[Federal Register Volume 63, Number 238 (Friday, December 11, 1998)]
[Notices]
[Pages 68480-68483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32933]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23589; File No. 812-10996]


Cova Financial Services Life Insurance Company, et al.; Notice of 
Application

December 4, 1998.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order pursuant to Sections 17(b) 
and 26(b) of the Investment Company Act of 1940 (the ``1940 Act'').

-----------------------------------------------------------------------

SUMMARY OF APPLICATION: Applicants request an order pursuant to 26(b) 
of the 1940 Act, approving the proposed substitution of securities, and 
pursuant to Section 17(b) of the 1940 Act exempting related 
transactions from Section 17(a) of the 1940 Act.

APPLICANTS: Cova Financial Services Life Insurance Company (``Cova 
Life''), First Cova Life Insurance Company (``First Cova Life''), Cova 
Financial Life Insurance Company (``Cova Financial Life) (collectively, 
the ``Life Companies''), Cova Variable Annuity Account One (``Cova 
Account One''), Cova Variable Life Account One (``Cova Life Account 
One''), First Cova Variable Annuity Account One (``First Cova Account 
One''), Cova Variable Annuity Account Five (``Cova Account Five'') 
(collectively, the ``Accounts''), Cova Series Trust (``Cova Trust''), 
Lord Abbett Series Fund, Inc. (``Lord Abbett Fund''), and General 
American Capital Company (``General American Fund'') (collectively, the 
``Management Companies'').

FILING DATE: The application was filed on February 5, 1998, and amended 
and restated on November 4, 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 on this application by writing to the 
Secretary of the SEC and serving Applicants with a copy of the request, 
in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on December 29, 1998, and 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, N.W., Washington, D.C. 
20549. Applicants, c/o Blazzard, Grodd & Hasenauer, P.C., 943 Post Road 
East, Westport, CT 06880, Attn: Raymond A. O'Hara III, Esq.

FOR FURTHER INFORMATION CONTACT:
Megan L Dunphy, Attorney, or Mark Amorosi, Special Counsel, Office of 
Insurance Products, Division of Investment Management, at (202) 942-
0670.

SUPPLEMENTARY INFORMATION: 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, N.W., Washington, D.C. 
20549 (tel. (202) 942-8090).

Applicants' Representations

    1. The Life Companies are affiliated stock life insurance 
companies, whose parent is General American Life Insurance Company 
(``General American''). Cova Life is incorporated in Missouri and does 
business in the District of Columbia and in all states except 
California, Maine, New Hampshire, New York and Vermont. First Cova is 
incorporated in and licensed to do business only in the state of New 
York. Cova Financial Life is incorporated in and licensed to do 
business only in the state of California.
    2. Each of the Accounts is registered with the Commission as a unit 
investment trust. The assets of each Account support variable annuity 
contracts and, with respect to Cova Life Account One, variable life 
insurance policies (the ``Contracts''). Interests under the Contracts 
have been registered under the Securities Act of 1933 (File Nos. 33-
39100; 33-14979; and 333-34741).
    3. The Accounts are divided into subaccounts, each of which 
reflects the investment performance of corresponding portfolios of Cova 
Trust, Lord Abbett Fund, and the General American Fund.
    4. Cova Trust is registered under the 1940 Act as an open-end 
management investment company and is currently comprised of twenty 
portfolios, nine of which are involved in the proposed substitution; 
Stock Index Portfolio, Large Cap Stock Portfolio, Quality Income 
Portfolio, Quality Bond Portfolio, High Yield Portfolio, Bond Debenture 
Portfolio, Money Market Portfolio, VKAC Growth and Income Portfolio and 
the Lord Abbett Growth and Income Portfolio.
    5. Cova Investment Advisory Corporation (``Cova Advisory''), an 
indirect wholly owned subsidiary of General American, is the investment 
adviser for Cova Trust. Cova Advisory has engaged sub-advisers for each 
of the portfolios of Cova Trust. The sub-adviser for the Large Cap 
Stock and Quality Bond Portfolios is J.P. Morgan Investment Management, 
Inc. (``JPM''). The sub-adviser for the Stock Index, Quality Income, 
High Yield, Money Market and VKAC Growth and Income Portfolios is Van 
Kampen American Capital Investment Advisory Corp. (``VKAC''). Lord 
Abbett is the sub-adviser for the Lord Abbett Growth and Income 
Portfolio and the Bond Debenture Portfolio of Cova Trust.
    6. Lord Abbett Fund is registered under the 1940 Act as an open end 
management investment company and is currently comprised of two 
portfolios, one of which--the Growth and Income Portfolio--is relevant 
to the proposed substitution. Lord Abbett & Co. (``Lord Abbett'') is 
the investment manager of the Lord Abbett Fund.
    7. General American Fund is registered under the 1940 Act as an 
open-end management investment company and is comprised of eight 
series, one of which--the Money Market Fund--is relevant to the 
proposed substitution. Conning Asset Management Company, an affiliate 
of General American, is the investment adviser to the Money Market 
Fund.
    8. Applicants propose to substitute shares of certain portfolios of 
Cova Trust and the General American Fund (``Substitute Funds'') for 
shares of certain other portfolios of Cova Trust, the General American 
Fund, and the Lord Abbett Fund (the ``Replaced Funds'') as follows:

