[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
[[Page 18466]]
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