[Federal Register Volume 64, Number 157 (Monday, August 16, 1999)]
[Notices]
[Pages 44563-44565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21091]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23938; File No. 812-11594]


Dow Target Variable Fund LLC; Notice of Application

August 10, 1999.
agency: Securities and Exchange Commission (``SEC'').

action: Notice of application for an amended order under Section 6(c) 
of the Investment Company Act of 1940 (the ``Act'').

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summary of application: Applicant seeks an order under Section 6(c) of 
the Act amending an existing order (Investment Company Act Release No. 
23628, Dec. 20, 1998). The amended order would exempt Applicant and any 
other existing or future open-end management investment company or 
portfolio thereof that is advised by its investment adviser, Ohio 
National Investments, Inc. (the ``Adviser''), or any entity controlled 
by or under common control with the Adviser that follows an investment 
strategy that is the same as one of the two investment strategies 
described in the application (``Future Funds'') from the provisions of 
Section 12(d)(3) of the Act to the extent necessary to permit their 
portfolios: (a) to invest up to 10.5% of their total assets in 
securities of issuers that derive more than 15% of their gross revenues 
from securities related activities; or (b) to invest up to 20.5% of 
their total assets in securities of issuers that derive more than 15% 
of their gross revenues from securities related activities.

applicant: Dow Target Variable Fund LLC.

filing date: The application was filed on March 18, 1999, and amended 
on July 23, 1999.

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 
Applicant with a copy of the request, personally or by mail. Hearing 
requests must be received by the SEC by 5:30 p.m. on August 31, 1999, 
and must 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 by writing to the 
Secretary of the SEC.

addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549-0609. Applicant, Dow Target Variable Fund LLC, One Financial Way, 
Cincinnati, Ohio 45242.

for further information contact: Joyce M. 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 
Public Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0102 [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.) (collectively, the ``Dow Target 10 
Portfolios''). Applicant proposes to add another twelve non-diversified 
portfolios, also named after the calendar months (collectively, the 
``Dow Target 5 Portfolios'').
    2. 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.
    3. The Interests are not offered directly to the public. The only 
direct owner of 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 with regard to how it votes the Interests that it holds in its 
variable annuity separate accounts.
    4. Applicant's investment adviser is Ohio National Investment, Inc. 
(the ``Adviser''), a wholly owned subsidiary of Ohio National Life. 
First Trust Advisors L.P. (``First Trust'') is the sub-adviser to each 
of Applicant's portfolios.
    5. Each of Applicant's Dow Target 10 Portfolios invests 
approximately 10% of its total assets in the common stock of the ten 
companies in the Dow Jones Industrial Average (the ``Dow'') having the 
highest dividend yield as of the close of business on the next to 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.'' On or about the first 
business day of the month for which a portfolio is named, First Trust 
sets the proportionate relationship 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 rebalanced with a new mix of Dogs 
of the Dow stocks.
    6. Each of Applicant's Dow Target 5 Portfolios will invest 
approximately 20% of its total assets in the common stock of the five 
companies of the Dogs of the Dow having the lowest per share stock 
price as of the close of business on the Stock Selection Date. On or 
about the first business day of the month for which a portfolio is 
named, First Trust will set the proportionate relationship among the 
five 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 
rebalanced with a new mix of five Dogs of the Dow stocks.
    7. 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. Generally, it will not be 
possible for all of a portfolio's funds to be invested in the 
prescribed mix of applicable stocks at any given time. However, 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 stocks.
    8. The Dow consists of 30 stocks selected by Dow Jones & Company, 
Inc. as representative of the broader domestic stock market and of 
American industry. Dow Jones and Company, Inc. is not affiliated with 
the Applicant 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.
    9. 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.
    10. 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 
applicable stocks

