[Federal Register Volume 63, Number 175 (Thursday, September 10, 1998)]
[Notices]
[Pages 48537-48540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24206]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23424; File No. 812-11200]


Integrity Life Insurance Company, et al.; Notice of Application

September 2, 1998.
AGENCY: Securities and Exchange Commission (``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 other 
separate accounts of the Companies or affiliated insurance companies 
that support materially similar investment divisions, from the 
provisions of Section 12(d)(3) of the 1940 Act, to the extent necessary 
to permit the divisions of Separate Account Ten and the Select Ten Plus 
Division to invest up to 10% of their total assets in securities of 
issuers that derive more than 15% of their gross revenues from 
securities related activities.

APPLICANTS: Integrity Life Insurance Company (``Integrity''), Separate 
Account Ten of Integrity Life Insurance Company (``Separate Account 
Ten''), National Integrity Life Insurance Company (``National 
Integrity,'' together with Integrity, the ``Companies''), and Select 
Ten Plus Division of Separate Account II of National Integrity Life 
Insurance Company (Select Ten Plus Division'') (collectively, the 
``Applicants'').

FILING DATE: The application was filed on June 26, 1998.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC and servicing 
Applicants with a copy of the request, in person or by mail. Hearing 
requests must be received by the SEC by 5:30 p.m. on September 28, 
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 notified of a hearing may request notification by writing to the 
Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20459. 
Applicants, c/o ARM Financial Group, Inc., 515 West Market Street, 
Louisville, Kentucky 40202-3319.

FOR FURTHER INFORMATION CONTACT:
Megan L. Dunphy, Attorney, or Mark C. Amorosi, 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 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. Integrity is a stock life insurance company and is authorized to 
sell life insurance and annuities. Integrity is an indirect, wholly-
owned subsidiary of ARM Financial Group, Inc., (``ARM'').
    2. Separate Account Ten is a separate account of Integrity and is a 
funding vehicle for variable annuity contracts. The account is 
registered with the SEC as an open-end management investment company 
and is divided into four non-diversified investment divisions, Select 
Ten Plus Division--March, Select Ten Plus Division--June, Select Ten 
Plus Division--September, and Select Ten

[[Page 48538]]

