[Federal Register Volume 62, Number 202 (Monday, October 20, 1997)]
[Notices]
[Pages 54493-54495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27654]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22854: File No. 812-10288]


The Prudential Insurance Company of America, et al.

October 10, 1997.
AGENCY: The Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order under section 11(a) of the 
Investment Company Act of 1940 (the ``1940 Act'') permitting certain 
exchange offers between certain unit investment trusts and certain 
open-end management investment companies.

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SUMMARY OF APPLICATION: Applicants seek an order amending a previous 
order \1\ (the ``Prior Order''), which approved the terms of certain 
offers of exchange from interests in certain unit investment trusts to 
certain open-end management investment companies. Applicants seek an 
amended order: (1) To extend relief to open-end management investment 
companies that have succeeded to the assets of those open-end 
management investment companies granted relief in the Prior Order; (2) 
to permit exchanges both ways between the unit investment trusts and 
the successor management investment companies; and (3) to permit 
exchanges between the unit investment trusts and certain other similar 
current and future funds.

    \1\ Prudential Insurance Company of America, File No. 812-8536, 
Rel. No. IC-19826 (Nov. 8, 1993) (Notice), Rel. No. IC-19918 (Dec. 
2, 1993) (Order).
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APPLICANTS: The Prudential Insurance Company of America 
(``Prudential''), Prudential Dryden Fund (``Dryden Fund,'' formerly The 
Prudential Institutional Fund (``PIF'')), The Prudential Variable 
Contract Account-10 (``VCA-10''), The Prudential Variable Contract 
Account-11 (``VCA-11''), The Prudential Variable Contract Account-24 
(``VCA-24,'' collectively with VCA-10 and VCA-11, the ``Medley separate 
accounts''), Prudential Investment Management Services LLC (``PIMS''), 
Prudential Jennison Series Fund, Inc. (``Jennison Fund''), Prudential 
Allocation Fund (``Allocation Fund''), Prudential World Fund, Inc. 
(``World Fund''), Prudential Government Income Fund, Inc. (``Government 
Income Fund''), Prudential MoneyMart Assets, Inc. (``MoneyMart Fund''), 
and Prudential Securities Incorporated (``PSI'').

FILING DATES: The application was filed on June 20, 1996 and was 
amended and restated on July 8, 1997 and September 17, 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 November 4, 1997, and should be accompanied 
by proof of service on Applicants in the from of an affidavit or, for 
lawyers, a certificate of service. Hearing requests 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, SEC. 450 Fifth Street, N.W. Washington, D.C. 
20549. Applicants, c/o Christopher E. Palmer, Shea & Gardner, 1800 
Massachusetts Ave., N.W., Washington, D.C. 20036.

FOR FURTHER INFORMATION CONTACT:
Ethan D. Corey, Attorney, or Kevin M. Kirchoff, 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 is available for a fee from the 
Commission's Public Reference Branch, 450 5th Street, N.W., Washington, 
D.C. 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. Prudential is a mutual life insurance company organized under 
New Jersey Law.
    2. The Dryden Fund, formerly PIF, is an open-end, no-load, 
registered management investment company. Prior to the reorganization 
described below, PIF was a series mutual fund with the following seven 
series, each of which is referred to as a ``PIF Fund'': PIF Growth 
Stock Fund, PIF Balanced Fund, PIF International Stock Fund, PIF Income 
Fund, PIF Money Market Fund, PIF Active Balanced Fund, and PIF Stock 
Index Fund. PIF was generally available only as an investment vehicle 
to certain retirement programs and other institutional investors.
    3. The Jennison Fund, the World Fund, the Government Income Fund,

