[Federal Register Volume 61, Number 223 (Monday, November 18, 1996)]
[Notices]
[Pages 58725-58728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29415]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22325; File No. 812-10274]
Merrill Lynch Variable Series Funds, Inc. et al.
November 8, 1996.
AGENCY: Securities and Exchange Commission (the ``SEC'' or
``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: Merrill Lynch Variable Series Funds, Inc. (``Company''),
Merrill Lynch Asset Management L.P., Merrill Lynch Life Insurance
Company, ML Life Insurance Company of New York, Merrill Lynch Variable
Life Separate Account, Merrill Lynch Life Variable Life Separate
Account II, Merrill Lynch Life Variable Annuity Separate Account A,
Merrill Lynch Life Variable Annuity Separate Account B, Merrill Lynch
Life Variable Annuity Separate Account, ML of New York Variable Life
Separate Account, ML of New York Variable Life Separate Account II, ML
of New York Variable Annuity Separate Account A, ML of New York
Variable Annuity Separate Account B, and ML of New York Variable
Annuity Separate Account.
RELEVANT 1940 ACT SECTIONS: Order requested under Section 17(b) of the
1940 Act granting an exemption from the provisions of Section 17(a) of
the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
Company's Merrill Lynch Flexible Strategy Fund series to combine with
and into its Merrill Lynch Global Strategy Focus Fund series and
permitting the Company's Merrill Lynch International Bond Fund series
to combine with and into its Merrill Lynch World Income Focus Fund
series.
FILING DATE: The application was filed on July 25, 1996, and amended on
November 6, 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 Commission Secretary
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 December 3, 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. Any person may request notification of a hearing by writing
to the Commission Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington D.C.
20549. Ira P. Shapiro, Esq., Merrill Lynch Variable Series Funds, Inc.,
800 Scudders Mill Road, Plainsboro, New Jersey 08536. Edward Diffin,
Esq., Merrill Lynch Insurance Group, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. Leonard B. Mackey, Jr., Esq., Rogers &
Wells, 200 Park Avenue, New York, NY 10166.
FOR FURTHER INFORMATION CONTACT: Joyce Merrick Pickholz, Senior
Counsel, or Patrice M. Pitts, Branch 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 may be obtained for a fee from the Public
Reference Branch of the Commission.
Applicants' Representations
1. The Company is a Maryland corporation registered under the 1940
Act as an open-end management investment company.
2. The Company currently offers its shares in seventeen separate
series (``Funds'') to separate accounts (``Separate Accounts'') of
certain insurance companies (``Insurance Companies''), including
Merrill Lynch Life Insurance Company (``MLLIC'') and ML Life Insurance
Company of New York (``ML of New York''), wholly owned subsidiaries of
Merrill Lynch & Co., Inc. (``Merrill Lynch''), to fund benefits under
variable annuity contracts and/or variable life insurance contracts
issued by such companies (``Contracts'').
3. The Separate Accounts include Merrill Lynch Variable Life
Separate Account; Merrill Lynch Life Variable Life Separate Account II;
Merrill Lynch Life Variable Annuity Separate Account A; Merrill Lynch
Life Variable Annuity Separate Account B; Merrill Lynch Life Variable
Annuity Separate Account; ML of New York Variable Life Separate
Account; ML of New York Variable Life Separate Account II; ML of New
York Variable Annuity Separate Account A; ML of New York Variable
Annuity Separate Account B; and ML of New York Variable Annuity
Separate Account.
4. Merrill Lynch Asset Management L.P. (``Investment Adviser'') is
the investment adviser for each series of the Company and an indirect
wholly owned subsidiary of Merrill Lynch.
5. Applicants request an exemption from the provisions of Section
17(a) of the 1940 Act to permit the Company's Merrill Lynch Flexible
Strategy Fund series (``Flexible Strategy Fund'') to be combined with
and into its Merrill Lynch Global Strategy Focus Fund series
(the``Global Strategy Focus Fund'') and the Company's Merrill Lynch
International Bond Fund series (``International Bond Fund'') be
combined with and into its Merrill Lynch World Income Focus Fund series
(``World Income Focus Fund'')(the ``Reorganizations''). MLLIC and ML of
New York hold of record in their own name more than 5% of the
outstanding shares of each of the Flexible Strategy Fund and the
International Bond Fund (together, the ``Transferor Funds'') and the
Global Strategy Focus Fund and the World Income Focus Fund (together,
the ``Acquiring Funds'').
