[Federal Register Volume 63, Number 113 (Friday, June 12, 1998)]
[Notices]
[Pages 32268-32271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15632]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23241; File No. 812-10948]


PFL Endeavor Target Account, et al.; Notice of Application

June 5, 1998.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``1940 Act'').

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SUMMARY OF APPLICATION: The Applicants seek an order pursuant to 
Section 6(c) of the 1940 Act exempting the Applicants and future 
separate

[[Page 32269]]

accounts of PFL or its affiliated insurance companies that support 
materially similar subaccounts from Section 12(d)(3) of the 1940 Act to 
the extent necessary to permit the Target 10 Subaccount to invest up to 
10% and the Target 5 Subaccount to invest up to 20% of their (or, if 
there is more than one Portfolio thereunder, of the applicable 
Portfolio's) respective total assets in securities of issuers that 
derive more than 15% of their gross revenues in their most recent 
fiscal year from securities related activities.

APPLICANTS: PFL Endeavor Target Account (the ``Target Account'') and 
PFL Life Insurance Company (``PFL'') (together, the ``Applicants'').

FILING DATE: The application was filed on January 2, 1998, and amended 
and restated on April 1, 1998, and June 5, 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, 
in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on June 30, 1998, 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, N.W., Washington, D.C. 
20549. Applicant, c/o PFL Life Insurance Company, 4333 Edgewood Road, 
N.E., Cedar Rapids, Iowa 53499.

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, N.W., Washington, D.C. 
20549 (tel. (202) 942-8090).

Applicant's Representations

    1. The Target Account is a separate account of PFL and is 
registered with the Commission as an open-end management investment 
company. The Target Account is currently divided into two non-
diversified subaccounts, the DJIA Target 10 Subaccount and the DJIA 
Target 5 Subaccount (each a ``Subaccount'' and together, the 
``Subaccounts''). Additional subaccounts may be established in the 
future at the discretion of PFL.
    2. PFL, a stock life insurance company, is incorporated under the 
name NN Investors Life Insurance Company, Inc., pursuant to Iowa law. 
PFL is principally engaged in the sale of life insurance and annuity 
policies, and is licensed in the District of Columbia, Guam, and in all 
states except New York. PFL is a wholly-owned indirect subsidiary of 
AEGON, USA, Inc., which is indirectly owned by AEGON n.v. of the 
Netherlands.
    3. The investments and administration of each Subaccount are under 
the direction of the Target Account's Board of Managers. Endeavor 
Investment Advisers (the ``Manager'') performs administerial and 
managerial functions for the Target Account. First Trust Advisers L.P. 
(the ``Adviser''), the Target Account's investment adviser, is 
responsible for selecting the investments of each Subaccount consistent 
with the investment objectives and policies of that Subaccount, and 
will conduct securities trading for the Subaccounts.
    4. The DJIA Target 10 Subaccount will invest approximately 10% of 
its (or, if there is more than one Portfolio thereunder, of the 
applicable Portfolio's) total assets in the common stock of each of the 
ten companies in the Dow Jones Industrial Average (the ``DJIA'') that 
have the highest dividend yield as of each specified Stock Selection 
Date.
    5. The DJIA Target 5 Subaccount will invest approximately 20% of 
its (or, if there is more than one Portfolio thereunder, of the 
applicable Portfolio's) total assets in the common stock of each of the 
five companies with the lowest per share stock price of the ten 
companies in the DJIA that have the highest dividend yield as of each 
specified Stock Selection Date.
    6. The DJIA comprises thirty stocks chosen by the editors of The 
Wall Street Journal. The DJIA is the property of the Dow Jones & 
Company, Inc., which is not affiliated with any Subaccount or PFL and 
does not participate in any way in the creation of any Subaccount or 
the selection of its stocks.
    7. Applicants state that the objective of each Subaccount is to 
provide an above-average total return through a combination of dividend 
income and capital appreciation. On a Stock Selection Date specified in 
the prospectus, each Subaccount will invest, in substantially equal 
amounts, in the common stock of the companies meeting each Subaccount's 
investment criteria (as held in a Subaccount, such common stock is 
referred to as the ``Common Shares''). Each Subaccount may have 
different investment portfolios (each a ``Portfolio'') running 
simultaneously for different 12-month periods. For example, within the 
DJIA Target 10 Subaccount there may be more than one Portfolio, each 
with a different Stock Selection Date. A percentage relationship among 
the number of Common Shares in a Portfolio will be established as of 
that Stock Selection Date. When funds are deposited into or withdrawn 
from the Portfolio during the year, Common Shares will be purchased or 
sold, as appropriate, to duplicate, as nearly as practicable, the 
percentage relationship of the number of Common Shares established at 
the initial purchase. Applicants state that the percentage relationship 
among the number of Common Shares in the Portfolio therefore should 
remain stable (until the next Stock Selection Date).
    8. Applicants state that, as of each Annual Stock Selection Date 
(i.e., the last Business Day of the 12-month period following each 
Stock Selection Date), a new percentage relationship will be 
established among the number of Common Shares for each Portfolio on 
such date. Common Shares may be sold or new equity securities bought so 
that the Portfolio is equally invested in the common stock of each 
company meeting the Subaccount's investment criteria. Thus, the 
Portfolio may or may not hold equity securities of the same companies 
as the previous year. Purchases or sales of Common Shares during the 
year will duplicate, as nearly as practicable, the percentage 
relationship among the number of Common Shares in the Portfolios as of 
the Annual Stock Selection Date.
    9. Section 817(h) of the Internal Revenue Code of 1986, as amended 
(the ``Code''), provides that in order for a variable contract which is 
based on a segregated asset account to qualify as an annuity contract 
under the Code, the investments made by such account must be 
``adequately diversified'' in accordance with Treasury regulations. The 
Treasury regulations issued under Section 817(h) (Treas. Reg. 
Sec. 1.817-5) apply a diversification requirement to each of the 
Subaccounts and any Portfolios thereunder (``Section 817(h) 
diversification requirements''). To qualify as ``adequately 
diversified,'' each Subaccount and any Portfolio thereunder must have: 
(i) No more than 55% of the value of its total assets represented by 
any one investment; (ii) no more than 70% of the value of its total 
assets represented by any two

