[Federal Register Volume 64, Number 170 (Thursday, September 2, 1999)]
[Notices]
[Pages 48213-48217]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22839]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23979; File No. 812-11682]
The American Franklin Life Insurance Company, et al.
August 26, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'' or
``SEC'').
ACTION: Notice of application for an order pursuant to Section 26(b) of
the Investment Company Act of 1940 (the ``1940 Act'') approving certain
substitutions of securities.
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Summary of Application
Applicants request an order to permit a certain registered unit
investment trust to substitute shares of EQ Advisors Trust, a
registered open-end investment company, for shares of The Hudson River
Trust, another registered open-end investment company, currently held
by the unit investment trust.
Applicants
The American Franklin Life Insurance Company and Separate Account
VUL of The American Franklin Life Insurance Company (collectively the
``Applicants'').
Filing Date
The application was filed on July 1, 1999, and amended and
restarted on August 13, 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 p.m. on September 20,
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 by writing to the
Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington DC 20549-0609. Applicants: The American
Franklin Life Insurance Company, #1 Franklin Square, Springfield,
Illinois 62713, Attn: Elizabeth E. Arthur, Esq.
FOR FURTHER INFORMATION CONTACT:
[[Page 48214]]
Kevin P. McEnery, Senior Counsel, or Susan M. Olson, 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
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC
20549-0102 (tel. (202) 942-8090).
Applicant's Representations
1. The American Franklin Life Insurance Company (``American
Franklin'') is an Illinois stock life, accident and health insurance
company. American Franklin is the depositor for Separate Account VUL of
The American Franklin Life Insurance Company (``American Franklin
Account'').
2. American Franklin is an indirect wholly-owned subsidiary of
American General Corporation (``American General''), a publicly-traded
corporation. American General's operating subsidiaries provide
retirement services, consumer loans, and life insurance.
3. The American Franklin Account is a segregated asset account of
American Franklin, is registered with the Commission under the 1940 Act
as a unit investment trust, and meets the definition of a separate
account under Section 2(a)(37) of the 1940 Act. The American Franklin
Account funds the variable benefits under certain variable life
insurance policies issued by American Franklin (the ``Policies''). The
Policies are individual flexible premium variable life insurance
policies. American Franklin no longer offers the Policies through the
American Franklin Account, but the Policies that it issued are still
outstanding.\1\
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\1\ Applicants represent that, in reliance on the relief in
Great-West Life Insurance Company (pub. avail. Oct. 23,
1990)(``Great-West''), they provide certain information to Policy
owners about the Policies, American Franklin, and the underlying
fund in lieu of filing post-effective amendments to the registration
statement relating to those Policies or delivering updated
prospectuses to those Policies owners.
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4. The Hudson River Trust (``HRT'') is organized as a Massachusetts
business trust. It is registered as an open-end management investment
company under the 1940 Act, and its shares are registered under the
Securities Act of 1933 (the ``1933 Act'') on Form N-1A. HRT is a series
investment company, as defined by Rule 18f-2 under the 1940 Act, and
currently offers shares of 14 separate portfolios, six of which
(``Current Funds'') would be involved in the proposed substitutions.
HRT sells shares to the American Franklin Account to serve as an
investment medium for the Policies.\2\ Sales of HRT shares to the
American Franklin Account currently account for less than 1% of HRT's
total assets. HRT currently offers two classes of shares, Class IA and
Class IB shares, which differ only in that Class IB shares are subject
to a distribution plan adopted and administered pursuant to Rule 12b-1
under the 1940 Act. The American Franklin Account holds only Class IA
shares. Each Current Fund is advised by Alliance Capital Management
L.P. (``Alliance''), an investment adviser registered under the
Investment Advisers Act of 1940, as amended (``Advisers Act'').
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\2\ An exemptive order was issued by the Commission granting
exemptions from the 1940 Act to permit shares of HRT to be offered
to separate accounts of affiliated and unaffiliated insurance
companies that offer either variable life insurance policies or
variable annuity contracts. See Equitable Variable Life Insurance
Company. Investment Company Act Rel. Nos. 14899 (Jan. 14, 1986)
(order) and 14860 (Dec. 18, 1985) (notice). An exemptive order also
was issued by the Commission granting exemptions from the 1940 Act
to permit shares of EQ Advisors Trust to be offered to separate
accounts of affiliated and unaffiliated insurance companies that
offer either variable life insurance policies or annuity contracts
(``EQAT Shared Funding Order''). See EQ Advisors Trust, Investment
Company Act Rel. Nos. 22651 (April 30, 1997) (order) and 22602
(April 4, 1997) (notice).
