[Federal Register Volume 63, Number 218 (Thursday, November 12, 1998)]
[Notices]
[Pages 63342-63347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30246]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23524; File No. 812-11282]


Provident Mutual Life Insurance Co. et al.

November 4, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of 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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SUMMARY OF APPLICATION: Applicants seek an order approving the 
substitution of securities issued by certain management investment 
companies (each a ``Management Company'') and held by either Provident 
Mutual Variable Managed Separate Account (the ``Managed Account''), 
Provident Mutual Variable Separate Account (the ``Separate Account''), 
Providentmutual Variable Annuity Separate Account (the ``Variable 
Account''), or Providentmutual Variable Life Separate Account (the 
``Variable Life Account'') (each, an ``Account,'' together, 
``Accounts'') to support variable life insurance contracts or variable 
annuity contracts (collectively, the ``Contracts'') issued by Provident 
Mutual Life Insurance Company (``PMLIC'') or Providentmutual Life and 
Annuity Company of America (``PLACA''). Applicants also seek an order 
exempting them from Section 17(a) of the Act to the extent necessary to 
permit PMLIC to consolidate the Managed Account with the Separate 
Account to permit PLACA to consolidate two subaccounts to the Variable 
Account and to consolidate two subaccounts of the Variable Life 
Account.

APPLICANTS: PMLIC, PLACA, the Managed Account, the Separate Account, 
the Variable Account, and the Variable Life Account.

FILING DATE: August 27, 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 SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests must be received by the SEC by 5:30 p.m. on November 30, 1998, 
and must 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 writer'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 SEC's 
Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, c/o Adams Scaramell, 
Esq., Provident Mutual Life Insurance Company, 1050 Westlakes Drive, 
Berwyn, Pennsylvania 19312. Copies to Stephen E. Roth, Esq. and David 
S. Goldstein, Esq., Sutherland Asbill & Brennan LLP, 1275 Pennsylvania 
Avenue, N.W., Washington, D.C. 20004-2415.

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 may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, 
D.C. 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. PMLIC, a mutual life insurance company chartered by the 
Commonwealth of Pennsylvania, is authorized to transact life insurance 
and annuity business in Pennsylvania and in 50 other jurisdictions. 
PLMIC is the depositor and sponsor of the Separate Account and the 
Managed Account.
    2. PLACA is a stock life insurance company originally incorporated 
under the laws of the Commonwealth of Pennsylvania in 1958, and 
redomiciled as a Delaware insurance company in 1992. It is a wholly 
owned subsidiary of PMLIC. PLACA is licensed to do business in 48 
states and the District of Columbia. PLACA is a depositor and sponsor 
of the Variable Account and the Variable Life Account.
    3. PMLIC established the Managed Account on October 21, 1985, and 
the Separate Account on June 3, 1993, as segregated investment accounts 
under Pennsylvania law. PLACA established the Variable Account on May 
9, 1991, as a segregated investment account under Pennsylvania law, and 
established the Variable Life Account on June 30, 1994, as a segregated 
investment account under Delaware law. Each Account is a ``separate 
account'' as defined by Rule 0-1(e) under the Act, and is registered 
with the Commission as a unit investment trust.
    4. The Separate Account is divided into sixteen subaccounts. Each 
subaccount invests exclusively in shares representing an interest in a 
separate corresponsing investment portfolio (each, a ``Portfolio'') of 
one of six series-type Management Companies. The Managed Account is not 
divided into subaccounts and invests in shares of the Market Street 
Fund, Inc. The assets of the Separate Account and the Managed Account 
support variable life insurance Contracts, and interests in these 
Accounts offered through such Contracts have been registered under the 
Securities Act of 1933 (the ``1933 Act'') on Form S-6.
    5. The Variable Account is divided into thirty-three subaccounts. 
Each subaccount invests exclusively in a Portfolio of one of ten 
series-type Management Companies. The assets of Variable Account 
support annuity Contracts, and interests in the Account offered through 
such Contracts have been registered under the 1933 Act on Form N-4.
    6. The Variable Life Account is divided into twenty-two 
subaccounts. Each subaccount invests in a Portfolio of one of seven 
series-type Management Companies. The assets of the Variable Life 
Account support variable life Contracts, and interests in the Account 
offered through such Contracts have been registered under the 1933 Act 
on Form S-6.
    7. The Separate Account, the Variable Account, and the Variable 
Life Account each invest in two Management Companies that are involved 
in the substitutions discussed in the application: the Neuberger & 
Berman Advisers Management Trust and the American Century Portfolios, 
Inc.
    8. American Century Variables Portfolios, Inc. (``ACVP'') was 
organized as a Maryland corporation on June 4, 1987. It is registered 
under the Act as an open-end management investment company. ACVP is a 
series investment company as defined by Rule 18f-2 under the Act, and 
currently comprises six Portfolios, one of which, American Century V.P. 
Capital Appreciation Portfolio, is involved in the proposed 
substitutions. Investors Research Corporation serves as the investment 
adviser to ACVP.

