[Federal Register Volume 61, Number 218 (Friday, November 8, 1996)]
[Notices]
[Pages 57928-57930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28760]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22312; File No. 812-10086]


First Variable Life Insurance Company, et al.

November 1, 1996.
AGENCY: U.S. 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: First Variable Life Insurance Company (``First Variable''), 
First Variable Annuity Fund A (``Fund A''), and First Variable Annuity 
Fund E (``Fund E'').

RELEVANT ACT SECTIONS: Order requested pursuant to Section 26(b) 
approving the proposed substitution of securities.

SUMMARY OF APPLICATION: Applicants seek an order approving the proposed 
substitution of securities issued by the Prime Money Fund of the 
Insurance Management Series for certain securities issued by the Cash 
Management Portfolio of the Variable Investors Series Trust (``Cash 
Management Portfolio'') which currently are held by Fund A and Fund E 
(collectively referred to herein as ``Funds'') to fund certain variable 
annuity contracts (``Contracts'') issued by First Variable.

FILING DATE: The application was filed on April 16, 1996, and amended 
and restated on October 4, 1996.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC 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 November 26, 
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 writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: SEC, Secretary, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicant, c/o Arnold R. Bergman, Vice-President--Legal and 
Administration, First Variable Life Insurance Company, 10 Post Office 
Square, 12th Floor, Boston, MA 01209. Copy to: Raymond A. O'Hara III, 
Blazzard, Grodd & Hasenauer, P.C., P.O. Box 5108, Westport, CT 06881.

FOR FURTHER INFORMATION CONTACT:
Edward P. Macdonald, Staff Attorney, or Patrice M. Pitts, Branch Chief 
(Office of Insurance Products), Division of Investment Management, at 
(202) 942-0670.

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

Applicants' Representations

    1. First Variable is a stock life insurance company which was 
organized under the laws of the State of Arkansas in 1968. The Company 
is principally engaged in the annuity business and is licensed in 49 
states, the District of Columbia and the U.S. Virgin Islands. First 
Variable is not licensed in the State of New York.
    2. Fund A is a separate account of First Variable registered under 
the 1940 Act as a unit investment trust and established for the purpose 
of funding certain variable annuity contracts, including the Contracts.
    3. Fund E is a separate account of First Variable registered under 
the 1940 Act as a unit investment trust and established for the purpose 
of funding certain variable annuity contracts, including the Contracts.
    4. The investment objectives of the Cash Management Portfolio are 
to preserve shareholder capital, to maintain liquidity, and to achieve 
maximum current income (consistent with those objectives) by investing 
exclusively in a diversified portfolio of short-term money market 
securities. First Variable Advisory Corp. (``Adviser''), a wholly-owned 
subsidiary of First Variable, is the investment adviser for the Cash 
Management Portfolio. The Adviser has retained Federated Investment 
Counselling to serve as the sub-adviser for the Cash Management 
Portfolio. The Adviser receives a management fee of .50% of the Cash 
Management Portfolio's net assets for the first $70,000,000 of 
Portfolio assets.
    5. Many of the Cash Management Portfolio's expenses (such as those 
for accounting and outside auditors) are significant relative to the 
Portfolio's small asset base. Since the inception of the Cash 
Management Portfolio, the Adviser has agreed to reimburse operating 
expenses (exclusive of management fees) in excess of .25% of the Cash 
Management Portfolio's average net assets. The Cash Management 
Portfolio has not grown rapidly enough to absorb its actual expenses, 
and the Adviser continues to reimburse it voluntarily. Over the last 
three years, the Adviser has reimbursed $280,161 in operating expenses 
for the Cash Management Portfolio and earned $140,936 in fees for 
managing the Cash Management Portfolio. Neither state nor federal law 
requires expense reimbursement, and the Adviser is likely to cease to 
make expense reimbursements in the future.
    6. The investment objectives of the Prime Money Fund of Insurance 
Management Series (``IMS Prime Money Fund'') are substantially similar 
to those of the Cash Management Portfolio--i.e., to preserve 
shareholder capital, to maintain liquidity, and to achieve maximum 
current income (consistent with those objectives) by investing 
exclusively in a diversified portfolio of short-term money market 
securities. Federated Advisers (``Federated''), an affiliate of 
Federated Investment Counselling, is the investment adviser for the 
Prime Money Fund, and the investment strategies employed by Federated 
as the investment adviser to

[[Page 57929]]

