[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