Plus Division--December (each a ``Division'' and collectively, with the 
Select Ten plus Division of National Integrity, the ``Divisions'').
    3. National Integrity is a stock life insurance company and is 
authorized to sell life insurance and annuities. National Integrity is 
a wholly-owned subsidiary of Integrity and an indirect, wholly-owned 
subsidiary of ARM.
    4. Separate Account II is a separate account of National Integrity 
and is a funding vehicle for variable annuity contracts. The account is 
registered with the SEC as a unit investment trust. The Select Ten Plus 
Division is a non-diversified investment division of Separate Account 
II that is registered with the Commission as an open-end management 
investment company. Additional similar investment divisions may be 
established in the future at the discretion of National Integrity.
    5. The business and affairs of Separate Account Ten and the Select 
Ten Plus Division, respectively, are under the direction of a Board of 
Managers, currently consisting of five members. Integrity Capital 
Advisors, Inc. serves as the investment adviser (the ``Adviser'') and 
National Asset Management Corporation serves as the sub-adviser (the 
``Sub-Adviser'') to both Separate Account Ten and the Select Ten Plus 
Division.
    6. Applicants state that each of the Divisions will invest 
approximately 10% of its 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 calculated as of the day preceding 
the applicable specified Investment Date (the last business day of each 
calendar year for the Select Ten Plus Division and the last business 
day of the appropriate calendar quarter for the Divisions of Separate 
Account Ten).
    7. The DJIA is composed of thirty stocks chosen by the editors of 
The Wall Street Journal as representative of the New York Stock 
Exchange and of American industry. The DJIA is the property of the Dow 
Jones & Company, Inc., which is not affiliated with the Applicants and 
has not participated in any way in the creation of Separate Account Ten 
or the Select Ten Plus Division or in the selection of their stocks.
    8. Applicants state that the Divisions seek total return by 
acquiring the ten highest dividend yielding common stocks in the DJIA 
in equal weights and holding them for approximately twelve months. At 
the end of each Division's twelve-month period, the Division's 
portfolio is restructured to again hold the ten highest yielding stocks 
in the DJIA in equal weights for the next twelve months. The term 
``highest yielding stocks'' means the yield for each stock calculated 
by annualizing the last quarterly or semi-annual ordinary dividend 
distributed on that stock and dividing the result by the market value 
of that stock as of the close of the New York Stock Exchange on the 
business day prior to the applicable specified Investment Date.
    9. Applicants state that the weights of the individual stock 
positions will not be rebalanced during the year, nor will new or 
additional contributions or transfers be accepted during any Division's 
twelve-month holding period. Rather, new or additional contributions or 
transfers will be invested on the next available Investment Date. 
Dividends from stocks in each Division's portfolio will be reinvested 
on the day the dividend is received in additional shares of the stock 
that paid the dividend. Upon the receipt of a withdrawal request, 
approximately equal dollar amounts of shares of each of the ten stocks 
will be sold, such that the total dollar amount sold equals the amount 
of the withdrawal.
    10. 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) (Tres. Reg. 
Sec. 1.817-5) apply a diversification requirement to each of the 
Divisions (``Section 817(h) diversification requirements''). To qualify 
as ``adequately diversified,'' each Division 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 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.
    11. Applicants state that the Divisions intend to comply with the 
Section 817(h) diversification requirements. Separate Account Ten and 
the Select Ten Plus Division have each entered into an agreement with 
the Adviser, who in turn has entered into an agreement with the Sub-
Adviser, that requires the Divisions be operated in compliance with the 
Treasury regulations. Therefore, the Adviser and the Sub-Adviser may 
depart from the Divisions' investment strategy, if necessary, in order 
to meet these Section 817(h) diversification requirements.
    12. Applicants represent that under all circumstances, except in 
order to meet Section 817(h) diversification requirements, the common 
stocks purchased for each Division 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 or Sub-Adviser. The Adviser and Sub-
Adviser have no discretion as to which common stocks are purchased.
    13. Applicants state that securities purchased for each of the 
Divisions may include securities of issuers in the DJIA that derived 
more than 15% of their gross revenues in their most recent fiscal year 
from securities related activities. To the extent any of the ten 
highest yielding stocks qualifying for a Division are reasonably 
believed to receive 15% or more of their revenues from securities 
related activities, the Division will allocate a maximum of 5% of its 
assets to each of those stocks, and will allocate the remainder of its 
assets among the remaining stocks not so limited unless and until the 
exemptive relief from this limitation has been granted by the SEC.

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 from Section 12(d)(3) 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 15% of its gross revenues in its 
most recent fiscal year from securities related activities, provided 
that, among other things, immediately after any such acquisition the 
acquiring company has invested not more than 5% of the value of its 
total assets in the securities of the issuer.
    2. Section 6(c) of the 1940 Act provides that the Commission may 
exempt any person, transaction, or class of persons or transaction from 
any provision 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 provision of the 1940 Act.
    3. Applicants request that the Commission exempt Separate Account

[[Page 48539]]

