[Federal Register Volume 64, Number 71 (Wednesday, April 14, 1999)]
[Notices]
[Pages 18464-18467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9243]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23775; File No. 812-10798]


The Prudential Insurance Company of America, et al.; Notice of 
Application

April 7, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under Section 11 of the 
Investment Company Act of 1940 (the ``1940 Act'' or ``Act'') permitting 
certain exchange offers between certain unit investment trusts and 
certain open-end management investment companies.

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applicants: The Prudential Insurance Company of America 
(``Prudential''), The Prudential Individual Variable Contract Account 
(the ``VIP Nonqualified Account''), The Prudential Qualified Individual 
Variable Contract Account (the ``VIP Qualified Account''), Global 
Utility Fund, Inc., Nicholas-Applegate Fund, Inc., Prudential Balanced 
Fund, Prudential Developing Market Fund, Prudential Diversified Bond 
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity 
Fund, Inc., Prudential Equity Income Fund, Inc., Prudential Europe 
Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential 
Global Limited Maturity Fund, Inc., Prudential Government Income Fund, 
Inc., Prudential Government Securities Trust, Prudential High Yield 
Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential 
Index Series Fund, Prudential Intermediate Global Income Fund, Inc., 
Prudential International Bond Fund, Inc., Prudential Mid-Cap Value 
Fund, Prudential MoneyMart Assets, Inc., Prudential Natural Resources 
Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Real 
Estate Securities Fund, Prudential Small-Cap Quantum Fund, Inc., 
Prudential Small Company Value Fund, Inc., Prudential Structured 
Maturity Fund, Inc., Prudential 20/20 Focus Fund, Prudential Utility 
Fund, Inc., Prudential World Fund, Inc., The Global Total Return Fund, 
Inc., The Prudential Investment Portfolios, Inc., Pruco Securities 
Corporation (``Pruco''), the Prudential Investment Management Services 
LLC (``PIMS'').

SUMMARY OF APPLICATION: Applicants seek an order to permit exchanges 
from individual variable annuity contracts of the VIP Nonqualified 
Account and the VIP Qualified Account (collectively, the ``VIP 
Accounts'') and similar current and future variable annuity accounts of 
Prudential or an affiliated insurance company to certain open-end 
management investment companies.

FILING DATE: The application was filed on September 24, 1997 and 
amended on March 22, 1999.

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 Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30

[[Page 18465]]

p.m. on April 29, 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 
requester's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Secretary of the Commission.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW Washington, DC 20549-
0609. Applicants, c/o Christopher E. Palmer, Shea & Gardner, 1800 
Massachusetts Ave., NW, Washington, DC 20036.

FOR MORE INFORMATION CONTACT: Joyce Merrick Pickholz, 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 
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington, 
DC 20549 (202) 942-8090.

