[Federal Register Volume 63, Number 237 (Thursday, December 10, 1998)]
[Notices]
[Pages 68317-68321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32826]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23587; File No. 812-11338]


UNUM Life Insurance Company of America, et al.; Notice of 
Application

December 3, 1998.
AGENCY: The Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to Section 26(b) of 
the Investment Company Act of 1940 (the ``1940 Act'') approving certain 
substitutions of securities.

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SUMMARY OF APPLICATION: Applicants request an order to permit certain 
registered unit investment trusts to substitute shares of Fidelity 
Variable Insurance Products Fund II Asset Manager Portfolio and 
Fidelity Variable Insurance Products Fund Growth Portfolio for shares 
of Calvert Social Balanced Portfolio of Calvert Variable Series and 
shares of American Century VP Capital Appreciation of American Century 
Variable Portfolios Inc. currently held by those unit investment 
trusts.

APPLICANTS: UNUM Life Insurance Company of America (``UNUM''), UNUM's 
VA-I Separate Account (the ``UNUM Account''), First UNUM Life Insurance 
Company (``First UNUM''), and First UNUM's VA-I Separate Account (the 
``First UNUM Account'') (the UNUM Account, together with the First UNUM 
Account, the ``Accounts'').

FILING DATE: The application was filed on October 2, 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 should be received by the 
Commission by 5:30 p.m. on December 28, 1998, and should 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 may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, c/o Rosemary Moore, 
Esq., UNUM Life Insurance Company of America, 2211 Congress Street, 
Portland, Maine 04122. Copies to William R. Galeota, Esq., Shea & 
Gardner, 1800 Massachusetts Avenue, NW., Washington, DC 20036 and 
Kimberly J. Smith, Esq., Sutherland Asbill & Brennan LLP, 1275 
Pennsylvania Avenue, NW., Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT:
Ethan D. Corey, Senior Counsel, at (202) 942-0675, or Kevin M. 
Kirchoff, Branch Chief, at (202) 942-0672, Office of Insurance 
Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application; the complete application may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 5th Street, NW., 
Washington, DC 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. UNUM is a life insurance company originally chartered under 
Maine law in 1966. UNUM is a subsidiary of UNUM Holding Company and its 
wholly-owned parent company, UNUM Corporation. UNUM is the depositor 
and sponsor of the UNUM Account.
    2. First UNUM is stock life insurance company organized under New 
York law in 1978. First UNUM is a subsidiary of UNUM Holding Company 
and its wholly-owned parent company, UNUM Corporation. First UNUM is 
the depositor and sponsor of the First UNUM Account.
    3. On October 1, 1996, UNUM completed the sale of its tax-sheltered 
annuity business to the Lincoln National Life Insurance Company 
(``Lincoln National''), pursuant to an acquisition agreement with 
Lincoln National (the ``Acquisition Agreement''). Under the Acquisition 
Agreement, Lincoln National assumed UNUM's obligations under contracts 
previously issued through the UNUM Account, and Lincoln Life & Annuity 
Company of New York (``LLANY'') assumed First UNUM's obligations under 
contracts previously issued through the First UNUM Account, other than 
in each case those obligations under contracts held by contractowners 
and/or participants who neither consented nor were

[[Page 68318]]

