[Federal Register Volume 63, Number 128 (Monday, July 6, 1998)]
[Notices]
[Pages 36457-36460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17715]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23288; File No. 812-11004]
Phoenix Home Life Mutual Insurance Company, et al.; Notice of
Application
June 26, 1998.
AGENCY: Securities and Exchange Commission (``Commission''
ACTION: Notice of application (``Application'') for order pursuant to
Section 26(b) and Section 17(b) of the Investment Company Act of 1940
(the ``Act'' or the ``1940 Act'').
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[[Page 36458]]
Summary of Application: Applicants seek an order approving the
proposed substitution of shares of the Phoenix Money Market Series of
the Phoenix Edge Series Fund (the ``Substitute Fund'') for shares of
the Templeton Money Market Series of the Templeton Variable Products
Series Fund (the ``Current Fund'')(the ``Substitution''). Applicants
also seek an order pursuant to Section 17(b) of the Act granting
exemptions from Section 17(a) to permit Applicants to: (1) effect the
Substitution by redeeming shares of the Current Fund in-kind and using
the proceeds to purchase shares of the Substitute Fund; and (2) merge
two investment divisions of Phoenix Home Life Variable Accumulation
Account (the `'Account'') which will be holding shares of the same
Substitute Fund as a result of the Substitution.
Applicants: Phoenix Home Life Mutual Insurance Company
(``Phoenix'') and the Account.
Filing Date: The application was filed on February 12, 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 by writing to the Secretary of
the Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission no later than 5:30 p.m. on July 21, 1998, and must 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 notified of a
hearing may request notification by writing to the Secretary of the
Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549. Applicants, c/o Phoenix Home Life
Mutual Insurance Company, One American Row, P.O. Box 5056, Hartford,
Connecticut 06102-5056.
FOR FURTHER INFORMATION CONTACT:
Keith E. Carpenter, 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 Commission (tel. (202) 942-8090).
Applicants' Representations
1. Phoenix is a mutual insurance company existing under New York
law and is licensed to do business in all states, as well as in the
District of Columbia and Puerto Rico. Phoenix offers individual and
group variable immediate and deferred annuity contracts and single
premium and flexible premium variable life insurance policies.
2. Phoenix established the Account on June 21, 1982, pursuant to
the provisions of the insurance laws of the state of Connecticut. The
Account is a segregated investment account registered with the
Commission as a unit investment trust pursuant to the provisions of the
1940 Act. The Account is divided into subaccounts (``Subaccounts'')
that correspond to the portfolios of the Phoenix Edge Series Fund (the
``Phoenix Trust'') and the Templeton Variable Products Series Fund (the
``Templeton Trust''), including the Phoenix Money Market Series (the
``Phoenix Fund'') and the Templeton Money Market Series (the
``Templeton Fund''). The Account serves as the funding medium for
certain variable annuity contracts issued and administered by Phoenix.
WS Griffith & Co., Inc. serves as principal underwriter for the
flexible premium variable annuity contract (the ``Contract'') involved
in the Substitution.
3. The deferred variable annuity Contract offered by the Account
currently provides for investment in five Subaccounts, each of which
invests solely in shares of a different portfolio of the Templeton
Trust.
4. On April 18, 1986, the Phoenix Trust filed its initial
registration statement with the Commission on Form N-1A under the
Securities Act of 1933 (``1933 Act'') and the 1940 Act. The Phoenix
Trust is a series type investment company, organized as a Massachusetts
business trust on February 18, 1986, that currently has ten separate
investment portfolios (referred to individually as a ``Fund'') that
have differing investment objectives, policies and restrictions. Each
Fund is managed in compliance with diversification requirements under
the Internal Revenue Code of 1986, as amended, (the ``Code''). Shares
of the Funds of the Phoenix Trust are currently sold only to separate
accounts of Phoenix and its affiliates to fund variable life insurance
policies or variable annuity contracts. Phoenix Investment Counsel,
Inc. (the ``Phoenix Adviser'') serves as investment adviser to the
Phoenix Fund.
5. On February 25, 1988, the Templeton Trust filed its initial
registration statement with the Commission on Form N-1A under the 1993
Act and the 1940 Act. The Templeton trust is a series type investment
company, organized as a Massachusetts business trust on February 25,
1998, that currently has nine separate investment portfolios (referred
to individually as a ``Fund'') that have differing investment
objectives, policies and restrictions. Each Fund is managed in
compliance with diversification requirements under the Code. Shares of
the Funds of the Templeton Trust are sold only to insurance company
separate accounts to fund variable life insurance policies or variable
annuity contracts. Templeton Investment Counsel, Inc. (the ``Templeton
Adviser'') services as investment adviser to the Templeton Fund.
6. The Templeton Fund as an individual investment alternative has
not generated substantial interest of holders of Contracts (``Owners'')
in recent years. On December 31, 1997, the Templeton Fund had $15.77
million in assets, compared to $14.09 million at the end of 1996,
$20.72 million at the end of 1995 and $33.09 million at the end of
1994, an aggregate decrease of 52% from 1994 to 1997 and 57.4% from
1994 to 1996.