Applicants' Representations

    1. Prudential is a mutual life insurance company organized under 
the laws of New Jersey. Prudential issues the individual Variable 
Investment Plan variable annuity contracts (the ``VIP contracts'').
    2. The VIP Nonqualified Account and the VIP Qualified Account 
(collectively, the ``VIP Accounts'') are separate accounts of 
Prudential holding assets relating to the VIP contracts. They are 
registered as unit investment trusts under the 1940 Act. Both VIP 
Accounts currently have thirteen separate subaccounts, each of which 
invests in a single corresponding portfolio of The Prudential Series 
Fund, Inc. (the ``Series Fund''), an open-end management investment 
company. Shares of the Series Fund are currently sold exclusively to 
separate accounts of Prudential and certain other affiliated insurance 
companies to fund benefits under variable annuity and variable life 
contracts. The Series Fund may in the future sell its shares to 
unaffiliated insurance companies and qualified plans.
    3. The following Applicants or series of an Applicant are each 
individually referred to as a ``Prudential Fund'' and collectively 
referred to as the ``Prudential Funds''; Global Utility Fund, Inc.; 
Nicholas-Applegate Growth Equity Fund of the Nicholas-Applegate Fund, 
Inc.; Prudential Balanced Fund; Prudential Developing Markets Equity 
Fund and Prudential Latin America Equity Fund of the Prudential 
Developing Market Fund; Prudential Diversified Bond Fund, Inc.; 
Prudential Emerging Growth Fund, Inc.; Prudential Equity Fund, Inc.; 
Equity Income Fund, Inc.; Prudential Europe Growth Fund Inc.; 
Prudential Global Genesis Fund, Inc.; Limited Maturity Fund of the 
Prudential Global Limited Maturity Fund, Inc.; Prudential Government 
Income Fund, Inc.; Money Market Series, U.S. Treasury Money Market 
Series and Short-Intermediate Term Series of the Prudential Government 
Securities Trust; Prudential High Yield Fund, Inc.; Prudential High 
Yield Total Return Fund, Inc.; Prudential Stock Index Fund of the 
Prudential Index Series Fund; Prudential Intermediate Global Income 
Fund, Inc.; Prudential International Bond Fund, Inc.; Prudential Mid-
Cap Value Fund; Prudential MoneyMart Assets, Inc.; Prudential Natural 
Resources Fund, Inc.; Prudential Pacific Growth Fund, Inc,; Prudential 
Real Estate Securities Fund; Prudential Small-Cap Quantum Fund, Inc.; 
Prudential Small Company Value Fund, Inc.; Income Portfolio of the 
Prudential Structured Maturity Fund, Inc.; Prudential 20/20 Focus Fund; 
Prudential Utility Fund, Inc.; Global Series and International Stock 
Series of the Prudential World Fund, Inc.; The Global Total Return 
Fund, Inc.; and Prudential Active Balanced Fund, Prudential Jennison 
Growth Fund and Prudential Growth & Income Fund of The Prudential 
Investment Portfolios, Inc.
    4. With the exception of three money market funds discussed below, 
each Prudential Fund offers four classes of shares, two of which are 
relevant here. Class A shares are offered with: (i) up to a 5% front-
end sales charge and (ii) a fee pursuant to Rule 12b-1 under the Act 
(``Rule 12b-1 fee'') of up to 0.30%. Class C shares are offered with: 
(i) a contingent deferred sales charge of 1% on redemptions made within 
one year of purchase and (ii) a Rule 12b-1 fee of 1%. The three money 
market funds (the Money Market Series of the Prudential Government 
Securities Trust, the U.S. Treasury Money Market Series of the 
Prudential Government Securities Trust, and Prudential MoneyMart 
Assets, Inc.) have only two classes of shares--A shares and Z shares. 
Each Prudential Fund currently pays an investment advisory fee and 
certain other expenses.
    5. Pruco is an indirect, wholly-owned subsidiary of Prudential and 
is a registered broker-dealer under the Securities Exchange Act of 1934 
(the ``1934 Act''). Pruco distributes the VIP contracts.
    6. PIMS is a direct, wholly-owned subsidiary of Prudential and is a 
registered broker-dealer under the 1934 Act. It distributes the shares 
of each class of the Prudential Funds.
    7. Prudential offers the VIP contracts through the VIP Qualified 
Account for use in connection with retirement arrangements that qualify 
for federal tax benefits under sections 401, 403(b), 408, or 457 of the 
Internal Revenue Code of 1986, as amended (the ``Code''). Prudential 
offers nonqualified VIP contracts through the VIP Nonqualified Account. 
A contract owner may choose to have purchase payments invested in any 
of the respective Account's subaccounts. Subject to certain 
limitations, contract owners may transfer subaccount units at net asset 
value among the various subaccounts.
    8. Applicants request an order to allow VIP contract owners to 
exchange any or all of their subaccount units for shares of a 
Prudential Fund under one of the two following exchange offers. 
Exchange offer ``A'' would be available only for exchanges of aggregate 
subaccount units worth $1,000,000 or more. Contract owners would 
exchange subaccount units for Prudential Fund Class A shares, and any 
front-end sales charge customarily assessed on purchases of Class A 
shares would be waived. Any such exchange would be effected at the 
relative net asset values of the securities exchanged, and would be 
priced in accordance with Rule 22c-1 under the 1940 Act. No sales load, 
administrative fee, redemption fee, or other transaction charge would 
be imposed at the time of the exchange, and Prudential would waive: (1) 
any recapture of any bonus amount exchanged; and (2) any annual 
maintenance charge that would otherwise be deducted upon withdrawal of 
the full value of the contract. Exchange offer ``C'' would be available 
only for exchanges of aggregate subaccount units worth less than 
$1,000,000. Contract owners would exchange subaccount units for 
Prudential Fund Class C shares. Any such exchange would be effected at 
the relative net asset values of the securities exchanged and would be 
priced in accordance with Rule 22c-1 under the Act. No sales load, 
administrative fee, redemption fee, or other transaction charge would 
be imposed at the time of the exchange, and Prudential would waive: (1) 
any recapture of any bonus amount exchanged; and (2) any annual 
maintenance charge that would otherwise be deducted upon withdrawal of 
the full value of the contract. Moreover, any contingent deferred sales 
charge that might otherwise be

