[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]                              
------------------------------------------------------------------------
                                                Six months    Year ended
                     Fund                       ended June     Dec. 31, 
                                                 30, 1997       1996**  
------------------------------------------------------------------------
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