[Federal Register Volume 64, Number 196 (Tuesday, October 12, 1999)]
[Notices]
[Pages 55316-55323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26523]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-24071; File No. 812-11544]
Ameritas Variable Life Insurance Corp., et al.
October 4, 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, and pursuant to Section 17(b) of the 1940
Act exempting related transactions from Section 17(a) of the 1940 Act.
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SUMMARY OF APPLICATION: Applicants request an order to permit certain
registered unit investment trusts to substitute investment portfolios
created by Calvert Variable Series, a registered open-end management
investment company, for portfolios of other registered management
investment companies, and to permit certain in-kind redemptions of
portfolio securities in connection with the substitutions.
APPLICANTS: Ameritas Variable Life Insurance Corp. (``AVLIC''),
Ameritas Variable Life Insurance Corp. Separate Account VA-2
(``Separate Account VA-2''), Ameritas Investment Corp. (``AIC''), and
Ameritas Variable Life Insurance Corp. Separate Account V (``Separate
Account V'') (collectively, the ``Applicants'').
FILING DATE: The application was filed on March 18, 1999 and amended
and restated on September 27, 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 October 27, 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, N.W., Washington, D.C. 20549-0609. Applicants: c/o Ameritas
Variable Life Insurance Company, P.O. Box 81889, Lincoln, Nebraska
68501-1889, Attention: Donald R. Stading, Esquire.
FOR FURTHER INFORMATION CONTACT: Zandra Y. Bailes, 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, N.W., Washington, D.C.
20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. AVLIC is a stock life insurance company organized in the State
of Nebraska and currently licensed to sell life insurance in 46 states
and in the District of Columbia. AVLIC is a wholly-owned subsidiary of
AMAL Corporation (``AMAL''), a corporation organized under Nebraska law
in 1996; Ameritas Life Insurance Company (``Ameritas Life''), also a
Nebraska corporation, owns a majority interest in AMAL Corporation.
Ameritas Life was, in turn a wholly-owned indirect subsidiary of
Ameritas Mutual Insurance Holding Company. Ameritas Mutual Insurance
Holding Company and Acacia Mutual Holding Company (``Acacia''),
subsidiaries of which include companies that provide investment
advisory and/or other services to CVS, consummated a merger effective
January 1, 1999 (``Ameritas-Acacia Merger''). The combined company is
known as AmeritasAcacia Mutual Holding Company.
2. AIC, a Nebraska corporation, is an investment adviser registered
under the Investment Advisers Act of 1940, as amended. AIC is a wholly-
owned subsidiary of AMAL and an affiliate of Ameritas Life.
3. Separate Account VA-2 and Separate Account V (collectively, the
``Separate Accounts'') are each registered with the Commission under
the 1940 Act as a unit investment trust. Separate Account VA-2 serves
as the funding vehicle for variable annuity contracts (``VA
Contracts'') issued by AVLIC. Separate Account V serves as the funding
vehicle for variable universal life contracts (``VUL Contracts'')
issued by AVLIC. Each of the variable annuity and variable universal
life contracts funded by the Separate Accounts (collectively,
``Variable Contracts'') is registered with the Commission under the
Securities Act of 1933 (``1933 Act'') and is offered exclusively by
means of a prospectus which describes the applicable terms and
conditions of each such contract. The Separate Accounts are each
divided into separate subaccounts (each a ``Subaccount'') and each
Subaccount invests exclusively in shares of one of the investment
options currently available to contract holders (the ``Existing
Funds'').
4. The Existing Funds consist of 26 investment portfolios issued by
investment companies not affiliated with Applicants, as follows:
Variable
[[Page 55317]]
Insurance Products Funds and Variable Insurance Products Fund II
(collectively, the ``Fidelity Portfolios''), Alger American Fund
(``Alger Portfolios''), MFS Variable Insurance Trust (``MFS
Portfolios''); and Morgan Stanley Dean Witter Universal Funds, Inc.
(``Morgan Stanley Portfolios''). Each Of the Existing Funds is
registered as a management investment company under the 1940 Act. Not
all of the Existing Funds are involved in the substitutions. The
application contemplates that four of the six Alger Portfolios, three
of the five MFS Portfolios and two of the ten Fidelity Portfolios will
be replaced by substantially similar funds. In fact, Applicants state
that the substitutions are structured so that the investment objectives
and policies of the substituted portfolios will mirror the investment
policies and objectives of the corresponding replaced portfolios.
