[Federal Register Volume 63, Number 25 (Friday, February 6, 1998)]
[Notices]
[Pages 6243-6247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2936]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23016; File No. 812-10850]
Security Benefit Life Insurance Company, et al.; Notice of
Application
January 30, 1998.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for order pursuant to sections 17(b) and
26(b) of the Investment Company Act of 1940 (``1940 Act'').
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SUMMARY OF APPLICATION: Applicants seeks an order approving the
substitution of shares of the Prime Obligations Series of the Parkstone
Advantage Fund (the ``Trust'') for shares of Series C of SBL Fund.
Thereafter, Series C of SBL Fund, together with other series of the
Trust, SBL Fund and Liberty Variable Investment Trust will continue to
serve as the eligible funding vehicles for individual deferred variable
annuity contracts (``Contracts'') offered by Security Benefit Life
Insurance Company (the ``Company'') for which the Parkstone Variable
Annuity Account of Security Benefit Life Insurance Company serves as
the funding medium.
APPLICANTS: Security Benefit Life Insurance Company and Parkstone
Variable Annuity Account of Security Benefit Life Insurance Company
(the ``Account'').
FILING DATE: The application was filed on October 30, 1997 and amended
and restated on January 8, 1998.
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 regarding this application by writing to
the Secretary of the Commission 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. EST on February 24, 1998, and should be
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
[[Page 6244]]
notified of a hearing may request notification by writing to the
Secretary of the Commission.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission: 450
Fifth Street, N.W., Washington, D.C. 20549. Applicants: Security
Benefit Life Insurance Company, 700 S.W. Harrison Street, Topeka,
Kansas 66636-0001. Copies to Jeffrey S. Puretz, Esq., Dechert Price &
Rhoads, 1500 K Street, N.W., Suite 500, Washington, D.C. 20005.
FOR FURTHER INFORMATION CONTACT: Susan M. Olson, 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 may be obtained for a fee from
the Public Reference Branch of the Commission, 450 Fifth Street, N.W.
Washington, D.C. 20549 (202-942-8090).
Applicants' Representations
1. The Company is a mutual life insurance company organized under
the laws of the state of Kansas on February 22, 1892. The Company
became a mutual life insurance company under its current name on
January 2, 1950. The Company offers variable annuities and variable
life insurance and is authorized to do business in the District of
Columbia and all states except New York.
2. The Account is a segregated asset account of the Company. The
Account was established by the Company on February 22, 1993, pursaunt
to the provisions of the insurance laws of the state of Kansas. The
Account is a registered unit investment trust that is currently divided
into twelve sub-accounts or divisions (``sub-account'') that correspond
to five series of the Trust, including the Prime Obligations Series,
four series of the SBL Fund and three series of the Liberty Variable
Investment Trust (the ``Liberty Trust''). The Account serves as the
funding medium for the Contracts.
3. The Contracts are individual flexible purchase payment deferred
variable annuity contracts. The Contracts provide for the accumulation
of values on a variable basis, a fixed basis, or both, during the
accumulation period and provide several options for annuity payments on
a variable basis, a fixed basis, or both. The Contracts are eligible
for purchase as individual non-tax qualified retirement plans. The
Contracts are also eligible for purchase in connection with retirement
plans qualified under Section 401, 403(b), 408, or 457 of the Internal
Revenue Code of 1986. The Contracts provide for investment in, among
other options, the Prime Obligations Series sub-account of the Account,
which invests in the Prime Obligations Series of the Trust. Other
series of the Trust and certain series of the SBL Fund and the Liberty
Trust are offered as investment options under the Contracts.
4. The Trust filed its initial registration statement on July 6,
1993. The Trust is a Massachusetts business trust registered as a
series type open-end management investment company. The Trust currently
consists of 5 series (``Series''), including the Prime Obligations
Series (``Prime Obligations Series''). The investment management of the
Trust is First of America Investment Corporation (``FAIC''), a wholly-
owned subsidiary of FOA-Michigan, which is a wholly-owned subsidiary of
First of America Bank Corporation.
5. SBL Fund (the ``Fund'') is a Kansas corporation that was
organized on May 26, 1977, to serve as the investment vehicle for
certain of the Company's variable annuity and variable life separate
accounts. The Fund filed its initial registration statement in 1977.
