[Federal Register Volume 62, Number 169 (Tuesday, September 2, 1997)]
[Notices]
[Pages 46387-46390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23185]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22798; File No. 812-10364]


Monarch Life Insurance Company, et al.

August 25, 1997.
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: Monarch Life Insurance Company (``Monarch Life'') and 
Monarch Separate Account VA (``Separate Account VA'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 26(b).

SUMMARY OF APPLICATION: Applicants seek an order approving the 
substitution of shares of certain funds (``Funds'') of Merrill Lynch 
Variable Series Funds, Inc. (``ML Fund'') for shares of certain series 
(``Portfolios'') of Variable Investors Series Trust (``VIST'') held by 
Separate Account VA to fund certain variable annuity contracts 
(``Contracts'') issued by Monarch Life.

FILING DATE: The Application was filed on September 25, 1996, and an 
amendment thereto was filed on May 29, 1997.

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 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 September 19, 1997, and should be 
accompanied by proof of service on Applicants in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing request 
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, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, DC 20549. Applicants, c/o Raymond A. O'Hara 
III, Esq., Blazzard, Grodd & Hasenauer, P.C., P.O. Box 5108, Westport, 
Connecticut, 06881. Copies to John S. Coulton, Esq., Monarch Life 
Insurance Company, One Monarch Place, Springfield, MA 01133.

FOR FURTHER INFORMATION CONTACT: Joyce Merrick Pickholz, Senior 
Counsel, or Kevin M. Kirchoff, 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 is available for a free from the Public 
Reference Branch of the Commission.

Applicants' Representations

Background

    1. Monarch Life was incorporated in 1901 and is domiciled in 
Massachusetts. Monarch Life is a wholly-owned subsidiary of Regal 
Reinsurance Company (``Regal Re''), formerly Monarch Capital 
Corporation (``Monarch Capital''). On September 23, 1992, pursuant to a 
reorganization under Chapter 11 of the Federal Bankruptcy Code, Monarch 
Capital was reorganized and emerged from bankruptcy as a Massachusetts 
life insurer, Regal Re. Regal Re is owned by Monarch Capital's pre-
bankruptcy secured and unsecured creditors.
    2. On June 9, 1994, the Insurance Commissioner of the Commonwealth 
of Massachusetts (the ``Commissioner'') was appointed receiver (the 
``Receiver'') of Monarch Life in a rehabilitation proceeding pending 
before the Supreme Judicial Court for Suffolk County, Massachusetts 
(the ``Court'').
    3. A term sheet dated July 19, 1994 (the ``Term Sheet'') among the 
Commissioner (in her capacity as Commissioner and Receiver) and certain 
Regal Re shareholders and noteholders and holders of Monarch Life's 
surplus notes (representing approximately 85% of both the total 
outstanding Regal Re notes and common stock) (the ``Holders'') was 
approved by the Court on September 1, 1994. Pursuant to the Term Sheet, 
the Holders transferred their notes and stock into voting trusts for 
which the Commissioner is the sole trustee, which effectively vests 
control of Regal Re and Monarch Life in the Commissioner.
    4. Insurance department of various jurisdictions have either 
suspended the certificate of authority of Monarch Life, ordered Monarch 
Life to cease writing new business, or have requested a voluntary 
suspension of sales by Monarch Life. In addition, Monarch Life's 
certificate of authority has been revoked by the insurance departments 
of the states of Louisiana on May 13, 1994, Michigan on February 27, 
1994,

[[Page 46388]]

