[Federal Register Volume 62, Number 206 (Friday, October 24, 1997)]
[Notices]
[Pages 55438-55440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28176]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22859; File No. 812-10738]


Integrity Life Insurance Company, et al.; Notice of Application

October 17, 1997.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order pursuant to Section 26(b) of 
the Investment Company Act of 1940 (the ``1940 Act'').

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SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section 
26(b) of the 1940 Act, approving the substitution of shares of certain 
registered management investment companies (``Current Portfolios'') 
with shares of other registered management investment companies 
(``Substitute Portfolios''). Applicants also seek an order pursuant to 
Section 17(b) of the 1940 Act to permit Applicants to carry out the 
above-referenced substitution (the ``Substitution'') by redeeming 
shares of the Current Portfolios in-kind, and using the redemption 
proceeds to purchase shares of the Substitute Portfolios, and to permit 
Applicants to combine certain subaccounts holding shares of the same 
Substitute Portfolio after the Substitution.

APPLICANTS: Integrity Life Insurance Company (``Integrity''), Integrity 
Life Insurance Company Separate Account II (``Integrity Separate 
Account''), National Integrity Life Insurance Company (``National 
Integrity,'' together with Integrity, the ``Companies'') and National 
Integrity Life Insurance Company Separate Account II (``National 
Integrity Separate Account,'' together with Integrity Separate Account, 
the ``Separate Accounts'').

FILING DATE: The application was filed on July 23, 1997, and amended 
and restated on October 9, 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 this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on November 12, 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 requester'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, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, 515 West Market Street, Louisville, Kentucky 40202-3319.

FOR FURTHER INFORMATION CONTACT: Megan L. Dunphy, Attorney, or Mark 
Amorosi, 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 fee from the Public 
Reference Branch of the SEC, 450 Fifth Street, NW., Washington, DC 
20549 (tel. (202) 942-8090).

Applicants' Representations

    1. Integrity, a stock life insurance company, is authorized to sell 
life insurance and annuities in 45 states and the District of Columbia. 
Integrity is the sponsor and depositor of the Integrity Separate 
Account.
    2. National Integrity, a stock life insurance company, is 
authorized to sell life insurance and annuities in 8 states and the 
District of Columbia. National Integrity is the sponsor and depositor 
of the National Integrity Separate Account.
    3. Both Integrity and National Integrity are wholly owned 
subsidiaries of ARM Financial Group, Inc. (``ARM''). Approximately 53% 
of the outstanding shares of ARM's common stock is owned by private 
equity funds sponsored by Morgan Stanley, Dean Witter, Discover & Co.
    4. The Integrity Separate Account was established by Integrity Life 
Insurance Company pursuant to the insurance laws of Arizona, and was 
redomesticated under the insurance laws of Ohio, to fund variable unity 
contracts. Integrity Separate Account is registered under the 1940 Act 
as a unit investment trust.
    5. The National Integrity Separate Account was established by 
National Integrity Life Insurance Company pursuant to the insurance 
laws of New York, to fund variable annuity contracts (collectively with 
the variable annuity contracts referred to above, the ``Contracts''). 
National Integrity Separate Account is registered under the 1940 Act as 
a unit investment trust.
    6. Each Separate Account consists of ten investment divisions, each 
of which invests its assets in the shares of one of ten designated 
investment portfolios (each a ``Portfolio'' and collectively, the 
``Portfolios'') of The Legends Fund, Inc. (``Legends Fund''), a 
registered open-end management investment company. There are currently 
ten different Portfolios offered as investment options under the 
Contracts. The investment adviser for each Portfolios is ARM Capital 
Advisors, Inc.
    7. Due to higher relative expenses and/or the poor performance of 
the Current Portfolios, Applicants are proposing the following 
substitutions:

------------------------------------------------------------------------
           Current portfolio                   Substitute portfolio     
------------------------------------------------------------------------
1. Morgan Stanley Asian Growth (Asian    Morgan Stanley Asian Equity    
 Growth'').                               (``Asian Equity'').           
2. Morgan Stanley Worldwide High Income  Morgan Stanley Emerging Markets
 (``Worldwide High Income'').             Debt (``Emerging Markets'').  
3. Renaissance Balanced................  Janus Aspen Series Balanced    
                                          (``Janus Balanced'').         
4. Nicholas-Applegate Balanced.........  Janus Aspen Series Balanced    
                                          (``Janus Balanced'').         
5. Pinnacle Fixed Income (``Fixed        JPM Bond.                      
 Income'').                                                             
6. ARM Capital Advisors Money Market     Janus Aspen Series Money Market
 (``ARM Money Market'').                  (``Janus Money Market'').     
------------------------------------------------------------------------

