[Federal Register Volume 62, Number 202 (Monday, October 20, 1997)]
[Notices]
[Pages 54481-54484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27697]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22855; File No. 812-10622]
Acacia National Life Insurance Company, Inc., et al.
October 10, 1997.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for an Order under Section 26(b) of the
Investment Company Act of 1940 (the ``Act'') approving proposed
substitutions of securities.
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SUMMARY OF APPLICATION: Applicants seek an order to permit the
substitution of shares of the Neuberger & Berman Advisors Management
Trust Limited Maturity Bond Portfolio (``N&B Bond Portfolio'') for
shares of the Strong Advantage Fund II (``Strong Advantage'') and the
substitution of shares of Acacia Capital Corporation Calvert
Responsibly Invested Balanced Portfolio (``Calvert Balanced
Portfolio'') for shares of the Strong Asset Allocation Fund II
(``Strong Asset Allocation'' and, collectively with Strong Advantage,
the ``Strong Funds'').
APPLICANTS: Acacia National Life Insurance Company (``Acacia
National''), Acacia National Life Insurance Company Variable Life
Separate Account I (``Separate Account I''), Acacia National Life
Insurance Company Variable Annuity Separate Account II (``Separate
Account II'', together with Separate Account I, the ``Separate
Accounts'').
FILING DATES: The application was filed on April 17, 1997, and amended
on September 25, 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 on the application by writing to the
Secretary of the SEC and serving
[[Page 54482]]
the Applicants with a copy of the request, in person or by mail.
Hearing requests must be received by the Commission by 5:30 pm., on
November 4, 1997, and accompanied by proof of service on the 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. Persons who wish to be
notified of a hearing may request notification by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, c/o Ellen Jane
Abromson, Esq., Acacia National Life Insurance Company, 7315 Wisconsin
Avenue, Bethesda, Maryland 20814.
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: The following is a summary of the
application. The complete application is available for a fee from the
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington D.C.
(tel. (202) 942-8090).
Applicants' Representations
1. Acacia National is a stock life insurance company organized
under the laws of Virginia. Acacia National is a wholly owned
subsidiary of Acacia Mutual Life Insurance Company, a mutual life
insurance company chartered by special act of Congress and subject to
the laws of the District of Columbia. The Separate Accounts were
established by Acacia National under the insurance laws of Virginia to
fund, in the case of Separate Account I, variable life insurance
policies and, in the case of Separate Account II, variable annuity
policies (together, the ``Policies''). The Separate Accounts are
registered with the Commission under the 1940 Act as unit investment
trusts.
2. Each Separate Account currently consisted of twenty-one sub-
accounts. Each sub-account invests its assets in the shares of one of
twenty-one designated investment portfolios of seven open-end
management investment companies. Strong Advantage, Strong Asset
Allocation, N&B Bond Portfolio, and Calvert Balanced Portfolio are four
of the twenty-one existing portfolios.
3. Strong Advantage is a series of Strong Variable Insurance Funds,
Inc. (``Strong Variable Funds'') for which Strong Capital Management,
Inc. (``SCM'') is the investment adviser. Strong Advantage seeks to
provide current income with a low degree of share-price fluctuation by
investing in ultra short term, investment grade debt obligations; its
average effective portfolio maturity is normally less than one year.
Strong Advantage is designed for investors who seek higher yields than
money market funds and who are willing to accept some modest principal
fluctuation in order to achieve that objective. Under normal market
conditions, at least 75% of its net assets are invested in investment
grade debt obligations. Strong Advantage may also invest up to 25% of
its net assets in non-investment grade debt obligations that are rated
in the fifth-highest rating category or in unrated securities of
comparable quality.
4. Strong Asset Allocation is also a series of Strong Variable
Funds for which SCM is the advisor. Strong Asset Allocation seeks high
total return consistent with reasonable risk over the long term by
allocating its assets among a diversified portfolio of equity
securities, bonds and short-term fixed-income securities with benchmark
allocations of 60% stock, 35% bonds and 5% cash.
5. N&B Bond Portfolio is a portfolio of the Neuberger & Berman
Advisors Management Trust. As a feeder fund in a ``master-feeder''
arrangement, the fund invests its assets in a corresponding series, AMT
Limited Maturity Bond Investments (``AMT Series''), of Advisors
Management Trust, an open-end management investment company registered
under the 1940 Act. The investment objective of the N&B Bond Portfolio
and the AMT Series is to provide the highest current income consistent
with low risk to principal and liquidity and, secondarily, total
return. The AMT Series invests in short-to-intermediate term fixed and
variable debt securities and seeks to increase income and preserve or
enhance total return by actively managing average portfolio duration.
The AMT Series invests primarily in investment grade securities but may
invest up to 10% of its pet assets, measured at the time of investment,
in debt securities rated below investment grade or in unrated
securities determined by its adviser to be of comparable quality.