5. The Variable contracts expressly reserve to AVLIC the right,
subject to compliance with applicable law, to substitute shares of one
open-end investment company for shares of another open-end investment
company held by a Separate Account.
6. Calvert Variable Series, Inc., (``CVS'') is registered under the
1940 Act as an open-end management series. Currently, CVS has five
investment portfolios (``Current CVS Series''). Shares of the Current
CVS Series are offered only to insurance companies for allocation to
certain of their variable separate accounts. Calvert Asset Management
Company (``CAMCO'') provides investment management services to each of
the current CVS Series. CVS has organized nine new series
(collectively, the ``Ameritas Portfolios''). Each of the Ameritas
Portfolios will replicate the investment objectives and policies of one
of the Existing Funds involved in the Substitutions (each, a ``Replaced
Fund'').
7. Overall investment management services will be provided to each
of the newly organized Ameritas Portfolios by AIC pursuant to an
advisory agreement between AIC and CVS (``AIC Advisory Agreement'').
Under the AIC Advisory Agreement, IC will be responsible for the
management of the business and affairs of each of the Ameritas
Portfolios, subject to the supervision of the Board of Directors of
CVS. AIC will also be authorized to exercise full investment discretion
and make all determinations with respect to the investment of the
assets of the respective Ameritas Portfolios. Under the AIC Advisory
Agreement, AIC will have the ability, at its own cost and expense and
subject to applicable requirements of the 1940 Act, to retain other
investment advisory organizations (``Subadvisers'') to provide day-to-
day portfolio management to each of the Ameritas Portfolios. For its
services under the AIC Advisory Agreement, AIC will receive a fee from
each of the Ameritas Portfolios. AIC, in turn, will pay the fees and
expenses of any Subadviser retained by AIC or any of the Ameritas
Portfolios.
8. Applicants seek relief for nine substitutions. The table below
lists, for seven of the nine substitutions, the Replaced Funds and the
Ameritas Portfolios that will be substituted for each if the order
requested is granted. The column entitled ``Investment Objective and
Policies'' summarizes the investment objectives and policies that are
now in effect for the indicated Replaced Fund and will be in effect,
following the substitutions, with respect to the indicated Ameritas
Portfolio. The investment objectives and policies of the Ameritas
Portfolios mirror those of the Replaced Funds. Therefore, Applicants
stat that following the substitutions, each of the listed Ameritas
Portfolios will have objectives and policies that are substantially the
same as the objectives and policies of the Replaced Funds. Moreover,
Applicants state that day-to-day investment decisions for the Ameritas
Portfolios listed in the table below will be made by the same
investment advisory organization that currently serves the
corresponding Replaced Fund. Under these circumstances, Applicants
represent that the investment objectives of those contractholders who
are affected by substitutions 1 through 7 will not be materially
affected by the substitutions.
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Investment objective and
Subadviser for Ameritas policies of replaced
Replaced fund Ameritas portfolio portfolio fund and Ameritas
portfolio
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1. Alger Income and Growth....... Ameritas Income and Fred Alger Management, Primarily seeks to
Growth. Inc.. provide a high level of
dividend income.
Secondary goal is to
provide capital
appreciation. Under
normal circumstances,
invests in dividend
paying equity
securities, such as
common or preferred
stocks, preferably
those believed to offer
opportunities for
capital appreciation.
2. Alger Growth.................. Ameritas Growth.......... Fred Alger Management, Seeks long-term capital
Inc.. appreciation. Focuses
on companies that
generally have broad
product lines, markets,
financial resources and
depth of management.
Under normal
circumstances, invests
primarily in equity
securities, such as
common or preferred
stocks, of companies
listed on U.S.
exchanges or in the
U.S. over-the-counter
market, with market
capitalizations of $1
billion or greater.
