[Federal Register Volume 63, Number 239 (Monday, December 14, 1998)]
[Notices]
[Pages 68803-68806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33073]


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

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23591; No. 812-11328]


Dow Target Variable Fund LLC

December 8, 1998.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``Act'').

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

APPLICANT: Dow Target Variable Fund LLC.

SUMMARY OF APPLICATION: Applicant seeks an order pursuant to Section 
6(c) of the Act exempting Applicant from the provisions of Section 
12(d)(3) of the Act to the extent necessary to permit Applicant's 
portfolios to invest up to 10% of their total assets in securities of 
issuers that derive more than 15% of their gross revenues from 
securities related activities.

FILING DATE: The application was filed on September 28, 1998 and 
amended on December 2, 1998.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC and serving 
Applicants with a copy of the request, personally or by mail. Hearing 
requests must be received by the Commission by 5:30 p.m. on December 
29, 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 be received by the Commission by 5:30 p.m. on 
December 29, 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 requester's 
interest, the reason for

[[Page 68804]]

the request, and the issues contested. Persons who wish to be notified 
of a hearing may request notification by writing to the Secretary of 
the Commission.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicant, One Financial Way, Cincinnati, Ohio 45242.

FOR FURTHER INFORMATION CONTACT:
Susan M. Olson, Senior Counsel, or Kevin M. Kirchoff, Branch Chief, 
Office of Insurance Products, Division of Investment Management, at 
(202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, 
D.C. 20549 (tel. (202) 942-8090).

Applicant's Representations

    1. Applicant is a registered, open-end management investment 
company (File No. 811-09019). It currently consists of twelve non-
diversified portfolios, each named after a calendar month (January 
Portfolio, February Portfolio, etc.). Applicant was organized under the 
laws of Ohio as a limited liability company on September 21, 1998. 
Under Ohio law, a limited liability company does not issue shares of 
stock. Instead, ownership rights are contained in membership interests. 
Each membership interest of Applicant (``Interest'') represents an 
undivided interest in the stocks held in one of Applicant's portfolios.
    2. The Interests are not offered directly to the public. The only 
direct owner of the Interests is The Ohio National Life Insurance 
Company (``Ohio National Life''), through its variable annuity separate 
accounts. Those of Ohio National Life's variable annuity owners who 
have contract values allocated to any of Applicant's portfolios have 
indirect beneficial rights in the Interests and have the right to 
instruct Ohio National Life with regard to how it votes the Interests 
that it holds in its variable annuity separate accounts.
    3. Applicant's investment adviser is Ohio National Investments, 
Inc. (the ``Adviser''). First Trust Advisors L.P. (``First Trust'') is 
the sub-adviser to each of Applicant's portfolios.
    4. Applicant states that each of its twelve portfolios consist of 
an investment portfolio of the common stocks of the ten companies in 
the Dow Jones Industrial Average (the ``Dow'') having the highest 
dividend yield as of the close of business of the last business day of 
the month preceding the month for which the portfolio is named (the 
``Stock Selection Date''). These ten companies are popularly known as 
the ``Dogs of the Dow.'' Applicant states that on or about the first 
business day of the month for which a portfolio is named, First Trust 
will set the proportionate relationships among the ten stocks to be 
held in that portfolio for the next twelve months. At the end of a 
portfolio's twelfth month, the portfolio will be re-balanced with a new 
mix of ten Dogs of the Dow stocks.
    5. Applicant states that the objective of each portfolio is to 
provide above-average total return through both capital appreciation 
and dividend income. The portfolios may or may not achieve that 
objective. Applicant states that the ten stocks held in any portfolio 