6. Pursuant to the Reorganizations, the Acquiring Funds will
acquire all of the assets and assume all of the liabilities of the
corresponding Transferor Funds in exchange for shares of the Acquiring
Funds of the basis of relative new asset values at the effective date
of the Reorganizations. Following the Reorganizations each Transferor
Fund will liquidate and distribute the shares of the Acquiring Funds
pro rata to its shareholders of record.
7. Each Reorganization is intended to be a ``reorganization''
within the meaning of Section 368 of the Internal Revenue Code of 1986,
as amended (the ``Code''). The Transferor Funds and corresponding
Acquiring Funds will
[[Page 58726]]
receive an opinion of outside counsel substantially to the effect,
among other things, that (a) shareholders of each Transferor Fund will
recognize no income, gain or loss upon receipt, pursuant to the
Reorganizations, of the corresponding Acquiring Fund's shares; (b) the
Transferor Funds will recognize no income, gain or loss by reason of
their Reorganization; and (c) the Acquiring Funds will recognize no
income, gain or loss by reason of their Reorganization.
Comparison of the Transferor Funds to the Acquiring Funds Fund
Assets
Fund Assets
8. At March 31, 1996, the Flexible Strategy Fund had net assets of
approximately $324,163,771, while the Global Strategy Focus Fund had
net assets of approximately $554,297,564, and the International Bond
Fund had net assets of approximately $17,166,252, while the World
Income Focus Fund had net assets of approximately $87,923,711. For the
three months ended March 31, 1996, the annualized ratio of total
expenses to average net assets was 0.71% for the shares of each of the
Flexible Strategy Fund and the Global Strategy Focus Fund, and the
annualized ratio of total expenses to average net assets was 0.78%
(before expense reimbursement) for the shares of the International Bond
Fund, compared to 0.68% for the shares of the World Income Focus Fund.
Fund Expenses
9. The Company's Investment Advisory Agreements require the
Investment Adviser to reimburse each Fund (up to the amount of the
advisory fee earned by the Investment Adviser with respect to such
Fund) if and to the extent that in any fiscal year the operating
expenses of the Fund exceed the most restrictive expense limitation
then in effect under any state securities law or the published
regulations thereunder. At present the most restrictive expense
limitation requires the Investment Adviser to reimburse expenses which
exceed 2.5% of each Fund's first $30 million of average daily net
assets, 2.0% of its average daily net assets in excess of $30 million
but less than $100 million, and 1.5% of its average daily net assets in
excess of $100 million. Expenses for this purpose include the
Investment Adviser's fee but exclude interest, taxes, brokerage fees
and commissions and extraordinary charges, such as litigation costs.
10. The Investment Adviser and Merrill Lynch Life Agency, Inc.
(``MLLA'')--the entity that sells the Contracts--entered into two
reimbursement agreements (the ``Reimbursement Agreements'') that
provide that the expenses paid by each Fund (excluding interest, taxes,
brokerage fees and commissions and extraordinary charges such as
litigation costs) will be limited to 1.25% of its average net assets.
Any expenses in excess of this percentage will be reimbursed to the
Fund by the Investment Advisers which, in turn, will be reimbursed by
MLLA. The Reimbursement Agreements may be amended or terminated by the
parties thereto upon prior written notice to the Company.
11. The investment advisory fee for each of the Flexible Strategy
Fund and the Global Strategy Focus Fund is 0.65% per annum of average
daily net assets. The investment advisory fee for each of the
International Bond Fund and the World Income Focus Fund is 0.60% per
annum of average daily net assets. During the Company's financial year
ended December 31, 1995, the advisory fee expense incurred by the
Company totalled $21,376,742 of which $1,941,598 related to the
Flexible Strategy Fund and $3,348,535 related to the Global Strategy
Focus Fund, and $70,573 related to the International Bond Fund and
$464,049 related to the World Income Focus Fund.
12. During the same period, the total operating expenses of the
Transferor Funds and the Acquiring Funds (including the advisory fees
paid by the Investment Adviser), were as follows: $2,128,926 by
Flexible Strategy Fund (representing .71% of its average net assets),
$3,719,425 by Global Strategy Focus Fund (representing .72% of its
average net assets), and $112,261 by International Bond Fund
(representing .95% of its average net assets prior to complete
reimbursement by the Investment Manager) and $527,752 by World Income
Focus Fund (representing .68% of its average net assets). Thus far
during 1996, the Investment Adviser has continued to waive all of its
fees and reimbursed all expenses of the International Bond Fund. The
Investment Adviser has no current intention of waiving its advisory fee
payable by the World Income Focus Fund or reimbursing the World Income
Focus Fund for any expenses, other than as required under the
Reimbursement Agreements.