[[Page 55318]]
3. Alger Small Capitalization.... Ameritas Small Fred Alger Management, Seeks long-term capital
Capitalization. Inc.. appreciation. Focuses
on small, fastgrowing
companies that offer
innovative products,
services or
technologies to a
rapidly expanding
marketplace. Under
normal circumstances,
invests primarily in
equity securities, such
as common or preferred
stocks, of small
capitalization
companies listed on
U.S. exchanges or in
the U.S. over-the-
counter market. A small
capitalization company
is one that has a
market capitalization
within the range of
companies in the Russel
2000 Growth Index or
the S&P SmallCap 600
index.
4. Alger MidCap Growth........... Ameritas MidCap Growth... Fred Alger Management, Seeks long-term capital
Inc.. appreciation. Invests
in midsize companies
with promising growth
potential. Under normal
circumstances, invests
primarily in equity
securities, such as
common or preferred
stocks, of companies
listed on U.S.
exchanges or in the
U.S. over-the-counter
market and having a
market capitalization
within the range of
companies in the S&P
MidCap 400 Index.
5. MFS Emerging Growth Series.... Ameritas Emerging Growth. MFS Co.................. Seeks long-term growth
of capital. Invests,
under normal market
conditions, at least
65% of its total assets
in common stocks and
related securities,
such as preferred
stocks, convertible
securities and
depositary receipts for
those securities, of
emerging growth
companies.
6. MFS Research Series........... Ameritas Research........ MFS Co.................. Seeks long-term growth
of capital and future
income. Invests, under
normal market
conditions, at least
80% of its total assets
in common stocks and
related securities,
such as preferred
stocks, convertible
securities and
depositary receipts.
Focuses on companies
that are believed to
have favorable
prospects for long-term
growth, attractive
valuations based on
current and expected
earnings or cash flow,
dominant or growing
market share and
superior management.
Investments may be made
in companies of any
size and may include
securities traded on
securities exchanges or
on the over-the counter-
markets.
[[Page 55319]]
7. MFS Growth w/Income........... Ameritas Growth w/Income. MFS Co.................. Seeks to provide
reasonable current
income and long-term
growth of capital and
income. Invests, under
normal market
conditions, at least
65% of its total assets
in common stocks and
related securities,
such as preferred
stocks, convertible
securities and
depositary receipts for
those securities. These
securities may be
listed on a securities
exchange or traded in
the over the counter
markets. While
investments may be made
in companies of any
size, the focus is on
companies with larger
market capitalizations
that are believed to
have sustainable growth
prospects and
attractive valuations
based on current and
expected earnings or
cash flow.
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9. Substitutions 8 and 9 involve a stock index and a money market
fund, respectively--vehicles that select their investments from
narrowly defined classes of securities and in accordance with legally
mandated investment disciplines. The tables below compare the
investment objectives and policies of the Replaced Funds and the
Ameritas Portfolios involved in these two remaining substitutions, and
indicate the investment advisory organization that will be responsible
for day-to-day portfolio management following the Substitutions. With
respect to substitutions 8 and 9, Applicants represent that the
Ameritas Portfolios involved in substitutions have objectives and
policies that are sufficiently similar to those of the Replaced Funds
so that the objective of the affected contractholders can continue to
be met.
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Investment objective and policies
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Substitution No. 8
Replaced Fund, Fidelity Index 500, Fidelity Management Seeks investment results that correspond to the total
and Research. return of common stocks publicly traded in the United
States, as represented by the Standard & Poor's 500.
Invests at least 80% of assets in common stocks
included in the Standard & Poor's 500. May lend
securities to earn income for the fund.
Ameritas Portfolio, Ameritas Index 500 Portfolio, State Seeks investment results that correspond to the total
Street Global Advisors. return of common stocks publicly traded in the United
States, as represented by the S&P 500 Stock Index. The
Portfolio intends to invest in all 500 stocks in the
S&P Index in proportion to the weighting in the Index.
Substitution No. 9
Replaced Fund, Fidelity Money Market, Fidelity Seeks as high a level of current income as is
Management and Research. consistent with the preservation of capital and
liquidity. Invests in U.S. dollar-denominated money
market securities, including U.S. Government
securities and repurchase agreements, and may enter
into reverse repurchase agreements.
Ameritas Portfolio, Ameritas Money Market Portfolio, Seeks as high a level of current income as is
CAMCO. consistent with the preservation of capital and
liquidity. Invests in U.S. dollar-denominated money
market securities of domestic and foreign issuers,
including U.S. Government securities and repurchase
agreements, and may enter into reverse repurchase
agreements. Invests more than 25% in the financial
services industry.