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5. EQ Advisors Trust (``EQAT'') is organized as a Delaware business
trust. It is registered as an open-end management investment company
under the 1940 Act, and its shares are registered under the 1933 Act on
Form N-1A. EQAT is a series investment company, as defined by Rule 18f-
2 under the 1940 Act, and currently offers 25 separate portfolios of
shares. EQAT currently sells shares to certain registered and
unregistered separate accounts (``Equitable Separate Accounts'') used
as the underlying investment options for certain variable annuity
contracts and/or variable life insurance policies issued by The
Equitable Life Assurance Society of the United States (``Equitable'').
EQAT currently offers two classes of shares, Class IA and IB shares,
which differ only in that Class IB shares are subject to a distribution
plan adopted and administered pursuant to Rule 12b-1 under the 1940
Act. EQ Financial Consultants, Inc. (``EQ Financial''), an indirect
wholly-owned subsidiary of Equitable, serves as investment manager of
each of the current 25 portfolios of EQAT under an investment
management agreement with EQAT.\3\ EQ Financial is an investment
adviser registered under the Advisers Act and a broker-dealer
registered under the Securities Exchange Act of 1934, as amended.
Pursuant to the investment management agreement, the investment manager
(``Manager'') is responsible for the general management and
administration of EQAT, including selecting the investment advisers for
each of EQAT's portfolios (``Advisers''), monitoring their investment
programs and results, reviewing brokerage matters, overseeing
compliance issues, and carrying out the directives of the Board of
Trustees. EQAT has received an exemptive order from the Commission
(``Multi-Manager Order'') that permits EQ Financial, or any entity
controlling, controlled by, or under common control (within the meaning
of Section 2(a)(9) of the 1940 Act) with EQ Financial, subject to
certain conditions, including approval of the Board of Trustees of
EQAT, and without the approval of shareholders, to: (a) Employ a new
Adviser or Advisers for any portfolio pursuant to the terms of a new
Investment Advisory Agreement, in each case either as a replacement for
an existing Adviser or as an additional Adviser; (b) change the terms
of any Investment Advisory Agreement; and (c) continue the employment
of an existing Adviser on the same contract terms where a contract has
been assigned because of a change of control of the Adviser.\4\ In such
circumstances, Contract owners and owners of Policies would receive
notice of any such action, including information concerning any new
Adviser, that normally is provided in proxy materials.
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\3\ During 1999, EQ Financial plans to change its name to AXA
Advisors, Inc. On July 12, 1999, the Board of Trustees of EQAT
approved a transfer of the Investment Management Agreement to
Equitable. That transfer of the Investment Management Agreement is
expected to occur prior to October 1, 1999.
\4\ See EQ Advisors Trust and EQ Financial Consultants, Inc.,
Investment Company Act Rel. Nos. 23128 (April 24, 1998) (order) and
23093 (March 30, 1998) (notice). Before a New Fund may rely on the
Multi-Manager Order, the operation of that New Fund as a multi-
manager fund, as described in the application for the Multi-Manager
Order, will be approved, following the substitutions proposed in the
application, by a majority of that New Fund's outstanding voting
securities in a manner consistent with the EQAT Shared Funding
Order.
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6. EQAT has filed a post-effective amendment to its registration
statement on Form N-1A in order to register 14 new portfolios for which
Alliance will provide the day-to-day advisory services (``Alliance
Funds''), including the six portfolios (``New Funds'') that American
Franklin proposes to substitute for the Current Funds. EQAT intends to
sell shares of the New Funds to the Equitable Separate Accounts, as
well as to the American Franklin Account.
[[Page 48215]]
7. The Policies expressly reserve to the Applicants the right,
subject to compliance with applicable law, to change or add investment
companies and add or remove investment divisions. The prospectuses
describing the Policies contain appropriate disclosure of this right of
substitution.
8. Applicants represent that they are not affiliates of HRT, EQAT
or Equitable.