7. Applicants believe the Phoenix Fund, with assets of $126.48
million on December 31, 1997, offer Owners a larger fund with similar
investment policies, providing a potential for economies of scale. The
Applicants believe that they can better serve the interests of Owners
by using the Phoenix Fund rather than the Templeton Fund as a funding
vehicle for the Contracts.
8. Phoenix proposes to effect a substitution of shares of the
Phoenix Fund for all shares of the Templeton Fund attributable to the
Contract. Phoenix will pay all expenses and transaction costs
associated with the Substitution, including any applicable brokerage
commissions. Applicants state that concurrent with the filing of the
Application with the Commission, Phoenix will have filed with the
Commission and mailed to Owners a supplement to the prospectus of the
Account to provide Owners and prospective investors with information
concerning the proposed Substitution.
9. Phoenix will schedule the Substitution to occur as soon as
practicable following the issuance of the requested order so as to
maximize the benefits to be realized from the Substitution.
[[Page 36459]]
10. Within five days after the Substitution, Phoenix will send to
Owners written notice of the Substitution (the ``Notice'') that
identifies the shares of the Templeton Fund that have been eliminated
and the shares of the Phoenix Fund that have been substituted. Owners
will be advised in the Notice that for a period of 30 days from the
mailing of the Notice, Owners may transfer all assets, as substituted,
to any other available Subaccount, without limitation and without
charge. Moreover, any owner-initiated transfers of all available assets
from the Subaccount investing in the Phoenix Fund to a Subaccount
investing in certain other portfolios of Templeton Variable Products
Series Fund, from the date of the Notice to 30 days thereafter, will
not be counted as transfer requests under any contractual provisions of
the Contracts that limit the number of allowable transfers. The period
from the date of the Notice to 30 days thereafter is referred to herein
as the ``Free Transfer Period.''
11. Following the Substitution, Owners will be afforded the same
contract rights, including surrender and other transfer rights with
regard to amounts invested under the Contracts, as they currently have.
Any applicable contingent deferred sales loads will be imposed.
12. Immediately following the Substitution, Phoenix will combine
the Subaccount invested in the Templeton Fund with the Subaccount
invested in the Phoenix Fund. Phoenix will reflect this treatment in
disclosure documents for the Account, the Financial Statements of the
Account and the Form N-SAR annual reports filed by the Account.
13. Phoenix will redeem all shares of the Templeton Fund it
currently holds on behalf of the Account at the close of business on
the effective date of the Substitution. In connection with the
redemption of all shares of the Templeton Fund held by Phoenix, it is
expected that the Templeton Fund will incur brokerage fees and expenses
in connection with such redemption. To reduce the impact of such fees
and expenses on the Templeton Fund, the redemption of shares will be
effected partly for cash and partly for portfolio securities redeemed
``in-kind.'' By this procedures, at the effective date of the
Substitution, the Templeton Fund will transfer to the Account cash
proceeds and/or portfolio securities held by the Templeton Fund and the
Account will use such cash proceeds and/or portfolio securities to
purchase shares of the Substitute Fund. The Templeton Trust will effect
the redemption-in-kind and the transfers of portfolio securities in a
manner that is consistent with the investment objectives and policies
and diversification requirements applicable to the Substitute Fund.
Phoenix will take appropriate steps to assure that the portfolio
securities selected by the Templeton Adviser for redemptions-in-kind
are suitable investments for the Substitute Fund. In effecting the
redemption-in-king and transfers, the Templeton Trust will comply with
the conditions of Rule 18f-1 under the 1940 Act.
14. The portfolio securities redeemed in-king will be used together
with the cash proceeds to purchase the shares of the Substitute Fund.
The Applicants have determined that partially effecting the redemption
of shares of the Templeton Fund in-kind is appropriate, based on the
current similarity of certain of the portfolio investments of the
Templeton Fund to those of the Substitute Fund. The valuation of any
``in-kind'' redemptions will be made on a basis consistent with the
normal valuation procedures of the Templeton Fund and the normal
valuation procedures of the Substitute Fund.
15. In all cases, Phoenix, on behalf of the Account, will
simultaneously place redemption requests with the Templeton Fund and
purchase orders with the Substitute Fund so that purchases will be for
the exact amount of the redemption proceeds. As a result, at all times,
monies attributable to Owners whose funds are currently invested in the
Templeton Fund will remain fully invested.
16. The full net asset value of the redeemed shares held by the
Account will be reflected in the Owners' accumulation unit or annuity
unit values following the Substitution. Phoenix hereby undertakes to
assume all transaction costs and expenses relating to the Substitution,
including any direct or indirect costs of liquidating the assets of the
Templeton Fund, so that the full net asset value of the redeemed shares
of the Templeton Fund held by the Account will be reflected in the
Owners' accumulation unit or annuity unit values following the
Substitution.
17. The Templeton Adviser and the Phoenix Adviser have been fully
advised of the terms of the Substitution. Phoenix anticipates that the
Templeton Adviser and the Phoenix Adviser, to the extent appropriate,
will conduct the trading of portfolio securities in a manner that
provides for the anticipated redemptions of shares held by the Account.