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10. In contrast to the Ameritas Portfolios involved in Substitution
Nos. 1-7, the Ameritas Money Market Portfolio and the Ameritas Index
500 Portfolio will, following the substitutions, be subadvised by
investment advisory organizations different from the organizations that
currently manage the money market and stock index offerings among the
Existing Portfolios. Following the substitutions, day-to-day portfolio
decisions for the Ameritas Money Market Portfolio will be the
responsibility of CAMCO. Day-to-day portfolio decisions for the
Ameritas Index 500 Portfolio will be the responsibility of State Street
Global Advisors, a division of State Street Bank and Trust Co. As in
the case of the other Ameritas Portfolios, however, AIC will provide
overall management supervision for both the Ameritas Money Market and
Ameritas Index 500 Portfolios.
11. Applicants acknowledge that different investment advisory
organizations may approach the management of money market and index
funds differently. However, Applicants state that the potential impact
of the change in the identity of the investment advisory organization
responsible for day-to-day investment
[[Page 55320]]
decisions will be mitigated by the fact that these substitutions
involve vehicles required to invest in a narrow range of securities and
adhere to strict limits in their investment practices. In addition,
Applicants believe the anticipated benefits that will follow from
Applicants' increased ability to monitor and control the investment
options offered to contractholders through the Variable Contracts
outweigh any impact that a change in the portfolio manager of these
funds may have on affected contractholders. Applicants also state that
the investment advisory organizations that will be designated to make
day-to-day investment decisions for the Ameritas Money Market Portfolio
and Ameritas Index 500 Portfolio are experienced money managers and
fully equipped to provide such services.
12. Applicants state that the Ameritas Portfolios will, in all
cases, be smaller than the Replaced Funds. Applicants, state therefore
that it is likely that the Ameritas Portfolios will have higher expense
ratios than the Replaced Funds. Recognizing this, Applicants state
that, as a condition of the requested order, AIC will waive its fee
and/or reimburse the expenses of any Ameritas Portfolios if the expense
ratio of that Portfolio exceeds the expense ratio of the corresponding
Replaced Fund (``Prior Expense Ratio''). This fee cap will remain in
effect until one year following the date on which the order is issued.
Following the one year period, Applicants believe that the economies
that can be achieved under the proposed structure, and future
transactions under consideration by AVLIC and certain of its affiliated
companies will tend to reduce the expense ratios of the Ameritas
Portfolios.
13. Because there can be no guarantee that there will be
substantial growth in the assets of the Ameritas Portfolios, AIC will
guarantee, and will include such guarantee as a term in the AIC
Advisory Agreement, that the expenses of an Ameritas Portfolio will not
be permitted to exceed an expense ratio which is .10% greater than the
Prior Expense Ratio of the corresponding Replaced Fund following the
expiration of the initial one year fee cap, unless an amendment to the
investment advisory contract is approved modifying or eliminating AIC's
expense guarantee. Under Sections 15 (a) and (c) of the 1940 Act, any
such amendment would require the approval of both the Board of
Directors of CVS, including those directors who are ``independent
directors'' of CVS, and the shareholders of the relevant Ameritas
Portfolios. It is anticipated that the AIC Advisory Agreement will
permit AIC to recapture expenses paid on behalf of the Ameritas
Portfolios following the end of the one year fee cap period under
certain circumstances. The AIC Advisory Agreement will include a
provision that will permit AIC to recapture fees waived and/or expenses
reimbursed to an Ameritas Portfolio following the expiration of the
initial fee cap period. Such recapture would be permitted under the AIC
Advisory Agreement, however, only after the expiration of the initial
one year fee cap period and only with respect to periods in which the
expense ratio of the relevant Ameritas Portfolio is a ratio which does
not exceed the Prior Expense Ratio by more than .10%, after taking into
account the fee recapture. In addition, such recapture will be
available to AIC only until the second anniversary of the end of the
initial fee cap period.
14. The chart below shows Applicants' representations regarding:
(i) Expense ratios for the Replaced Funds as of December 31, 1998 and
(ii) the total assets of each Replaced Fund as of December 31, 1998.
