[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]
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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'').
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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