[Federal Register Volume 63, Number 104 (Monday, June 1, 1998)]
[Notices]
[Pages 29764-29767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14403]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23204; File No. 812-10964]
Monarch Life Insurance Company, et al.
May 22, 1998.
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 (``1940 Act'').
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SUMMARY OF APPLICATION: Applicants seek an order approving the
substitution of units of certain series of Merrill Lynch Fund of
Stripped (``Zero'') U.S. Treasury Securities, Series B through G (``ML
Fund'') for units of certain series of the Oppenheimer Zero Coupon U.S.
Treasury Trust, Series A through F (``Oppenheimer Trust'') held by
Variable Account B to fund certain life insurance policies
(``Policies'') issued by Monarch Life.
[[Page 29765]]
APPLICANTS: Monarch Life Insurance Company (``Monarch Life'') and
Variable Account B of Monarch Life Insurance Company (``Variable
Account B'').
FILING DATE: The Application was filed on January 13, 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 on this application by writing to the
Secretary of the SEC 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 June 16, 1998, and should be accompanied by
proof of service on 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 may request notification of a hearing by
writing to the Secretary of the SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549. Applicants, c/o Raymond A. O'Hara
III, Esq., Blazzard, Grodd & Hasenauer, P.C., P.O. Box 5108, Westport,
Connecticut, 06881. Copies to John S. Coulton, Esq., Monarch Life
Insurance Company, One Monarch Place, Springfield, Massachusetts 01133
and Katherine P. Feld, Esq., Oppenheimer Funds, Inc., Two World Trade
Center, New York, New York 10048-0203.
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
Public Reference Branch of the SEC, 450 Fifth Street, NW., Washington,
DC (tel. (202) 942-8090).
Applicants' Representations
Background
1. Monarch Life was incorporated in 1901 and is domiciled in
Massachusetts. Monarch Life is a wholly-owned subsidiary of Regal
Reinsurance Company (``Regal Re''), formerly Monarch Capital
Corporation (``Monarch Capital''). On September 23, 1992, pursuant to a
reorganization under Chapter 11 of the Federal Bankruptcy Code, Monarch
Capital was reorganized and emerged from bankruptcy as a Massachusetts
life insurer, Regal Re. Regal Re is owned by Monarch Capital's pre-
bankruptcy secured and unsecured creditors.
2. On June 9, 1994, the Insurance Commissioner of the Commonwealth
of Massachusetts (``Commissioner'') was appointed receiver
(``Receiver'') of Monarch Life in a rehabilitation proceeding pending
before the Supreme Judicial Court for Suffolk County, Massachusetts
(``Court'').
3. A term sheet dated July 19, 1994 (``Term Sheet'') among the
Commissioner (in her capacity as Commissioner and Receiver) and certain
Regal Re shareholders and noteholders and holders of Monarch Life's
surplus notes (representing approximately 85% of both the total
outstanding Regal Re notes and common stock) (``Holders'') was approved
by the Court on September 1, 1994. Pursuant to the Term Sheet, the
Holders transferred their notes and stock into voting trusts for which
the Commissioner is the sole trustee, which effectively vests control
of Regal Re and Monarch Life in the Commissioner.
4. Insurance departments of various jurisdictions have either
suspended the certificate of authority of Monarch Life, ordered Monarch
Life to cease writing new business, or have requested a voluntary
suspension of sales by Monarch Life. In addition, Monarch Life's
certificate of authority has been revoked by the insurance departments
of the states of Louisiana on May 13, 1994, Michigan on February 27,
1994, Missouri on November 10, 1994 and Wyoming on June 25, 1992.
5. Monarch Life currently limits its business to maintaining its
existing blocks of disability income insurance, variable life
insurance, and annuity businesses. Monarch Life ceased issuing new
variable life policies and new annuity contracts effective May 1, 1992,
and new disability income insurance policies effective June 15, 1993.
6. Variable Account B was established under Massachusetts law on
August 9, 1984, for the purpose of funding the Policies which invest in
the Oppenheimer Trust. Variable Account B is registered under the 1940
Act as a unit investment trust and security interests under the
Policies have been registered under the Securities Act of 1933 (``1933
Act'') on Form N-4 (File Nos. 33-18759, 2-94659 and 33-464).