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Assets at 12/31/98
Replaced fund Expense ratio (000 omitted)
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Alger Small Cap......................... 0.89%........................................ 1,216,584
Alger Growth............................ 0.79%........................................ 1,904,719
Alger Income and Growth................. 0.70%........................................ 77,926
Alger MidCap............................ 0.84%........................................ 689,571
MFS Emerging Growth..................... 0.85%........................................ 908,987
MFS Research............................ 0.86......................................... 567,778
MFS Growth w/Income..................... 0.88% (after waiver \2\)..................... 244,310
Fidelity Index 500...................... 0.28% (after waiver \2\)..................... 3,772,068
Fidelity Money Market................... 0.30%........................................ 1,507,489
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\1\ Prior to October 2, 1998, MFS voluntarily capped operating expenses of the Growth w/Income Fund (exclusive
of management fees) at .25%; has this policy not been in effect, the expense ratio for that fund would have
been .95%.
\2\ For the period shown, Fidelity voluntarily capped total operating expenses at .28%; had this policy not been
in effect, the expense ratio for the Fidelity Index 500 Portfolio would have been .35%.
15. The following chart shows (i) the estimated expense ratio for
the Ameritas Portfolios; (ii) estimated assets of the Ameritas
Portfolios; (iii) expense ratios for the Ameritas Portfolios with the 1
year cap in effect; and (iv) expense ratios after the one year cap.
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Estimated expense ratio Estimated assets (000
Ameritas portfolio (percent) omitted) 1 Year cap (percent) Expense cap (percent)
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Small Cap........................................... 1.00 146,000 0.89 0.99
Growth.............................................. 0.89 184,000 0.79 0.89
ncome & Growth...................................... 0.82 68,000 0.70 0.80
MidCap.............................................. 0.97 84,000 0.84 0.94
Emerging Growth..................................... 0.91 106,000 0.85 0.95
Research............................................ 1.15 26,000 0.86 0.96
Growth w/Income..................................... 1.00 45,000 0.88 0.98
Index 500........................................... 0.41 197,000 0.28 0.38
Money Market Fund................................... 0.35 142,000 0.30 0.40
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[[Page 55321]]
16. Applicants state that the Ameritas-Acacia Merger brought
together under one corporate umbrella several separate asset management
organizations. Applicants represent that one of the anticipated
benefits of the substitutions will be the opportunity to take advantage
of economies of scale created by the Ameritas-Acacia Merger. The
substitutions are a first step in the process. Specifically, the
substitutions are the first step in establishing a manager of managers
structure that will provide Applicants with increased ability to affect
the administration and management of the investment options offered
through Variable Contracts. As the overall investment manager of each
of the Ameritas Portfolios, AIC will be in a position to oversee the
operations of the Ameritas Portfolios, including the performance and
portfolio management. Applicants represent that, following the
substitutions, Applicants will have the means to more directly monitor
the overall manner in which investment options available through the
Variable Contracts are managed and administered. Applicants also state
that this will be an important tool in assuring an efficient interface
between the Ameritas Portfolios and the Variable Contracts. Applicants
further represent that Applicants' involvement in overseeing the
investment options offered through the Variable Contracts will allow
Applicants greater flexibility to react to poor performance or
mismanagement by a service provider, including Subadvisers, than is
possible under the current arrangement. Applicants believe that may be
the case even before the Ameritas Portfolios are permitted to rely upon
the CVS 15(a) Order (see below). For example, Applicants, through AIC,
would be in a position to monitor the operation of the Ameritas
Portfolios more closely than is currently the case with respect to the
Replaced Funds. In addition, Rule 15a-4 under the 1940 Act would permit
Applicants to recommend to the CVS Board that a particular manager be
replaced. Assuming Board approval and assuming that the subadvisory fee
would remain unchanged, a new investment advisory organization could be
engaged and assume portfolio management responsibilities immediately ,
provided only that the approval of the holders of a majority of the
outstanding voting securities of the affected portfolio were obtained
within the period prescribed by the rule.