Ten and the Select Ten Plus Division from the provisions of Section 
12(d)(3) in order to permit the Divisions 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 day preceding the applicable specified Investment 
Date, (ii) those securities represent one of the ten companies in the 
DJIA that have the highest dividend yield as of the day preceding the 
applicable specified Investment Date, and (iii) as of the day preceding 
the applicable specified Investment Date, the value of the common stock 
of each securities related issuer represents approximately 10% of the 
value of any Division's total assets, but in no event more than 10.5% 
of the value of the Division's total assets. 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 or 100 shares of stock. The 10.5% standard will be used on the 
prices of the common stock as of the close of business on the day 
preceding the applicable specified Investment Date.
    4. Each of the Divisions undertakes to comply with all of the 
requirements of Rule 12d3-1, except the condition in subparagraph 
(b)(3) prohibiting an investment company from investing more than 5% of 
the value of its total assets in securities of a securities related 
issuer.
    5. 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.
    6. A potential conflict could occur, for example, 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, Sub-Adviser, nor any 
Division has discretion in choosing the common stock or amount 
purchased. The stock must first be included in the DJIA (which is 
unaffiliated with the Applicants, Adviser, Sub-Adviser or the Boards of 
Managers). In addition, the securities must also qualify as one of the 
ten companies in the DJIA that has the highest dividend yield as of the 
day preceding the applicable specified Investment Date.
    7. 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 with discretion to sell portfolio securities to the extent 
necessary to meet redemptions. The Adviser and Sub-Adviser are 
obligated to follow the investment formula described in the application 
and summarized in this notice as nearly as practicable. Securities 
purchased for each Division will be chosen with respect to the 
specified formulas and not at the Adviser's or Sub-Adviser's 
discretion.
    8. The Adviser or Sub-Adviser would be permitted to deviate from 
the formula only where circumstances are such that the investment of a 
particular Division would fail to be ``adequately diversified'' under 
the Section 817(h) diversification requirements, and would thus cause 
the annuity contracts to fail to qualify as an annuity contract under 
the Code. In such a situation, the Adviser and Sub-Adviser must be 
permitted to deviate from the investment strategy 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.
    9. Applicants represent that the liquidity of a Division's 
portfolio is not a concern here since each common stock selected is a 
component of the DJIA, listed on the New York Stock Exchange, and among 
the most actively traded securities in the United States.
    10. Applicants also represent that the effect of a Division's 
purchase of 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. Potential purchases by a 
Division would represent an insignificant amount of the outstanding 
common stock and trading volume of any of these issuers.
    11. Applicants state that a possible 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 Division, however, 
Applicants maintain 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 a Division 
would be invested in the broker-dealer or parent thereof.
    12. Finally, Applicants state that another potential conflict of 
interest could occur if an investment company directed brokerage to an 
affiliated broker-dealer which the company has invested to enhance the 
broker-dealer's profitability or to assist it during financial 
difficulty, even through the broker-dealer may not offer the best price 
and execution. To preclude this type of conflict, the Applicants agree, 
as a condition of the application, that no company whose stock is held 
in any Division, nor any affiliate of such company, will act as broker 
or dealer for any Division in the purchase or sale of any security for 
its portfolio.
    13. Applicants seek relief not only with respect to Separate 
Account Ten and the Select Ten Plus Division, but also with respect to 
(i) other separate accounts of the Companies or affiliated insurance 
companies that support materially similar investment divisions, and 
(ii) other materially similar investment divisions of Separate Account 
II of National Integrity Life Insurance Company as may be created in 
the future. Applicants represent that the terms of relief requested are 
consistent with the standards set forth in Section 6(c) of the 1940 
Act.

Applicants' Conditions

    Applicants agree to the following conditions:
    1. The common stock is included in the DJIA as of the day preceding 
the applicable specified Investment Date;
    2. The common stock represents one of the ten companies in the DJIA 
that have the highest dividend yield as of the day preceding the 
applicable specified Investment Date;
    3. As of the day preceding the Investment Date, the value of the 
common stock of each securities related issuer represents approximately 
10% of the value of any Division's total assets, but in no event more 
than 10.5% of the value of the Division's total assets; and
    4. No company whose stock is held in any Division, nor any 
affiliate thereof, will act as broker or dealer for any Division in the 
purchase or sale of any security for the Division.

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

[[Page 48540]]

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. 98-24206 Filed 9-9-98; 8:45 am]
BILLING CODE 8010-01-M