[[Page 54494]]

and the MoneyMart Fund are organized as Maryland corporations and each 
is registered under the 1940 Act as a diversified open-end management 
investment company. The Jennison Fund consists of two series: The 
Jennison Growth Stock Fund and the Jennison Growth and Income Fund. 
Currently, the World Fund consist of two series: the International 
Stock Series and the Global Series. The Allocation Fund is organized as 
a Massachusetts business trust and is registered under the Act as a 
diversified open-end management investment company. The Allocation Fund 
consists of two series: the Balanced Portfolio and the Strategy 
Portfolio. The Jennison Growth Stock Fund of the Jennison Fund, the 
International Stock Series of the World Fund, the Government Income 
Fund, the MoneyMart Fund, and the Balanced Portfolio of the Allocation 
Fund are referred to individually as a ``PMF Fund'' and collectively as 
the ``PMF Funds.'' Each PMF Fund offers Class Z shares to certain 
institutional investors and other investors meeting specified criteria 
without a sales charge or a Rule 12b-1 fee.
    4. VCA-10 and VCA-11 are separate accounts of Prudential that are 
registered as open-end management investment companies under the 1940 
Act. Prudential is the investment manager of VCA-10 and VCA-11. VCA-24 
is a separate account of Prudential that is registered as a unit 
investment trust under the 1940 Act. VCA-24 has seven separate 
subaccounts, each of which invests exclusively in a single 
corresponding portfolio of The Prudential Series Fund, Inc. (the 
``Series Fund''), an open-end management investment company.
    5. PIMS is a direct wholly-owned subsidiary of Prudential and is 
registered as a broker-dealer under the Securities Exchange Act of 1934 
(the ``1934 Act''). It is the principal underwriter of the group 
variable annuity contracts funded through the Medley separate accounts.
    6. The Medley program consists of Prudential group annuity 
contracts issued to employers (``Contractholders'') who make 
contributions under them on behalf of their employees 
(``Participants''). The contracts are offered for use in connection 
with retirement arrangements that qualify for federal tax benefits 
under Sections 401, 403(b), 408 or 457 of the Internal Revenue Code of 
1986, as amended, and with certain non-qualified annuity arrangements. 
Under the Medley program, a Contractholder may hold a fixed-dollar 
group annuity contract (the ``Companion Contract'') and up to three 
group variable annuity contracts, funded by VCA-10, VCA-11 and VCA-24, 
respectively. Typically, a Participant may choose to have contributions 
invested in any one or more of the Companion Contract, VCA-10, VCA-11 
and the subaccounts of VCA-24. Subject to certain limitations, 
Participants may transfer amounts credited to their accumulation 
accounts during the accumulation period.
    7. The Prior Order approved an exchange program referred to as 
``Medley Plus'' under which Participants could transfer amounts from 
any of the Medley separate accounts to PIF. No fee of any kind was 
imposed at the time of the exchange and PIF shares acquired in an 
exchange were not subject to any deferred sales load or redemption fee. 
Although these exchanges were effected at relative net asset value, the 
Prior Order was obtained because of the involvement of VCA-24, which is 
a unit investment trust. Section 11(c) of the 1940 Act requires the 
Commission's approval of exchange offers involving registered unit 
investment trusts unless the exchange can be effected pursuant to an 
exemptive rule.
    8. The PMF Funds (Jennison Growth Stock Fund, Balanced Portfolio of 
the Allocation Fund, International Stock Series of World Fund, 
Government Income Fund and MoneyMart Fund) have acquired all or 
substantially all of the assets of five of the seven PIF Funds (PIF 
Growth Stock Fund, PIF Balanced Fund, PIF International Stock Fund, PIF 
Income Fund and PIF Money Market Fund, respectively) in exchange for 
Class Z shares of the relevant PMF Fund, and have distributed such 
Class Z shares to the shareholders of the PIF Funds (the 
``Reorganization''). The two remaining PIF Funds did not merge into a 
different fund, but entered into new investment advisory and 
distribution contracts with Prudential Mutual Fund Management LLC 
(``PMF'') and related entities, and thereby became part of the same 
``group of investment companies'' as the PMF Funds, as that term is 
defined in Rule 11a-3 under the 1940 Act. PIF's name was changed to 
``Prudential Dryden Fund,'' and its two remaining series (the 
Prudential Active Balanced Fund and the Prudential Stock Index Fund) 
now each issue Class Z shares with no sales load or Rule 12b-1 fees. 
The five PMF Funds and the two Dryden Funds are referred to together as 
the ``PMF/Dryden Funds.''
    9. PSI is an indirect, wholly-owned subsidiary of Prudential and is 
registered as a broker-dealer under the 1934 Act. PSI distributes the 
shares of each class of the PMF/Dryden Funds.
    10. Applicants request that the Commission amend the Prior Order to 
allow Participants to exchange any or all of their units of the Medley 
separate accounts for Class Z shares of any or all of the PMF/Dryden 
Funds, the successor funds to PIF (the ``Medley-to-PMF/Dryden 
Exchanges''). Any Medley-to-PMF/Dryden Exchange will be effected at the 
relative net asset values of the securities exchanged, and will be 
priced in accordance with Rule 22c-1 under the 1940 Act. No sales load, 
administrative fee, redemption fee, or other transaction charge will be 
imposed at the time of a Medley-to-PMF/Dryden Exchange. Moreover, all 
PMF/Dryden Fund Class Z shares, including those acquired in a Medley-
to-PMF/Dryden Exchange, are not subject to any deferred sales load upon 
their subsequent redemption because Class Z shares are completely no-
load.
    11. Applicants also request that the Commission amend the Prior 
Order to permit holders of Class Z shares of any PMF/Dryden Fund to 
exchange any or all such shares for units of any or all of the Medley 
separate accounts (the ``PMF/Dryden-to-Medley Exchanges''). Any PMF/
Dryden-to-Medley Exchange will be effected at the relative net asset 
values of the securities to be exchanged, and will be priced in 
accordance with Rule 22c-1 under the 1940 Act. No sales load, 
administrative fee, redemption fee, or other transaction charge will be 
imposed at the time of a PMF/Dryden-to-Medley Exchange. No sales load 
will be imposed on the subsequent surrender of any interests in the 
Medley separate accounts acquired in a PMF/Dryden-to-Medley Exchange.
    12. With respect to both Medley-to-PMF/Dryden Exchanges and PMF/
Dryden-to-Medley Exchanges, Prudential will, in its sole discretion, 
determine to whom an exchange offer will be made, the time period 
during which the exchange offer will be in effect, and when an exchange 
offer is terminated. Prudential may, for example, establish fixed 
periods of time for exchanges under a particular contract (a 
``window'') of at least 60 days in length. No open-ended exchange offer 
will be terminated or its terms amended materially without prominent 
notice to any Contractholder subject to that offer of the impending 
termination or amendment at least 60 days prior to the date of 
termination or the effective date of the amendment; provided, however, 
that no such notice will be required if, under extraordinary 
circumstances, either: (a) There is a suspension in redemption of the