[[Page 63343]]

    9. AMT was organized as a Delaware business trust on May 23, 1994. 
AMT is registered under the Act as a diversified, open-end management 
investment company. AMT is a series investment company as defined by 
Rule 18f-2 under the Act, and is a ``feeder'' fund in a ``master-
feeder'' structure. Each series of AMT currently invests all of its net 
investible assets in a corresponding series of Advisers Master Trust, 
the ``master'' fund. AMT currently comprises eight Portfolios. 
Neuberger & Berman Management Incorporated serves as investment adviser 
to AMT. The following AMT Portfolios are involved in the proposed 
substitutions discussed in the application: AMT's Balance Portfolio, 
AMT's Growth Portfolio and AMT's Partners Portfolio.
    10. MSF was incorporated in Maryland on March 21, 1985. MSF is 
registered under the Act as an open-end diversified management 
investment company. MSF is a series investment company as defined by 
Rule 18f-2 under the Act and currently comprises eleven Portfolios. 
Providentmutual Investment Management Company serves as investment 
adviser to the MSF All Pro Large Cap Growth Portfolio. Sentinel 
Advisers Company serves as investment adviser to the Managed Portfolio.
    11. The Contracts are flexible premium variable life insurance 
contracts and individual flexible premium deferred variable annuity 
contracts. PMLIC issues four of the variable life insurance Contracts 
that are participating in the proposed substitution. PLACA issues one 
of the variable life insurance Contracts and the only variable annuity 
Contract that are participating in the proposed substitution. The 
Contracts provide for the accumulation of values on a variable basis, 
fixed basis, or both, during the accumulation period, and provide 
settlement or annuity payment options on a fixed basis. PMLIC or PLACA, 
under each of the Contracts, reserves the right to substitute shares of 
one Portfolio for shares of another, including a Portfolio of a 
different Management Company.
    12. Under all of the variable life insurance Contracts except the 
``Options Contract,'' a Contract owner may make unlimited transfers (in 
minimum amounts of at least $1000) of contract value in a Contract year 
between and among the subaccounts of the relevant Account, the other 
separate accounts available under the Contract, and either PMLIC's or 
PLACA's general account. However, after the fourth transfer in a 
Contract year, each insurer assesses a $25 charge for each transfer. 
Under the Options Contract, a Contract owner may make four transfers 
(of at least $100) of account value in a contract year between and 
among the subaccounts of the Separate Account and the other separate 
accounts available under this Contract. Under the PLACA variable 
annuity contract, a Contract owner may make unlimited transfers (of at 
least $500) of account value between and among the subaccounts of the 
Variable Annuity Account and PLACA's general account. There is no 
charge for transfers.
    13. PMLIC, on its behalf and on behalf of the Separate Account; and 
PLACA, on its behalf and on behalf of the Variable Account and the 
Variable Life Separate Account; propose to make certain substitutions 
of shares held in those Accounts. PMLIC and PLACA propose to substitute 
shares of MSF Managed Portfolio for shares of AMT Balanced Portfolio, 
shares of MSF All-Pro Large Cap Growth Portfolio for shares of ACVP 
Capital Appreciation Portfolio, and shares of AMT Partners Portfolio 
for shares of AMT Growth Portfolio. PMLIC and PLACA believe that by 
making the proposed substitutions in each of their Accounts, they can 
better serve the interests of owners of their Contracts.
    14. MSF Managed Portfolio and AMT Balanced Portfolio have 
substantially the same investment objectives and achieve these 
objectives by investing in equity and debt securities. Applicants, 
however, believe that the proposed substitutions will benefit Contract 
owners by offering MSF Managed Portfolio, which in recent years has had 
lower expenses and better performance than AMT Balanced Portfolio. MSF 
Manged Portfolio also is a more popular investment option than the AMT 
Balanced Portfolio. The expense ratios for MSF Manged Portfolio have 
been significantly lower over each of the past three years (by 
approximately 33% in 1995, by approximately 49% in 1996, and by 
approximately 46% in 1997) than the expense ratios for AMT Balanced 
Portfolio for the same periods. Applicants believe that MSF Managed 
Portfolio will continue to have low expense ratios, and have no reason 
to believe that AMT Balanced Portfolio will match the low expense 
ratios of the Balanced Portfolio in the near future. Likewise, for each 
of the past three years, MSF Managed Portfolio has had somewhat higher 
total returns than AMT Balanced Portfolio. Similarly, as shown below, 
the average annual total returns for the Portfolios for 1, 3, and 5 
years show MSF Managed Portfolio with somewhat better performance 
results than AMT Balanced Portfolio.