deemed to have consented to the assumption (``Unassumed Contracts'').
    4. Separate account assets relating to the Unassumed Contracts 
continue to be maintained in the UNUM Account or the First UNUM 
Account, respectively. Unassumed Contracts are administered by Lincoln 
National (if issued by UNUM) or LLANY (if issued by First UNUM).
    5. The Unassumed Contracts are group flexible premium deferred 
variable annuity contracts issued by UNUM (for the UNUM Account) or 
First UNUM (for the First UNUM Account). Currently, transfers of cash 
value can be made in unlimited amounts each contract year among and 
between the sub-accounts available as investment options under the 
Contracts without the imposition of a transfer charge. All of the 
Unassumed Contracts reserve to UNUM or First UNUM, as applicable, the 
right to restrict transfer privileges.
    6. The UNUM Account is registered under the 1940 Act as a unit 
investment trust (File No. 811-5803). The UNUM Account currently 
consists of nine sub-accounts. Each sub-account currently invests its 
assets exclusively in shares of the following series of the following 
open-end management investment companies (``Portfolios''): Dreyfus 
Stock Index Fund; Calvert Social Balanced Portfolio of Calvert Variable 
Series; Small Cap Portfolio of Dreyfus Variable Investment Fund; 
Fidelity Variable Money Market Portfolio; Fidelity Variable Insurance 
Products Fund II (``VIP II'') Asset Manager Portfolio, American Century 
VP Capital Appreciation and American Century VP Balanced of American 
Century Variable Portfolios Inc.; and International Stock Portfolio of 
T. Rowe Price International Series.
    7. The First UNUM Account is registered under the 1940 Act as a 
unit investment trust (File No. 811-6455). The First UNUM Account 
currently consists of nine sub-accounts. Since inception, each sub-
account of the First UNUM Account has invested in the same Portfolios 
as those available under the UNUM Account.
    8. The investment objective of the Calvert Social Balanced 
Portfolio, a non-diversified fund, is to achieve a total return greater 
than the rate of inflation through an actively managed, non-diversified 
portfolio of common and preferred stocks, bonds, and money market 
instruments which offer income and capital growth opportunity and which 
satisfy the social concern criteria established for the Portfolio. The 
Portfolio invests in enterprises that make a significant contribution 
to society through their products and services and through the way they 
do business. The Calvert Social Balanced Portfolio's investment 
objective is not fundamental and may be changed at any time with 60 
days notice to shareholders. The Calvert Asset Management Company, Inc. 
serves as the Fund's investment adviser.
    9. The investment objective of the VIP II Asset Manager Portfolio, 
a diversified fund, is to achieve high total return with reduced risk 
over the long term. It seeks to achieve this objective by diversifying 
its investments across stocks, bonds, and short-term and money market 
instruments, both in the U.S. and abroad. It may invest in all types of 
equity securities and short-term and money market instruments, and all 
types of fixed income securities with maturities greater than one year. 
Fidelity Management & Research Company (``FMR'') is the manager of the 
VIP II Asset Manager Portfolio.
    10. The investment objective of American Century VP Capital 
Appreciation is to seek capital growth. It seeks to achieve its 
investment objective by investing in common stocks (including 
securities and convertibles into common stocks and other equity 
equivalents) and other securities that meet certain fundamental and 
technical standards of selection and have, in the opinion of its 
investment manager, better than average potential for appreciation. It 
seeks to stay fully invested in such securities, regardless of the 
movement of stock prices generally. American Century Investment 
Management, Inc. manages American Century VP Capital Appreciation.
    11. The investment objective of the VIP Growth Portfolio is capital 
appreciation. It pursues its objective by investing primarily in common 
stocks. It is not restricted to any one type of security and may pursue 
capital appreciation through the purchase of bonds and preferred 
stocks. FMR is the manager of the VIP Growth Portfolio.
    12. Applicants assert that the performance of the VIP II Asset 
Manager Portfolio and the VIP Growth Portfolio (collectively, the 
``Substitute Funds'') has been better than the performance of the 
Calvert Social Balanced Portfolio and the American Century VP Capital 
Appreciation (collectively, the ``Replaced Funds'') on a historical 
basis. Applicants also assert that the expenses of the Substitute Funds 
have been lower than those of the Replaced Funds.
    13. The following chart shows the standard average annualized total 
returns for the Replaced Funds for the past two years as well as the 
total return for each Replaced Funds since its date of inception.

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                                                                               Standard total return
                                                                 -----------------------------------------------
                                                                   Inception of
                         Replaced funds                              portfolio
                                                                  through 12/31/  1997 (percent)  1996 (percent)
                                                                   97 (percent)
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Calvert Social Balanced:
    (Inception date: September 27, 1982)........................           11.20           20.08           12.62
American Century VP Capital:
    Appreciation (Inception date: November 20, 1987)............            4.34           -3.26           -4.32
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    14. The chart below provides the average annual total returns for 
the Substitute Funds for the past two years as well as standard total 
return since date of inception. Each Substitute Fund has outperformed 
the corresponding Replaced Fund during each period shown.