17. CVS and certain of its affiliates have obtained exemptive
relief from Section 15(a) of the 1940 Act (``CVS 15(a) Order''). The
CVS 15(a) Order permits CAMCO, as the investment adviser for the
several existing series of CVS to replace any subadviser or to employ a
new Subadviser, without submitting such actions for the approval of
shareholders of the affected series. Following the substitutions,
Applicants anticipate that each of the Ameritas Portfolios will be
entitled to rely on the CVS 15(a) Order. As a condition to the
application, however, Applicants state that they will take no action in
reliance on the CVS 15(a) Order with respect to any one of the Ameritas
Portfolios unless and until the operation of that portfolio in the
manner contemplated by the CVS 15(a) Order is approved following the
substitutions, by the holders of a majority of the outstanding shares
of that portfolio within the meaning of the 1940 Act and in a manner
that is consistent with the order exempting CVS from certain provisions
of Rules 6e-2 and 6e-3T under the 1940 Act (``CVS Shared Funding
Order'').
18. Applicants state that on May 3, 1999, a supplement to each of
the prospectuses relating to the Variable Contracts was filed with the
Commission. The supplements summarized the substitutions, including the
possible impact that the substitutions may have on fees and expenses,
and were mailed to all contractholders. Prior to the time that the
order requested by the application is issued, but following the date on
which a notice of the application is published in the Federal Register,
AVLIC will file with the Commission another supplement to the
prospectus relating to the Variable Contracts. These supplements
(``Product Supplements'') will reflect all material information
relating to the substitutions and the Ameritas Portfolios, including
the identity of the Replaced Funds, a description of the Ameritas
Portfolios and their respective investment objectives and policies, the
Subadviser for each of the Ameritas Portfolios, fees and expenses
associated with the Ameritas Portfolios, and the impact that the
substitution will have on fees and expenses. In addition, CVS has filed
a post-effective amendment to its registration statement to reflect the
organization of the nine Ameritas Portfolios (``Amended CVS
Prospectus'').
19. Following the date on which the notice of the application is
published in the Federal Register, but before the date on which the
order requested by the application becomes effective (``Effective
Date''), AVLIC will send to affected contractholders a notice (``Pre-
Substitution Notice'') which will include the Product Supplements. The
Pre-Substitution Notice will inform affected contractholders of (i) the
effective date of the substitutions; (ii) the right of each affected
contractholder, under the VUL and VA Contracts, to transfer contract
values among the various subaccounts; (iii) the fact that any such
transfer that involves a transfer from any of the Replaced Funds will
not be subject to any administrative charge and will not count as one
of the ``free transfers'' to which affected contractholders may
otherwise be entitled.
20. Within five days after the Effective Date, affected
contractholders will be sent written confirmation (``Confirmation
Notice'') of the substitution transactions. The Confirmation Notice
will (i) confirm that the substitutions were carried out; (ii)
reiterate that each affected contractholder may make one transfer of
all of the contract value or cash value under their Variable Contract
that is invested in any one of the Subaccounts that were affected by
the substitutions to any other Subaccount available under their
Variable Contract without such transfer being subject to any
administrative charge, or being counted as one of the ``free
transfers'' (or one of the limited number of transfers) to which
affected contractholders may be entitled under their Variable Contract;
and (iii) state that AVLIC will not exercise any rights reserved by it
under the Variable Contracts to impose additional restrictions on
transfers until at least 30 days after the Effective Date. The
Confirmation Notice will be accompanied by a then current prospectus
relating to the relevant Variable Contract, amended to reflect the
inclusion of the Ameritas Portfolios, as well as a definitive
prospectus relating to the Ameritas Portfolios.
21. Applicants state that the substitutions will be effected by
redeeming shares of the Replaced Funds at relative net asset value and
using the proceeds to purchase shares of the Ameritas Portfolios at net
asset value on the date the substitutions take place. The proceeds of
such redemptions will be effected through a combination of cash and in-
kind transactions. All redemptions and purchases will be effected in
accordance with Rule 22c-1 under the 1940 Act. No transfer or similar
charges will be imposed by AVLIC, and, at all times, all contract and
policy values will remain unchanged and fully invested.