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applicable to the Class C shares when subsequently sold would be 
waived.
    9. With respect to both exchange offers, Prudential would limit the 
offer to exchanges in which the following two criteria were met. First, 
the exchange must involve a group plan. Second, the plan sponsor must 
agree that, if it terminates its recordkeeping arrangement with 
Prudential or the affiliate when the VIP contract surrender charge or 
bonus amount recapture provision would have been applicable had the 
exchange not occurred (or, for those plans that do not use Prudential 
or an affiliate for recordkeeping, if the plan withdraws a set portion 
of its investment in the Prudential Funds during that time period), the 
plan sponsor will pay Prudential a negotiated amount designed to 
approximate the VIP surrender charge and/or recapture of bonus amount 
that would have been applicable. The plan sponsor must agree that any 
such payment would not be assessed directly or indirectly against plan 
participants. Applicants represent that the purpose of this second 
requirement is to prevent plan sponsors from using the exchange offer 
simply to avoid sales charges that would be applicable if the plan 
sponsor surrendered the VIP contract for its cash surrender value and 
ended its business relationship with Prudential.
    10. Prudential would, in its sole discretion, determine to whom an 
exchange offer would be made, the time period which the exchange offer 
would be in effect, and when to terminate an exchange offer. Also, with 
respect to both offers, Prudential may establish fixed periods of time 
for exchanges under a particular contract or group of contracts (a 
``window'') of at least 60 days in length. Any pre-sect window would be 
at least 60 days in length, and no open-ended exchange offer would be 
terminated or its terms amended materially without prominent notice to 
any contract owners subject to that offer of the impending termination 
or amendment at least 60 days prior to the date of termination or the 
effective date of the amendment; provided, however, that no such notice 
would be required if, under extraordinary circumstances, either: (a) 
there were a suspension in redemption of the exchange security under 
section 22(e) of the 1940 Act or rules thereunder; or (b) the offering 
company were temporarily to delay or crease the sale of the security 
because it was unable to invest amounts effectively in accordance with 
applicable investment objectives, policies and restrictions.
    11. Applicants respensent that at the commencement of the exchange 
offers, and as long as the offers remain in effect, the prospectus of 
each VIP Account will: (1) Describe the terms of each offer; (2) 
disclose that no redemption or administrative fee would be imposed in 
connection with the exchange program; (3) disclose that each exchange 
offer is subject to termination and its terms are subject to change; 
and (4) describe the tax implications of the exchanges including, if 
appropriate, a description of any adverse tax consequences of an 
exchange. Applicants anticipate that the exchange offers would be 
extended only to persons that have been provided a copy of the current 
VIP Qualified Account or VIP Nonqualified Account prospectus. As long 
as that were the case and the disclosure about the exchange offers were 
in the respective prospects, no additional disclosure about the 
exchange offers would be included in the prospectuses for the 
Prudential Funds, because the Prudential Funds are offered to a 
significant number of persons who would not be given the exchanges 
offers. Applicants represent that if the exchange offers are extended 
to persons that have not been provided copies of a current VIP Account 
prospectus, the prospectus(es) for the relevant Prudential Fund(s) will 
also; (1) describe the terms of each offer; (2) disclose that no 
redemption or administrative fee would be imposed in connection with 
the exchange program; (3) disclose that each exchange offer is subject 
to termination and its terms are subject to change; and (4) describe 
the tax implications of the exchanges including, if appropriate, a 
description of any adverse tax consequences of an exchange.
    12. With respect to the exchange security, Applicants request that 
the Commission order extend to all other current and future variable 
annuity contracts issued by Prudential or an affiliated insurance 
company, to the separate accounts relating to any such contracts, and 
to underwriters distributing the contracts (``Future Contracts'').