Missouri on November 10, 1994 and Wyoming on June 25, 1992.
    5. Monarch Life currently limits its business to maintaining its 
existing blocks of disability income insurance, variable life 
insurance, and annuity businesses. Monarch Life ceased issuing new 
variable life policies and new annuity contracts effective May 1, 1992, 
and new disability income insurance policies effective June 15, 1993.
    6. Separate Account VA, a separate account of Monarch Life, was 
established under Massachusetts law on October 20, 1987, for the 
purpose of funding the Contracts which invest in VIST. Separate Account 
VA is registered under the 1940 Act as a unit investment trust and 
security interest under the Contracts have been registered under the 
Securities Act of 1933 (``1933 Act'') on Form N-4 (File No. 33-21238). 
Separate Account VA is currently divided into seven sub-accounts, each 
of which reflects the investment performance of a corresponding 
Portfolio of VIST.
    7. VIST currently offers shares of its Portfolios to corresponding 
sub-accounts of Separate Account VA and certain separate accounts of 
First Variable Life Insurance Company (``First Variable Life''). VIST 
was organized as a Massachusetts business trust under the laws of 
Massachusetts on December 23, 1986, and is registered under the 1940 
Act as an open-end management investment company of the series type. 
VIST currently offers nine Portfolios.
    8. The Cash Management Portfolio seeks to preserve shareholder 
capital, to maintain liquidity, and to achieve maximum current income 
consistent with the foregoing objectives by investing exclusively in a 
diversified portfolio of short-term money market securities. The High 
Income Bond Portfolio primarily invests in high yield, high risk, 
fixed-income securities to obtain as high a level of current income as 
is believed to be consistent with prudent investment management and, as 
a secondary objective, capital appreciation when consistent with its 
primary objective. The Multiple Strategies Portfolio seeks to achieve 
as high a level of total return over an extended period of time as the 
adviser and sub-adviser consider consistent with prudent investment 
risk. The Growth Portfolio (formerly the ``Common Stock Portfolio'') 
seeks capital growth by investing primarily in a diversified portfolio 
of common stocks and securities convertible into or exchangeable for 
common stocks, including convertible preferred stock, convertible 
debentures, warrants, and options. As a secondary objective, the Growth 
Portfolio may seek current income when consistent with its primary 
investment objective. The U.S. Government Bond Portfolio seeks current 
income and preservation of capital through investment primarily in 
securities issued or guaranteed as to principal and interest by the 
U.S. Government or by its agencies, authorities, or instrumentalities. 
The investment objective of the Matrix Equity Portfolio is capital 
appreciation and current income to be achieved by investing in a 
diversified portfolio of equity securities that is selected by State 
Street Global Advisors, the Sub-Advisor, on the basis of its 
proprietary model. Sector weights are maintained at a similar level to 
the S&P 500 Index. The Portfolio will invest at least 65% of its total 
assets in equity securities. The World Equity Portfolio seeks maximum 
long-term total return by investing primarily in common stocks, and 
securities convertible into common stocks, traded in securities markets 
located around the world, including the United States.
    9. First Variable Advisory Services Corp. (``FVAS''), a wholly-
owned subsidiary of First Variable, is the investment adviser for VIST. 
FVAS has engaged sub-advisers for each Portfolio to make investment 
decisions and place orders.
    10. The shares of the ML Fund are sold to separate accounts of 
certain insurance companies to fund benefits under variable annuity 
contracts and/or variable life insurance policies issued by such 
companies. The ML Fund was incorporated on October 16, 1981, and is 
registered under the 1940 Act as an open-end management investment 
company of the series type. The ML Fund currently offers sixteen Funds, 
seven of which are relevant herein.
    11. The investment objectives of the Domestic Money Market Fund of 
the ML Fund are to preserve shareholder capital, to maintain liquidity 
and to achieve the highest possible current income consistent with the 
foregoing objectives by investing in short-term domestic money market 
securities. The primary investment objective of the High Current Income 
Fund is to obtain the highest level of current income that is 
consistent with the investment policies of the Fund and with prudent 
investment management. As a secondary objective, the High Current 
Income Fund seeks capital appreciation when consistent with its primary 
objective. The Quality Equity Fund seeks to achieve the highest total 
investment return, or the aggregate of income and capital value 
changes, consistent with prudent risk. The investment objective of the 
Equity Growth Funds \1\ is to seek long-term growth of capital by 
investing in a diversified portfolio of securities, primarily common 
stocks, of relatively small companies that management of the ML Fund 
believes have special investment value, and of emerging growth 
companies regardless of size. The investment objective of the 
Government Bond Fund (formerly the ``Intermediate Government Bond 
Fund'') is to seek the highest possible current income consistent with 
the protection of capital afforded by investing in debt securities 
issued or guaranteed by the U.S. Government, its agencies or 
instrumentalities. The investment objective of the Basic Value Focus 
Fund is to seek capital appreciation and, secondarily, income by 
investing in securities, primarily equities, that management of the 
Fund believes are undervalued and therefore represent basic investment 
value. The investment objective of the Global Strategy Focus Fund is to 
seek high total investment return by investing primarily in a portfolio 
of equity and fixed income securities, including convertible 
securities, of U.S. and foreign issuers.
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    \1\ The Board of Directors of the ML Fund has approved a change 
in the name of the Equity Growth Fund to the Special Value Focus 
Fund.
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    12. Merrill Lynch Asset Management, L.P. (``MLAM''), an indirect 
wholly-owned subsidiary of Merrill Lynch & Co., Inc., is the investment 
adviser for each of the Funds.
    13. Certain separate accounts of Monarch Life currently are 
invested in the shares of other investment companies advised by MLAM, 
the investment adviser to the ML Fund. Further, an affiliate of MLAM 
provides third party administrative services to Monarch Life in 
connection with its variable life insurance operations. Given its 
existing relationship with the Merrill Lynch organization and given the 
fact that it is no longer affiliated with First Variable Life, Monarch 
Life determined that it was in its best interests and in the best 
interests of its variable annuity contract owners to pursue the 
substitutions.
    14. Applicants state that the VIST Portfolios are relatively small 
when compared with many other similar investment portfolios of open-end 
management investment companies. As a result, the annual expense ratios 
of these Portfolios have generally been higher than the ratios of many 
similar but larger funds. Applicants state further that, although the 
recent performance of the VIST Portfolios has been generally good, 
frequent changes