Prime Money Fund are substantially similar to those employed by 
Federated Investment Counselling as sub-adviser to the Cash Management 
Portfolio. In addition, the portfolio manager for the Prime Money Fund 
is the individual currently responsible for the day to day investment 
management of the Cash Management Portfolio. The maximum investment 
advisory fee payable to Federated, .50% of net asset value, currently 
is being waived.
    7. The IMS Prime Money Fund currently offers its shares to six 
insurance companies and their separate accounts funding variable 
annuity and variable life insurance contracts. Applicants have 
determined that there is a great likelihood that IMS Prime Money Fund 
will be able to achieve economies of scale because of the anticipated 
inflow of cash from a greater number of sources. The assets of IMS 
Prime Money Fund have grown from $549,950 on January 1, 1995, to 
$17,738,508 as of December 31, 1995. Over the same period, the Cash 
Management Portfolio grew from $8,198,345 to $10,095,723. The expense 
ratio for the IMS Prime Money Fund steadily declined over this period, 
while the expense ratio of the Cash Management Portfolio remained 
relatively constant. During the first two months of 1996, the expense 
ratio (before reimbursement) of the IMS Prime Money Fund declined 
further, from 2.31% to 1.55%, while the Cash Management Portfolio 
expense ratio (before reimbursement) during the same period only 
declined from 1.72% to 1.68%. Applicants have determined that these 
trends are likely to continue, and believe that the investment 
opportunities available to larger money-market funds, such as IMS Prime 
Money Fund, have historically resulted in larger yields than those 
obtained by smaller money-market funds, such as the Cash Management 
Portfolio.
    8. In the registration statements filed by the Funds, and under the 
terms of the Contracts, First Variable expressly retained the right to 
eliminate sub-accounts, combine two or more sub-accounts, or substitute 
one or more new underlying mutual funds or portfolios for others in 
which one or more Fund sub-accounts are invested.
    9. Applicants propose to substitute shares of the IMS Prime Money 
Fund for shares of the Cash Management Portfolio held in sub-accounts 
of the Funds, and to cease offering shares of the Cash Management 
Portfolio to Contract owners, in the following manner.
    a. The prospectuses for the Contracts have been or will be amended 
via post-effective amendments and/or prospectus supplements, to 
describe the proposed substitution as set forth in this application.
    b. Affected Contract owners will not incur any fees or charges as a 
result of the substitution including any applicable brokerage, nor will 
their rights or the obligations of First Variable under the Contracts 
be altered in any way. In particular, the proposed substitution will 
not be considered a ``transfer'' for purposes of calculating any 
transfer fee that may otherwise be payable under a Contract.
    c. The proposed substitution would be affected by a simple 
accumulation unit exchange at net asset value, so that the total amount 
of the shares of the Cash Management Portfolio would be redeemed by 
first Variable at net asset value per share, calculated in accordance 
with Rule 22c-1 under 1940 Act, and the same dollar amount invested by 
First Variable in shares of the IMS Prime Money Fund, also calculated 
in accordance with Rule 22c-1.
    d. If the Commission approves the proposed substitution, Contract 
owners will receive prior written notice of the substitution and a 
prospectus describing all of the then available investment options. The 
date of substitution will be within thirty (30) days of the latest of: 
(1) the effective date of the post-effective amendments (referred to in 
``a.'' above); (2) the granting of the requested exemptive relief; and 
(3) approval, if required, of the state insurance department of the 
jurisdiction concerned. During such thirty (30) day period, Contract 
owners may transfer Contract values from the sub-accounts of the Funds 
holding shares of the Cash Management Portfolio to other investment 
options then available under a Contract without the imposition of any 
transfer fee.

Applicants' Legal Analysis and Conditions

    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 purchase payments, 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 the shares of 
one issuer from substituting for those shares the shares of another 
issuer, unless the Commission approves that substitution.
    2. 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 Section 26(b) 
is designed to prevent. Because the assets invested in the Cash 
Management Portifolio are, and are likely in the future to be, of 
insufficient size to promote consistent investment performance or to 
reduce operating expenses, Applicants further assert that the proposed 
substitution is an appropriate solution to the limited Contract owner 
interest or investment in the Cash Management Portfolio.
    3. The proposed substitution will not result in the type of costly 
forced redemption 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 proposed substitution is of shares of the Cash Management 
Portfolio whose objectives, policies and restrictions are substantially 
similar to those of the IMS Prime Money Fund so as to continue 
fulfilling Contract owners' objectives and risk expectations.
    b. The investment advisory services and the management fees of the 
IMS Prime Money Fund make it a reasonable substitute for Contract 
owners currently invested in the Cash Management Portfolio.\1\
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    \1\ Applicants assert that it is reasonable to anticipate that 
Contract owners will not suffer detriment from increases in the 
levels of unreimbursed advisory fees and other expenses of the IMS 
Prime Money Fund as compared to those anticipated for the Cash 
Management Portfolio.
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    c. The proposed substitution will be at net asset value of the 
respective shares, without the imposition of any transfer or similar 
charge.
    d. Affected Contract owners will not incur any fees or charges as a 
result of the proposed substitution, nor will their rights or the 
obligations of First Variable under the Contracts be altered in any 
way.
    e. Contract owners will be given written notice of the 
substitution, and an opportunity (at least thirty (30) days)

[[Page 57930]]

to allocate Contract values among the other investment options in their 
Contracts.
    f. The proposed substutition will not be considered a ``transfer'' 
for purposes of calculating any transfer fee that may otherwise be 
payable under a Contract.
    g. The proposed substitution will not alter the tax benefits to the 
Contract owners.
    h. Contract owners may choose to withdraw amounts credited to them 
following the proposed substitution, subject to any applicable deferred 
sales charge and other restrictions on withdrawal rights currently 
imposed under their respective contracts.
    i. The number of separate accounts investing in the IMS Prime Money 
Fund make it more likely to achieve economies of scale in operations 
more quickly than the Cash Management Portfolio. Moreover, Applicants 
do not expect, and do not believe it is reasonable to expect, that the 
Adviser will remain forever willing and able to spend large sums of 
money to maintain the favorable expense ratio that the Cash Management 
Portfolio has enjoyed so far.

Conclusion

    For the reasons set forth above, Applicants represent that the 
order requested approving the proposed substitution is necessary and 
appropriate in the public interest and consistent with the protection 
of investors and purposes fairly intended by the policy and provisions 
of the Act and should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-28760 Filed 11-7-96; 8:45 am]
BILLING CODE 8010-01-M