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exchanged security under Section 22(e) of the 1940 Act or rules 
thereunder; or (b) the offering company temporarily delays or ceases 
the sale of the security because it is unable to invest amounts 
effectively in accordance with applicable investment objectives, 
policies and restrictions.
    13. Applicants represent that at the commencement of the exchange 
offer, and at all times thereafter, the Medley prospectus will: (a) 
Disclose that no administrative or redemption fee will be imposed in 
connection with the exchange program; (b) disclose that the exchange 
offer is subject to termination and that its terms are subject to 
change; and (c) describe the tax implications of the exchanges 
including, if appropriate, a description of any adverse tax 
consequences of an exchange. Applicants anticipate that the exchange 
offers will be extended only to persons that have been provided a copy 
of the current Medley prospectus. As long as that is the case and the 
disclosure about the exchange offer is in the Medley prospectus, no 
additional disclosure about the exchange offers will be included in the 
PMF/Dryden prospectuses because those funds are offered to a 
significant number of persons who will not be given the exchange offer. 
Applicants represent that if the exchange offer is extended to persons 
that have not been provided copies of the current Medley prospectus, 
the PMF/Dryden prospectuses also will: (a) Disclose that no 
administrative or redemption fee will be imposed in connection with the 
exchange program; (b) disclose that the exchange offer is subject to 
termination and its terms are subject to change; and (c) describe the 
tax implications of the exchanges including, where appropriate, a 
description of any adverse tax consequences of an exchange.
    14. Applicants request that the Commission amend the Prior Order to 
allow exchanges not only with the PMF/Dryden Funds, but also with all 
other current and future classes of registered open-end management 
investment companies for which Prudential or an affiliate serves as 
investment adviser or principal underwriter for which there is no 
front-end sales charge, no Rule 12b-1 fee, and no contingent deferred 
sales charge (each a ``Prudential Class Z Fund''). Specifically, 
Applicants request that the Commission amend the Prior Order to allow 
Participants to exchange any or all of their units in the Medley 
separate accounts for shares of any or all of the Prudential Class Z 
Funds (the ``Medley-to-Prudential Class Z Exchanges''). In addition, 
Applicants request that the Commission amend the Prior Order to permit 
holders of Prudential Class Z Fund shares to exchange any or all such 
shares for units of any or all of the Medley separate accounts (the 
``Prudential Class Z-to-Medley Exchanges''). Applicants represent that 
all Medley-to-Prudential Class Z Exchanges will be subject to the same 
conditions as those set forth in the application that is the subject of 
this notice (the ``Application'') as applicable to the Medley-to-PMF/
Dryden Exchanges. Applicants further represent that all Prudential 
Class Z-to-Medley Exchanges will be subject to the same conditions as 
those set forth in the Application as applicable to the PMF/Dryden-to-
Medley Exchanges.

