[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,
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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