    8. For each substitution, the Applicants have concluded that the 
investment objectives of the Substitute Portfolios are the same as or 
substantially similar to those of the Current Portfolios, and, 
therefore, sufficiently consistent so as to ensure that the investment 
objectives and expectations of the contractowners will be met.
    9. Applicants state that the Contracts give the Companies the right 
to add to or remove investment divisions, combine two or more 
divisions, or substitute one or more underlying mutual funds or 
portfolios for others in which one or more investment divisions are 
invested. These contractual provisions have also been disclosed in the 
prospectuses or statement of additional information relating to the 
Contracts.
    10. Applicants represent that the proposed Substitution will be 
effected by redeeming shares of the Current Portfolios on an in-kind 
basis at net

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asset value and using the proceeds to purchase shares of the Substitute 
Portfolios at net asset value on the same date. Net asset value will be 
calculated in accordance with Section 22(c) of the Act and Rule 22c-1 
thereunder. All contract values will remain unchanged and fully 
invested and the Substitution will not result in any change in the 
dollar value of any contractowner's investment in his or her contract.
    11. Applicants represent that each Substitute Portfolio's 
investment adviser will review the in-kind redemption to assure that 
the assets are suitable for the Substitute Portfolio. The assets will 
be valued based on the normal valuation procedures of the redeeming and 
purchasing Portfolios.
    12. Applicants state that after the Substitution is completed, 
there will be two investment divisions holding shares of the same 
Substitute Portfolio. Applicants intend to combine those two investment 
divisions into a single investment division by transferring shares from 
one investment division to the other. The transfer will be done at net 
asset value on the same date as the Substitution so that there is no 
financial impact to any contractowner.
    13. Applicants represent that a preliminary notice advising 
affected contractowners of the proposed Substitution was mailed on 
September 19, 1997. The notice described the reasons for engaging in 
the Substitution and referred contractowners to the prospectus 
supplement adding the Substitute Portfolios to the investment options 
underlying the Separate Accounts.
    14. Prospectus supplements for each of the Companies were filed 
with the Commission on September 12, 1997 and amended on September 22 
and 26, 1997. The prospectus supplements provide complete information 
on each new Portfolio including its investment objectives and policies, 
its investment adviser and applicable fees and expenses. The supplement 
states that contractowners can reallocate contract values from the 
Portfolios to be replaced and the proposed Substitute Portfolios to 
other Portfolios available under the Contract, without imposition of 
any transfer charge or limitation. No. such transfers from the date of 
initial notice, through a date thirty days following the Substitution 
will count against the number of free transfers permitted in a year. 
The supplement was mailed to contractowners of Integrity on October 1-
2, 1997, and is expected to be mailed to contractowners of National 
Integrity on October 31, 1997.
    15. Amendments to the prospectuses for the Contracts reflecting the 
proposed Substitution were filed with the Commission on September 5, 
1997. The Applicants represent that within five days after the 
Substitution, the companies will send to affected contractowners 
written confirmation that the Substitution has occurred, identifying 
the Portfolios that were substituted and disclosing the Substitute 
Portfolios.
    16. Applicants represent that the Companies will pay all expenses 
and transaction costs of the Substitution. Affected contractowners will 
not incur any fees or charges as a result of the Substitution, nor will 
the rights or obligations of the Companies under the Contracts be 
altered in any way. The proposed Substitution will not cause the fees 
and charges under the Contracts currently being paid by contractowners 
to be greater after the proposed Substitution than before the proposed 
Substitution.
    17. Applicants state that their request satisfies the requirements 
of Section 26(b) of the 1940 Act because: (i) The proposed 
Substitutions involve Portfolios with the same or substantially similar 
investment objectives; and (ii) after the Substitution, contractowners 
will be invested in Portfolios whose performance has been better on an 
historical basis or whose performance should be identical because the 
new Portfolios will have the same investment adviser and investment 
objectives, but whose net performance should be better as a result of 
lower Portfolio expenses due to lower management fees, lower total 
expenses, greater combined assets, and, therefore, greater economies of 
scale.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to Section 26(b) of the 
1940 Act approving the substitutions. Section 26(b) of the 1940 Act 
makes it 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 approves the 
Substitution. Section 26(b) of the 1940 Act also provides that the 
Commission will approve such Substitution if the evidence establishes 
that the Substitution is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act.
    2. Applicants assert that the purposes, terms, and conditions of 
the proposed Substitutions are consistent with the protection of 
investors and the purposes of Section 26(b) and do not entail any of 
the abuses that Section 26(b) is designed to prevent Applicants 
represent that a substitution is an appropriate solution to the 
unfavorable performance, on a relative basis, and/or higher relative 
expenses of the Portfolios to be eliminated. Applicants anticipate that 
the Substitute Portfolios will better serve contractowners interests 
because their performance has been significantly better than the 
performance of the Portfolios to be eliminated and/or their expenses 
have been or can be expected to be significantly lower, as applicable.
    3. Applicants represent that the Substitution will not result in 
the type of costly forced redemption that Section 26(b) was intended to 
guard against and is consistent with the protection of investors and 
the purposes fairly intended by the 1940 Act:

