Hub may sell 
interests to other eligible entities to the extent permitted by 
applicable law.
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    \1\ Hub and Spoke is a registered service mark of 
Signature Financial Group, Inc.
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    9. Allocations of a Subaccount's assets among units of the 
Underlying Spokes will be made consistent with its investment 
objective. For example, it is anticipated that an ``aggressive'' 
Subaccount would, under normal circumstances, invest substantially all 
of its assets in Underlying Spokes that in turn invest in Underlying 
Hubs investing in equity securities. The Underlying Spokes/Underlying 
Hubs in which each Subaccount will invest will be described in the 
Subaccount's prospectus. In addition, the prospectus will disclose the 
general ranges for investment by the Subaccount in each type of 
Underlying Spoke (i.e., equity, fixed-income, and money market), and in 
each specific Underlying Spoke. Contractholders will receive disclosure 
of any changes in the identity of the Underlying Spokes in which the 
Subaccount may invest (e.g., if a new Underlying Spoke is included) or 
any changes in the investment ranges. Allocations of a Subaccount's 
assets among Underlying Spokes initially will be made, and subsequently 
adjusted, by Investment Advisors in its role as investment manager to 
Strategic Variable Funds.
    10. Applicants anticipate that Strategic Variable Funds, the 
Underlying Spokes, and the Underlying Hubs will be sold without a 
front-end sales charge, and will not be subject to any redemption 
charge, contingent deferred sales charge, or Rule 12b-1 fees. 
Applicants reserve the right, however, to charge sales charges and 
service fees in the future subject to Condition 5 below. The only 
direct expense payable by Strategic Variable Funds will be an asset 
allocation and administrative fee, in return for which investors in 
Strategic Variable Funds will receive allocation and other services 
provided by Investment Advisors and AUSA. Applicants anticipate that 
the asset allocation and administrative fee will be at a rate of .20% 
per annum of average daily net assets for each Subaccount.\2\
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    \2\ AUSA permits unlimited transfers without charge among the 
subaccounts of Diversified Variable Funds. AUSA, however, reserves 
the right to impose limitations upon the number and timing of such 
transfers and to impose transfer charges. AUSA also reserves the 
right to deduct an annual contract charge not to exceed $50.
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    11. Each Subaccount will pay indirectly its proportional share of 
the expenses of the respective Underlying Spokes in which it invests. 
These expenses include daily charges for mortality and administrative 
expense risks which currently are charged against the net assets of the 
Underlying Spokes at an annual rate of .90%, but may be charged at a 
maximum annual rate of 1.25%. In addition, these expenses include the 
Underlying Spokes' proportional shares of the expenses of the 
Underlying Hubs in which they invest, which include advisory fees and 
other customary expenses of registered investment companies, primarily 
consisting of compensation to independent trustees, insurance premiums, 
fees and expenses of independent auditors and legal counsel, custodial 
fees and expenses, and accounting expenses.

Applicants' Legal Analysis

Section 12(d)(1)
    1. Section 12(d)(1)(A) provides that no registered investment 
company may acquire securities of another investment company if such 
securities represent more than 3% of the acquired company's outstanding 
voting stock, more than 5% of the acquiring company's total assets, or 
if such securities, together with the securities of any other acquired 
investment companies, represent more than 10% of the acquiring 
company's total assets. Section 12(d)(1)(B) provides that no registered 
open-end investment company may sell its securities to another 
investment company if the sale will cause the acquiring company to own 
more than 3% of the acquired company's voting stock, or if the sale 
will cause more than 10% of the acquired company's voting stock to be 
owned by investment companies.
    2. Section 6(c) provides that the Commission may exempt persons or 
transactions if, and to the extent that, such 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. Applicants request an order under Section 
6(c) exempting them from Section 12(d)(1) to permit Strategic Variable 
Funds to invest in the Underlying Spokes in excess of the percentage 
limitations of Section 12(d)(1).
    3. Section 12(d)(1) is intended to prevent unregulated pyramiding 
of investment companies, and the abuses that are perceived to arise 
from such pyramiding. These abuses include the acquiring fund imposing 
undue influence over the acquired fund through the threat of large-
scale redemptions and the layering of sales charges and advisory fees.
    4. Applicants believe that Strategic Variable Funds is structured 
in a manner consistent with the intent of Section 12(d)(1) of the 1940 
Act and which avoids the abuses intended to be prevented by that 
Section. Applicants state that the proposed structure of Strategic 
Variable Funds is very different from the structure of the investment 
companies whose practices led to the adoption of Section 12(d)(1) and 
its amendment in 1970. As required by Condition 1 below, Strategic 
Variable Funds and the Underlying Hubs must be part of the same ``group 
of investment companies,'' as defined in Rule 11a-3 under the 1940 Act. 
Underlying Spokes must be registered separate accounts (or subaccounts 
thereof) established by

[[Page 50357]]

