[Federal Register Volume 64, Number 55 (Tuesday, March 23, 1999)]
[Notices]
[Pages 14028-14032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6971]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23740; File No. 812-11378]


Protective Life Insurance Co., et al.

March 16, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under Section 26(b) of the 
Investment Company Act of 1940 (``Act'') approving the proposed 
substitution of securities.

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SUMMARY OF APPLICATION: Applicants seek an order approving the 
substitution of shares of Oppenheimer Variable Account Funds 
(``Oppenheimer Variable Funds'') representing interests in its 
Oppenheimer Money Fund for shares of Protective Investment Company 
(``PIC'') representing interests in its Money Market Fund and held by 
the Life Account, Annuity Account, and Account A (together, the 
``Accounts'') to support variable life insurance contracts or variable 
annuity contracts (collectively, the ``Contracts'') issued by 
Protective Life or American Foundation.

APPLICANTS: Protective Life Insurance Company (``Protective Life''), 
American Foundation Life Insurance Company (``American Foundation''), 
Protective Variable Life Separate Account (``Life Account''), 
Protective Variable Annuity Separate Account (``Annuity Account''), and 
Variable Annuity Account A of American Foundation (``Account A'').

FILING DATE: The application was filed October 28, 1998 and amended and 
restated on February 9, 1999.


[[Page 14029]]


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 the Secretary of the SEC and serving 
Applicants with a copy of the request, in person or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on April 12, 1999, 
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 who wish to be 
notified of a hearing may request notification of a hearing by writing 
to the Secretary of the SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Steve M. 
Callaway, Esq., Protective Life Insurance Company, 2801 Highway 280 
South, Birmingham, AL 35223. Copies to Stephen E. Roth, Esq. and David 
S. Goldstein, Esq. Sutherland Asbill & Brennan LLP, 1275 Pennsylvania 
Avenue, NW., Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Elisa D. Metzger, Senior Counsel, and/
or Susan M. Olson, Branch Chief, on (202) 942-0670, Office of Insurance 
Products, Division of Investment Management.

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, NW., Washington, DC 
20549 or call (202) 942-8090.