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held by that portfolio. Because the prices of each of the stocks will 
change nearly every day, the ratio of the price of each to the total 
price of the entire group of applicable stocks will also change daily. 
However, 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.
    11. Applicant is not a ``regulated investment company'' under 
Subchapter M of the Internal Revenue Code of 1986, as amended (the 
``Code''). Nonetheless, 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, it is 
disregarded as an entity for purposes of federal income taxation. 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). 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.
    12. Section 817(h) of the Code provides that in order for a 
variable contract that 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.
    13. Each portfolio must comply with the Section 817(h) 
diversification requirements. Therefore, the Adviser and First Trust 
may depart from the portfolio investment strategy, if necessary, in 
order to satisfy the Section 817(h) diversification requirements. Under 
all circumstances, except in order to meet Section 817(h) 
diversification requirements, the common stocks purchased for each 
portfolio are chosen solely according to the formula described above 
and are not based on the research opinions or buy or sell 
recommendations of the Adviser or First Trust. Neither the Adviser nor 
First Trust has any discretion as to which common stocks are purchased. 
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.
    14. The existing order permits Applicant's Dow Target 10 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. Applicant now proposes to extend the relief to permit 
Applicant's portfolios and Future Funds: (a) to invest up to 10.5% of 
their total assets in securities of issuers that derive more than 15% 
of their gross revenues from securities related activities; or (b) to 
invest up to 20.5% of their total assets in securities of issuers that 
derive more than 15% of their gross revenues from securities related 
activities.

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 of the 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 SEC, 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 investment merit. Applicant states that this concern does not arise 
in this situation. Applicant states that generally, none of Applicant, 
the Adviser or 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 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 
close of business on the Stock Selection Date. In the case of Dow 
Target 5 Portfolios, the stock must then qualify as one of the five 
companies of the Dogs of the Dow that have the lowest per share stock 
price as of the close of business on the Stock Selection Date.
    5. The Adviser and First Trust are obligated to follow the 
investment formula described above as nearly as practicable. Applicant 
represents 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 annuity contracts 
under the Code. Applicant states that the likelihood of this exception 
arising is extremely remote. In such a situation, Applicant submits 
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 asserts 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.
    6. Applicant states that the liquidity of a portfolio is not a 
concern here since each common stock selected is a component of the 
Dow, listed on the New York Stock Exchange, and among the most actively 
traded securities in the United States.
    7. In addition, Applicant submits 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

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that potential purchases by a portfolio 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.
    8. Another possible conflict of interest is where a broker-dealer 
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 are purchased by a portfolio, it is extremely 
unlikely that any advice 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 is invested in the broker-dealer or a 
parent thereof.
    9. Finally, another potential conflict of interest could occur if 
any 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.
    10. Applicant seeks relief not only with respect to the Dow Target 
10 Portfolios and the Dow Target 5 Portfolios, but also with respect to 
Future Funds. Applicant states that without the requested class relief, 
exemptive relief for any Future Fund would have to be requested and 
obtained separately. Applicant asserts that these additional requests 
for exemptive relief would present no issues under the Act not already 
addressed in the application. Further, if Future Funds were to 
repeatedly seek exemptive relief with respect to the same issues, 
investors would receive no additional protection or benefit, and 
investors could be disadvantaged by increased costs from preparing the 
additional requests for relief. Applicant argues that class relief is 
appropriate in the public interest because the relief will promote 
competitiveness in the variable insurance products market by 
eliminating the need for Future Funds to file redundant exemptive 
applications, thereby reducing administrative expenses and maximizing 
efficient use of resources. Also, eliminating the delay and the 
expenses of repeatedly seeking exemptive relief would enhance the 
ability of Future Funds to effectively take advantage of business 
opportunities as such opportunities arise.

Applicant's Conditions

    Applicant agrees that any order granting the requested relief from 
Section 12(d)(3) of the Act shall be subject to the following 
conditions:
    1. The common stock is included in the Dow as of the Stock 
Selection Date;
    2. With respect to Dow Target 10 Portfolios, the common stock 
represents one of the ten companies in the Dow that have the highest 
dividend yield as of the close of business on the Stock Selection Date;
    3. With respect to Dow Target 5 Portfolios, the common stock 
represents one of the five companies with the lowest dollar per share 
stock price out of the ten companies in the Dow that have the highest 
dividend yield as of the close of business on the Stock Selection Date;
    4. With respect to Dow Target 10 Portfolios, 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 in no event more than 10.5% 
of the value of the portfolio's total assets;
    5. With respect to Dow Target 5 Portfolios, as of close of business 
on the Stock Selection Date, the value of the common stock of each 
securities related issuer represents approximately 20% of the value of 
any portfolio's total assets, but in no event more than 20.5% of the 
value of the portfolio's total assets; and
    6. No company whose stock is held in any 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 SEC, by the Division of Investment Management, pursuant 
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21091 Filed 8-13-99; 8:45 am]
BILLING CODE 8010-01-M