AUSA in connection with the offering by AUSA of Variable Contracts. In 
addition, Investment Advisors will be the investment adviser to 
Strategic Variable Funds and each of the Underlying Hubs. Applicants 
assert that Investment Advisors and AUSA are governed by their 
obligations to the various funds at different levels, and that any 
allocation or reallocation by Investment Advisors of a Subaccount's 
assets among Underlying Spokes/Underlying Hubs will be made in 
accordance with these obligations. Finally, Applicants argue that 
AUSA's and Investment Advisors' self-interest will prompt them to 
maximize benefits to all shareholders, and not disrupt the operations 
of Strategic Variable Funds or any of the Underlying Spokes or 
Underlying Hubs.
    5. Applicants believe that Strategic Variable Funds' asset and 
administrative fee will be justified by the incremental benefits, not 
otherwise available, of the professional assets allocation service that 
Investment Advisors would provide for investors choosing Strategic 
Variable Funds. In addition, Applicants note that, as required by 
Condition 4 below, before a Subaccount may adopt an asset allocation 
and administrative fee, the directors of Strategic Variable Funds, 
including the independent directors, must find that the fee is based on 
services that are in addition to, rather than duplicative of, services 
provided under any Underlying Hub's advisory contract. Moreover, 
Applicants assert that no fees for duplicative services can exist at 
the Underlying Spoke level, because no advisory fees are or will be 
charged at the Underlying Spoke level.
    6. Applicants also state that no layering of sales charges will 
exist. Condition 5 below requires that Strategic Variable Funds' 
acquisition, disposition, or holding of interests directly in the 
Underlying Spokes and indirectly in the Underlying Hubs shall not be 
subject, directly or indirectly, to any sales charges or service fees 
as defined in Rule 2830 of the Conduct Rules of the National 
Association of Securities Dealers, Inc.
    7. Accordingly, Applicants believe that the requested exemption 
from Section 12(d)(1) is appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policies of the 1940 Act.

Section 17(a)

    8. Section 17(a) of the 1940 Act makes it unlawful for an 
affiliated person of a registered investment company to sell securities 
to, or purchase securities from, the company. Section 17(b) provides 
that the Commission shall exempt a proposed transaction from Section 
17(a) if evidence establishes that: (a) the terms of the proposed 
transaction are reasonable and fair and do not involve overreaching; 
(b) the proposed transaction is consistent with the policies of the 
registered investment company involved; and (c) the proposed 
transaction is consistent with the general provisions of the 1940 Act.
    9. Applicants request exemptive relief from the prohibitions of 
Section 17(a) to allow the transactions described in the application. 
Applicants assert that the relief is consistent with the standards of 
Section 17(b), and that such relief should be granted for the same 
reasons set forth above under the discussion of Section 12(d)(1) of the 
1940 Act.

Applicants' Conditions

    Applicants agree that the order granting the requested relief shall 
be subject to the following conditions:
    1. Strategic Variable Funds and each Underlying Hub will be part of 
the same ``group of investment companies,'' as defined in Rule 11a-3 
under the 1940 Act, and the Underlying Spokes will be registered 
separate accounts (of subaccounts thereof) established by AUSA in 
connection with its offering of the Variable Contracts.\3\
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    \3\ Because the Underlying Spokes will be unit investment 
trusts, they do not fall within the technical definition of ``group 
of investment companies'' under Rule 11a-3(a)(5) of the 1940 Act, 
which only applies to open-end investment companies. Applicants note 
that although the Underlying Spokes do not technically comply with 
the definition, the policy underlying a requirement that all funds 
in a ``fund of funds'' be part of the same group of investment 
companies is served by the proposed structure because AUSA is an 
affiliated person of Investment Advisors.
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    2. No Underlying Hub shall acquire securities of any other 
investment company in excess of the limits contained in Section 
12(d)(1)(A) of the 1940 Act, and no Underlying Spoke shall acquire 
securities of any other investment company except in conformity with 
Section 12(d)(1)(E) of the 1940 Act.
    3. A majority of the directors \4\ of Strategic Variable Funds will 
not be ``interested persons,'' as defined in Section 2(a)(19) of the 
1940 Act (``Independent Directors'').
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    \4\ Although Strategic Variable Funds will be a separate account 
of an insurance company, and not a corporation, trust, or similar 
entity, Applicants state that Strategic Variable Funds will create a 
board of individuals who will function as `'directors'' of Strategic 
Variable Funds within the meaning of Section 2(a))(12) of the 1940 
Act for purposes of exercising the function of directors under the 
1940 Act and the rules thereunder.
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    4. Before approving any advisory contract under Section 15 of the 
1940 Act, the directors of Strategic Variable Funds, including a 
majority of the Independent Directors, shall find that advisory fees 
charged under such contract are based on services provided that are in 
addition to, rather than duplicative of, services provided pursuant to 
any Underlying Hub's advisory contract. Such finding, and the basis 
upon which the finding was made, will be recorded fully in the minute 
books of Strategic Variable Funds.
    5. Strategic Variable Funds' acquisition, disposition, or holding 
of interests directly in the Underlying Spokes and indirectly in the 
Underlying Hubs shall not be subject, directly or indirectly, to any 
sales charges or service fees as such terms are defined in Rule 2830 of 
the Conduct Rules of the National Association of Securities Dealers, 
Inc.
    6. Applicants will provide the following information, in electronic 
format, to the Chief Financial Analyst of the Division of Investment 
Management of the Commission: monthly average total assets for each 
Subaccount and each of its Underlying Spokes and Underlying Hubs; 
monthly purchases and redemptions (other than by exchange) for each 
Subaccount and each of its Underlying Spokes and Underlying Hubs; 
monthly exchanges into and out of each Subaccount and each of its 
Underlying Spokes; month-end allocations of each Subaccount's assets 
among its Underlying Spokes; annual expense ratios for each Subaccount 
and each of its Underlying Spokes and Underlying Hubs; and a 
description of any vote taken by the unit holders of any Underlying 
Spoke, including a statement of the percentage of votes cast for and 
against the proposal by Strategic Variable Funds and by the other unit 
holders of the Underlying Spoke. Such information will be provided as 
soon as reasonably practicable following each fiscal year-end of 
Strategic Variable Funds (unless the Chief Financial Analyst shall 
notify Strategic Variable Funds or Investment Advisors in writing that 
such information need no longer be submitted).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-24490 Filed 9-24-96; 8:45 am]
BILLING CODE 8010-01-M