9. The Applicants propose to substitute Class IA shares issued by
the six New Funds for the Class IA shares issued by the six Current
Funds. Equitable and each Equitable Separate Account that is registered
under the 1940 Act and that currently invests in HRT (collectively, the
``Equitable Accounts'') have filed an application with the Commission
(``Equitable Application'') requesting, inter alia, an order pursuant
to Section 26(b) of the 1940 Act, approving the substitution of
securities issued by the Alliance Funds for the securities issued by
the 14 portfolios of HRT and currently used as the investment options
for the contracts issued by Equitable through the Equitable
Accounts.\5\ If approved, Equitable will redeem more than 99% of HRT's
assets, and more than 99% of the assets of the Current Funds, in
connection with those substitutions. Applicants state that it is their
belief that it is reasonable to conclude that, following the proposed
substitutions by Equitable: (i) The expense level of the Current Funds
will increase dramatically as a percentage of net assets due to the
smaller asset base, which is highly unlikely to increase; (ii) the
Current Funds will be more difficult to manage in conformity with the
applicable diversification regulations under the Internal Revenue Code
of 1986, as amended (``Code''); and (iii) the asset levels of the
Current Funds will be small enough to raise concern as to whether the
Current Funds will remain viable investment options. By contrast, none
of these concerns will be associated with investments in EQAT. It is
anticipated that if the Equitable Application is approved, all of the
net assets of the Equitable Accounts attributable to the Current Funds
will be transferred to the New Funds. Applicants submit that, under
these circumstances, the substitution of the New Funds for the Current
Funds is in the best interest of Policy owners.
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\5\ File No. 812-11602 (filed Apr. 30, 1999).
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10. The Applicants represent that the Manager of the 25 current
portfolios of EQAT will also serve as Manager of the New Funds and that
the Alliance will serve as the portfolio manager to each of the New
Funds, just as it serves as portfolio manager to each of the Current
Funds. The Applicants also state that each of the New Funds will have
investment objectives, investment strategies and anticipated risks that
are identical in all material respects to those of the corresponding
Current Fund. The investment objectives of the Current fund and the
corresponding New Fund are as follows:
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Current fund Investment objective New fund Investment objective
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Alliance Aggressive Stock.... Seeks to achieve long-term Alliance Seeks to achieve long-term
growth of capital. Aggressive growth of capital
Stock.
Alliance Balanced............ Seeks to achieve a high return Alliance Seeks to achieve a high return
through both appreciation of Balanced. through both appreciation of
capital and current income. capital and current income
Alliance Common Stock........ Seeks long-term growth of its Alliance Common Seeks long-term growth of its
capital and increase in income. Stock. capital and increase in
income
Alliance Global.............. Seeks long-term growth of Alliance Global. Seeks long-term growth of
capital. capital
Alliance High Yield.......... Seeks to achieve a high return Alliance High Seeks to achieve a high return
by maximizing current income Yield. by maximizing current income
and, to the extent consistent and, to the extent consistent
with that objective, capital with that objective, capital
appreciation. appreciation
Alliance Money Market........ Seeks to obtain a high level of Alliance Money Seeks to obtain a high level
current income, preserve its Market. of current income, preserve
assets and maintain liquidity. its assets and maintain
liquidity
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11. The Applicants state that it is expected that: (i) The
management fees (i.e., the total management fees and investment
advisory fees paid to the Manager and the Adviser) with respect to each
New Fund will be the same as the management fees currently applicable
to the corresponding Current Funds; and (ii) there may be a slight
increase in the total expense ratios of each of the New Funds as
compared to those of the Current Funds. The Applicants also represent
that the chart below shows: (i) The management fees and total expenses
for Class IA shares of each of the Current Funds for the year ending
December 31, 1998; and (ii) the estimated management fees and total
expenses of Class IA shares of each of the New Funds following the
proposed substitutions. Estimated management fees and total expenses of
Class IA shares of each of the New Funds are based on pro forma
expenses of the New Funds following the proposed substitutions and are
based upon the audited financial statements of HRT for the year ending
December 31, 1998.
Year Ending December 31, 1998
[Pro Forma]
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Management and
Advisory fees Total advisory fees Total
(as percentage expenses (as (as percentage expenses (as
Current fund class IA of average percentage of New fund class of average percentage of
daily net average daily IA daily net average daily
assets) net assets) assets) net assets)
(percent) (percent) (percent) (percent)
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Alliance aggressive stock..... 0.54 0.56 Alliance 0.54 0.57
aggressive
stock.
[[Page 48216]]
Alliance balanced............. 0.41 0.45 Alliance 0.41 0.46
balanced.
Alliance common stock......... 0.36 0.39 Alliance common 0.36 0.40
stock.
Alliance global............... 0.64 0.71 Alliance global. 0.64 0.72
Alliance high yield........... 0.60 0.63 Alliance high 0.60 0.64
yield.
