[Federal Register Volume 64, Number 37 (Thursday, February 25, 1999)]
[Notices]
[Pages 9365-9368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4635]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23699; File No. 812-11428]


Morgan Stanley Dean Witter Variable Investment Series; Notice of 
Application

February 18, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order under Section 17(b) of the 
Investment Company Act of 1940 (``1940 Act'').

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SUMMARY OF APPLICATION: Applicant seeks an order exempting it from the 
provisions of Section 17(a) of the 1940 Act to the extent necessary to 
permit the reorganization of Applicant's Capital Appreciation Portfolio 
(``Capital Appreciation'') into Applicant's Equity Portfolio 
(``Equity'') the ``Reorganization'').

APPLICANT: Morgan Stanley Dean Witter Variable Investment Series (the 
``Trust'').

FILING DATE: The application was filed on December 9, 1998, and amended 
and restated on February 12, 1999.


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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 Applicant with a copy of the request, in person 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on March 12, 1999, and should be accompanied by proof of 
service on Applicant, 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 of a hearing by writing to the Secretary of the 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicant, c/o Barry Fink, Esq., 
Morgan Stanley Dean Witter Variable Investment Series, Two World Trade 
Center, New York, New York 10048.

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 is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth St., N.W., 
Washington, D.C. 20549 (tel. (202) 942-8090).

Applicant's Representations

    1. The Trust, an open-end diversified management investment 
company, is a Massachusetts business trust. It is a series investment 
company currently comprised of fifteen separate series (the 
``Portfolios''), two of which are Capital Appreciation and Equity. The 
Trust issues a separate series of shares of beneficial interest in 
connection with each Portfolio and has registered these shares under 
the Securities Act of 1933 on Form N-1A (File Nos. 2-82510; 811-3692).
    2. The shares of Capital Appreciation and Equity are currently sold 
exclusively to four insurance companies (the ``Insurance Companies''), 
each of which allocates such shares to separate accounts (``Separate 
Accounts'') established to fund the benefits provided under certain 
variable annuity contracts and/or variable life insurance contracts 
(``Contracts'') issued by such Insurance Company. Owners of the 
Contracts (``Owners'') may choose to have their Contract premiums 
allocated among the sub-accounts (``Sub-Accounts'') of the Separate 
Accounts, which Sub-Accounts correspond to the fifteen Portfolios of 
the Trust. As a result, Owners participate in the performance of the 
Sub-Accounts and, consequently, in the performance of the applicable 
Portfolio of the Trust.
    3. Although the Insurance Companies, through the Separate Accounts, 
are, as a technical matter, the shareholders of the Trust, Owners, 
through their premium allocations to the Sub-Accounts, are the true 
investors in the Trust, albeit indirectly. On all matters requiring the 
vote of shareholders of a Portfolio, the Insurance Companies are 
required to vote their Portfolio shares pursuant to instructions 
received by those Owners whose Contracts are indirectly invested in the 
Portfolio (through the applicable Sub-Account). Shares for which no 
instructions are received in time to be voted are voted by the 
Insurance Companies in the same proportion as shares for which 
instructions have been received in time to be voted.
    4. Morgan Stanley Dean Witter Advisors Inc. (``MSDW Advisors'' or 
the ``Investment Manager''), a wholly owned subsidiary of Morgan 
Stanley Dean Witter & Co., serves as the investment manager to each of 
the Portfolios. MSDW Advisors, as full compensation for the investment 
management services furnished to the Portfolios, accrues its investment 
management fee as a percentage of each Portfolio's average daily net 
assets. Morgan Stanley Dean Witter Trust FSB (``MSDW Trust'') is the 
transfer agent of the Trust's Portfolio shares and dividend disbursing 
agent for payment of dividends and distributions on the shares. MSDW 
Trust is an affiliate of MSDW Advisors. Morgan Stanley Dean Witter 
Distributors Inc., also an affiliate of MSDW Advisors, acts without 
remuneration from the Portfolios as the exclusive distributor of their 
respective shares.
    5. At its meeting held on October 28, 1998 (the ``Meeting''), the 
Board of Trustees of the Trust (the ``Board''), including all of the 
Trustees who are not ``interested persons'' (as defined in the 1940 
Act) of the Trust, MSDW Advisors and their affiliates (``Independent 
Trustees''), unanimously approved an Agreement and Plan of 
Reorganization (the ``Reorganization Agreement'').
    6. The Reorganization Agreement provides that on the closing date, 
Capital Appreciation will transfer all of its assets (other than any 
cash reserve (as defined in the Reorganization Agreement)) to Equity in 
exchange for the assumption by Equity of Capital Appreciation's stated 
liabilities and the delivery of shares of Equity (``Equity Shares''). 
The number of Equity Shares to be delivered to Capital Appreciation 
will be determined by dividing the value of Capital Appreciation assets 
acquired by Equity (net of stated liabilities assumed by Equity) by the 
net asset value of an Equity Share. Such Equity Shares would be 
distributed to the shareholders of Capital Appreciation on the closing 
date, and Capital Appreciation would be liquidated.
    7. The Reorganization Agreement provides that any consents and 
orders of other parties that are deemed necessary by the Portfolios to 
permit consummation of the Reorganization, which would include the 
order requested in the application, are required to be obtained as a 
condition precedent to implementation of the Reorganization.
    8. Applicant states that, at the Meeting, the Board, including all 
the Independent Trustees, on behalf of each of Capital Appreciation and 
Equity, determined to recommend that shareholders of Capital 
Appreciation and, in particular, those Owners who indirectly own shares 
of Capital Appreciation, approve the Reorganization Agreement. In 
making such determination, the Board determined that the Reorganization 
is in the best interests of shareholders of each of Capital 
Appreciation and Equity and those Owners who indirectly own shares of 
such Portfolios, and that the interests of such shareholders and Owners 
would not be diluted as a result of the Reorganization. The Board made 
an extensive inquiry into a number of factors, particularly, the 
comparative expenses incurred in the operations of Capital Appreciation 
and Equity. The Board also considered other factors, including, but not 
limited to: the compatibility of the investment objectives, policies, 
restrictions and portfolios of Capital Appreciation and Equity; the 
terms and conditions of the Reorganization which would affect the price 
of shares to be issued pursuant to the Reorganization; the tax-free 
nature of the Reorganization; and any direct or indirect costs to be 
incurred by Capital Appreciation and Equity in connection with the 
Reorganization.
    9. Shareholders of Capital Appreciation will be asked to approve 
the Reorganization Agreement at a special meeting of shareholders of 
Capital Appreciation to be held February 24, 1999. Approval of the 
Reorganization Agreement by the Capital Appreciation shareholders 
requires the affirmative vote of a majority of the outstanding shares 
of