Applicants' Representations

    1. Protective Life is a stock life insurance company organized 
under Alabama law in 1907 and redomesticated under Tennessee law in 
1992. Protective Life provides individual life and health insurance, 
annuities, group life and health insurance, and guaranteed investment 
contracts, and is licensed to transact insurance business in 49 states 
and the District of Columbia. As of December 31, 1997, Protective Life 
had total assets of approximately $10.4 billion. Protective Life is the 
principal operating subsidiary of Protective Life Corporation 
(``PLC''), a Delaware insurance holding company whose stock is traded 
on the New York Stock Exchange. For the purposes of the Act, Applicants 
state that Protective Life is the depositor and sponsor of the Life 
Account and Annuity Account.
    2. American Foundation, an Alabama insurance company, is a wholly 
owned subsidiary of Protective Life. American Foundation provides 
individual life, annuity, and group dental insurance products, and is 
licensed to transact insurance business in 30 states, including New 
York. As of December 31, 1997, the company had assets in excess of $100 
million. For the purposes of the Act, Applicants state that American 
Foundation is the depositor and sponsor of Account A.
    3. Protective Life established the Life Account on February 22, 
1995, and the Annuity Account on October 23, 1993, as separate 
investment accounts under Tennessee law. American Foundation 
established the Account A on December 1, 1997, as a separate investment 
account under Alabama law. Under both Tennessee and Alabama laws, the 
assets of each Account attributable to the Contracts through which 
interests in that Account are issued are owned by either Protective 
Life or American Foundation as appropriate, but are held separately 
from all other assets of Protective Life or American Foundation Life, 
for the benefit of the owners of, and the persons entitled to payment 
under, those contracts. Consequently, such assets in each Account are 
not chargeable with liabilities arising out of any other business that 
Protective Life or American Foundation may conduct. Income, gains and 
losses, realized or unrealized, from each of these Account's assets are 
credited to or charged against the amounts allocated to that Account in 
accordance with the Contracts without regard to other income, gains or 
losses of Protective Life or American Foundation. Each Account is a 
``separate account'' as defined by Rule 0-1(e) under the Act, and is 
registered with the Commission as an unit investment trust.
    4. The Life Account, Annuity Account, and Account A each are 
divided into seventeen sub-accounts. Each sub-account invests 
exclusively in shares representing an interest in a separate 
corresponding investment portfolio (each, a ``Fund'') of one of four 
series type management investment companies. The assets of the Life 
Account support variable life insurance contracts and the assets of the 
Annuity Account and the Account A support variable annuity contracts. 
Interests in these Accounts offered through such Contracts have been 
registered under the Securities Act of 1933 (the ``1933 Act'') on Form 
S-6 (Life Account) and on Form N-4 (Annuity Account and Account A). The 
Life Account, Annuity Account, and Account A each invest in the 
Protective Money Market Fund of PIC that is involved in the 
substitution discussed in this application.
    5. PIC was organized as a Maryland corporation on September 2, 
1993, to serve as an investment vehicle for Protective Life's and 
American Foundation Life's variable life and variable annuity separate 
accounts. PIC is registered under the Act as an open-end management 
investment company, and is a series investment company as defined by 
Rule 18f-2 under the Act. PIC issues a separate series of shares of 
stock in connection with each Fund, and has registered such shares 
under the 1933 Act on Form N-1A. Protective Investment Advisors, Inc. 
(``Protective Investment Advisor''), formerly Investment Distributors 
Advisory Services, Inc., a wholly owned subsidiary of PLC, serves as 
the investment manager to PIC. PIC currently comprises seven Funds, one 
of which is the Protective Money Market Fund and is the subject of the 
proposed substitution.
    6. Oppenheimer Variable Funds was organized in 1984 as a 
Massachusetts business trust, and is registered under the Act as a 
diversified, open-end management investment company. Oppenheimer 
Variable Funds is a series investment company as defined by Rule 18f-2 
under the Act, and issues a separate series of shares of beneficial 
interest in connection with each Fund. Oppenheimer Variable Funds has 
registered shares of such Funds under the 1933 Act on Form N-1A. 
Oppenheimer Funds, Inc., serves as the investment manager to 
Oppenheimer Variable Funds. Oppenheimer Variable Funds currently 
comprises ten Funds, one of which, the Oppenheimer Money Fund, is the 
subject of the proposed substitution.
    7. The Contracts are individual flexible premium variable and fixed 
life insurance contracts, individual modified single premium variable 
and fixed life insurance contracts, and individual flexible premium 
deferred variable and fixed annuity contracts. Protective Life issues 
three variable life insurance contracts and one variable annuity 
contract. American Foundation issues one variable annuity contract. The 
Contracts provide for the accumulation of values on a variable basis, 
fixed basis or both, and provide settlement or annuity payment options 
on a fixed basis. Protective Life's variable annuity contract also 
provides for variable annuity payment options. Protective Life or 
American Foundation, under each of the Contracts, reserves the right to 
substitute shares of one Fund for shares of another, including a Fund 
of

[[Page 14030]]