Alliance money market......... 0.35 0.37 Alliance money 0.35 0.38
market.
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12. The Applicants state that they provided Policy owners with
detailed notice disclosing the proposed substitutions (the ``First
Notice'') shortly after the application was initially filed. The
Applicants state that, upon effectiveness of the post-effective
amendment to the registration statement of EQAT with respect to the New
Funds and publications of notice by the Commission with respect to the
application, they will send the Policy owners further detailed notice
concerning the proposed substitutions (the ``Second Notice''). The
Second Notice will state the anticipated date of the Substitution,
describe each of the New Funds, identify each Current Fund that is
being replaced, and disclose the impact of the substitutions on fees
and expenses at the underlying fund level. The Applicants state that
copies of the prospectuses for the New Funds will be sent to Policy
owners with the Second Notice. Confirmation of the substitutions will
be mailed to affected Policy owners within five days after the
substitutions are effected.
13. The Applicants state that the substitutions will be effected by
redeeming shares of the Current Funds on the effective date of the
substitutions proposed in the application and proposed in the Equitable
Application (``Substitution Date'') at net asset value and using the
proceeds to purchase shares of the New Funds at net asset value on the
same date. No transfer or similar charges will be imposed by the
Applicants and, on the Substitution Date, all Policy values will remain
unchanged and fully invested. The Applicants expect that the
substitutions will be effected by redeeming the shares of each Current
Fund in-kind. Those assets will then be contributed in-kind to the
corresponding New Fund to purchase shares of that New Fund. Redemptions
and contributions in-kind will reduce the brokerage costs that
otherwise would be incurred in connection with the proposed
substitutions and will ensure that Policy values remain fully invested.
In-kind redemptions and contributions will be done in a manner
consistent with the investment objectives, policies and diversification
requirements of each corresponding New Fund. All assets subject to in-
kind redemption and purchase will be valued based on the normal
valuation procedures of the redeeming and purchasing Funds, as set
forth in the HRT and EQAT registration statements.
14. The significant terms of the substitutions described above
include:
a. The New Funds have investment objectives, investment strategies,
and anticipated risks that are identical in all material respects to
those of the Current Funds. In this regard, the Applicants note that
the New Funds will continue to employ the same portfolio managers
currently employed by the Current Funds and are intended to mirror the
investment options provided by the Current Funds.
b. The fees and expenses of the New Funds will in all cases be
substantially similar to those of the Current Funds, assuming that the
asset levels of the New Funds do not decrease significantly from the
Current Funds' present asset levels. Again, the Applicants note in this
regard that given the substantial similarity of the Current Funds and
the New Funds, Applicants do not expect there to be a reduction in the
asset levels of the New Funds as a result of the substitutions.
c. Policy owners may transfer assets from one variable investment
division to another variable investment division available under their
Policy without the imposition of any fee, charge, or other penalty that
might otherwise be imposed from the date of the First Notice through a
date at least thirty days following the Substitution Date.
d. The substitutions, in all cases, will be effected at the net
asset value of the respective shares of the Current Fund and the
corresponding New Fund in conformity with Section 22(c) of the 1940 Act
and rule 22c-1 thereunder, without the imposition of any transfer or
similar charge by the Applicants, and with no change in the amount of
any Policy owner's Policy value or in the dollar value of his or her
investment in such Policy.
e. Policy owners will not incur any fees or charges as a result of
the proposed substitutions, nor will their rights or American
Franklin's obligations under the Policies be altered in any way.
Equitable will bear all expenses incurred in connection with the
proposed substitutions and related filings and notices, including
legal, accounting and other fees and expenses. The proposed
substitutions will not cause the Policy fees and charges currently
being paid by existing Policy owners to be greater after the proposed
substitutions than before the proposed substitutions.
f. Redemptions in-kind and contributions in-kind will be done in a
manner consistent with the investment objectives, policies and
diversification requirements of the applicable Current and New Funds.
Consistent with Rule 17a-7(d) under the 1940 Act, no brokerage
commissions, fees (except customary transfer fees) or other
remuneration will be paid in connection with the in-kind transactions.
g. The substitutions will not be counted as new investment
selections in determining the limit, if any, on the total number of
funds that policy owners can select during the life of a Policy.
h. The substitutions will not alter in any way the tax benefits,
life insurance and other policy benefits, or any Policy obligations of
the Applicants, under the Policies.
i. Policy owners may withdraw amounts under the Policies or
terminate their interest in a Policy, under the
[[Page 48217]]
conditions that currently exist, including payment of any applicable
withdrawal or surrender charge.
j. Policy owners affected by the substitutions will be sent written
confirmation of the substitutions that identify each substitution made
on behalf of that Policy owner within five days following the
Substitution Date.
k. Before a New Fund may rely on the Multi-Manager Order, the
operation of that New Fund as a multi-manager fund as described in the
application for the Multi-Manager Order will be approved, following the
substitutions proposed in the application and the substitutions
proposed in the Equitable Application, by a majority of that New Fund's
outstanding voting securities in a manner consistent with the EQAT
Shared Funding Order.