                      Average Annual Total Returns
                            [As of 12/31/97]
------------------------------------------------------------------------
                                             1 year    3 years   5 years
------------------------------------------------------------------------
AMT Balanced..............................     18.6%     15.6%      9.4%
MSF Managed...............................     20.3%     18.2%     12.2%
------------------------------------------------------------------------

    Applicants have no reason to believe that, in the near term, the 
performance of AMT Balanced Portfolio will match or exceed that of MSF 
Managed Portfolio. Finally, Applicants assert that the AMT Balanced 
Portfolio has proved to be an unpopular investment choice with Contract 
owners and does not exhibit signs of becoming more popular in the 
future. During each of the past three fiscal years, far more Contract 
owners allocated Contract values to MFS Managed Portfolio than to AMT 
Balanced Portfolio.

  Number of Owners of All PMLIC/PLACA Contracts With Value Allocated To
                             Each Portfolio
------------------------------------------------------------------------
                                                                 AMT
                                                MSF managed    balanced
                                                 portfolio    portfolio
------------------------------------------------------------------------
12/31/97......................................       13,062        3,320
12/30/96......................................       12,767        2,802
12/31/95......................................       12,495        2,058
------------------------------------------------------------------------

    For the foregoing reasons, Applicants submit that the proposed 
substitution of

[[Page 63344]]