Series C of the Fund (``Series C'') commenced operations in 1977. The
investment manager of the Fund is Security Management Company LLC, a
wholly owned subsidiary of the Company. Series C is currently available
under variable annuity and variable life insurance contracts offered by
the Company, including the Contracts.
6. The Company on its own behalf and on behalf of the Account
proposes to effect a substitution of shares of Series C for all shares
of the Prime Obligations Series attributable to the Contracts (the
``Substitution''). The Company believes that it is in the best
interests of owners of the Contracts (``Owners'') to substitute shares
of Series C for shares of the Prime Obligations Series. The Company
will pay all expenses and transaction costs of the Substitution,
including any applicable brokerage commissions. The Company states that
it has amended the prospectus for the Account in order to provide
Owners with information concerning the proposed Substitution.
7. The Company states that the overall investment objectives of the
Prime Obligations Series and Series C are sufficiently similar to be
appropriate for substitution. The Prime Obligations Series seeks
current income with liquidity and stability of principal. Series C
seeks a high level of current income consistent with preservation of
capital. Applicants state that the Prime Obligations Series and Series
C share the primary objective of seeking current income and both funds
are money market series managed in accordance with Rule 2a-7 under the
1940 Act. The Prime Obligations Series seeks to maintain a stable net
asset value of $1.00 per share. The Company states that although Series
C does not seek to maintain a stable net asset value, the funds have
similar investment objectives, and therefore Substitution is
appropriate because Series C is sufficiently similar to the Prime
Obligations Series.
8. Applicants state that the Prime Obligations Series has not
generated the interest that was anticipated at the time of its
creation. During the period of almost four years from the commencement
of operations of the Prime Obligations Series to June 30, 1997, net
assets have grown to $3,427,772. Net assets for Series C as of June 30,
1997 were $138,375,916. The following table sets forth net assets for
the Prime Obligation Series and Series C for the years ending December
31, 1994, December 31, 1995 and December 31, 1996. Net assets for each
fund as of June 30, 1997 are also included.
Net Assets
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Fund June 30, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
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Prime Obligations............................... $3,427,772 $3,579,203 $2,944,914 $2,204,277
Series C........................................ 138,375,916 128,672,113 105,435,680 118,668,327
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9. Applicants state that at all times since inception, the assets
of the Prime Obligations Series have been relatively small. Applicants
submit that the Prime Obligations Series has not generated a sufficient
level of assets to be a viable mutual fund portfolio. Applicants state
that the Prime Obligations Series has had relatively high expense
ratios and that the expenses for Series C are lower than the Prime
Obligations Series. Applicants state that Owners will not
[[Page 6245]]
be exposed to higher expenses following the Substitution of Series C
for the Prime Obligation Series and in fact will benefit from lower
expense ratios. The following table sets forth expense information for
the two funds.
Annual Total Expenses
[As a percentage of average net assets]
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Total Total expenses for fiscal year ended
expenses Dec. 31
for 6 --------------------------------------
Fund months
ended June 1996 1995 1994
30, 1997
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Prime Obligations Series.................................... *1.97 1.01 1.64 1.90
Series C.................................................... *.58 .58 .60 .61
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* Annualized.
10. Applicants state that the Company has also considered the
comparative investment performance of the Prime Obligations Series and
Series C. Applicants submit that the performance of Series C has been
similar or superior to the investment performance of the Prime
Obligations Series. The total returns for each fund for the six month
period ended June 30, 1997, and the fiscal year ended December 31,
1996, were as follows:
Total Return
[In percent]
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Six months Year ended
Fund ended June Dec. 31,
30, 1997 1996**
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Prime Obligations............................ *1.75 4.46
Series C..................................... *2.5 5.10
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* Not annualized.
** As set forth in the Trust's prospectus, dated April 30, 1997, and the
Fund's prospectus, dated October 15, 1997.
11. Applicants state that the Substitution will occur as soon as
practicable following the issuance of the order requested by
Applicants. Approximately thirty days before the Substitution, the
Company will send to Owners written notice of the Substitution (the
``Notice'') stating that shares of Prime Obligations Series will be
eliminated and that the shares of Series C of the Fund will be
substituted. The Company will refer in such mailing to the recent
mailing to Owners of the prospectus for the Account, which describes
the Substitution and the prospectuses for the underlying mutual funds.