[[Page 68481]]



----------------------------------------------------------------------------------------------------------------
              Substitute fund                                           Replaced fund
----------------------------------------------------------------------------------------------------------------
                 Cova Trust                                               Cova Trust
 
1. Large Cap Stock Portfolio...............  1. Stock Index Portfolio.
2. Quality Bond Portfolio..................  2. Quality Income Portfolio.
3. Bond Debenture Portfolio................  3. High Yield Portfolio.
4. Lord Abbett Growth and Income Portfolio.  4. VKAC Growth and Income Portfolio.
 
                 Cova Trust                                            Lord Abbett Fund
 
5. Lord Abbett Growth and Income Portfolio.  5. Growth and Income Portfolio.
 
           General American Fund                                          Cova Trust
 
6. Money Market Portfolio..................  6. Money Market Portfolio.
----------------------------------------------------------------------------------------------------------------

    9. Applicants represent that the Substitute Funds have investment 
objectives that are the same as, similar to, or consistent with those 
of the Replaced Funds. For each of the substitutions numbered 1-4 in 
Table 1, above, Applicants state that the Replaced Fund and Substitute 
Fund are not the same, but are substantially similar. For the 
substitution numbered 5 above, Applicants state that the Replaced Fund 
and Substitute Fund are ``clone'' funds with identical investment 
objectives and policies, and the investment adviser of the Replaced 
Fund will continue to provide investment advice to the Substitute Fund 
as a sub-adviser to the fund. Applicants state that the substitution 
numbered 6 involves two money market funds with substantially identical 
investment objectives.
    10. Applicants state that five of the six proposed substitutions 
involve Replaced Funds that are sub-advised by VKAC which is no longer 
an affiliated entity of the Life Companies. These five Portfolios are: 
the Stock Index Portfolio, the Quality Income Portfolio, the High Yield 
Portfolio, the VKAC Growth and Income Portfolio and the Money Market 
Portfolio. The Life Companies examined the historical investment 
performance records of the proposed sub-advisers/advisers for the 
Substitute Funds and determined that such records compared favorably, 
or were better than, those of VKAC, the sub-adviser for five Replaced 
Funds. Applicants also maintain that the expense ratios of these 
Replaced Funds is likely to increase over time as assets decline and 
therefore, the performance of these funds will be hurt. Applicants 
state that, given the desire of the Life Companies to improve 
performance, the Life Companies have determined that it is in their 
best interest and in the best interest of the Contract owners to pursue 
the proposed substitutions.
    11. The Lord Abbett Growth and Income Portfolio of Cova Trust is a 
newly created investment portfolio that will not begin operations until 
the proposed substitution takes place and therefore does not have an 
operating history. Applicants state that the Substitute Fund's 
investment objectives and policies are a ``clone'' of the Replaced 
fund, and therefore, the Applicants expect the Substitute Fund to have 
portfolio characteristics that are substantially the same as the 
Replaced Fund.
    12. Applicants state that certain of the Substitute Funds are 
substantially larger than the Replaced Funds. Applicants maintain that 
other Substitute Funds, although smaller than the Replaced Funds, are 
growing at a much faster rate than the Replaced Funds. Applicants 
assert that the increased asset size of the Substitute Funds is more 
likely to result in economies of scale and in lower operating expenses 
which inure to the benefit of Contract owners.
    13. Applicants state that certain of the Replaced Funds of Cova 
Trust have experienced more favorable expense ratios than the 
Substitute Funds. Applicants state, however, that the Cova Trust 
Replaced Funds are no longer offered for sale and therefore their 
assets are likely to decrease over time given normal levels of 
transfers and redemptions. Accordingly, Applicants maintain that the 