    1. The Substitute Portfolios have objectives, policies and 
restrictions the same as or substantially similar to the objectives, 
policies and restrictions the Portfolios being replaced so as to 
continue fulfilling contractowners' objectives and expectations.
    2. The costs of the Substitution will be borne by Integrity and 
National Integrity and will not be borne by contractowners. No 
charges will be assessed to effect the Substitution.
    3. The Substitution will, in all cases, be at net asset values 
of the respective shares, without the imposition of any transfer or 
similar charge and with no change in the amount of any 
contractowner's account value.
    4. The proposed Substitution will not cause the contract fees 
and charges currently being paid by existing contractowners to be 
greater after the proposed Substitution than before the proposed 
Substitution.
    5. The contractowners have been given notice of the Substitution 
and will have the opportunity to reallocate contract values among 
the available Portfolios without the imposition of any transfer 
charge or limitation, nor will any such transfers from the date of 
the initial notice, through a date 30 days following the 
Substitution count against the number of free transfers permitted in 
a year.
    6. Within five days after the Substitution, the Companies will 
send to contractowners written notice that the Substitution has 
occurred, identifying the Portfolios that were substituted and 
disclosing the Substitute Portfolios.
    7. The Substitution will in no way alter the insurance benefits 
to contractowners or the contractual obligations of the Companies.
    8. The Substitution will in no way alter the tax benefits to 
contractowners. Counsel for the Companies has advised that the 
Substitution will not give rise to any tax consequences to the 
contractowners.

    4. Section 17(a) (1) and (2) of the 1940 Act prohibits any 
affiliated person of a registered investment company, or an affiliated 
person of an affiliated person, from selling any security or other 
property to or purchasing any security

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or other property from such registered investment company.
    5. Applicants state that the redemptions and purchases in-kin 
involve the purchase of property from the Current Portfolios by the 
Separate Accounts, affiliated persons of those Portfolios, and the sale 
of property to the Substitute Portfolios by the Separate Accounts, 
which may be considered affiliates of the Substitute Portfolios. 
Similarly, by combining two investment divisions holding shares of the 
same Substitute Portfolios into a single investment division, the 
Companies, each being the depositor for and therefore each an 
affiliated person of the respective Separate Account, could be said to 
be transferring property of one investment division to another 
investment division. This transfer of property could be said to involve 
purchase and sale transactions between the investment divisions such 
that an affiliated person (the ``first investment division'') of an 
investment division (the ``second investment division'') could be said 
to be selling its shares of a Portfolio to the second investment 
division in return for units of the second investment division, which 
are immediately credited to the accounts of the contractowners 
participating in the first investment division. Conversely, the second 
investment division could be said to be purchasing from the first 
investment division shares of a Portfolio owned by the first investment 
division.
    6. Applicants request an order pursuant to Section 17(b) of the 
1940 Act exempting the in-kind redemptions and purchases and the merger 
of investment divisions from the provisions of Section 17(a). Section 
17(b) of the 1940 Act provides that the Commission may grant an order 
exempting a proposed transaction from Section 17(a) 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.
    7. Applicants assert that the terms of the in-kind redemptions and 
purchases are reasonable and fair and do not involve overreaching on 
the part of any person concerned and that the interests of 
contractowners will not be diluted. The in-kind redemptions and 
purchases will be done at values consistent with the policies of both 
the Current Portfolios and Substitute Portfolios. The investment 
advisers will review the asset transfers to assure that the assets meet 
the objectives and policies of the Substitute Portfolios and that they 
are valued under the appropriate valuation procedures of the Current 
and Substitute Portfolios.
    8. Applicants represent that the merger of investment divisions is 
intended to reduce administrative costs and thereby benefit 
contractowners with assets in those investment divisions. The purchase 
and sale transactions described in the application will be effected 
based on the net asset value of the shares held in the investment 
divisions and the value of the units of the investment division 
involved. Therefore, there will be no change in the value to any 
contractowner.

Conclusion

    Applicants assert that, for the reasons summarized above, the 
requested orders approving the Substitution and related transactions 
involving in-kind redemptions and the merger of certain investment 
divisions should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-28176 Filed 10-23-97; 8:45 am]
BILLING CODE 8010-01-M