7. Units of the Oppenheimer Trust are currently offered solely to
Variable Account B to fund the benefits under the Policies. Series A
through F of the Oppenheimer Trust were created under New York Law by a
trust indenture among Oppenheimer Funds Distributor, Inc.
(``Oppenheimer''), The Chase Manhattan Bank, N.A. (``Chase'' or
``Trustee'') and Standard & Poor's Corporation (``Evaluator''). On each
date of deposit for each of Series A through F, Oppenheimer deposited
the underlying obligations with the Trustee at prices equal to the
valuation of those obligations on the offering side of the market as
determined by the Evaluator, and the Trustee delivered to Oppenheimer
units of interest representing the entire ownership of each series of
the Oppenheimer Trust. Variable Account B, as the holder of the units,
has the right to have its units redeemed in cash or in kind.
8. The investment objective of the Oppenheimer Trust is to provide
safety of capital and income by offering units in fixed portfolios
consisting primarily of bearer debt obligations issued by the United
States that have been stripped of their unmatured interest coupons,
interest coupons that have been stripped from bearer debt obligations
issued by the United States, and receipts and certificates for such
stripped debt obligations and stripped coupons (collectively,
``Stripped Treasury Securities''). The Oppenheimer Trust consists of
Series A, B, C, D and E (each of which has two separate series
outstanding) and Series F (one separate series), each separate series
containing Stripped Treasury Securities with a fixed maturity
corresponding to the designation of the series. The portfolio of each
series consists of one issue of Stripped Treasury Securities, with a
fixed maturity date, that has been stripped of its interest coupons or
underlying bond and as such was purchased at a deep discount, and an
interest-bearing Treasury security generally with the same maturity
date as the Stripped Treasury Security, deposited in order to provide
income with which to pay the expenses of the Series.
9. Oppenheimer receives no fee from the series for its services as
such. On units sold to Variable Account B, Monarch Life initially pays
a transaction charge to Oppenheimer out of Monarch Life's general
account assets. Monarch Life is reimbursed for its payment of the
transaction charge by its assessment of a daily asset charge which is
deducted form the assets of investment divisions of Variable Account B
investing in the Oppenheimer Trust. The amount of this charge is
currently equivalent to .34% annually. This amount may be increased in
the future but in no event will it exceed an effective annual rate of
.50%.
10. Each series of the ML Fund consists of a number of separate
unit investment trust (``trust(s)'') created under New York law by one
trust
[[Page 29766]]
indenture among Merrill Lynch, Pierce, Fenner & Smith Incorporated
(``Merrill Lynch''), Chase and Standard & Poor's J.J. Kenny
(``Kenny''). On each date of deposit for each trust, Merrill Lynch, as
the sponsor, deposited underlying securities with Chase, the trustee,
at prices equal to the valuation of those securities on the offer side
of the market as determined by Kenney, the evaluator, and Chase
delivered to Merrill Lynch units of interest representing the entire
ownership of that trust in the series. The holder of the units has the
right to have its units redeemed in cash or in kind.
11. The investment objective of each series of the ML Fund is to
provide safety of capital and a high yield to maturity through
investment in fixed portfolios consisting primarily of Stripped
Treasury Securities. Each series contains Stripped Treasury Securities
with a fixed maturity corresponding to the designation of the series.
Each series also contains one issue of interest bearing Treasury
Securities with a similar maturity to provide income to pay the
expenses of the series.
12. Merrill Lynch receives no fee from the series for its services
as sponsor. On units that are proposed to be sold to Variable Account
B, Monarch Life will pay transaction charges to Merrill Lynch out of
Monarch Life's general account assets as follows:
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Transaction
Transaction charge as
Remaining years to maturity of stripped charge as percentage
treasury security percentage of net
of offering amount
price invested
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Less than 2 years............................. 0.25 0.251
At least 2 years but less than 3 years........ 0.50 0.503
At least 3 years but less than 5 years........ 0.75 0.756
At least 5 years but less than 8 years........ 1.00 1.010
At least 8 years but less than 13 years....... 1.50 1.523
At least 13 years but less than 81 years...... 1.75 1.781
18 years or more.............................. 2.00 2.041
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This transaction charge is identical to the transaction charge
which Monarch Life currently pays to Oppenheimer in connection with the
Oppenheimer Trust. Monarch Life will be reimbursed for its payment of
the transaction charge by its assessment of a daily asset charge which
will be deducted from the assets of the investment divisions of
Variable Account B investing in the ML Fund. The amount of this charge
will be equivalent initially to .34% annually. This amount may be
increased in the future but in no event will it exceed an effective
annual rate of 0.50%.