The Company will also state that such prospectuses may be obtained at
no cost by calling the Company's toll free customer service line.
12. Applicants state that Owners will be advised in the Notice that
for a period of thirty days from the mailing of the Notice, Owners may
transfer all assets to any other available sub-account, without
limitation and without charge. The 30 day period from the mailing of
the Notice is herein referred to as the ``Free Transfer Period.'' The
prospectus for the Account states that the first 12 transfers in any
calendar year are without charge, and additional transfers are subject
to a charge of $25. The Notice will also provide that a transfer from
the Account during the Free Transfer Period will be without charge and
will not count as one of the 12 transfers that may be made without
charge. Following the Substitution, Owners will be afforded the same
contract rights with regard to amounts invested under the Contracts, as
they currently have.
13. The Company added to the Account seven new investment options,
including Series C, which became available December 1, 1997. New sub-
accounts have become investment options under the Contracts, including
one that invests in Series C. Immediately following the Substitution,
Applicants state that the Company will treat, as a single sub-account
of the Account, the sub-account invested in Prime Obligations Series
and the sub-account investing in Series C. The Company will reflect
this treatment in disclosure documents for the Account, the financial
statements of the Account, and the Form N-SAR annual report filed by
the Account.
14. Applicants state that the Company will redeem entirely for cash
all the shares of Prime Obligations Series it currently hold on behalf
of Prime Obligations Series sub-account of the Account at the close of
business on the date selected for the Substitution. All shares of the
Prime Obligations Series held by the Prime Obligations Series sub-
account of the Account are attributable to Owners. The Company on
behalf of the Prime Obligations Series sub-account of the Account will
simultaneously place a redemption request with the Prime Obligations
Series and a purchase order with Series C of the Fund so that the
purchase will be for the exact amount of the redemption proceeds.
Applicants note that the Prime Obligations Series of the Trust will
process the redemption request, and Series C of the Fund will process
the purchase order, at prices based on the current net asset value per
share next computed after receipt of the redemption request and
purchase order and, therefore, in a manner consistent with Rule 22c-1
under the 1940 Act. At all times, monies attributable to Owners
currently invested in the Prime Obligations Series will be fully
invested. The full net asset value of redeemed shares held by Prime
Obligations Series sub-account of the Account will be reflected in the
Owners' accumulation unit value following the Substitution. The Company
will assume all transaction costs and expenses relating to the
Substitution, including any direct or indirect costs of liquidating the
assets of the Prime Obligations Series so that the full net asset value
of redeemed shares of the Prime Obligations Series will be reflected in
the Owner's accumulation units following the Substitution.
[[Page 6246]]
Applicant's Legal Analysis and Conclusions
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 approves such substitution.'' Section 26(b) of the 1940 Act
also provides that the Commission shall issue an order approving such
substitution if the evidence establishes that the substitution is
consistent with the protection of investors and the purposes fairly
intended by the policies and provisions of the 1940 Act.
2. Applicants request an order pursuant to Section 26(b) of the
1940 Act approving the substitution of Series C for the Prime
Obligations Series.
3. Applicants submit 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. Applicants assert that the Substitution is an
appropriate solution to the limited Owner interest or investment in the
Prime Obligations Series, which is currently, and in the future may be
expected to be, of insufficient size to promote consistent investment
performance or to reduce operating expenses.
4. Applicants submit 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 for the following reasons:
(a) the Substitution is of shares of Series C, the objectives,
polices, and restrictions of which are sufficiently similar to the
objectives of the Prime Obligations Series;
(b) if an Owner so requests, during the Free Transfer Period,
assets will be reallocated for investment in any other available
sub-account of the Account. The Free Transfer Period is sufficient
time for Owners to consider the Substitution;
(c) the Substitution will, in all cases, be at net asset value
of there respective shares, without the imposition of any transfer
or similar charge;
(d) the Company has undertaken to assume the expenses and
transaction costs, including among others, legal and accounting fees
and any brokerage commissions, relating to the Substitution in a
manner that attributes all transaction costs to the Company;
(e) the Substitution in no way will alter the insurance benefits
to Owners or the contractual obligations of the Company;
(f) the Substitution in no way will later the tax benefits to
Owners and the Company has determined that the Substitution will not
give rise to any tax consequences to Owners;
(g) Owners may choose simply to withdraw amounts credited to
them following the Substitution under the conditions that currently
exists; and
(h) the Substitution is expected to confer certain modest
economic benefits to Owners by virtue of the enhanced asset size of
Series C.