expense ratios of these Replaced Funds will rise given the declining 
assets and the resulting loss of economies of scale.
    14. Furthermore, Applicants state that Life Companies have been 
voluntarily subsidizing the Cova Trust Replaced Funds for all operating 
expenses exclusive of investment advisory fees. Applicants maintain 
that the Life Companies have already expended considerable amounts of 
money voluntarily subsidizing these portfolios, and it is likely that 
the Life Companies will cease any future expense reimbursements. 
Without expense reimbursements, Applicants maintain that the expense 
ratios of the Cova Trust Replaced Funds will likely exceed their 
Substitute Fund counterparts over time.
    15. Applicants state that the proposed substitution will take place 
at relative net asset value with no change in the amount of any 
Contract owner's Contract value or in the dollar value of their 
investment in the Accounts. The substitutions will be effected by 
redeeming shares of the Replaced Funds on the date of substitution at 
net asset value and using the proceeds to purchase shares of the 
Substitute Funds at net asset value on the same date. At all times, the 
Contract values will remain unchanged and fully invested. Contract 
owners will not incur any fees or charges as a result of the proposed 
substitutions nor will their rights 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 the Life Companies. 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.
    16. Applicants state that it is expected that certain of the 
substitutions will be effected by redeeming the shares of the Replaced 
Fund partly in cash and partly in-kind. Those assets will then be 
contributed to the Substitute Fund to purchase shares of that fund. 
Redemptions and contributions in-kind will reduce the brokerage costs 
that would otherwise be incurred in connection with the redemption. The 
use of in-kind redemptions and contributions will be done in a manner 
consistent with the investment objectives and policies and 
diversification requirements of the applicable Substitute Fund, and the 
adviser and each Substitute Fund's sub-adviser will review the in-kind 
redemptions to assure that the assets proposed for the fund are 
suitable for the Substitute Fund. The assets subject to in-kind 
redemption and purchase will be valued based on the normal valuation 
procedures of the redeeming and purchasing funds. Applicants state that 
any inconsistencies in valuation

[[Page 68482]]

procedures between the Replaced Fund and the Substitute Fund will be 
reconciled so that the redeeming and purchasing values are the same.
    17. Applicants state that after the substitutions have been 
completed there will be one instance where more than one sub-account of 
an Account will hold shares of a single Substitute Fund. The Life 
Companies intend to consolidate those sub-accounts. Specifically, 
Applicants state the subaccounts currently investing in the VKAC Growth 
and Income Portfolio and the Growth and Income Portfolio of the Lord 
Abbet Fund will be merged in to new sub-accounts which will invest in 
the Lord Abbett Growth and Income Portfolio of Cova Trust. Shares held 
by the existing sub-accounts will be transferred to the new sub-
accounts at net asset value so there will be no financial impact to the 
Contract owner.
    18. Applicants state that the Life Companies have supplemented the 
Contract prospectuses to reflect the proposed substitutions. The 
supplements identify which funds are being replaced and advise Contract 
owners that they may transfer assets from any subaccount involved in 
the proposed substitution to any other subaccount available under a 
Contract without any limitation or charge prior to the date of the 
substitution and for a period of 30 days after the substitution. 
Contract owners who are affected by the substitution will be sent 
notice of the substitutions within five days following the substitution 
date confirming that the substitutions have been completed and 
reiterating their right to make transfers to any other subaccount for a 
period of 30 days from the date of the notice without any limitation or 
charge being imposed.
    19. Applicants state that following the substitutions, Contract 
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.