[[Page 32270]]

investments; (iii) no more than 80% of the value of its total assets 
represented by any three investments; and (iv) no more than 90% of the 
value of its total assets represented by any four investments.
    10. Applicants state that the Target Account, through the 
Subaccounts and any Portfolios thereunder, intends to comply with the 
Section 817(h) diversification requirements. PFL has entered into an 
agreement with the Manager, who in turn, has entered into a contract 
with the Adviser that requires the Subaccounts and any Portfolios 
thereunder to be operated in compliance with the Treasury regulations. 
Therefore, the Adviser may depart from a Subaccount's or Portfolio's 
investment strategy, if necessary, in order to meet these Section 
817(h) diversification requirements.
    11. Applicants represent that, except in order to meet Section 
817(h) diversification requirements, the Common Shares purchased for 
each Subaccount and any Portfolios thereunder will be chosen solely 
according to the formula described in the application and summarized in 
this notice, and will not be based on the research opinions or buy or 
sell recommendations of the Adviser. During each year, the Adviser will 
invest premiums received in additional Common Shares or arrange sales 
of Common Shares (e.g., to meet redemption or transfer requests) so 
that the original proportionate relationship among the number of shares 
of each stock in the Portfolio established at the beginning of the 
relevant 12-month period is maintained, to the extent practicable. The 
Adviser has no discretion as to which Common Shares are purchased. 
Securities purchased for each of the Subaccounts and any Portfolios 
thereunder may include securities of issuers in the DJIA that derived 
more than fifteen percent of their gross revenues in their most recent 
fiscal year from securities related activities.