[[Page 68319]]



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                                                                       Total return of substitute portfolios
                                                                 -----------------------------------------------
                                                                   Inception of
                        Substitute funds                           fund through        1997            1996
                                                                     12/31/97        (percent)       (percent)
                                                                     (percent)
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VIP II Asset Manager Portfolio:
    (Inception date: September 6, 1989).........................           12.73           20.65           14.60
VIP Growth Portfolio:
    (Inception date: October 9, 1986)...........................           17.55           23.48           14.71
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    15. The chart below shows the approximate size and expense ratios 
for each of the Replaced Funds for the past two years. Expense ratios 
include management fees and operating expenses. Each Fund currently 
pays a monthly management fee based on its average daily net assets at 
the following annual rates: Calvert Social Balanced Portfolio, 0.70% 
(plus or minus a fee adjustment of 0.05% to 0.15%) and American Century 
VP Capital Appreciation, 1.00%. As of October 1, 1998, the management 
fee for the American Century VP Capital Appreciation will be: 1.00% of 
the first $500 million, 0.95% of the next $500 million, and 0.90% of 
the excess over $500 million.

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                                           Net assets at
             Replaced funds                 December 31    Expense ratio
                                          (in thousands)     (percent)
------------------------------------------------------------------------
Calvert Social Balanced:
    1996................................        $161,473            0.81
    1997................................         227,834            0.80
    June 30, 1998 (inception date:
     September 27, 1982)................         275,385            0.77
American Century VP Capital
 Appreciation:
    1996................................      $1,313,865            1.00
    1997................................         593,698            1.00
    June 30, 1998 (inception date:
     November 20, 1987).................         515,262            1.00
------------------------------------------------------------------------

    16. The next chart provides the approximate size and expense ratios 
for each of the Substitute Funds for the past two and one-half years. 
Expense ratios include management fees and operating expenses. Each 
Substitute Fund currently pays a monthly management fee. The management 
fee for each Substitute Fund is calculated by adding a group fee rate 
to an individual fund fee rate, multiplying the result by the Fund's 
monthly average net assets, and dividing by twelve. The group fee rate 
is based on the average net assets of all the mutual funds advised by 
FMR, and cannot rise above 0.52%. For December 1997, the group fee rate 
for each of the VIP II Asset Manager Portfolio and the VIP Growth 
Portfolio was 0.29%. The individual fund fee rate for the VIP II Asset 
Manager Portfolio is 0.25% and for the VIP Growth Portfolio is 0.30%. 
The management fee for each Substitute Fund for the fiscal year ended 
December 31, 1997 was as follows: VIP II Asset Manager Portfolio--
0.55%; and VIP Growth Portfolio--0.60%. Each Substitute Fund has lower 
expense ratios, and is significantly larger in size than the 
corresponding Replaced Fund for the periods shown.

------------------------------------------------------------------------
                                           Net assets at      Expense
            Substitute funds                December 31      ratio\1\
                                          (in thousands)     (percent)
------------------------------------------------------------------------
VIP II Asset Manager Portfolio:
    1996................................      $3,641,194            0.74
    1997................................       4,399,948            0.65
    June 30, 1998 (inception date:
     September 6, 1982).................       4,965,445            0.65
VIP Growth Portfolio:
    1996................................      $6,086,424            0.69
    1997................................       7,729,147            0.69
    June 30, 1998 (inception date:
     October 9, 1986)...................       9,398,758            0.69
------------------------------------------------------------------------
\1\ FMR, the VIP II Asset Manager Portfolio or the VIP Growth Portfolio
  has entered into varying arrangements with third parties who either
  paid or reduced a portion of the Funds' expenses. With these
  arrangements, the VIP II Asset Manager Portfolio's expense ratio for
  1996 and 1997 was 0.73% and 0.64%, respectively, and the VIP Growth
  Portfolio's expense ratio for each of the 1996 and 1997 was 0.67%.

    17. The charts below show a comparison of the Replaced Funds' and 
the Substitute Funds' total return, standard deviation and expense 
ratios for the three years ended June 20, 1998.

[[Page 68320]]



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                                                                                      3-year       Expense ratio
                                                                   3-year total      standard       for 3 years
                         Replaced funds                               return         deviation    ending 6/30/98
                                                                     (percent)       (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Calvert Social Balanced.........................................            16.7            14.9            0.77
American Century VP Capital Appreciation........................            -0.4            20.3            1.00
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----------------------------------------------------------------------------------------------------------------
                                                                                      3-year       Expense ratio
                                                                   3-year total      standard       for 3 years
                        Substitute Funds                              return         deviation    ending 6/30/98
                                                                     (percent)       (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
VIP II Asset Manager Portfolio..................................            17.4             7.7            0.65
VIP Growth Portfolio............................................            21.5            14.4            0.69
----------------------------------------------------------------------------------------------------------------