Applicant's Legal Analysis

    1. Section 26(b) of the 1940 Act provides, in pertinent part, that 
`[i]t 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 a security unless the Commission 
shall have approved such substitution.'' Section 26(b) of the 1940 Act 
also provides that the Commission shall issue an order approving such 
substitution if the evidence establishes that the substitution is 
consistent with the protection of investors and the purpose fairly 
intended by the policies and provisions of the 1940 Act.
    2. Applicants request an order pursuant to 26(b) of the 1940 Act 
approving the proposed substitutions by the Life Companies. Applicants 
assert that the purposes, terms, and conditions of the proposed 
substitutions are consistent with the protection of investors and the 
purposes fairly intended by the 1940 Act. Applicants further assert 
that the proposed substitutions will not result in the type of costly 
forced redemption that Section 26(b) of the 1940 Act was intended to 
guard against.
    3. Applicants state that the Contracts reserve the Life Companies' 
right, subject to Commission approval, to substitute shares of one 
management investment company for another in situations where it could 
benefit the Life Companies and the Contract owners. Applicants also 
state that the Contract prospectuses disclose this right. Applicants 
maintain that each of the Substitute Funds is a suitable and 
appropriate investment vehicle for Contract owners and each of the 
Substitute Funds has either a substantially identical investment 
objective or an investment objective that is similar to or comparable 
with the Replaced Fund.
    4. Applicants submit that the proposed substitutions meet the 
following standards that have been applied to substitutions in the past 
in that:
    a. The investment objectives of the Substitute Funds are 
substantially identical to, similar to, or comparable with those of the 
Replaced Funds;
    b. The substitutions, in all cases, will be effected at the net 
asset value of the respective shares in conformity with Section 22(c) 
of the 1940 Act and Rule 22c-1 thereunder, without the imposition of 
any transfer or similar charge;
    c. The Life Companies have undertaken to assume the expenses and 
transaction costs, including among others, legal and accounting fees 
and any brokerage commission, relating to the substitutions;
    d. The substitutions in no way will alter the insurance benefits to 
Contract owners or the contractual obligations of the Life Companies;
    e. The substitutions in no way will alter tax benefits to Contract 
owners; and
    f. Contract owners may choose simply to withdraw amounts credited 
to them following the substitutions under the conditions that currently 
exist without incurring any charges (other than any applicable 
withdrawal charges).
    5. Section 17(a)(1) of the 1940 Act prohibits an 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 1940 Act prohibits any 
affiliated person from purchasing any security or other property from 
such registered investment company.
    6. Applicants state that certain portfolios of the Management 
companies may be affiliated persons of each other or affiliated persons 
of affiliated persons of each other. In addition, Applicants state that 
the proposed substitutions by the Life Companies, which may entail the 
indirect purchase of shares of the Substitute Funds with portfolio 
securities of the Replaced Funds and the indirect sale of portfolio 
securities of the Replaced Funds for shares of the Substitute Funds, 
may also entail the purchase or sale of such securities by each of the 
portfolios of the Management Companies involved, acting as principal, 
to one of the other portfolios of the Management Companies and 
therefore may be in contravention of Section 17(a) of the 1940 Act.
    7. Applicants request an order pursuant to Section 17(b) of the 
1940 Act exempting the in-kind redemptions and purchases from the 
provisions of Section 17(a). Section 17(b) of the 1940 Act provides 
that the Commission may grant an order exempting a proposed transaction 
from Section 17(a) if evidence establishes that: (1) 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; (2) 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 1940 Act; and (3) the proposed transaction is consistent with 
the general purposes of the 1940 Act.
    8. Applicants represent that the terms of the proposed 
substitution, including the consideration to be paid and received, are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned and that the interest of Contract owners will not be 
diluted. The in-kind redemptions and purchases will take place at 
relative net asset value with no change in the amount of any Contract 
owner's Contract or accumulation value or death benefit or in the 
dollar value of his or her investment in any of the Accounts. Both the 
investment advisers/and or

[[Page 68483]]

sub-advisers will examine the portfolios securities being offered to 
each Portfolio and accept only those securities as consideration that 
they would have acquired directly in a cash transaction. The Applicants 
represent that the transactions are consistent with the policies of 
each investment company and the general purposes of the 1940 Act, and 
comply with the requirements of Section 17(b).

Conclusion

    Applicants assert that, for the reasons summarized above, the 
requested order approving the substitution and related transactions 
involving in-kind redemptions should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32933 Filed 12-10-98; 8:45 am]
BILLING CODE 8010-01-M