Applicants' Legal Analysis

    1. Section 11(a) of the Act provides, in pertinent part, that it 
shall be unlawful for any registered open-end company or any principal 
underwriter for such a company to make or cause to be made an offer to 
the holder of a security of such company, or of any other open-end 
investment company, to exchange that security for a security in the 
same or another such company on any basis other than the relative net 
asset values of the respective securities to be exchanged, unless the 
terms of the offer have first been submitted to and approved by the 
Commission. Section 11(c) of the Act provides that, irrespective of the 
basis of exchange, Commission approval is required for any offer of 
exchange of any security of a registered unit investment trust for the 
securities of any other investment company. Accordingly, although 
Applicants believe that the proposed exchanges are at relative net 
asset value, Commission approval is required for the proposed exchanges 
because of the involvement of the VIP Accounts, each of which is a 
registered unit investment trust. Applicants state that they cannot 
rely on existing exemptive rules because neither Rule 11a-2 nor Rule 
11a-3 permits exchanges between a unit investment trust separate 
account and an open-end investment company that is not a separate 
account.
    2. The legislative history of Section 11 indicates that its purpose 
is to provide the Commission with an opportunity to review the terms of 
certain offers of exchange to ensure that a proposed offer is not being 
made ``solely for the purpose of exacting additional selling charges.'' 
H. Rep. No. 2639, 76th Cong., 2d Sess. 8 (1940). One of the practices 
Congress sought to prevent through Section 11 was the practice of 
inducing investors to switch securities so that the promoter could 
charge investors another sales load. Applicants assert that the 
proposed exchange offers involve no possibility of such abuse because 
the acquired shares would be subject to neither a front-end nor 
deferred sales charge. With respect to Exchange offer ``A,'' the 
acquired Class A shares would have no deferred sales charge and any 
front-end sales charge would be waived. Similarly, with respect to 
Exchange offer ``C,'' the acquired Class C shares have no front-end 
sales charge and the deferred sales charge would be waived.
    3. Applicants assert that the Commission, in adopting Rule 11a-3, 
did not prohibit or restrict exchange offers where the acquired mutual 
fund shares involve a fee under Rule 12b-1. They further assert that 
the Commission recognized the possibility that the acquired security 
might have a 12b-1 fee, by considering that as a factor in calculating 
the holding period for deferred sales charges in Rule 11a-3(b)(5)(i).
    4. Applicants submit that providing class relief with respect to 
the exchanged security is appropriate. All exchanges that would be 
permitted under the order would be on the same terms as the exchanges 
between the VIP Accounts and the Prudential Funds,

[[Page 18467]]

including waiving any front-end sales charge or contingent deferred 
sales charge on the exchanged security and the acquired security. 
Therefore, there would be no possibility of the switching abuses 
Congress sought to prevent through Section 11. Without class relief, 
before Prudential annuity contract owners could be given additional 
exchange options, Applicants would have to apply for and obtain 
additional exemptive orders. Applicants believe that these additional 
applications would present no new issues under the 1940 Act not already 
addressed in their application.
    5. Applicants submit that the proposed offers of exchange meet all 
the objectives of Section 11, and would provide a benefit to contract 
owners by providing new investment options, and an attractive way to 
exchange existing interests in variable contracts for interests in 
open-end management investment companies.

Conclusion

    For the reasons summarized above, Applicants request that the 
Commission issue an order under sections 11(a) and 11(c) of the Act 
approving the exchange offers described in the application.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-9243 Filed 4-13-99; 8:45 am]
BILLING CODE 8010-01-M