a different management investment company.
    8. Under all of the Contracts, subject to certain conditions, 
Contract owners may make unlimited free transfers (in minimum amounts 
of $100 or the entire value of the subaccount or fixed account being 
transferred) between and among the subaccounts of the appropriate 
Account and a fixed account that is part of Protective Life's or 
American Foundation's general account. Protective Life and American 
Foundation, however, under each of the Contracts, reserve the right to 
limit transfers to 12 per contract year and to charge a transfer fee of 
$25 for each transfer after the twelfth in a contract year. Applicants 
also serve the right to restrict the maximum amount which may be 
transferred from the fixed account in any contract year to the greater 
of (i) $2500, or (ii) 25% of the fixed account value.
    9. Protective Investment Advisors has recommended to Protective 
Life and American Foundation that it cease operating Protective Money 
Market Fund. Since its inception, Protective Money Market Fund has been 
relatively small for several reasons, including the fact that it is 
only offered in Protective Life or American Foundation products and 
that Contracts owners generally do not allocate contract value to the 
Fund on a long-term basis. As a result, Protective Money Market Fund 
has been unable to generate a sufficient level of assets to achieve any 
significant economics of scale, and has not been able to achieve above-
average performance results or otherwise distinguish itself from other 
money market funds. Likewise, the small size of the Fund results in 
little income being generated from management fees. Conversely, due to 
the requirements of Rule 2a-7 under the Act, management of the Fund is 
time consuming and difficult for either Protective Investment Advisors 
or the subadviser retained by Protective Investment Advisors to manage 
the day-to-day operations of the Fund. In light of the fact that a 
number of unaffiliated mutual fund organizations have large and 
successful insurance product money market funds in which the Accounts 
could invest, the foregoing factors have led Protective Life and 
American Foundation to conclude that there is little reason for 
Protective Investment Advisors to maintain an affiliated money market 
fund for them. Consequently, after consulting with the PIC's board of 
directors, Protective Investment Advisors, Protective Life and American 
Foundation have determined to liquidate Protective Money Market Fund 
via a substitution.
    10. Protective Money Market Fund and Oppenheimer Money Fund have 
identical investment objectives and achieve these objectives by 
investing in ``money market'' securities. Both Funds seek to maintain a 
constant net asset value per share of $1.00. Applicants believe that by 
making the proposed substitution, they can better serve the interests 
of Contract owners by offering them a Fund which in recent years has 
had lower expenses and better performance than Protective Money Market 
Fund.
    11. The assets of Oppenheimer Money Fund have been significantly 
greater than the assets of Protective Money Market Fund for each of the 
past three years. For the years 1997, 1996, and 1995, the net assets of 
the Oppenheimer Money Fund \1\ were $126,782,000; $129,719,000; and 
$65,386,000, respectively. For the years 1997, 1996, and 1995, the net 
assets of the Protective Money Market Fund \2\ were $3,622,000; 
$6,121,000; and $5,070,000, respectively. As a result of its size. 
Oppenheimer Money Fund has been able to achieve economies of scale that 
Protective Money Market could not attain. These economies of scale are 
reflected in Oppenheimer Money Fund's ratio of total operating expenses 
to net asset value. Oppenheimer Money Fund's expenses have ranged from 
one half to one third of those of the Protective Money Market Fund over 
the past three years.
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    \1\ Oppenheimer Money Fund pays a monthly investment management 
fee based upon the average daily net assets of the Fund at an annual 
rate of .450% of the first $500 million, .425% of the next $500 
million, .400% of the next $500 million, and .375% of the average 
net assets over $1.5 billion.
    \2\ Protective Money Market Fund pays a monthly investment 
management fee based upon the average daily net assets of the Fund 
at an annual rate of .60%. Protective Life or Protective Investment 
Advisors has voluntarily reimbursed the Fund for expenses in excess 
of its management fee over each of the last three fiscal years.

                                Ratio of Operating Expenses to Average Net Assets
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                                                                       1197            1996            1995
                                                                     (percent)       (percent)       (percent)
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Protective Money Market Fund (before reimbursement).............            1.42            1.27            1.17
Protective Money Market Fund (after reimbursement)..............             .60             .60             .60
Oppenheimer Money Fund..........................................             .48             .49             .51
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    12. Applicants believe that Oppenheimer Money Fund will continues 
to have significantly greater assets than Protective Money Market Fund, 
and have no reason to believe, given the limited distribution of 
Protective Money Market Fund's shares and the relatively short-term 
nature of contract owners' investment in the Fund, that Protective 
Money Market Fund will match the low expense ratios of Oppenheimer 
Money Fund in the near future. Likewise, for each of the past three 
years, Oppenheimer Money Fund has had somewhat higher total returns 
than Protective Money Market Fund.