22. Redemptions in-kind will be done in a manner consistent with
the investment objectives, policies and diversification requirements of
the respective Ameritas Portfolios. Further,
[[Page 55322]]
Applicants represent that the in-kind redemptions for each of the
Ameritas Portfolios will be reviewed by the Subadviser responsible for
making day-to-day investments decisions for that Portfolio to assure
that the investment objective, investment policies and diversification
requirements set forth in the registration statement relating to the
relevant Ameritas Portfolio are satisfied. In addition, Applicants
represent that the in-kind asset transfers will be valued in the manner
that is consistent with the valuation procedures of both the Replaced
Fund and the relevant Ameritas Portfolio. Applicants further state that
any inconsistencies in valuation procedures between the Replaced Fund
and the relevant Ameritas Portfolio will be reconciled so that the
redeeming and purchasing values are the same. In addition, and
consistent with Rule 17a-7 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.
23. The significant terms of the substitutions described in the
application include:
a. The Ameritas Portfolios involved in substitutions 1-7 have
objectives and policies that are substantially the same as the
objectives and policies of the Replaced Fund so that the objectives of
the affected contractholders can continue to be met. The Ameritas
Portfolios involved in substitutions 8 and 9 have objectives and
policies that are sufficiently similar so that the objective of the
affected contractholders can continue to be met.
b. In connection with the proposed manager of managers structure,
Applicants anticipate that each of the Ameritas Portfolios will seek to
rely upon the CVS 15(a) Order. Applicants will take no action in
reliance on the CVS 15(a) Order with respect to any one of the Ameritas
Portfolios unless and until the application of the manager of managers
structure contemplated by the CVS 15(a) Order is approved by a vote of
a majority of the outstanding shares of that portfolio following the
substitution and in a manner consistent with the CVS Shared Funding
Order.
c. As a result of AIC's contractual obligation to waive fees and/or
reimburse expenses, the expense ratio of each Ameritas Portfolio will,
immediately following the Effective Date, not exceed the expense ratio
reported by the respective Replaced Funds as of the end of such
Replaced Fund's then most recently ended fiscal quarter (``Prior
Expense Ratio''). AIC will continue to waive its fees and/or reimburse
expenses, for each Ameritas Portfolio as necessary in accordance with
this undertaking until one year following the date on which the order
requested by the application is issued.
d. The AIC Advisory Agreement will also require AIC to guarantee
that, following the initial one year fee cap, the expenses of an
Ameritas Portfolio will not exceed an expense ratio that is 0.10%
higher than the Prior Expense Ratio of its corresponding Replaced Fund
unless an amendment to the AIC Advisory Agreement is approved, in
accordance with Sections 15(a) and (c) of the 1940 Act, by the Board of
Directors of CVS, including those directors who are ``independent
directors'' of CVS, and the shareholders of the relevant Ameritas
Portfolio.
e. Affected contractholders may transfer assets from any Subaccount
of the Separate Accounts to any other subaccount available under the
Variable Contract as permitted by their contract. Any such transfer
that involves a transfer from any of the Replaced Funds, from the date
of the notice that the Replaced Funds will be substituted through a
date at least 30 days following the Effective Date, will not be subject
to any administrative charge, and will not count as one of the ``free
transfers'' to which affected contractholders may otherwise be
entitled. Affected contractholders may also withdraw amounts under any
contract or terminate their interest in any such contract in accordance
with the terms and conditions of any such contract, including, but not
limited to payment of any applicable surrender charge.
f. The substitutions will be effected at the net asset value of the
respective shares in conformity with Section 22(c) of the 1940 Act and
Rule 22c-1 thereunder, without the imposition of any transfer or
similar charge, and without change in the amount or value of any
Variable Contract held by affected contractholders. Affected
contractholders will not incur any fees or charges as a result of the
substitutions, nor will their rights or the obligations of AVLIC under
such Variable Contracts be altered in any way. All expenses incurred in
connection with the substitutions, including legal, accounting and
other fees and expenses, will be borne by Applicants, other than the
Separate Accounts.
g. Redemptions in-kind will be handled in a manner consistent with
the investment objectives, policies and diversification requirements of
the Ameritas Portfolios. Consistent with Rule 17a-7(d) under the 1940
Act, no brokerage commissions, fees (except customary transfer fees) or
other remuneration will be paid by the Replaced Funds or Ameritas
Portfolios or affected contractholders in connection with the in-kind
transactions. In addition, the in-kind asset transfers will be valued
in the manner that is consistent with the valuation procedures of both
the Replaced Fund and relevant Ameritas Portfolio.
h. The substitutions will not be counted as transfers in
determining the limit on the total number of transfers that affected
contractholders may otherwise make under the Variable Contracts.
i. The substitutions will not alter in any way the annuity, life or
tax benefits afforded under the Variable Contracts held by any
contractholder.