The Proposed Substitution
13. Oppenheimer, as sponsor of the Oppenheimer Trust, has informed
Monarch Life that it intends to terminate its sponsorship of the
Oppenheimer Trust. Since the inception of the Oppenheimer Trust,
Oppenheimer has maintained a secondary market in units of the Trust at
the offering price which has generally resulted in a loss to
Oppenheimer (apart from any gains realized from subsequent market
improvements).
14. Applicants, faced with having to find a suitable replacement
for the Oppenheimer Trust, determined that the ML Fund is a suitable
and appropriate underlying investment vehicle for Policy owners
currently invested in the Oppenheimer Trust for the following reasons.
The ML Fund, like the Oppenheimer Trust, is comprised of series of unit
investment trusts. The series of the ML Fund have the same investment
objective as the series of the Oppenheimer Trust. Both the ML Fund and
the Oppenheimer Trust invest primarily in Stripped Treasury Securities.
The proposed transaction charge arrangement with respect to the ML Fund
is identical to the arrangement that Monarch Life currently has with
respect to the Oppenheimer Trust, namely, that Monarch Life pays the
transaction charge to the Fund sponsor which it then recoups through an
asset charge to Variable Account B. The Variable Account B asset charge
with respect to the ML Fund investment will be identical to that with
respect to the Oppenheimer Trust. Other fees and expenses of the ML
Fund are either identical to or somewhat lower than those of the
Oppenheimer Trust. Also, Monarch Life has an existing relationship with
the Merrill Lynch organization. Certain separate accounts of Monarch
Life currently are invested in the shares of investment companies
advised by a subsidiary of Merrill Lynch and an affiliate of that
subsidiary provides third party administrative services to Monarch Life
in connection with Monarch Life's variable life insurance operations.
15. Applicants propose that Monarch Life substitute units of the
series of the ML Fund (each a ``substitute series'') for units of the
series of the Oppenheimer Trust (each a ``removed series'') as follows:
(a) units of Series G-2000 Trust for units of Series A-2000 Series; (b)
units of Series B-2005 Trust for units of Series A-2005 Series; (c)
units of Series C-2006 Trust for units of Series B-2006 Series; (d)
units of Series D-2007 Trust for units of Series C-2007 Series; (e)
units of Series E-1998 Trust for units of Series D-1998 Series; (f)
units of Series E-2008 Trust for units of Series D-2008 Series; (g)
units of Series F-1999 Trust for units of Series E-1999 Series; (h)
units of Series F-2009 Trust for units of Series E-2009 Series; and (i)
units of Series G-2010 Trust for units of Series F-2010 Series.
16. Applicants propose that Monarch Life redeem units of each
removed series in cash and purchase with the proceeds units of the
substitute series identified above. The proposed substitution will not
change the number of subaccounts in Variable Account B.
17. Applicants represent that the proposed substitutions will take
place at relative net asset value with no change in the amount of any
Policy owner's Policy value or in the dollar value of his or her
investment in Variable Account B. Policy owners will not incur any fees
or charges as a result of the proposed substitutions nor will their
rights under the Policies be altered in any way. All expenses incurred
in connection with the proposed substitutions, including legal,
accounting and other fees and expenses, will be paid by Monarch Life.
In addition, the proposed substitutions will not impose any tax
liability on Policy owners. The proposed substitutions will not cause
the Policy fees and charges currently being paid by existing Policy
owners to be greater after the proposed substitutions than before the
proposed substitutions.