6. The Calvert Balanced Portfolio, a series of Acacia Capital
Corporation, is advised by Calvert Asset Management Company, Inc. It
seeks to achieve a total return above the rate of inflation through an
actively managed portfolio of common and preferred stocks, bonds, and
money market instruments. For its fixed-income investments, the Calvert
Balanced Portfolio normally invests in investment grade bonds but may
invest up to 20% of its assets in obligations rated lower than B. No
more than 10% of assets may be invested in privately placed
instruments. Each investment of the Calvert Balanced Portfolio is
selected with a concern for its social impact.
7. On November 1, 1996, SCM notified Acacia National that Strong
Variable Funds intended to cease offering shares of the Strong Funds
for inclusion in variable polices due to the small amount of assets in
the two portfolios and the corresponding absence of economies of scale.
New allocations to the Strong Funds are no longer permitted.
8. Acacia National proposes to provide policyowners with the option
to transfer into any of the other portfolios offered under the
Policies. However, because some policyowners will not voluntarily
transfer from the affected sub-accounts, Acacia National proposes to
substitute shares of the N&B Bond Portfolio for shares of Strong
Advantage and Calvert Balanced Portfolio shares for shares of Strong
Asset Allocation in the sub-accounts.
9. The Policies give Acacia National the right to eliminate or add
sub-accounts, combine two or more sub-accounts, or substitute one or
more new underlying mutual funds or portfolios for others in which one
or more sub-accounts are invested. These contractual provisions are
disclosed in the prospectuses or statements of additional information
relating to the Policies.
10. Acacia National will schedule the substitutions to occur as
soon as practicable following the issuance of an exemptive order. As of
the effective date of the substitutions, Acacia National will redeem
shares of the Strong Funds. Simultaneously, Acacia National will use
the proceeds of the redemptions to purchase the appropriate number of
shares of N&B Bond Portfolio and Calvert Balanced Portfolio. The
substitution will take place at the relative net asset values of the
portfolios with no change in the amount of any policyowner's account
values.
11. Acacia National will pay all expenses and transaction costs of
the substitutions. SCM may reimburse Acacia National for some or all of
those costs but none will be borne by policyowners. Affected
policyowners will not incur any fees or charges as a result of the
substitutions, nor will the rights or obligations of Acacia National
under the Policies be altered in any way.
[[Page 54483]]
12. The substitutions were first described to policyowners in a
prospectus supplement dated November 25, 1996, and again in
correspondence to policyowners dated May 1, 1997, or May 16, 1997,
depending on the state in which the Policy was issued. The prospectus
supplement advised policyowners that the Strong Funds would cease
offering shares under the Policies effective May 1, 1997, and,
consequently, deposits would no longer be accepted into the Strong
Funds after that time. Policyowners were also notified that if the
substitutions were approved by the SEC, the substitutions would be
effected at the net asset value of the relevant portfolios, that
policyowners would be given the opportunity to transfer into any other
available portfolio, and that no costs for any substitution would be
borne by policyowners.
13. Within five days after the substitutions, Acacia National will
send to policyowners written notice stating that the substitutions have
occurred. Acacia National will include in the mailing a supplement to
the prospectus which discloses the completion of the substitutions.
Affected policyowners will be advised that for a period of 30 days from
the mailing of the notice, they may transfer all assets, as
substituted, to any other available sub-account without limitation and
without charge, and no such transfer will be counted as a transfer
under any contractual provision that may limit the number of transfer
in any year. No transfer charge is currently in effect and none will be
imposed prior to the expiration of the 30 day period. Following the
substitutions, policyowners will be afforded the same rights, including
surrender and other transfer rights with regard to amounts invested
under the Policies as they currently have. Thus policyowners may choose
simply to withdraw amounts credited to them following the substitutions
under the conditions that currently exists, subject to any applicable
surrender charge.
14. The investment advisory fee for Strong Advantage is, on an
annual basis, .60% of the average daily net asset value of the
portfolio. As a result of an expense limitation agreement, the expense
ratio for Strong Advantage for the year ending December 31, 1996, was
2.00%. in the absence of this agreement, the expense ratio would have
been 2.85%.
15. The investment advisory fee for Strong Asset Allocation is, on
an annual basis, .85% of the average daily net asset value of the
portfolio up to a value of $35 million in assets and .80% of the
portfolio's assets in excess of $35 million. As a result of an expense
limitation agreement, the expense ratio for Strong Asset Allocation for
the year ending December 31, 1996, was 2.00%. In the absence of this
agreement, the expense ratio would have been 4.29%.