the MSF Managed Portfolio for shares of the AMT Balanced Portfolio is 
in the best interests of Contract owners.
    15. MSF All Pro Large Cap Growth Portfolio and ACVP Capital 
Appreciation Portfolio have substantially the same investment 
objective: to achieve capital appreciation or growth by investing in 
equity securities. In addition, ACVP Capital Appreciation Portfolio was 
managed with an essentially large capitalization growth stock 
investment style. Applicants' however, believe that Contract owners 
will be better served by replacing ACVP Capital Appreciation Portfolio 
with MSF All Pro Large Cap Growth Portfolio for three basic reasons: 
(a) ACVP Capital Appreciation's poor performance and shrinking asset 
base over each of the past three years, (b) the shift in investment 
strategy made by the adviser of ACVP Capital Appreciation Portfolio, 
and (c) the unpopularity of ACVP Capital Appreciation Portfolios as an 
investment option under the Contracts. For each of the past three 
fiscal years the total returns for ACVP capital Appreciation Portfolio 
have been poor. In 1996 and 1997 the Portfolio had negative total 
returns (-4.32% and -3.26%, respectively). The Portfolio had these poor 
returns despite the record highs achieved in the U.S. equity markets 
during 1996 and 1997. Further, ACVP Capital Appreciation Portfolio is 
the worst performing domestic equity Portfolio available under the 
Contracts for each of the past two fiscal years. In addition, the net 
assets of ACVP Capital Appreciation Portfolio have declined in each of 
the past three fiscal years. Significantly, the Portfolio's net assets 
declined by more than 50% during 1997. Should the decline in net assets 
of ACVP Capital Appreciation Portfolio continue, Applicants believe 
that the expenses of the Fund would eventually increase. Applicants 
have no reason to believe that the performance of the Portfolio or the 
rate of decline of its asset base will be reversed in the foreseeable 
future.
    16. In addition to poor performance and a shrinking asset base, 
ACVP Capital appreciation Portfolio has recently changed its investment 
style. When PMLIC and PLACA selected the Portfolio as an investment 
option under the Contracts, it was managed primarily as a large 
capitalization growth stock portfolio. However, the investment adviser 
now emphasizes primarily smaller capital stocks. MSF All Pro Large Cap 
Growth Portfolio is a large capitalization growth stock portfolio that 
invests in the equity securities of the 750 largest companies by market 
capitalization. Substituting MSF All Pro Large Cap Growth Portfolio for 
ACVP Capital Appreciation Portfolio will ensure that the Contracts 
continue to offer a growth portfolio with a large capitalization stock 
orientation.
    17. Finally, Applicants submit that ACVP Capital Appreciation 
Portfolio has been among the least (if not the least) popular 
investment option for Contract owners for each of the past three fiscal 
years, and does not exhibit signs of becoming more popular in the 
future. Applicants believe that MSF All Pro Large Cap Growth Portfolio 
would be a more popular investment option for Contract owners. For the 
foregoing reasons, Applicants submit that the substitution of MSF All 
Pro Large Cap Growth Portfolio shares for shares of ACVP Capital 
Appreciation Portfolio will better serve the interests of Contract 
owners.
    18. AMT Partners Portfolio has substantially the same investment 
objective as the AMT Growth Portfolio. Applicants, however, believe 
that it is in the best interests of Contract owners to substitute 
shares of the AMT Partners Portfolio for shares of the AMT Growth 
Portfolio because of the change in investment strategy of the AMT 
Growth Portfolio, and the good performance, declining expenses, and 
growth potential of the AMT Partners Portfolio. Although AMT Growth 
Portfolio has not changed its investment objective recently, its style 
of investing has changed dramatically. In July 1997, the Fund's adviser 
appointed a new portfolio manager. As a result of this management 
change, AMT Growth Portfolio no longer follows a strategy which 
emphasizes the selection of large capitalization stocks with value 
characteristics and instead employs a strategy which emphasizes the 
selection of mid-capitalization stocks with strong earnings growth 
momentum. AMT Partners Portfolio is essentially the portfolio that the 
AMT Growth Portfolio once was. In addition, AMT Partners Portfolio 
follows what used to be AMT Growth Portfolio's investment strategy of 
investing significantly in large capitalization stocks with value 
characteristics such as low price/earnings ratios. As such, the AMT 
Partners Portfolio is a suitable replacement to fill the void left by 
the AMT Growth Portfolio in the large capitalization value category of 
investment options available under the Contracts.
    19. Moreover, the AMT Partners Portfolio has exhibited stronger 
performance and greater growth over each of the past three fiscal years 
than has AMT Growth Portfolio. For example, during 1997, net assets 
increased by approximately 57%, the expense ratio declined .09% from 
1996 to .86%, and total return increased from 29.57% in 1996 to 31.25% 
in 1997. In contrast, net assets of AMT Growth Portfolio increased 
approximately 3% over 1997, the expense ratio declined only .02% from 
1996 to .90%, and total return increased from 9.14% in 1996 to 29.01%. 
In addition, for each of the past three years, the expense ratios for 
the AMT Partners Portfolio have declined, while the expense ratios for 
the AMT Growth Portfolio have stayed roughly the same. Applicants have 
no reason to believe that strong performance, declining expenses, and 
growth potential of the AMT Partners Portfolio will not continue. For 
the foregoing reasons, Applicants believe that Contract owners would be 
better served by substituting shares of the AMT Partners Portfolio for 
shares of the AMT Growth Portfolio.
    20. The following charts show the approximate year-end size (in net 
assets), expense ratio (ratio of operating expenses as a percentage of 
average net assets), and annual total returns for each of the past 
three years for five of the six Portfolios involved in the proposed 
substitutions. (The MSF All Pro Large Cap Growth Portfolio is not 
included in the charts below because it is new.)