    18. The Calvert Social Balanced Portfolio is restricted in the 
investments it may make by its social concern criteria. While the VIP 
II Asset Manager Portfolio does not duplicate these criteria, the 
Applicants assert that the VIP II Asset Manager Portfolio offers an 
investment program sufficiently similar to that of the Calvert Social 
Balanced Portfolio so that Unassumed Contract Owners will be able to 
pursue the same long-term investment objectives (albeit without social 
criteria) through the VIP II Asset Manager Portfolio, with lower fees 
and expenses and lower volatility.
    19. The Calvert Social Balanced Portfolio's investment objective 
(total return above the rate of inflation) and the VIP II Asset Manager 
Portfolio's investment objective (high total return with reduced risk 
over the long-term) are substantially similar. While the policies that 
they follow to achieve their objectives are not identical, they are 
both domestic hybrid funds that invest in the same types of 
instruments. Applicants assert that an investor in the Calvert Social 
Balanced Portfolio is attempting to achieve the same long term goals as 
those sought by the VIP II Asset Manager Portfolio.
    20. The investment objectives of the American Century VP Capital 
Appreciation (capital growth) and the VIP Growth Portfolio (capital 
appreciation) are substantially similar. While each of these Funds 
seeks to achieve its objective through somewhat different investment 
strategies, Applicants assert that an investor in the American Century 
VP Capital Appreciation is attempting to achieve the same long-term 
goals as those sought by the VIP Growth Portfolio, and through the same 
type of investments (equity securities).
    21. As part of an overall business plan of Lincoln National and 
LLANY to make the Unassumed Contracts more competitive and more 
efficient to administer and oversee, Lincoln National and LLANY have 
proposed to replace the Replaced Funds with the Substitute Funds. The 
proposed substitutions are consistent with this business plan, involve 
Portfolios with compatible investment objectives, and after the 
substitution, Unassumed Contracts will be invested in Portfolios whose 
performance has been better on a historical basis.
    22. UNUM and First UNUM have concurred with the determination by 
Lincoln National and LLANY that the Replaced Funds are good candidates 
for substitution. Applicants propose that UNUM and First UNUM replace: 
(a) shares of the Calvert Social Balanced Portfolio with shares of the 
VIP II Asset Manager Portfolio; and (b) shares of the American Century 
VP Capital Appreciation with shares of the VIP Growth Portfolio (the 
``Proposed Substitution''). Applicants propose to have UNUM and First 
UNUM redeem shares of each Removed Fund in cash and purchase with the 
proceeds shares of the Substitute Fund identified above.
    23. All owners and prospective owners of the Unassumed Contracts 
will be notified of UNUM's and First UNUM's intention to take the 
necessary actions, including seeking the requested order, to substitute 
portfolios. The supplements will advise owners and prospective owners 
that they will be unable to allocate net purchase payments to, or 
transfer cash values to, the sub-accounts of the Accounts corresponding 
to each of the Replaced Funds after April 30, 1999, and that on the 
date of the proposed substitution (on or about April 30, 1999, after 
the relief requested has been obtained and all necessary systems 
support changes have been made), the Substitute Funds will replace the 
Replaced Funds as the underlying investments for such sub-accounts. In 
addition, the supplements will apprise owners and prospective owners 
that neither UNUM nor First UNUM will exercise any rights reserved by 
it under any of the Unassumed Contracts to impose restrictions or fees 
on transfers until at least thirty days after the proposed 
substitutions.
    24. At least sixty days before the date of the proposed 
substitutions, affected owners will also be provided with a prospectus 
for each Substitute Fund which includes complete current information 
concerning the Substitute Funds. Thus, any owner affected by the 
substitutions will have received current prospectus disclosure for each 
Substitute Fund at least 60 days or more in advance of the proposed 
substitutions.
    25. The proposed substitutions will take place at relative net 
asset value with no change in the amount of any Unassumed Contract 
owner's cash value or death benefit or in the dollar value of his or 
her investment in any of the Accounts. Unassumed Contract owners will 
not incur any additional fees or charges as a result of the proposed 
substitutions nor will their rights or UNUM's and First UNUM's 
obligations under the Unassumed 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 UNUM and First UNUM or Lincoln National and LLANY. In addition, the 
proposed substitutions will not impose any tax liability on Unassumed 
Contract owners. The proposed substitutions will not cause the 
Unassumed Contract fees and charges currently paid by existing 
Unassumed Contract owners to be greater after the proposed 
substitutions than before the proposed substitutions. Neither UNUM nor 
First UNUM currently impose any restrictions or fees on transfers under 
the Unassumed Contracts, and neither will exercise any right it may 
have under the Unassumed Contracts to impose restrictions on transfers 
under any of the Unassumed Contracts for a period of at least thirty 
days following the proposed substitutions.