Applicant's Legal Analysis
1. Section 26(b) of the Act makes it unlawful for any depositor or
trustee of a registered unit investment trust holding the security of a
single issuer to substitute another security for such security unless
the Commission approves the substitution. The Commission will approve a
substitution if the evidence establishes that it is consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act.
2. 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 shares of a particular issuer by preventing
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 premium payments, an additional sales load upon
reinvestment of the redemption proceeds, or both. Moreover, in the
insurance product context, a contractowner forced to redeem is very
likely to suffer adverse tax consequences. 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 of another issuer, unless the Commission approves that
substitution.
3. The Substitution involves: (a) Funds with substantially
identical investment objectives, policies and restrictions; (b) Funds
with comparable investment strategies and levels of risk exposure; (c)
a Substitute Fund exhibiting equivalent or better prior investment
performance than the Current Fund; and (d) a Substitute Fund with a
substantially larger size than the Current Fund, which should promote
greater economies of scale that may help to lower expense ratios and
further improve investment performance. Applicants therefore believe
that their request for an order of approval satisfies the standards for
relief of Section 26(b).
4. The Substitution will not result in the type of costly forced
redemption that Section 26(b) was intended to guard against and, for
the following reasons, is consistent with the protection of investors
and the purposes fairly intended by the Act:
(a) The Substitution involves interests that have objectives,
policies and restrictions the same as or substantially similar to the
objectives, policies and restrictions of the Fund being replaced so as
to continue fulfilling
[[Page 36460]]
contractowners' objectives and expectations.
(b) The costs of the Substitution will be borne by the Applicants
and will not be borne by contractowners. No charges will be assessed to
effect the Substitution.
(c) The Substitution will, in all cases, be at net asset values of
the respective shares without the imposition of any transfer or similar
charge and with no change in the amount of any contractowner's account
value.
(d) The proposed Substitution will not cause fees and charges under
the Contracts currently being paid by contractowners to be greater
after the proposed Substitution than before the proposed Substitution.
(e) The contractowners have been given notice of the Substitution
and will have an opportunity to reallocate contract values among other
available Funds without the imposition of any transfer charge or
limitation, nor will any such transfers from the date of the initial
notice through a date 30 days following the Substitution count against
the number of free transfers permitted in a year.
(f) Within five days after the Substitution, Phoenix will send to
contractowners written Notice that the Substitution has occurred,
identifying the Fund that was substituted and disclosing the Substitute
Fund.
(g) The Substitution will in no way alter the insurance benefits to
contractowners or the contractual obligations of Phoenix.
(h) The Substitution will in no way alter the tax benefits to
contractowners. Counsel for Phoenix has advised that the Substitution
will not give rise to any tax consequences to the contractowners.
5. Section 17(a)(1) of the Act prohibits any affiliated person, or
an affiliate of an affiliated person, of a registered investment
company from selling any security or other property to such registered
investment company. Section 17(a)(2) of the Act prohibits any
affiliated person from purchasing any security or other property from
such registered investment company.
6. Applicants anticipate that the Substitution will be effected by
redeeming shares of the Current Fund in-kind and then using those
assets to purchase shares of the Substitute Fund. This redemption and
purchase in-kind involves the purchase of property from the Current
Fund by the separate account, an affiliated person of that Fund, and
the sale of property to the Substitute Fund by the separate account,
which may be considered an affiliate of the Substitute Fund.
7. Similarly, where two investment divisions holding shares of the
same Substitute Fund are combined into a single investment division,
the transfer of assets could be said to involve purchase and sale
transactions between the investment divisions by an affiliated person.
8. Applicants request an order pursuant to Section 17(b) of the Act
exempting the in-kind redemption and purchase and the merger of certain
investment divisions from the provisions of Section 17(a). Section
17(b) of the Act provides that the Commission shall grant an order
exempting a proposed transaction from Section 17(a) 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 overreaching on the part of any person concerned; (b)
the proposed transaction is consistent with the policy of each
registered investment company; and (c) the proposed transaction is
consistent with the general purposes of the Act.
9. Applicants represent that the terms of the in-kind redemption
and purchase are reasonable and fair and do not involve overreaching on
the part of any person concerned and that the interests of
contractowners will not be diluted. The in-kind redemption and purchase
will be done at values consistent with the objectives and policies of
both the Current and Substitute Funds. The asset transfers will be
reviewed to assure that the assets meet the objectives and policies of
the Substitute Fund and that they are valued under the appropriate
valuation procedures of the Current and Substitute Funds. In-kind
redemption and purchase will reduce the brokerage costs that would
otherwise be incurred in connection with the Substitution.
10. Applicants represent that the merger of the investment
divisions is intended to reduce administrative costs and thereby
benefit contractowners with assets in those investment divisions. The
purchase and sale transactions will be effected based on the net asset
value of the shares held in the investment divisions and the value of
the units of the investment division involved. Therefore, there will be
no change in value to any contractowner.
Conclusion
For the reasons summarized above, Applicants assert that the
requested orders meet the standards set forth in Sections 26(b) and
17(b), respectively, and should, therefore, be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17715 Filed 7-2-98; 8:45 am]
BILLING CODE 8010-01-M