Applicants' Legal Analysis

    1. Section 11(a) of the 1940 Act provides, in pertinent part, that 
it shall be unlawful for any registered open-end company or any 
principal underwriter for such a company to make or cause to be made an 
offer to the holder of a security of such company, or of any other 
open-end investment company, to exchange his or her security for a 
security in the same or another such company on any basis other than 
the relative net asset values of the respective securities to be 
exchanged, unless the terms of the offer have first been submitted to 
and approved by the Commission. Section 11(c) of the 1940 Act provides 
that, irrespective of the basis of exchange, Commission approval is 
required for any offer of exchange of any security of a registered 
open-end company for a security of a registered unit investment trust, 
or any offer of exchange of any security of a registered unit 
investment trust for the securities of any other investment company. 
Accordingly, although Applicants believe that the proposed exchanges 
will be at net asset value, Commission approval is required for the 
proposed exchanges because of the involvement of VCA-24, a registered 
unit investment trust. Applicants state that they cannot rely on 
existing exemptive rules because neither Rule 11a-2 nor Rule 11a-3 
permits exchanges between a unit investment trust separate account and 
an open-end investment company that is not a separate account.
    2. The legislative history of Section 11 of the 1940 Act indicates 
that its purpose is to provide the Commission with an opportunity to 
review the terms of certain offers of exchange to ensure that a 
proposed offer is not being made ``solely for the purpose of exacting 
additional selling charges.'' H. Rep. No. 2639, 76th Cong., 2d Sess. 8 
(1940). One of the practices Congress sought to prevent through Section 
11 was the practice of inducing investors to switch securities so that 
the promoter could charge investors another sales load. Applicants 
assert that the proposed offers of exchange involve no possibility of 
such abuse. On a Medley-to-PMF/Dryden Exchange, there is no sales load 
or transaction fee, and the acquired PMF/Dryden shares are completely 
no-load. On a PMF/Dryden-to-Medley Exchange, there is not sales load or 
transaction fee, and so sales load will be imposed on the subsequent 
surrender of any interests in the Medley separate accounts acquired in 
such an exchange.
    3. Applicants submit that providing class relief is appropriate. 
Applicants request that the order extend to all Prudential Class Z 
Funds which, like the PMF/Dryden Funds, offer shares that are subject 
to no front-end sales charge, no Rule 12b-1 fee, and no contingent 
deferred sales charge. Those exchanges would be on the same terms as 
the exchanges with the PMF/Dryden Funds, and therefore there would be 
no possibility of the abuses Congress sought to prevent through Section 
11. Furthermore, without such exemptive relief, before Medley 
Participants could be given any additional exchange options, Applicants 
would have to apply for and obtain additional approval orders. 
Applicants believe that such additional applications would present no 
new issues under the 1940 Act not already addressed in the Application.
    4. Applicants submit that the proposed offers of exchange meet all 
the requirements of Section 11, and provide a benefit to 
Contractholders and Participants by providing new investment options 
and an attractive way to exchange existing securities for interests in 
those options.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested exemptions are 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27654 Filed 10-17-97; 8:45 am]
BILLING CODE 8010-01-M