are not expected to reflect the entire index, and the prices of 
Interests are not intended to parallel or correlate with movements in 
the Dow. Applicant states that, generally, it will not be possible for 
all of the portfolios' funds to be invested in the prescribed mix of 
ten stocks at any time. Applicant states that the Adviser and First 
Trust will try, to the extent practicable, to maintain a minimum cash 
position at all times. Applicant represents that normally the only cash 
items held will represent amounts expected to be deducted as charges 
and amounts too small to purchase additional proportionate round lots 
of the Dogs of the Dow stocks.
    6. The Dow consists of 30 stocks selected by Dow Jones & Company, 
Inc. as representative of the broader domestic stock market and of 
American industry. Applicant states that the Dow Jones & Company, Inc. 
is not affiliated with it and has not participated, and will not 
participate, in any way in the creation of the portfolios or the 
selection of the stocks purchased by the portfolios.
    7. Applicant states that until the end of the initial month of a 
portfolio, Interests may be purchased by variable annuity separate 
accounts of Ohio National Life. After the initial month of a portfolio, 
no further Interests in that portfolio may be purchased until eleven 
months later. Interests may be redeemed at any time.
    8. Applicant states that any purchase of Interests made after the 
initial business day of the month for which the portfolio is named, 
will duplicate, as nearly as is practicable, the original proportionate 
relationships of the ten stocks held by that portfolio. Because the 
prices of each of the ten stocks will change nearly every day, the 
ratio of the price of each to the total price of the entire group of 
ten will also change daily. However, Applicant states that the 
proportion of stocks held by that portfolio will not change materially 
as a result of the sales of additional Interests after the first 
business day of the month for which the portfolio is named.
    9. Applicant states that it is not a ``regulated investment 
company'' under Subchapter M of the Internal Revenue Code of 1986, as 
amended (the ``Code''). Nonetheless, Applicant states that it does not 
pay federal income tax on its interest, dividend income or capital 
gains. As a limited liability company whose interests are sold only to 
Ohio National Life, Applicant states that it is disregarded as an 
entity for purposes of federal income taxation. Applicant states that 
Ohio National Life, through its variable annuity separate accounts, is 
treated as owning the assets of the portfolios directly and its tax 
obligations thereon are computed pursuant to Subchapter L of the Code 
(which governs the taxation of insurance companies). Applicant states 
that under current tax law, interest, dividend income and capital gains 
of Applicant are not taxable to Applicant, and are not currently 
taxable to Ohio National Life or to contract owners, when left to 
accumulate within a variable annuity contract.
    10. Section 817(h) of the Code provides that in order for a 
variable contract which is based on a segregated asset account to 
qualify as an annuity contract under the Code, the investments made by 
that account must be ``adequately diversified'' in accordance with 
Treasury regulations.
    11. Applicant states that each portfolio must comply with the 
Section 817(h) diversification requirements. Therefore, Applicant 
states that the Adviser and First Trust may depart from the portfolio 
investment strategy, if necessary, in order to satisfy these Section 
817(h) diversification requirements. Applicant represents that under 
all circumstances, except in order to meet Section 817(h) 
diversification requirements, the common stocks purchased for each 
portfolio will be chosen solely according to the formula described 
above and will not be based on the research opinions or buy or sell 
recommendations of the Adviser or First Trust. Applicant represents 
that neither the Adviser nor First Trust has any discretion as to which 
common stocks are purchased. Applicant states that securities purchased 
for each portfolio may include securities of issuers in the Dow that 
derived more than 15% of their gross revenues in their most recent 
fiscal year from securities related activities.