[[Page 68321]]

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act requires the depositor of a 
registered unit investment trust holding the securities of a single 
issuer to obtain Commission approval before substituting the securities 
held by the trust. Specifically, Section 26(b) states:

    It shall be 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 shall have approved such substitution. The Commission 
shall issue an order approving such 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 
this title.

    2. Applicants state that the Proposed Substitution appears to 
involve a substitution of securities within the meaning of Section 
26(b) of the 1940 Act and request that the Commission issue an order 
pursuant to Section 26(b) of the 1940 Act approving the Proposed 
Substitution.
    3. The Contracts all provide to UNUM or First UNUM the right, 
subject to Commission approval, to substitute shared of another open-
end management investment company for shares of an open-end management 
investment company held by a subaccount of the relevant Account. 
Applicants assert that the prospectuses for the Unassumed Contracts 
contain appropriate disclosure of this right.
    4. Applicants assert that, although there are differences in the 
objectives and policies of the Replaced Funds and the Substitute Funds, 
their objectives and policies are sufficiently consistent to assure 
that, following the Proposed Substitution, the achievement of the core 
investment goals of the affected owners invested in the Replaced Funds 
will not be frustrated.
    5. Applicants assert that the performance of the Calvert Social 
Balanced Portfolio was lower than that of a comparable securities index 
that had lower volatility (or risk), and was lower than the median of 
its peer group (domestic hybrid funds) over the three year period 
ending June 30, 1998. Applicants assert that the VIP II Asset Manager 
Portfolio has, however, performed better than its comparable securities 
index and ranks in the top decile of a similar peer group (large blend 
equities) over the three-year period ending June 30, 1998.
    6. Applicants assert that the performance of American Century VP 
Capital Appreciation was lower than that of a comparable securities 
index that had lower volatility (or risk), and was lower than the 
median of its peer group (mid-cap growth equities) over the three-year 
period ending June 30, 1998. Applicants assert that while the VIP 
Growth Portfolio performed below the comparable securities index and 
the median of its peer group (large cap equities) over the same time 
period, its performance was better than that of the comparable 
securities index and the median of its peer group for the one and five 
year periods ending June 30, 1998, and has substantially outperformed 
American Century VP Capital Appreciation in 1996, 1997 and since the 
inception of the VIP Growth Portfolio.
    7. Each Substitute Fund has performed favorably over the past two 
years in comparison to the Replaced Fund. While past performance is not 
necessarily indicative of future performance, applicants assert that 
the Proposed Substitution is appropriate in light of the performance of 
the Replaced Funds.
    8. Applicants assert that the Proposed Substitution would 
effectively consolidate the UNUM and First UNUM assets of each 
Substitute Fund with those of the corresponding Replaced Fund, with the 
goal of each Substitute Fund having lower future expense ratios than 
the past expense ratios of the Replaced Fund. The VIP II Asset Manager 
Portfolio is a larger Fund and has a lower expense ratio than the 
Calvert Social Balanced Portfolio. Moreover, the Calvert Social 
Balanced Portfolio is a small Fund, which has not grown significantly, 
and, Applicants assert, likely does not have prospects of significant 
growth. Based on these trends, the Applicants believe that the VIP II 
Asset Manager Portfolio is likelier to achieve economics of scale in 
the near and long term.
    9. The VIP Growth Portfolio is a larger fund and has a lower 
expense ratio than American Century VP Capital Appreciation. Moreover, 
Applicants assert that American Century VP Capital Appreciation has 
diminished in size over the past two and one-half years, while the VIP 
Growth Portfolio has gained in size over the past two and one-half 
years. Based on these trends, the Applicants believe that the VIP 
Growth Portfolio is likelier to achieve economies of scale in the near 
and long term. With the addition of the UNUM and First UNUM assets, the 
size of each Substitute Fund is expected to further increase.

Conclusion

    Applicants assert that, for the reasons summarized above, the 
Proposed Substitution is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32826 Filed 12-9-98; 8:45 am]
BILLING CODE 8010-01-M