[[Page 9367]]

Capital Appreciation. The Insurance Companies will vote the shares of 
Capital Appreciation held in each Separate Account based on 
instructions received from Owners having in interest in the 
corresponding Capital Appreciation Sub-Account of the Separate Account. 
Shares of Capital Appreciation for which no instructions are received 
in time to be voted will be voted by the Insurance Companies in the 
same proportion as shares for which instructions have been received in 
time to be voted.
    10. Applicant asserts that Capital Appreciation and Equity have 
similar investment objectives. Capital Appreciation has an investment 
objective of long-term capital appreciation and seeks to achieve its 
objective by investing principally in the common stocks of U.S. 
companies that, in the opinion of MSDW Advisors, offer the potential 
for either superior earnings growth and/or appear to be undervalued. 
Similarly, Equity has a primary investment objective of capital growth 
through investments, primarily in the common stock of companies 
believed by MSDW Advisors to have potential for superior growth. Equity 
has a secondary objective of income, but only when consistent with its 
primary objective. Capital Appreciation and Equity seek to achieve 
their respective investment objectives by investing, under normal 
circumstances, at least 65% of their total assets in common stocks and, 
in the case of Equity, securities convertible into common stock. 
Applicant states that both Portfolios have similar investment policies. 
The material difference in investment policies between Capital 
Appreciation and Equity include that the former invests significantly 
in ``lower priced stocks'' which may include smaller capitalized 
companies, whereas, the latter does not have a stated policy of 
investing in ``lower priced stocks.'' Further, Capital Appreciation may 
invest up to 10% of its total assets in foreign securities, whereas 
Equity has a fundamental investment restriction that it may not invest 
in foreign securities. Capital Appreciation may invest up to 35% of its 
total assets in debt securities rated Baa by Moody's Investors Service, 
Inc. (``Moody's'') or BBB by Standard & Poor's Corporation (``S&P''), 
whereas, Equity only invests in corporate debt securities rated as low 
as AA by S&P or Aa by Moody's.
    11. Applicant states that once the Reorganization is consummated, 
the expenses which would be borne by shareholders of the combined 
Portfolio (Equity) should be substantially lower on a percentage basis 
than the expenses per share of Capital Appreciation. This is primarily 
because the management fee rate for the surviving Portfolio (Equity) is 
0.25% lower than the contractual management fee rate for Capital 
Appreciation. Applicant also stated that Capital Appreciation's expense 
ratio, for its fiscal year ended December 31, 1997, was 0.97% (absent 
fee waivers and expense assumptions), whereas, the expense ratio for 
Equity Portfolio was 0.52% during the same period. There are no fee 
waivers or expense assumptions in effect for Equity.
    12. Applicant asserts that, apart from the fact that the future 
cash value of the Contracts that are indirectly invested in Capital 
Appreciation would reflect the investment performance and expenses of 
Equity (instead of Capital Appreciation), the proposed Reorganization 
would have no economic impact on Contract values, fees or charges under 
these Contracts. The proposed Reorganization would also have no effect 
on the rights or interests of Owners, other than reducing by one the 
number of Trust investment options available to them through the 
Contracts. The proposed transaction will also not have adverse tax 
consequences for the Owners because any income or capital gains earned 
by the respective separate accounts has no effect on the taxation of 
the Contracts or the Owners.