[[Page 68805]]

Applicant's Legal Analysis

    1. Section 12(d)(3) of the Act, with limited exceptions, prohibits 
an investment company from acquiring any security issued by any person 
who is a broker, dealer, underwriter or investment adviser. Rule 12d3-1 
under the Act exempts from Section 12(d)(3) purchases by an investment 
company of securities of an issuer, except its own investment adviser, 
promoter or principal underwriter or their affiliates, that derived 
more than 15% of its gross revenues in its most recent fiscal year from 
securities related activities, provided that, among other things, 
immediately after any such acquisition the acquiring company has 
invested not more than 5% of the value of its total assets in the 
securities of the issuer. Each of Applicant's portfolios undertakes to 
comply with all of the requirements of Rule 12d3-1, except the 
condition in subparagraph (b)(3) prohibiting an investment company from 
investing more than 5% of the value of its total assets in securities 
of a securities related issuer.
    2. Section 6(c) of the Act provides that the Commission by order 
upon application, may conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes thereof, from 
any provision of the Act or any rule or regulation thereunder, if and 
to the extent that the exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.
    3. Applicant states that Section 12(d)(3) was intended: (a) to 
prevent investment companies from exposing their assets to the 
entrepreneurial risks of securities related businesses; (b) to prevent 
potential conflicts of interest; (c) to eliminate certain reciprocal 
practices between investment companies and securities related 
businesses; and (d) to ensure that investment companies maintain 
adequate liquidity in their portfolios.
    4. A potential conflict could occur, for example, if an investment 
company purchased securities or other interests in a broker-dealer to 
reward that broker-dealer for selling fund shares, rather than solely 
on the basis of investment merit. Applicant states that this concern 
does not arise in this situation. Applicant states that generally, 
neither the Applicant, the Adviser nor First Trust has discretion in 
choosing the common stock or amount purchased. Applicant states that 
the stock must first be included in the Dow (which along with Dow Jones 
& Company, Inc., is unaffiliated with Applicant, the Adviser or First 
Trust). In addition, the stock must also qualify as one of the ten 
companies in the Dow that has the highest dividend yield as of the 
Stock Selection Date.
    5. Applicant states that identical exemptive relief from Section 
12(d)(3) has recently been granted to a management investment company 
for a structure which also involves investment options underlying 
variable annuities. In addition, Applicant states that Section 12(d)(3) 
relief has been granted to unit investment trusts with no discretion to 
choose the portfolio securities or the amount purchased, but with 
discretion to sell portfolio securities to the extent necessary to meet 
redemptions.
    6. Applicant states that the Adviser and First Trust are obligated 
to follow the investment formula described above as nearly as 
practicable. Applicant states that, like prior applications for Section 
12(d)(3) relief, securities purchased for each portfolio will be chosen 
with respect to the specified formula. Applicant states that the only 
time any deviation from the formula would be permitted would be where 
circumstances were such that the investments of a particular portfolio 
would fail to be ``adequately diversified'' under the Section 817(h) 
diversification requirements, and would thus cause the annuity 
contracts to fail to qualify as an annuity contract under the Code. 
Applicant states that the likelihood of this exception arising is 
extremely remote. In such a situation, Applicant states that it must be 
permitted to deviate from the investment strategy in order to meet the 
Section 817(h) diversification requirements and then only to the extent 
necessary to do so. Applicant states that this limited discretion does 
not give rise to the potential conflicts of interest or to the possible 
reciprocal practices between investment companies and securities 
related businesses that Section 12(d)(3) is designed to prevent.
    7. Applicant states that the liquidity of a portfolio is not a 
concern here since each common stock selected will be a component of 
the Dow, listed on the New York Stock Exchange, and among the most 
actively traded securities in the United States.
    8. In addition, Applicant states that the effect of a portfolio's 
purchase of the stock of parents of broker-dealers would be de minimis. 
Applicant states that the common stocks of securities related issuers 
represented in the Dow are widely held with active markets and that 
potential purchases by a portfolio would represent an insignificant 
amount of the outstanding common stock and trading volume of any of 
these issuers. Therefore, Applicant argues that it is almost 
inconceivable that these purchases would have any significant effect on 
the market value of any of these securities related issuers.
    9. Another possible conflict of interest which has raised concern 
is where broker-dealers may be influenced to recommend certain 
investment company funds which invest in the stock of the broker-dealer 
or any of its affiliates. Applicant states that because of the large 
market capitalization of the Dow issuers and the small portion of these 
issuers' common stock and trading volume that would be purchased by a 
portfolio, it is extremely unlikely that any device offered by a 
broker-dealer to a customer as to which investment company to invest in 
would be influenced by the possibility that a portfolio would be 
invested in the broker-dealer or a parent thereof.
    10. Finally, another potential conflict of interest could occur if 
an investment company directed brokerage to an affiliated broker-dealer 
in which the company has invested to enhance the broker-dealer's 
profitability or to assist it during financial difficulty, even though 
the broker-dealer may not offer the best price and execution. To 
preclude this type of conflict, Applicant agrees, as a condition of 
this application, that no company whose stock is held in any portfolio, 
nor any affiliate of such a company, will act as broker or dealer for 
any portfolio in the purchase or sale of any security.
    11. Applicant represents that the terms of the relief requested are 
consistent with the relief previously granted in similar applications. 
Applicant states that the terms of the relief requested are consistent 
with the standards set forth in Section 6(c) of the Act.

Applicant's Conditions

    Applicant and each portfolio of Applicant agrees that any order 
granting the requested relief from Section 12(d)(3) shall be subject to 
the following conditions:
    1. The common stock is included in the Dow as of the Stock 
Selection Date;
    2. The common stock represents one of the ten companies in the Dow 
that have the highest dividend yield as of the Stock Selection Date;
    3. As of close of business on the Stock Selection Date, the value 
of the common stock of each securities related issuer represents 
approximately 10% of the value of any portfolio's total assets, but

[[Page 68806]]

in no event more than 10.5% of the value of the portfolio's total 
assets; and
    4. No company whose stock is held in a portfolio, nor any affiliate 
thereof, will act as broker or dealer for any portfolio in the purchase 
or sale of any security for that portfolio.

Conclusion

    For the reasons summarized above, Applicant asserts that the order 
requested is appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33073 Filed 12-11-98; 8:45 am]
BILLING CODE 8010-01-M