[[Page 46389]]

in the VIST investment advisory arrangements over the years have 
contributed to a somewhat erratic long-term performance record.

The Proposed Substitution

    15. Applicants propose that Monarch Life substitute shares of the 
Funds of the ML Fund (each, a ``substitute fund'', together the 
``substitute funds'') for shares of the Portfolios of VIST (each a 
``removed fund'', together the ``removed funds'') as follows: (1) 
Shares of the Domestic Money Market Fund for shares of the Cash 
Management Portfolios; (2) shares of the High Current Income Fund for 
shares of the High Income Bond Portfolio; (3) shares of the Quality 
Equity Fund for shares of the Multiple Strategies Portfolio; (4) shares 
of the Equity Growth Fund for shares of the Growth Portfolio; (5) 
shares of the Government Bond Fund for shares of the U.S. Government 
Bond Portfolio; (6) shares of the Basic Value Focus Fund for shares of 
the Matrix Equity Portfolio; and (7) shares of the Global Strategy 
Focus Fund for shares of the World Equity Portfolio.
    16. Applicants propose to have Monarch Life redeem shares of each 
removed fund in cash and purchase with the proceeds shares of the 
substitute fund identified above. The proposed substitution would not 
change the number of subaccounts in Separate Account VA.
    17. By supplement to the prospectus for the Contracts and Separate 
Account VA, Contract owners were notified of the proposed 
substitutions. The supplement advised owners that they retained the 
ability to allocate net purchase payments, or transfer contracts values 
to the subaccounts of Separate Account VA corresponding to each of the 
removed funds until the date of the substitutions.
    18. Applicants state that the proposed substitutions will take 
place at relative net asset value with no change in the amount of any 
Contract owner's Contract value or in the dollar value of his or her 
investment in Separate Account VA. Contract owners will not incur any 
fees or charges as a result of the proposed substitutions nor will 
their rights under the Contracts be altered in any way. All expenses 
incurred in connection with the proposed substitutions, including 
legal, accounting and other fees and expenses, will be paid by Monarch 
Life. In addition, the proposed substitutions will not result in the 
imposition of any tax liability on Contract owners. The proposed 
substitutions will not cause the Contract fees and charges currently 
being paid by existing Contract owners to be greater after the proposed 
substitutions than before the proposed substitutions.
    19. Applicants state that in addition to the prospectus supplements 
distributed to owners of Contracts, within 5 days after the proposed 
substitutions, all owners who were affected by a substitution will be 
sent a written notice informing them that the substitutions were 
carried out. Monarch Life will include in such mailing the supplement 
to the prospectus of Separate Account VA, which describes the 
substitutions.
    20. Monarch Life and certain of its separate accounts (including 
Separate Account VA) (collectively, ``Accounts'') have previously 
received no-action assurances from the staff of the Commission that the 
staff would not recommend that the Commission take any enforcement 
action against Monarch Life or the Accounts if post-effective 
amendments to registration statements are not filed under the 1933 Act 
and the 1940 Act, and updated prospectuses for the Accounts are not 
distributed to owners of existing variable contracts issued through the 
Accounts provided that certain conditions are met (Monarch Life 
Insurance Company, pub. avail. June 9, 1992, referred to herein as the 
``June 9th No-Action Letter''). The conditions of the June 9th No-
Action Letter include providing various documents to the variable 
contract owners including, but not limited to, periodic reports, 
prospectuses, proxy statements and related voting instructions 
pertaining to the relevant underlying mutual funds. In accordance with 
the terms of the June 9th No-Action Letter, Monarch Life does not 
update the Separate Account VA prospectus on an annual basis as would 
otherwise be required by the 1933 Act and the 1940 Act. Therefore, 
Contract owners do not have the benefit of receiving an updated 
Separate Account VA prospectus which would provide them with certain 
information concerning the ML Fund. In light of this fact, Applicants 
undertake to provide the variable contract owners of Separate Account 
VA with the same disclosure concerning the ML Fund as such owners would 
receive if Monarch Life updated and mailed its Separate Account VA 
prospectus to owners. Such information primarily consists of a fee 
table for Separate Account VA, which includes the fees and expenses of 
the ML Fund, and a description of the investment objectives of each of 
the Funds of the ML Fund.
    21. Applicants state that following the substitutions, Contract 
owners will be afforded the same contract rights, including surrender 
an other transfer rights with regard to amounts invested under the 
Contracts, as they currently have. (Monarch Life currently imposes no 
restrictions or fees on the ability of Contract owners to make 
transfers nor does it intend to impose any after the proposed 
substitutions are effected.)