Applicant's Legal Analysis

    1. Applicant requests that the Commission issue an order pursuant 
to Section 17(b) of the 1940 Act exempting the proposed Reorganization 
from the provisions of Section 17(a) of the 1940 Act, to the extent 
necessary to permit Equity to acquire substantially all of the assets 
of Capital Appreciation in exchange for the Equity Shares, as described 
above.
    2. Section 17(a)(1) of the 1940 Act, in relevant part, prohibits 
any affiliated person of an investment company, or any affiliated 
person of such a person, acting as principal, from knowingly selling 
any security or other property to that company. Section 17(a)(2) of the 
1940 Act generally prohibits the persons described above, acting as 
principal, from knowingly purchasing any security or other property 
from the investment company.
    3. Section 2(a)(3) of the 1940 Act defines the term ``affiliated 
person,'' in relevant part, as: (a) any person directly or indirectly 
owning, controlling, or holding with power to vote, 5 per centum of 
more of the outstanding voting securities of such other person; and (b) 
any person 5 per centum or more of whose outstanding voting securities 
are directly or indirectly owned, controlled or held with power to 
vote, by such person.
    4. Applicant states that because Northbrook Life Insurance Company 
(``Northbrook''), one of the Insurance Companies, technically owns, 
through its Separate Accounts, more than 5% of the outstanding shares 
of Capital Appreciation and Equity, such Insurance Company is arguably 
a 5% affiliate of both Portfolios. Specifically, Northbrook technically 
owned more than 95% of the outstanding shares of each of Capital 
Appreciation and Equity as of November 30, 1998. If such technical 
ownership is of the type contemplated by Section 2(a)(3) of the 1940 
Act, then such Insurance Company, through its Separate Accounts, would 
be an affiliated person of each of Capital Appreciation and Equity (as 
a result of that Insurance Company's ``ownership'' of more than 5% of 
each such Portfolio's shares). As a result, each Portfolio may be an 
affiliated person (of an affiliated person) of one another. As such, 
transactions between the two Portfolios may be subject to the 
prohibitions of Section 17(a) of the 1940 Act. Without conceding that 
the two Portfolios are affiliated persons of one another (or affiliated 
persons of affiliated persons), Applicant requests that the Commission 
grant an exemption from Section 17(a) in connection with the proposed 
transaction.
    5. Section 17(b) of the 1940 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: (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 the registration statement and reports 
filed under the 1940 Act; and (c) the proposed transaction is 
consistent with the general purposes of the 1940 Act.
    6. Applicant represents that the terms of the proposed 
Reorganization, including the consideration to be paid and received, 
are reasonable and fair and do not involve overreaching on the part of 
any person concerned. Applicant also represents that the proposed 
Reorganization is consistent with the policies of the two Portfolios as 
recited in the Trust's current registration statement and reports filed 
under the

[[Page 9368]]