----------------------------------------------------------------------------------------------------------------
                                                           Net assets at
                                                            year-end (in      Expense ratio       Total return
                                                             millions)          (percent)          (percent)
----------------------------------------------------------------------------------------------------------------
AMT Balanced Portfolio:
  1995.................................................             $144.4                .99              23.76
  1996.................................................              173.2               1.09               6.89
  1997.................................................              161.9               1.04              19.45
MSF Managed Portfolio:
  1995.................................................               36.0                .66              24.43
  1996.................................................               43.4                .60              11.88

[[Page 63345]]

  1997.................................................               56.1                .58              21.23
American Century V.P. Capital Appreciation Portfolio:
  1995.................................................            1,461.0                .99              31.10
  1996.................................................            1,314.0               1.00             (4.32)
  1997.................................................              594.0               1.00             (3.26)
AMT Growth Portfolio:
  1995.................................................              537.8                .90              31.73
  1996.................................................              566.4                .92               9.14
  1997.................................................              583.7                .90              29.01
AMT Partners Portfolio:
  1995.................................................              207.5               1.09              36.47
  1996.................................................              705.4                .95              29.57
  1997.................................................            1,632.8                .86              31.25
----------------------------------------------------------------------------------------------------------------

    21. By supplements to the various prospectuses for the Contracts 
and the Accounts, all owners of the Contracts will be notified of 
PMLIC's and PLACA's intention to take the necessary actions to 
substitute shares of the Portfolios. The supplements for the Accounts 
advise Contract owners that from the date of the supplement until the 
date of the proposed substitution, owners are permitted to make one 
transfer of all amounts under a Contract invested in any one of the 
affected subaccounts or the Managed Account on the date of the 
supplement to another subaccount or separate account available under a 
Contract other than one of the other affected investment subaccounts or 
the Managed Account, without that transfer counting as a ``free'' 
transfer permitted under a Contract. The supplements also inform 
Contract owners that PMLIC and PLACA will not exercise any rights 
reserved under any Contract to impose additional restrictions on 
transfers until at least 30 days after the Proposed substitution.
    22. The proposed substitutions will take place at relative net 
asset value with no change in the amount of any Contract owner's 
account value or death benefit or in the dollar value of his or her 
investment in any of the Accounts. Contract owners will not incur any 
fees or charges as a result of the proposed substitutions, nor will 
their rights to PMLIC's nor PLACA's obligations under the Contracts 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 PMLIC or PLACA. In addition, the proposed 
substitutions will not impose any tax liability on Contract owners. The 
proposed substitutions will not cause the Contract fees and charges 
currently being paid by existing Contract owners to be greater after 
the proposed substitutions than before the proposed substitutions. The 
proposed substitutions will not be treated as a transfer for the 
purpose of assessing transfer charges or for determining the number of 
remaining permissible transfers in a Contract year. PMLIC and PLACA 
will not exercise any right either may have under the Contracts to 
impose additional restrictions on transfers under any of the Contracts 
for a period of at least 30 days following the substitutions.
    23. In addition to the prospectus supplements distributed to owners 
of Contracts, within five days after the proposed substitutions, any 
Contract owners who were affected by the substitution will be sent a 
written notice informing them that the substitutions were carried out 
and that they may make one transfer of all account value under a 
Contract invested in any one of the affected subaccounts or the Managed 
Account on the date of the notice to another subaccount or separate 
account available under their Contract without that transfer counting 
as one of any limited number of transfers permitted in a Contract year 
or as one of a limited number transfers permitted in a Contract year 
free of charge. The notice will also reiterate the fact that PMLIC and 
PLACA will not exercise any rights reserved by either under any of the 
Contracts to impose additional restrictions on transfers until at least 
30 days after the proposed substitutions. The notice as delivered in 
certain states also may explain that, under the insurance regulations 
in those states. Contract owners who are affected by the substitutions 
may exchange their Contracts for fixed-benefit life insurance contracts 
or annuity contracts, as applicable, issued by PMLIC (or one of its 
affiliates) or PLACA (or one of its affiliates) during the 60 days 
following the proposed substitutions. The notices will be accompanied 
by current prospectuses for MSF Managed Portfolio, the MSF All Pro 
Large Cap Growth Portfolio, and the AMT Partners Portfolio.
    24. PMLIC and PLACA also are seeking approval of the proposed 
substitutions from any state insurance regulators whose approval may be 
necessary or appropriate.