16. The investment advisory fee for the N&B Bond Portfolio equals a
percentage of the average daily net asset value of the portfolio, on an
annual basis, as follows: .65% for the first $500 million; .615% for
the next $500 million; .60% for the next $500 million; .575 for the
next $500 million; and .55% thereafter. The expense ratio for the N&B
Bond Portfolio for the year ending December 31, 1996, was .80%.
17. The investment advisory fee for the Calvert Balanced Portfolio
is, on an annual basis, .70% of the average daily net asset value of
the portfolio. Its expense ratio for the year ending December 31, 1996,
was .81%.
Applicants' Legal Analysis
1. 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.'' Section 26(b) provides that
the Commission will approve a substitution if it is consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the 1940 Act. 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 incurring either a loss of the sales
load deducted from initial proceeds, an additional sales load upon
reinvestment of the redemption proceeds, or both. Section 26(b) affords
protection to investors by preventing a depositor or trustee of a unit
investment trust holding shares of one issuer from substituting for
those shares the shares of another issuer, unless the Commission
approves that substitution.
2. Applicants submit that the purposes, terms and conditions of the
substitutions are consistent with the principals and purposes of
Section 26(b) and do not entail any of the abuses that Section 26(b) is
designed to prevent. Applicants believe that the N&B Bond and Calvert
Balanced portfolios will better serve policyowner interests because the
expenses of each portfolio have been significantly lower than, and the
performance of each has been essentially equivalent to or better than,
the expenses and performance of the funds to be eliminated. Also,
Applicants submit that Policyowners may transfer their assets to any of
seventeen additional portfolios currently available under the Policies.
3. Applicants believe that Calvert Balanced is an appropriate
replacement for Strong Asset Allocation notwithstanding the fact that
Calvert Balanced seeks to invest in organizations that: (a) Deliver
safe products and services; (b) are managed with participation
throughout the organization in defining and achieving objectives; (c)
negotiate fairly with their workers and provide a supportive working
environment; and (d) foster awareness of a commitment to human goals
within the organization and the word. Applicants submit that each
portfolio invests a percentage of its assets in stocks, bonds and money
market instruments. Also, Calvert Balanced can be expected to
outperform Strong Asset Allocation, were the latter to remain in
existence, because Calvert Balanced has much lower expenses than Strong
Asset Allocation, and, as Strong Asset Allocation's assets continue to
decrease and its expenses remain the same, its performance will
necessarily decline. Further, Applicant's assert that even though
Strong Asset Allocation has slightly outperformed Calvert Balanced
since each portfolio's inception, Calvert Balanced has gone through
many market cycles during its more than ten years of existence whereas
Strong Asset Allocation, which commenced operations in late 1995, has a
briefer history characterized by a rising market. For the past year,
the two Portfolios' total returns were identical (20.67%).
4. Applicants state that Acacia National has reserved the right to
substitute securities held by the Sub-Accounts of the Separate Accounts
and this right is disclosed in the prospectuses or statements of
additional information for the Separate Accounts.
5. Finally, Applicants represent that the substitutions will not
result in the type of costly forced redemption that Section 26(b) was
intended to guard against and, for the following reasons, are
consistent with the protection of investors and the purposes fairly
intended by the Act:
a. The N&B Bond Portfolio and Calvert Balanced Portfolio have
objectives, policies and restrictions that are substantially similar to
the objectives, policies and restrictions of the funds being replaced.
b. The expense ratio of the N&B Bond and Calvert Balanced
Portfolios are
[[Page 54484]]
significantly lower than those of the Strong funds.
c. The performance of the N&B Bond and Calvert Balanced Portfolios
has been essentially equivalent to or better than the performance of
the portfolios that will be eliminated.
d. The substitutions will, in all cases, be at the net asset value
of the respective portfolios without the imposition of any transfer or
similar charge.
e. The costs of the substitutions will be borne by Acacia National
and SCM and will not be borne by policyowners. No charges will be
assessed to effect the substitutions.
f. Within 5 days after the substitutions, Acacia National will send
to policyowners written notice of the substitutions that identifies the
shares that were substituted and discloses the shares which replaced
them. Included in the mailing will be a supplement to the prospectus
that discloses completion of the substitutions.
g. For 30 days following the mailing of the notice of
substitutions, policyowners may transfer substituted assets without any
charge. No such transfer will be counted as a transfer under any
contractual provision which limits the number of transfers in any year.
h. The substitutions will in no way alter the insurance benefits to
policyholders or the contractual obligations of Acacia National.
i. The substitutions will in no way alter the tax benefits to
policyowners. Counsel for Acacia National has advised that the
substitutions will not give rise to any tax consequences to the
policyowners.
Applicants' Conclusions
Applicants assert that, for the reasons and upon the facts set
forth in the application, the requested order approving the proposed
substitution meets the standards set forth in Section 26(b) of the 1940
Act and should be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27697 Filed 10-17-97; 8:45 am]
BILLING CODE 8010-01-M