1940 Act and with the general purposes of the 1940 Act. Based on the 
foregoing and as more fully analyzed below, the Applicant asserts that 
the Commission would have an appropriate basis from which to grant 
Applicant an exemptive order pursuant to Section 17(b). In fact, the 
Commission has exempted substantially similar transactions.
    7. Applicant states that the board, including a majority of the 
Independent Trustees, has reviewed and approved the terms of the 
Reorganization as set forth in the Reorganization Agreement, including 
the consideration to be paid or received by all parties. Applicant also 
states that the Board has independently determined that the proposed 
Reorganization, as set forth in the Reorganization Agreement and as 
contemplated by Rule 17a-8 under the 1940 Act, will be in the best 
interests of the shareholders of each affected Portfolio and of the 
Owners indirectly invested in each affected Portfolio and that 
consummation of the Reorganization will not result in the dilution of 
the current interests of any shareholder or Owner.
    8. Applicant states that in determining whether to recommend 
approval of the Reorganization Agreement to shareholders and Owners, 
the Board, including a majority of Independent Trustees, inquired into 
a number of factors, including, among others: the comparative expense 
ratios of the affected Portfolios; the terms and conditions of the 
Reorganization Agreement and whether the Reorganization would result in 
a dilution of shareholder (or Owner) interests; costs incurred by 
Capital Appreciation and Equity as a result of the proposed 
Reorganization; and tax consequences of the proposed Reorganization. 
The Trustees considered, in particular, the potential benefits of the 
Reorganization to shareholders and Owners, the similarity of investment 
objectives and policies of the affected Portfolios, the terms and 
conditions of the Reorganization Agreement which might affect the price 
of shares (or Owner interests) to be exchanged and the direct or 
indirect costs to be incurred by the affected Portfolios or 
shareholders or Owners invested in such Portfolios.
    9. Applicant states that the proposed Reorganization will not in 
any way affect the price of outstanding shares of Equity, nor will it 
in any way affect the Contract values or interests of Owners indirectly 
invested therein. Under the Reorganization Agreement, the transfer of 
assets of Capital Appreciation to Equity, and the issuance of shares of 
Equity in exchange therefor, will be made on the basis of the relative 
net asset values of the two Portfolios on the closing date (as 
described more fully in the Reorganization Agreement). In addition, the 
aggregate value of Equity Shares to be issued to each Capital 
Appreciation Sub-Account under the Reorganization will exactly equal 
the aggregate value of Capital Appreciation shares held by that Sub-
Account immediately prior to the proposed Reorganization. As a result, 
the aggregate value of all Owners' outstanding units of interest of 
each Capital Appreciation Sub-Account will not change on the closing 
date as a result of the share exchange phase of the proposed 
Reorganization. In addition, the Reorganization will have no impact on 
the value of the Owners' outstanding units of interest in any Equity 
Sub-Account. The proposed Reorganization will impose no tax liability 
upon Owners. Applicant asserts that as a result of all of the above, 
the Reorganization would not dilute the interests of shareholders or 
Owners currently invested (directly or indirectly) in Capital 
Appreciation or Equity.
    10. Rule 17a-8 under the 1940 Act exempts from Section 17(a) 
mergers, consolidations or purchases or sales of substantially all of 
the assets involving registered investment companies which may be 
affiliated persons, or affiliated persons of affiliated persons, solely 
by reason of having a common investment adviser, common directors and/
or common officers. Because of the potential affiliations noted above, 
neither the Portfolios nor the Sub-Accounts may be able to rely on Rule 
17a-8. Applicant asserts, however, that: (i) the Reorganization closely 
resembles transactions intended to be exempted by Rule 17a-8; and (ii) 
as a condition to the granting of the requested order, the Board has 
complied with the conditions that Rule 17a-8 requires respecting 
approval of the Reorganization.

Conclusion

    Applicant requests an order of the Commission pursuant to Section 
17(b) of the 1940 Act exempting the proposed Reorganization from the 
provisions of Section 17(a) of the 1940 Act. Applicant submits that, 
for all of the reasons summarized above, the terms of the proposed 
Reorganization as set forth in the Reorganization Agreement, including 
the consideration to be paid and received, are reasonable and fair to 
the Trust, to the affected Portfolios and the shareholders and Owners 
invested therein and do not involve overreaching on the part of any 
person concerned. Furthermore, the proposed Reorganization will be 
consistent with the policies of each of the affected Portfolios as 
recited in the Trust's registration statement and reports filed under 
the 1940 Act and with the general purposes of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-4635 Filed 2-24-99; 8:45 am]
BILLING CODE 8010-01-M