Applicants' Legal Analysis

    1. Section 12(d)(3) of the 1940 Act, with limited exceptions, 
prohibits an investment company from acquiring any security issued by 
any person who is a broker, dealer, underwriter or investment adviser. 
Rule 12d3-1 under the 1940 Act exempts purchases by an investment 
company of securities of an issuer (except its own investment adviser, 
promoter or principal underwriter or their affiliates) that derived 
more than fifteen percent of its gross revenues in its most recent 
fiscal year from securities related activities, provided that, among 
other things, immediately after such acquisition, the acquiring company 
has invested not more than five percent of the value of its total 
assets in securities of the issuer.
    2. Section 6(c) of the 1940 Act provides that the Commission may 
exempt any person, transaction, or class of transactions from any 
provisions of the 1940 Act or any rule thereunder, if and to the extent 
that the exemption is necessary or appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    3. Applicants request that the Commission exempt the Target Account 
from the provisions of Section 12(d)(3) in order to permit the DJIA 
Target 10 Subaccount (and any Portfolio thereunder) to acquire 
securities of an issuer that derives more than 15% of its gross 
revenues from securities related activities, provided that (i) those 
securities are included in the DJIA as of the applicable specified 
Stock Selection Date, (ii) they represent one of the ten companies in 
the DJIA that have the highest dividend yield as of the applicable 
specified Stock Selection Date, and (iii) as of the first business day 
after the applicable specified Stock Selection Date, the value of the 
Common Shares of each securities related issuer represents 
approximately 10%, but in no event more than 10.5%, of the value of the 
DJIA Target 10 Subaccount's (or, if there is more than one Portfolio 
thereunder, of the applicable Portfolio's) total. Applicants state that 
the use of the term ``approximately'' is intended to allow for such 
deviation from a precise 10% as to permit the purchase of round lots of 
50 to 100 shares of stock. The 10.5% standard will be based on the 
prices of the Common Shares as of the close of business on the Stock 
Selection Date.
    4. The Applicants further request that the Commission exempt the 
Target Account from the provisions of Section 12(d)(3) in order to 
permit the DJIA Target 5 Subaccount (and any Portfolio thereunder) to 
acquire securities of an issuer that derives more than 15% of its gross 
revenues from securities related activities, provided that (i) those 
securities are included in the DJIA as of the applicable specified 
Stock Selection Date, (ii) they represent one of the five companies 
with the lowest dollar per share stock price of the ten companies in 
the DJIA that have the highest dividend yield as of the applicable 
specified Stock Selection Date, and (iii) as of the first business day 
after the applicable specified Stock Selection Date, the value of the 
Common Shares of each securities related issuer represents 
approximately 20%, but in no event more than 20.5%, of the value of the 
DJIA Target 5 Subaccount's (of, if there is more than one Portfolio 
thereunder, of the applicable Portfolio's) total assets. Applicants 
state that the use of the term ``approximately'' is intended to allow 
for such deviation from a precise 20% as to permit the purchase of 
round lots of 50 or 100 shares of stock. The 20.5% standard will be 
based on the prices of the Common Shares as of the close of business on 
the Stock Selection Date.
    5. The Target Account and each Subaccount and any Portfolio 
thereunder undertake to comply with all of the requirements of Rule 
12d3-1, except the condition prohibiting an investment company from 
investing more than 5% of the value of its total assets in securities 
of a securities related issuer.
    6. Applicants represent that Section 12(d)(3) was intended: (i) to 
prevent investment companies from exposing their assets to the 
entrepreneurial risks of securities related businesses; (ii) to prevent 
potential conflicts of interest; (iii) to eliminate certain reciprocal 
practices between investment companies and securities related 
businesses; and (iv) to ensure that investment companies maintain 
adequate liquidity in their portfolios.
    7. A potential conflict could occur if an investment company 
purchased securities or other interests in a broker-dealer to reward 
that broker-dealer for selling fund shares, rather than solely on 
investment merit. Applicants maintain that this concern does not arise 
in this situation since neither the Adviser nor any Subaccount has 
discretion in choosing the Common Shares or amount purchased. The stock 
must first be included in the DJIA (which is unaffiliated with the 
Applicants, and Subaccount, the Adviser, the Manager or PFL). In 
addition, the security must also qualify as one of the ten companies in 
the DJIA that has the highest dividend yield as of the applicable 
specified Stock Selection Date, and with respect to the DJIA Target 5 
Subaccount, the security must also qualify as one of the five companies 
with the lowest per share stock price of the ten companies in the DJIA 
that have the highest dividend yield as of the applicable specified 
Stock Selection Date.
    8. Applicants state that prior Section 12(d)(3) relief has been 
granted to applicants which were unit investment trusts with no 
discretion to choose the portfolio securities or the amount purchased, 
but when discretion to sell

[[Page 32271]]