Applicants' Legal Analysis

Section 26(b)

    1. Section 26(b) of the Act requires the depositor of a registered 
unit investment trust holding the securities of a single issuer to 
receive Commission approval before substituting the securities held by 
the trust. Section 26(b) was added to the Act by the Investment Company 
Amendments of 1970. Prior to the enactment of the 1970 amendments, a 
depositor of a unit investment trust could substitute new securities 
for those held by the trust by notifying the trust's security holders 
of the substitution within five days of the substitution. In 1966, the 
Commission, concerned with the high sales charges then common to most 
unit investment trusts and the disadvantageous position in which such 
charges placed investors who did not want to remain invested in the 
substituted fund, recommended that Section 26 be amended to require 
that a proposed substitution of the underlying investments of a trust 
receive prior Commission approval. Congress responded to the 
Commission's concerns by enacting Section 26(b) to require that the 
Commission approve all substitutions by the depositor of investments 
held by unit investment trusts.
    2. The proposed substitutions appear to involve substitutions of 
securities within the meaning of Section 26(b) of the Act. Applicants 
therefore request an order from the Commission pursuant to Section 
26(b) approving the proposed substitutions.
    3. The Contracts expressly reserve for PMLIC or PLACA the right, 
subject to

[[Page 63346]]

compliance with applicable law, to substitute shares of another 
Management Company for shares of a Management Company held by an 
Account or a subaccount of an Account. The prospectuses for the 
Contracts and the Accounts contain appropriate disclosure of this 
right. PMLIC and PLACA each reserved this right of substitution both to 
protect themselves and their Contract owners in situations where either 
might be harmed or disadvantaged by circumstances surrounding the 
issuer of the shares held by one or more of their separate accounts and 
to afford the opportunity to replace such shares where to do so could 
benefit itself and Contract owners.
    4. In the case of the proposed substitution of shares of MSF 
Managed Portfolio for shares of AMT Balanced Portfolio, AMT Balanced 
Portfolio would be replaced by a Portfolio with substantially the same 
investment objectives but which has lower expenses and better 
performance. Moreover, MSF Managed Portfolio is already available under 
the Contracts and is a more popular investment option than AMT Balanced 
Portfolio.
    5. In the case of the proposed substitution of shares of MSF All 
Pro Large Cap Growth Portfolio for shares of ACVP Capital Appreciation 
Portfolio, the interests of Contract owners will be better served 
primarily because the worst performing domestic equity Portfolio and 
one of the least attractive investment options under the Contracts 
would be replaced by a Portfolio with substantially the same investment 
objective and hopefully better performance. In addition, ACVP Capital 
Appreciation Portfolio has shifted its investment strategy since it was 
first made available as an investment option to Contract owners. Its 
investment adviser no longer primarily invests in large capitalization 
stocks and instead primarily invests in smaller capitalization stocks. 
MSF All Pro Large Cap Growth Portfolio, in contrast, will invest 
primarily in large capitalization stocks.
    6. Finally, in the case of the proposed substitution of shares of 
AMT Partners Portfolio for shares of AMT Growth Portfolio, Contract 
owners will be better served because AMT Partners Portfolio has an 
investment strategy comparable to that of AMT Growth Portfolio before 
it changes its strategy. However, AMT Partners Portfolio has lower 
fees, better performance, and better growth potential than AMT Growth 
Portfolio. AMT Partners Portfolio uses the value style of investing (as 
opposed to the growth style of investing currently used by AMT Growth 
Portfolio) and has substantially the same investment objective as AMT 
Growth Portfolio.
    7. In addition to the foregoing, Applicants generally submit that 
the proposed substitutions meet the standards that the Commission and 
its staff have applied to similar substitutions that have been approved 
in the past.
    8. Applicants anticipate that Contract owners will be in at least 
as favorable a position with the proposed array of separate accounts 
and subaccounts offered after the proposed substitutions as they have 
been with the array of separate accounts and subaccounts offered prior 
to the substitutions. The proposed substitutions retain for Contract 
owners the investment flexibility which is a central feature of the 
Contracts. If the proposed substitutions are carried out, all Contract 
owners will be permitted to allocate purchase payments and transfer 
account values between and among the same number of separate accounts 
or subaccounts as they could before the proposed substitutions.
    9. Applicants assert that each of the proposed substitutions is not 
the type of substitution which Section 26(b) was designed to prevent. 
Unlike traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner which permanently 
affected all the investors in the trust, the Contracts provide each 
Contract owner with the right to exercise his or her own judgment and 
transfer account values into other separate accounts or subaccounts. 
Moreover, the Contracts will offer Contract owners the opportunity to 
transfer amounts out of the affected subaccounts into any of the 
remaining subaccounts without cost or other disadvantage. The proposed 
substitutions, therefore, will not result in the type of costly forced 
redemption which Section 26(b) was designed to prevent.
    10. The proposed substitutions also are unlike the type of 
substitution which Section 26(b) was designed to prevent in that by 
purchasing a Contract, Contract owners select much more than a 
particular investment company in which to invest their account values. 
They also select the specific type of insurance coverage offered by 
PMLIC or PLACA under their Contract as well as numerous other rights 
and privileges set forth in the Contract. Contract owners may also have 
considered PMLIC's or PLACA's size, financial condition, type and its 
reputation for service in selecting their Contract. These factors will 
not change as a result of the proposed substitutions.
    11. Applicants submit that, for all the reasons summarized above, 
the proposed substitutions are consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the Act.