Applicants' Legal Analysis

    22. 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 this 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.
    23. Applicants maintain that the purposes, terms and conditions of 
the 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.
    24. Applicants assert that each of the substitute funds is 
substantially larger than the removed fund that it would replace. Each 
of the substitute funds has also had significantly more favorable 
expense ratios over the past three years than the removed fund that it 
would replace. Applicants assert that recent investment performance 
between the substitute funds and the removed funds has been generally 
comparable. Applicants anticipate that, after the proposed 
substitutions, the substitute funds will provide Contract owners with 
comparable or more favorable investment results than would be the case 
if the proposed substitutions do not take place. Applicants further 
assert that each of the substitute funds is a suitable and appropriate 
investment vehicle for Contract owners. Each of the substitute funds 
has substantially identical investment objectives to the removed fund 
that it would replace.

[[Page 46390]]

    25. Applicants assert that, although the Equity Growth Fund invests 
primarily in the securities of relatively small companies, while the 
Growth Portfolio does not focus on companies with small market 
capitalizations, the investment objective of each of the Equity Growth 
Fund and the Growth Portfolio is capital growth and each invests 
primarily in equity securities. Because capital growth is the 
investment objective for both the Equity Growth Fund and the Growth 
Portfolio, Applicants believe that the investment goals of owners will 
continue to be achieved after the substitution and that the differences 
between the investment policies are non-material to the achievement of 
the investment goals of the owners.
    26. Applicants generally submit that the proposed substitutions 
meet the standards that the Commission and its staff have applied to 
substitutions that have been approved in the past in that:
    a. The expense ratios of each of the Funds of the ML Fund are 
substantially lower than the expense ratios of the corresponding VIST 
Portfolios and are expected to remain so;
    b. The substitution will be at net asset value of the respective 
shares, without the imposition of any transfer or similar charge;
    c. Monarch Life has undertaken to assume the expenses and 
transaction costs, including among others, legal and accounting fees 
and any brokerage commissions, relating to the substitution;
    d. The substitution in no way will alter the insurance benefits to 
Contract owners or the contractual obligations of Monarch Life;
    e. The substitution in no way will alter tax benefits to Contract 
owners;
    f. Contract owners may choose simply to withdraw amounts credited 
to them following the substitution under the conditions that currently 
exist without incurring any charges; and
    g. The substitution is expected to confer certain economic benefits 
to Contract owners by virtue of the enhanced asset size of the 
substitute funds. Conclusion:
    Applicants submit, for the reasons summarized above, that the 
proposed substitution is 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. 97-23185 Filed 8-29-97; 8:45 am]
BILLING CODE 8010-01-M