Fund Investment Objectives and Policies
13. The Flexible Strategy Fund has an investment objective of high
total investment return consistent with prudent risk and the Global
Strategy Focus Fund has an investment objective of high total
investment return by investing primarily in a portfolio of equity and
fixed income securities, including convertible securities, of United
States and foreign issues. The Flexible Strategy Fund seeks to meet its
investment objective by investing primarily in securities of U.S.
issuers \1\ whereas the Global Strategy Focus Fund invests primarily in
the securities of issuers located in the United States, Canada, Western
Europe and the Far East.
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\1\ As a matter of operating policy, the Flexible Strategy Fund
may invest up to 25% of its net assets in the securities of non-U.S.
issuers.
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14. The investment policies of the Flexible Strategy Fund and the
Global Strategy Focus Fund are also substantially similar. Both Funds
may invest in a broad range of securities, including equity securities
of domestic and foreign large-capitalization and small capitalization
companies, convertible and non-convertible intermediate and long-term
debt obligations issued or guaranteed by sovereign and corporate
issuers, and money market obligations. In addition, both Funds may, at
any given time, concentrate their investments in either equities or
debt securities. However, because of its greater ability to invest in
non-U.S. securities, the Global Strategy Focus Fund, unlike the
Flexible Strategy Fund, may engage in transactions in futures
contracts, options on futures contracts, forward foreign exchange
contracts, currency options and options on portfolio securities and on
stock indexes for hedging purposes only and not for speculation. This
ability to engage in hedging transactions also accounts for the
variation in what are otherwise substantially similar fundamental and
non-fundamental investment restrictions.
15. The investment objective of the International Bond Fund is to
seek a high total investment return. The investment objective of the
World Income Focus Fund is to seek to provide stockholders with high
current income. However, the Reorganization of the International Bond
Fund and the World Income Focus Fund is contingent upon the approval by
shareholders of the World Income Focus Fund of a proposal to change the
investment objective of the World Income Focus Fund to an investment
objective substantially similar to that of the International Bond Fund.
16. In addition, the fundamental and non-fundamental investment
restrictions applicable to the two Funds
[[Page 58727]]
are substantially similar.\2\ To the extent there was any variation in
those restrictions, such variations would be eliminated by the adoption
of proposed uniform investment restrictions submitted to stockholders
of the Company's Funds (other than the Merrill Lynch Domestic Money
Market Fund and the Merrill Lynch Reserve Assets Fund) at the same time
approval of the combination of the two Funds was sought.
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\2\ For example, both Funds may (i) utilize borrowings for
temporary emergency purposes or to meet redemption requests; (ii)
invest in illiquid securities, although the World Income Focus Fund
is limited to investing no more than 10% of its total assets in such
securities, whereas the International Bond Fund is limited to 15%;
(iii) the World Income Focus Fund has a fundamental restriction that
it will not purchase or retain the securities of any issuer, if
those individual officers and directors of the Company, the
Investment Adviser or any subsidiary thereof each owning
beneficially more than \1/2\ of 1% of the securities of such issuer,
own in the aggregate more than 5% of the securities of such issuer,
whereas the International Bond Fund has such investment restriction
as a non-fundamental investment restriction and refers only to
Merrill Lynch Funds Distributors, Inc., the distributor of the
shares of the Company, in place of ``any subsidiary''; and (iv) the
World Income Focus Fund is not prohibited from issuing senior
securities whereas the International Bond Fund is so prohibited.
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Approval by the Board and Contractowners
17. The Reorganizations were unanimously approved by the Board of
Directors of the Company, including the disinterested directors
thereof, on July 10, 1995, and were approved by the shareholders of the
Transferor Funds on October 11, 1996.
Applicants' Legal Analysis
1. Section 17(a) of the 1940 Act provides, in pertinent part, that
it is unlawful for any affiliated person of a registered investment
company, or any affiliated person of such person ``(1) knowingly to
sell any security or other property to such registered company * * *;
[or] (2) knowingly to purchase from such registered company * * * any
security or other property. * * *''
2. Section 2(a)(3) of the 1940 Act defines the term ``affiliated
person'' of another person to include, in pertinent part, ``(A) any
person directly or indirectly owning, controlling, or holding with
power to vote, 5 per centum or more of the outstanding voting
securities of such other person; (B) any person 5 per centum or more of
whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other person; (C) any
person directly or indirectly controlling, controlled by, or under
common control with, such other person; * * * [and] (E) if such other
person is an investment company, any investment adviser thereof. * *
*''
3. MLLIC and ML of New York, which are under common ownership and
control with the Investment Adviser, hold of record more than 5% of the
outstanding voting securities of the Acquiring Funds. Because of this
5% ownership, each Acquiring Fund might be deemed an ``affiliated
person'' of MLLIC and ML of New York under Section 2(a)(3)(B). Also,
MLLIC and ML of New York are ``affiliated persons'' of the Investment
Adviser under Section 2(a)(3)(C) by virtue of their common ownership
and control by Merrill Lynch. The Investment Adviser, in turn, is an
``affiliated person'' of the Transferor Funds under Section 2(a)(3)(E)
by virtue of its investment advisory relationship with those Funds.