portfolio securities to the extent necessary to meet redemptions. The 
Target Account, however, is a managed investment company issuing 
variable annuities and, as such, will continually accept new premiums 
which it must continue to invest; it is not a unit investment trust 
with a fixed number of units outstanding. The Adviser is obligated to 
follow the investment formula described in the application and 
summarized in this notice as nearly as practicable, and therefore, for 
new investments during a year the 10% ratio for the DJIA Target 10 
Subaccount and any Portfolios thereunder and the 20% ratio for the DJIA 
Target 5 Subaccount and any Portfolios thereunder will be based on the 
ratios of the number of shares established at the beginning of each 
year rather than the value of the stocks. Securities for each 
Subaccount and any Portfolio thereunder will be chosen with respect to 
specified formulas for each Subaccount or Portfolio and not in the 
Adviser's discretion.
    9. The Adviser is permitted to deviate from the respective formula 
for a Subaccount or Portfolio where circumstances are such that the 
investment of a particular Subaccount or Portfolio would fail to meet 
the 817(h) diversification requirements and would thus cause the 
annuity contracts to fail to qualify as an annuity contract under the 
Code. Applicants maintain that, in such a situation, the Adviser must 
be permitted to deviate from a Subaccount's or Portfolio's investment 
strategy, but only in order to meet the 817(h) diversification 
requirements and then only to the extent necessary to do so. Applicants 
state that this limited discretion does not raise the concerns that 
Section 12(d)(3) is designed to prevent.
    10. Applicants represent that the liquidity of a Subaccount's 
portfolio is not a concern here since the shares of common stock 
selected are each included in the DJIA, listed on the New York Stock 
Exchange and are among the most actively traded securities in the 
United States.
    11. Applicants also represent that the effect of a Subaccount's 
purchase on the stock of parents of broker-dealers would be de minimis. 
The common stocks of securities related issuers represented in the DJIA 
are widely held and have active markets, and potential purchases by a 
Subaccount would represent an insignificant amount of the outstanding 
common stock and the trading volume of any of those issuers.
    12. Applicants state that a potential conflict of interest could 
occur if broker-dealers are influenced to recommend certain investment 
company funds which invest in the stock of the broker-dealer or any of 
its affiliates. Because of the large market capitalization of the DJIA 
issuers and the small portion of these issuers' common stock and 
trading volume that would be purchased by a Subaccount, however, 
Applicants find that it is extremely unlikely that any advice offered 
by a broker-dealer to a customer as to which investment company to 
invest in would be influenced by the possibility that the Target 
Account would be invested in the broker-dealer or parent thereof.
    13. Finally, Applicants state that another potential conflict of 
interest could occur if an investment company directed brokerage to an 
affiliated broker-dealer in which the company has invested to enhance 
the broker-dealer's profitability or to assist it during financial 
difficulty, even though that broker-dealer may not offer the best price 
and execution. To preclude this type of conflict, Applicants and each 
Subaccount agree, as a condition of the application, that no company 
held in a Subaccount portfolio, nor any affiliate of such company, will 
act as broker for any Subaccount in the purchase or sale of any 
security for its portfolio.
    14. Applicants seek relief not only with respect to the Target 
Account and the Subaccounts described in the application, but also with 
respect to other separate accounts of PFL or its affiliated insurance 
companies hereinafter created that support materially similar 
subaccounts (``Future Accounts''). Applicants represent that the terms 
of relief requested with respect to Future Accounts are consistent with 
the standards set forth in Section 6(c) of the 1940 Act.

Applicants' Conditions

    The Applicants agree to the following conditions:
    1. The Common Shares are included in the DJIA as of the applicable 
specified Stock Selection Date;
    2. The Common Shares represent one of the ten companies in the DJIA 
that have the highest dividend yield as of the applicable specified 
Stock Selection Date;
    3. With respect to the DJIA Target 5 Subaccount, the Common Shares 
represent one of the five companies with the lowest dollar per share 
stock price of the ten companies in the DJIA that have the highest 
dividend yield as of the applicable specified Stock Selection Date;
    4. With respect to the DJIA Target 10 Subaccount and any Portfolios 
thereunder, at the beginning of each year, the value of the Common 
Shares of each securities related issuer represents approximately 10% 
of the value of the DJIA Target 10 Subaccount's (or, if there is more 
than one Portfolio thereunder, of the applicable Portfolio's) total 
assets, but in no event more than 10.5% of the value of the DJIA Target 
10 Subaccount's (or, if there is more than one Portfolio thereunder, of 
the applicable Portfolio's) total assets on the first business day 
after each Stock Selection Date;
    5. With respect to the DJIA Target 5 Subaccount and any Portfolios 
thereunder, at the beginning of each year, the value of the Common 
Shares of each securities related issuer represents approximately 20% 
of the value of the DJIA Target 5 Subaccount's (or, of there is more 
than one Portfolio thereunder, of the applicable Portfolio's) total 
assets, but in no event more than 20.5% of the value of the DJIA Target 
5 Subaccount's (or, if there is more than one Portfolio thereunder, of 
the applicable Portfolio's) total assets on the first business day 
after each Stock Selection Date; and
    6. No company whose stock is held in any Subaccount or Portfolio, 
nor any affiliate thereof, will act as broker for any Subaccount or 
Portfolio in the purchase or sale of any security for the Subaccount or 
Portfolio.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested exemptions are appropriate in the public interest and 
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. 98-15632 Filed 6-11-98; 8:45 am]
BILLING CODE 8010-01-M