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                                                                                Annual total return
                                                                 -----------------------------------------------
                                                                       1997            1996            1995
                                                                     (percent)       (percent)       (percent)
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Protective Money Market Fund....................................            4.96            4.82            5.32
Oppenheimer Money Fund..........................................            5.31            5.13            5.62
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[[Page 14031]]

    Applicants have no reason to believe that, in the near term, the 
performance of Protective Money Market Fund will match or exceed that 
of Oppenheimer Money Fund.
    13. For the foregoing reasons, Applicants submit that the proposed 
substitution of Oppenheimer Money Fund for shares of Protective Money 
Market Fund is in the best interests of Contract owners.
    14. Protective Life and American Foundation will redeem Protective 
Money Market Fund shares for cash and apply the redemption proceeds to 
the purchase of Oppenheimer Money Fund shares. The proposed 
substitution will take place at relative net asset value with no change 
in the amount of any Contract owner's contract or policy value, death 
benefit, or in the dollar value of his or her investment in any of the 
Accounts. As a result, Contract owners will remain fully invested. 
Contract owners will not incur any fees or charges as a result of the 
proposed substitution, nor will their rights nor Protective Life's or 
American Foundation's obligations under the Contracts be altered in any 
way. All expenses incurred in connection with the proposed 
substitution, including legal, accounting, and other fees and expenses, 
will be paid by Protective Life or American Foundation. In addition, 
the proposed substitution will not impose any tax liability on Contract 
owners. The proposed substitution will not cause the Contract fees and 
charges currently being paid by existing Contract owners to be greater 
after the proposed substitution than before the proposed substitution. 
The proposed substitution will not, of course, be treated as a transfer 
for the purpose of assessing transfer charges or for determining the 
number of remaining permissible transfers in a Contract year. 
Protective Life and American Foundation will not exercise their rights 
under the Contracts to impose additional restrictions on transfers from 
the affected subaccount to another subaccount or a fixed account for a 
period of at least 30 days following the substitution.
    15. Applicants state that by supplements to the various 
prospectuses for the Contracts and the Accounts, all owners of the 
Contracts have been notified of Protective Life's and American 
Foundation's intention to take the necessary actions, including seeking 
the order requested by this application, to substitute shares of 
Protective Money Market Fund as described herein. The supplements for 
the Accounts advise Contract owners that from the date of the 
supplement until the date of the proposed substitution, owners are 
permitted to make one transfer of all amounts under a Contract invested 
in the affected subaccount on the date of the supplement to another 
subaccount or a fixed account available under a Contract without that 
transfer counting as a ``free'' transfer permitted under a Contract. 
The supplements also inform Contract owners that Protective Life and 
American Foundation will not exercise their rights reserved under the 
Contracts to impose additional restrictions on transfers from the 
affected subaccount to another subaccount or a fixed account until at 
least 30 days after the proposed substitution.
    16. In addition to the prospectus supplements distributed to owners 
of Contracts, within five days after the proposed substitution, any 
Contract owners who were affected by the substitution will be sent a 
written notice informing them that the substitution was carried out and 
that they may make one transfer of all amounts under a Contract 
invested in the affected subaccount on the date of the notice to 
another sub-account or a fixed account available under their Contract 
without that transfer counting as one of any limited number of 
transfers permitted in a Contract year or as one of a limited number of 
transfers permitted in a Contract year free of charge. The notice will 
also reiterate the fact that Protective Life and American Foundation 
will not exercise any rights reserved by either under any of the 
Contracts to impose additional restrictions on transfers from the 
affected subaccount to another subaccount or a fixed account until at 
least 30 days after the proposed substitution. The notice as delivered 
in certain states also may explain that, under the insurance 
regulations in those states, Contract owners who are affected by the 
substitution may exchange their Contracts for fixed-benefit life 
insurance contracts or annuity contracts, as applicable, issued by 
Protective Life or American Foundation (or one of their affiliates) 
during the 60 days following the proposed substitution. The notices 
will be preceded or accompanied by a current prospectus for Oppenheimer 
Variable Funds.
    17. Protective Life and American Foundation also are seeking 
approval of the proposed substitution from any state insurance 
regulators whose approval may be necessary or appropriate.