Section 17(b)

    12. Applicants also request an order under Section 17(b) exempting 
them from the provisions of Section 17(a) to the extent necessary to 
consolidate: (a) the Managed Account with the subaccount of the 
Separate Account that will invest in MSF Managed Portfolio, (b) the 
subaccount of the Variable Account that currently invests in MSF 
Managed Portfolio with the subaccount that currently invests in AMT 
Balanced Portfolio, and (c) the subaccount of the Variable Life Account 
that currently invests in MSF Managed Portfolio with the subaccount 
that currently invests in AMT Balanced Portfolio.
    13. Section 17(a)(1) of the Act, in relevant part, prohibits any 
affiliated person of a registered investment company, or any affiliated 
person of such person, acting as principal, from knowingly selling any 
security or other property to that company. Section 17(a)(2) of the Act 
generally prohibits the persons described above, acting as principals, 
from knowingly purchasing any security or other property from the 
registered investment company. Because the Managed Account and the 
Separate Account (as well as several other PMLIC separate accounts) are 
registered collectively with the Commission as a single unit investment 
trust of which PMLIC is the depositor, the Managed Account and the 
Separate Account are affiliated persons of each other. Because PLACA is 
the depositor of the Variable Account and the Variable Life Account, 
these Accounts are affiliated persons of each other. Further, because 
all of the Accounts are under the common control of PMLIC, they are all 
affiliated persons of each other.
    14. The combining of the Managed Account with a subaccount of the 
Separate Account, and possibly the consolidation of subaccounts of the 
Variable Account and the Variable Life Account, because it could be 
deemed to involve the transfer of assets from one entity to another, 
may involve these entities, acting as principal, in buying and selling 
securities or other property from one to another in contravention of 
Section 17(a).
    15. Section 17(b) of the Act provides that the Commission may, upon 
application, grant an order exempting any transaction from the 
prohibitions of Section 17(a) if the evidence establishes that:

[[Page 63347]]