15. The Applicants state that they will not complete the
substitutions as described in the application unless all of the
following conditions are met:
a. The Commission will have issued an order approving the
substitutions under Section 26(b) of the 1940 Act.
b. The Commission will have issued an order approving the Equitable
Application.
c. The amendments to the registration statement for EQAT adding the
New Funds shall have become effective.
d. Each Policy owner will have been mailed the First Notice, and,
at least thirty days prior to the Substitution Date, the Second Notice
and effective prospectuses for the New Funds.
e. The Applicants will have satisfied themselves, based on advice
of counsel familiar with insurance laws, that the Policies allow the
substitution of portfolios as described in the application, and that
the transactions can be consummated as described herein under
applicable insurance laws and under the Policies.
f. The Applicants will have complied with any regulatory
requirements they believe are necessary to complete the transactions in
each jurisdiction where the Policies have been qualified for sale.
Applicants' Legal Analysis
1. Section 26(b) of the 1940 Act provides that it shall be unlawful
for any depositor or trustee of a registered unit investment trust
holding the security of a single issuer to substitute another security
for such security unless the Commission shall have approved such
substitution. Section 26(b) further provides that the Commission shall
issue an order approving such substitution if the evidence establishes
that it is consistent with the protection of investors and the purposes
fairly intended by the policies and provisions of the 1940 Act.
2. The Applicants submit that the Policies expressly reserve to the
Applicants the right, subject to compliance with applicable law, to
change or add investment companies and add or remove investment
divisions, and that appropriate disclosure of this right of
substitution is contained in the prospectuses describing the Policies.
The Applicants assert that they have reserved this right of
substitution both to protect themselves and the Policy owners in
situations where either might be harmed by events affecting the issuer
of the securities held by the American Franklin Account and to preserve
the opportunity to replace such shares in situations where a
substitution could benefit itself and its Policy owners.
3. The Applicants maintain that the proposed substitutions protect
the Policy owners who have allocated Policy value to the Current Funds
by: (1) Providing an underlying investment option that is essentially
identical in all material aspects to the current investment option; and
(2) eliminating Current Funds that will not be viable due to the low
level of assets following the proposed substitutions by Equitable.
4. The Applicants further submit that the proposed substitutions
meet the standards that the Commission and its staff generally have
applied to other substitutions that have been approved. In addition,
the Applicants contend that none of the proposed substitutions is the
type of substitution that Section 26(b) was designed to prevent. Unlike
traditional unit investment trusts, the Policies provide each Policy
owner with the right to exercise his own judgment and transfer Policy
values into any other available variable and/or fixed investment
options. Additionally, Applicants state that the proposed substitutions
will not, in any manner, reduce the number, nature or quality of the
available investment options. The Applicants assert that the Policy
owners will be offered the opportunity to transfer amounts out of the
affected subaccounts without any cost or penalty that may otherwise
have been imposed until thirty days after the Substitution Date. For
these reasons, the Applicants maintain that the proposed substitutions
will not result in the type of costly forced redemption that Section
26(b) was designed to prevent.
5. The Applicants further submit that the proposed substitutions
also are unlike the type of substitution that Section 26(b) was
designed to prevent in that by purchasing a Policy, Policy owners
select much more than a particular underlying fund in which to invest
their Policy values. The Policy owners also select the specific type of
insurance coverage offered by the Applicants under the applicable
Policy, as well as numerous other rights and privileges set forth in
the Policy. The Applicants state that, in choosing to buy a Policy from
American Franklin, the Policy owner also may have considered American
Franklin's size, financial condition, and reputation for service, and
that none of those considerations and factors will change as a result
of the proposed substitutions.
6. The Applicants submit that, for all reasons stated above, the
proposed substitutions are consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
1940 Act.
Conclusion
Applicants assert that, for the reasons summarized above, the
requested order approving the substitutions should be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22839 Filed 9-1-99; 8:45 am]
BILLING CODE 8010-01-M