Therefore, each Acquiring Fund might be deemed ``an affiliated person
of an affiliated person'' of the corresponding Transferor Fund.
4. Rule 17a-8 generally exempts from the prohibitions of Section
17(a) mergers, consolidations, or purchases or sales of substantially
all of the assets of registered investment companies that are
affiliated persons, or affiliated persons of an affiliated person,
solely by reason of having a common investment adviser, common
directors, and/or common officers, provided that certain conditions are
satisfied. For the reasons noted above, Applicants state that the
proposed Reorganization might not be deemed exempt from the
prohibitions of Section 17(a) by reason of Rule 17a-8.
5. Section 17(b) of the 1940 Act provides that, notwithstanding
Section 17(a), any person may file with the Commission an application
for an order exempting a proposed transaction from one or more
provisions of that subsection and that the Commission shall grant such
application and issue such order of exemption if evidence establishes
that ``(1) 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; (2) the
proposed transaction is consistent with the policy of each registered
investment company concerned, as recited in its registration statement
and reports filed under [the 1940 Act]; and (3) the proposed
transaction is consistent with the general purposes of [the 1940
Act].'' The Applicants seek an order under Section 17(b) to permit the
Reorganizations to proceed.
6. In this regard, Applicants assert that Transferor Fund
shareholders will receive corresponding Acquiring Fund shares with a
total net asset value equal to that of the Transferor Fund shares which
they previously held. Applicants further assert that the Board found,
as contemplated by Rule 17a-8(a) under the 1940 Act, that participation
in the Reorganizations is in the best interests of the Transferor Funds
and corresponding Acquiring Funds and that the interests of existing
shareholders of such Funds will not be diluted as a result of the
Reorganizations. In reaching this conclusion, the Board noted that the
Reorganizations should not result in any dilution of the interests of
the Contract holders for whom the Separate Accounts hold shares of the
Transferor Funds and the corresponding Acquiring Funds and should
provide those Contract holders with substantially the same benefits as
are expected to be realized by the Insurance Companies that own the
shares of such Funds directly. The factors considered by the Board
included: (1) The compatibility of the objectives, policies and
restrictions of the Transferor Funds and the corresponding Acquiring
Funds; (2) future cost savings or other advantages which might be
achieved by combining the Transferor Funds and the corresponding
Acquiring Funds; (3) the tax-free nature of the proposed
Reorganizations; (4) the terms and conditions of the Reorganization
Agreements; (5) the agreement of the Insurance Companies, primarily
MLLIC and ML of New York, to bear a substantial portion of the costs
associated with the proposed Reorganizations; (6) that the rate of the
advisory fees would remain constant for Transferor Funds' shareholders;
(7) that in no event will the holders of Transferor Funds' shares
become subject to a less advantageous expense reimbursement ``cap'' as
a result of the proposed combination of Funds; and (8) the potential
benefits to the Investment Adviser of the transactions contemplated by
the Reorganization Agreements.
7. Applicants also note that, consistent with the requirements of
Rule 18f-2 under the 1940 Act, the proposed Reorganizations were
approved by a majority of the outstanding voting securities of each
Transferor Fund, voting as a separate series, as well as by the vote
required under applicable state law. Moreover, the Reorganizations were
the subject of a registration statement on Form N-14.
Conclusion
For the reasons and upon the facts set forth above, the terms of
the proposed Reorganization transactions, including
[[Page 58728]]
the consideration to be paid and received, are: (a) fair and reasonable
and do not involve overreaching on the part of any person concerned;
(b) consistent with the policy of each registered investment company
concerned, as recited in its registration statements and reports filed
under the 1940 Act; and, (c) consistent with the general purposes of
the 1940 Act. Accordingly, Applicants submit that the terms of the
Reorganizations meet the standards for exemption from Section 17(a) of
the 1940 Act as set forth in Section 17(b) thereof.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-29415 Filed 11-15-96; 8:45 am]
BILLING CODE 8010-01-M