[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

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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