    (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 concerned, as recited in its registration 
statement and reports filed under the Act; and
    (c) The proposed transaction is consistent with the general 
purposes of the Act.
    16. Applicants submit that the terms of the proposed substitutions, 
as described in this Application, including the consideration to be 
paid and received, are fair and reasonable and do not involve 
overreaching on the part of any person concerned. Applicants also 
submit that the proposed substitutions are consistent with the policies 
of each of the Accounts and with the general purposes of the Act. The 
Commission has previously granted exemptions from Section 17(a) to 
permit the combination or consolidation of separate accounts registered 
as unit investment trusts. The Commission also has granted numerous 
exemptions from Section 17(a) to permit the consolidation of 
subaccounts of a separate account registered as a unit investment trust 
in connection with a substitution.
    17. Rule 17a-8 under the Act provides an exemption from Section 
17(a) of the Act for mergers of affiliated mutual funds (or 
acquisitions of one fund by an affiliated fund) as long as the 
directors of the funds determine that the merger (or acquisition) is in 
the best interests of the fund and that the interests of each fund's 
shareholders will not be diluted. In proposing Rule 17a-8, the 
Commission offered several factors for directors to consider in 
reaching this determination. Although the Accounts (and relevant 
subaccounts) do not have directors and the proposed substitutions do 
not come within the parameters of Rule 17a-8, Applicants submit that 
the Commission may look to these factors as a standard for judging the 
reasonableness and fairness of the proposed substitutions and related 
consolidations.
    (a) Immediately after the proposed substitutions, the Managed 
Account and each affected subaccount of the other Accounts would invest 
exclusively in shares of the same Portfolio as does the subaccount with 
which it would be consolidated. Therefore, to the extent that the 
investment objectives of these Portfolios can be attributed to the 
Managed Account or a subaccount, each surviving subaccount will, by 
definition, have the same ``investment objectives, policies, 
restrictions and portfolios'' after the proposed substitutions and 
related consolidations as it and its consolidation partner had before 
the transactions.
    (b) The proposed substitutions and related consolidations will be 
effected by ``combining'' the Managed Account and certain subaccounts 
with other subaccounts and transferring shares of Portfolios held by 
the Managed Account or a subaccount to a surviving subaccount. The 
transfer will be carried out in conformity with Section 22(c) of the 
Act and Rule 22c-1 thereunder in that the aggregate net asset value of 
the transferred shares will not change and each Contract owner holding 
units of interest in the Managed Account or a subaccount will have 
those units exchanged for units of equal value in the surviving 
subaccount. The ``prices'' or values of the exchanged interests under 
the Contracts will thus be equivalent. In addition, the proposed 
substitutions and related consolidations will impose no tax liability 
upon Contract owners or alter the tax status of the Contracts. The 
proposed substitutions and related consolidations will not in any way 
dilute the interests of Contract owners.
    (c) PMLIC or PLACA will bear all of the costs and expenses of the 
proposed substitutions and related consolidations. None of the 
Accounts, affected subaccounts or Contract owners will incur any costs 
or expenses and will not pay any fees or charges as a result of the 
proposed substitutions and related consolidations. Therefore, no direct 
or indirect costs to Contract owners or dilution of Contract owner 
interests will occur.
    18. The proposed substitutions and related consolidations will 
benefit Contract owners by consolidating an unneeded Account and 
several duplicative subaccounts of other Accounts. The consolidations 
are motivated by effiencies of administration that will result from the 
elimination of the Managed Account and two subaccounts of each of the 
other Accounts, the continued existence of which serves no useful 
purpose. PMLIC and PLACA expect and intend that Contract owners will 
benefit from the consolidation to the extent that it streamlines record 
keeping and other administrative operations.
    19. As explained above, each surviving subaccount will have the 
same investment policy as its consolidation partner as recited in the 
registration statements and reports for both filed under the Act.
    20. The proposed substitutions and related consolidations are 
consistent with the general purposes of the Act, as enunciated in the 
Findings and Declaration of Policy of the Act, particularly, Section 
1(b)(2). The proposed substitutions and related consolidations do not 
present any of the abuses that the Act was designed to prevent or raise 
issues it was designed to address. Applicants will carry out the 
proposed substitutions and related consolidations in a manner 
appropriate in the public interest and consistent with the protection 
of investors.
    21. Applicants submit that, for all of the reasons summarized 
above, the terms of the proposed substitutions and related 
consolidations, including the consideration to be paid or received, are 
reasonable and fair to each Account (and subaccounts) and to Contract 
owners invested in each and do not involve overreaching on the part of 
any person; furthermore, the proposed substitutions and related 
consolidations are consistent with the policy of each Account (and 
subaccount) and the general purposes of the Act.

Conclusion

    For the reasons summarized above, Applicants assert that the 
requested order meets the standards set forth in 26(b) and 17(b), 
respectively, and should, therefore, be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-30246 Filed 11-10-98; 8:45 am]
BILLING CODE 8010-01-M