Applicants' Legal Analysis

    1. Applicants request an order from the Commission pursuant to 
Section 26(b) approving the proposed substitution of securities issued 
by Oppenheimer Variable Funds for those issued by PIC which are 
currently held by the Accounts.
    2. Section 26(b) of the Act requires the depositor of a registered 
unit investment trust holding the securities of a single issuer to 
receive Commission approval before substituting the securities held by 
the trust.
    3. The Contracts expressly reserve for Protective Life or American 
Foundation the right, subject to compliance with applicable law, to 
substitute shares of another investment management company for shares 
of an investment management company held by an Account or a subaccount 
of an Account. The prospectuses for the Contracts and the Accounts 
contain appropriate disclosure of this right. Protective Life and 
American Foundation each reserved this right of substitution both to 
protect themselves and their Contract owners in situations where either 
might be harmed or disadvantaged by circumstances surrounding the 
issuer of the shares held by one or more of their separate accounts and 
to afford the opportunity to replace such shares where to do so could 
benefit itself and Contract owners.
    4. Applicants state that in this case the proposed substitution of 
shares is necessary because Protective Money Market Fund will no longer 
be offered. Further, Applicants submit that the proposed substitution 
of shares of Oppenheimer Money Fund for shares of Protective Money 
Market Fund, will benefit Contract owners by replacing Protective Money 
Market Fund with a Fund that not only has identical investment 
objectives but which also has lower expenses and better performance.
    5. Applicants anticipate that Contract owners will be at least as 
well off with the proposed array of subaccounts offered after the 
proposed substitution as they have been with the array of subaccounts 
offered prior to the substitution. Applicants state that the proposed 
substitution retains for Contract owners the investment flexibility 
which is a central feature of the Contracts.
    6. Applicants state that the proposed substitution is not the type 
of substitution which Section 26(b) was designed to prevent. Unlike 
traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner which permanently 
affected all the investors in the trust, the Contracts provide each 
Contract owner with the right to exercise his or her own judgment and 
transfer account values into other sub-accounts. Moreover, Applicants 
state that the Contracts will offer Contract owners the opportunity to 
transfer

[[Page 14032]]

amounts out of the affected subaccount into any of the remaining sub-
accounts without cost or other disadvantage. Therefore, Applicants 
submit that the proposed substitution will not result in the type of 
costly forced redemption which Section 26(b) was designed to prevent
    7. Applicants state that the proposed substitution also is unlike 
the type of substitution which Section 26(b) was designed to prevent in 
that by purchasing a Contract, Contract owners select much more than a 
particular investment company in which to invest their contract or 
policy values. They also select the specific type of insurance coverage 
offered by Protective Life or American Foundation under their Contract 
as well as numerous other rights and privileges set forth in the 
Contract. Contract owners may also have considered Protective Life's or 
American Foundation's size, financial condition, type and its 
reputation for service in selecting their Contract. These factors will 
not change as a result of the proposed substitution.
    8. Applicants request an order of the Commission pursuant to 
Section 26(b) of the Act approving the proposed substitution by 
Protective Life and American Foundation.

Conclusion

    Applicants submit that, for all the reasons and facts summarized 
herein, the proposed substitution is 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. 99-6971 Filed 3-22-99; 8:45 am]
BILLING CODE 8010-01-M