18. Applicants state that Monarch Life will supplement the
prospectus for
[[Page 29767]]
Variable Account B to reflect the proposed substitution. And, in
addition to the prospectus supplements distributed to owners of
Policies, within 5 days after the proposed substitutions, all owners
who were affected by a substitution will be sent a written notice
informing them that the substitutions were carried out. Monarch Life
will include in such mailing the supplement to the prospectus of
Variable Account B, which describes the substitutions.
19. Monarch Life and certain of its separate accounts (including
Variable Account B) (collectively, ``Accounts'') have previously
received no-action assurances from the staff of the Commission that the
staff would not recommend that the Commission take any enforcement
action against Monarch Life or the Accounts if post-effective
amendments to registration statements are not filed under the 1933 Act
And the 1970 Act, and updated prospectuses for the Accounts are not
distributed to owners of existing variable contracts issued through the
Accounts provided that certain conditions are met (Monarch Life
Insurance Company, pub. avail. June 9, 1992, the ``June 9th No-Action
Letter''). The conditions of the June 9th No-Action Letter include
providing various documents to the variable Policy owners including,
but not limited to, periodic reports, prospectuses, proxy statements
and related voting instructions pertaining to the relevant underlying
mutual funds. In accordance with the terms of the June 9th No-Action
Letter, Monarch Life does not update the Variable Account B prospectus
on an annual basis as would otherwise be required by the 1933 Act and
the 1940 Act. Therefore, Policy owners do not have the benefit of
receiving an updated Variable Account B prospectus which would provide
them with certain information concerning the ML fund. In light of this
fact, Applicants undertake to provide the Policy owners of Variable
Account B with the same disclosure concerning the ML Fund as such
owners would receive if Monarch Life updated and mailed its Variable
Account B prospectus to owners. Such information includes the fees and
expenses of the ML Fund, and a description of the investment objectives
of each of the series of the ML Fund.
20. Applicants state that following the substitutions, Policy
owners will be afforded the same policy rights, including surrender and
other transfer rights with regard to amounts invested under the
Policies, as they currently have. (Monarch Life currently imposes no
restrictions or fees on the ability of Policy owners to make transfers
nor does it intend to impose any after the proposed substitutions are
effected.)
Applicants' Legal Analysis
21. 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.'' 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 possibly incurring either a
loss of the sales load deducted from initial purchase payments, an
additional sales load upon reinvestment of the redemption proceeds, or
both. Section 26(b) affords this protection to investors by preventing
a depositor or trustee of a unit investment trust holding the shares of
one issuer from substituting for those shares the shares of another
issuer, unless the Commission approves that substitution.
22. Applicants maintain 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.
23. Applicants state that the Policies provide to Monarch Life the
right, subject to Commission approval, to effect a substitution of the
kind Applicants propose. The prospectus for the Policies contains
disclosure of this right.
24. Applicants anticipate that, after the proposed substitutions,
the substitute series will provide Policy owners with comparable
investment results to those achieved now by the Oppenheimer Trust.
Applicants submit that the investment objective of each of the
substitute series is identical to the investment objective of the
removed series that it would replace. Each of the substitute series is
substantially larger than the removed series that it would replace.
Each of the substitute funds is a suitable and appropriate investment
vehicle for Policy owners.
25. Applicants generally submit that the proposed substitutions
meet the standards that the Commission and its staff have applied to
substitutions that have been approved in the past in that:
a. The substitution will be at net asset value of the respective
units, without the imposition of any transfer or similar charge;
b. Monarch Life will assume the expenses and transaction costs,
including among others, legal and accounting fees and any brokerage
commissions, relating to the substitution;
c. The substitution will not alter the insurance benefits to Policy
owners or the contractual obligations of Monarch Life;
d. The substitution will not alter tax benefits to Policy owners;
e. Policy owners may choose simply to withdraw amounts credited to
them following the substitution under the conditions that currently
exist without incurring any charges; and
f. The substitution is expected to confer certain economic benefits
to Policy owners by virtue of the enhanced asset size of the substitute
series.
Conclusion
Applicants submit, for the reasons summarized above, that the
proposed substitution is 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. 98-14403 Filed 5-29-98; 8:45 am]
BILLING CODE 8010-01-M