Section 17(a)(1) 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 such
registered investment company. Section 17(a)(2) of the 1940 Act
prohibits such persons from purchasing any security or other property
form such registered investment company. Immediately following the
Substitution, the Company will treat as a single sub-account of the
Account, the sub-accounts investing in shares of Series C and the Prime
Obligations Series. Applicants state that the Company could be said to
be transferring until values between sub-accounts and that the transfer
of unit values could be construed as purchase and sale transactions
between sub-accounts that are affiliated persons. The sub-account
investing in Series C could be viewed as selling shares of Series C to
the sub-account investing in the Prime Obligations Series, in return
for units of that sub-account. Conversely, Applicants submit that it
could be said that the sub-account investing in the Prime Obligations
Series was purchasing shares of Series C. Applicants state that since
the sale and purchase transactions between sub-accounts could be
construed as transactions with in the scope of Sections 17(a)(1) and
17(a)(2) of the 1940 Act, the Substitution requires an exemption from
Section 17(a) of the 1940 Act, pursuant to Section 17(b) of the 1940
Act.
Section 17(b) of the 1940 Act provides that the Commission may
grant an order exempting transactions prohibited by Section 17(a) of
the 1940 Act upon application if evidence establishes that
(a) the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair and do
not involve over-reaching on the part of any person concerned;
(b) the proposed transaction is consistent with the investment
policy of each registered investment company concerned, as recited
in its registration statement and reports file under the 1940 Act;
and
(c) the proposed transaction is consistent with the general
purposes of the 1940 Act.
7. Applicants submit that the terms of the proposed transactions,
as described in the Application: (a) Are reasonable and fair, including
the consideration to be paid and received; (b) do not involve over-
reaching; (c) are consisting with the policies of Series C of the Fund
and the Prime Obligations Series of the Trust; and (d) are consistent
with the general purposes of the 1940 Act.
8. Applicants anticipate that existing Owners will benefit from the
Substitution. The transactions effecting the Substitution including the
redemption of the shares of the Prime Obligations Series and the
purchase of shares of Series C will be effected in conformity with
Section 22(c) of the 1940 Act and Rule 22c-1 thereunder. Owner
interests, economically, will not differ in any measurable way form
such interests immediately prior to the Substitution. Therefore,
Applicants assert that the consideration to be received and paid is
reasonable and fair. In addition, the Company believes, based on its
review of existing federal income tax laws and regulations and advice
of counsel, that the Substitution will not give rise to any taxable
income for Owners.
9. Applicants state that the Substitution is consistent with the
general purposes of the 1940 Act, as enunciated in the Findings and
Declaration of Policy in Section 1 of the 1940 Act. Applicants state
that the proposed transactions do not present any of the issues or
abuses that the 1940 Act is designed to prevent. Owners will be fully
informed of the terms of the Substitution through the Notice and will
have an opportunity to reallocate investments during the Free Transfer
Period.
10. Applicants further represent that the transactions that may be
deemed to be within the scope of Section 17(a) have been the subject of
Commission review in the context of reorganizations of separate
accounts from management separate accounts to unit investment separate
accounts and the transfer of assets to an underlying fund. Applicants
state that the terms and conditions of the transfer of assets entailed
in the Substitution are consistent with such precedent and the
precedent under Section 26(b).
11. Section 17(b) of the 1940 Act provides that the Commission may
grant an order exempting transactions prohibited by Section 17(a) or
the 1940 Act upon application, subject to certain conditions.
12. Applicants request an order of the Commission pursuant to
Section 17(b) granting exemptive relief from the provisions of Section
17(a) in connection with any aspects of the
[[Page 6247]]
Substitution that may be deemed prohibited by Section 17(a).
13. Applicants represent that the Substitution meets all of the
requirements of Section 17(b) of the 1940 Act and that an order should
be granted exempting the Substitution from the provisions of Section
17(a), to the extent requested.
Conclusion
For the reasons summarized above, Applicants submit that the
proposed substitution is consistent with the protection of investors
and the purposes fairly intended by the policy and the provisions for
the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2936 Filed 2-5-98; 8:45 am]
BILLING CODE 8010-01-M