24. Applicants state that they will not complete the substitutions
and related transactions described in the application (other than the
mailing of the Pre-Substitution Notices) unless all of the following
conditions are met:
a. The Commission shall have issued an order (i) approving the
substitutions under Section 26(b) of the 1940 Act; and exempting the
in-kind redemptions from the provisions of Section 17(a) of the 1940
Act as necessary to carry out the substitutions as described in the
application.
b. Each affected contractholder will be sent a Pre-Substitution
Notice, which will include the Product Supplements and will inform
affected contractholders of (i) the Effective Date of the
substitutions; (ii) the right of each affected contractholder, under
the VUL and VA Contracts, to transfer contract values among the various
subaccounts (iii) the fact that any such transfer involves a transfer
from any of the Replaced Funds will not be subject to any
administrative charge and will not count as one of the ``free
transfers'' to which affected contractholders may otherwise be
entitled.
c. Each affected contractholder will receive, within five days
following the Effective Date of the substitutions, written notice
(``Confirmation Notice'') which will (i) confirm that the substitutions
were carried out; (ii) reiterate that each affected contractholder may
make one transfer of all of the contract value or cash value under
their Variable Contract that is invested in any one of the Subaccounts
that was affected by the substitutions to any other Subaccount
available under their Variable Contract without such transfer being
subject to any administrative charge, or being counted as one of the
``free transfers'' (or one of the limited number of transfers) to
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which affected contractholders may be entitled under their Variable
Contract; and (iii) state that AVLIC will not exercise any rights
reserved by it under the Variable Contracts to impose additional
restrictions on transfers until at least 30 days after the Effective
Date. The Confirmation Notice will be accompanied by a then current
prospectus relating to the relevant Variable Contract, amended to
reflect the inclusion of the Ameritas Portfolios, as well as a
definitive prospectus relating to the Ameritas Portfolios.
d. AVLIC shall have satisfied itself that (i) the Variable
Contracts allow the substitution of investments in the manner
contemplated by the substitutions and related transaction described in
the application; (ii) the transactions can be consummated as described
in the application under applicable insurance laws; and (iii) that any
regulatory requirements in each jurisdiction where the Variable
Contracts are qualified for sale, have been complied with to the extent
necessary to complete the transactions.
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 approves 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. Applicants request an order pursuant to Section 26(b) of the
1940 Act approving the substitutions and related transactions.
Applicants assert that the purposes, terms, and conditions of the
substitutions are consistent with the protection of investors and the
purposes fairly intended by the 1940 Act. Applicants further assert
that the substitutions will not result in the type of forced redemption
that Section 26(b) was designed to guard against.
3. Applicants maintain that the substitutions do not represent the
type of transaction that Section 26(b) was designed to prevent for the
following reasons: (a) the substitutions are designed to give AVLIC
more control over investment products; (b) the substitutions are part
of a series of business initiatives which have the potential to reduce
expenses; (c) the substitutions will provide benefits to
contractholders due to the additional services provided by AIC; and (d)
the procedures that Applicants will follow in the substitutions will
give affected contractholders ample notice of the substitutions and any
potential impact. In addition, Applicants state that affected
contractholders can transfer from the Replaced Funds or the Ameritas
Portfolios (after the substitution) without a transfer charge.
Applicants also note that only 9 of 26 investment options are involved
in the substitutions, and this, in combination with the transfer
rights, gives affected contractholders an ability to ``opt out'' and
have an effective choice of investments. Applicants state that these
alternatives provide a range of investments sufficient to meet affected
contractholders' investment goals.
4. Section 17(a)(1) of the 1940 Act prohibits any affiliated person
of a registered investment company, or any affiliate of such affiliated
person, from selling any security or other property to such registered
investment company. Section 17(a)(2) of the 1940 Act prohibits any
affiliated person from purchasing any security or other property from
such registered investment company.
5. Applicants request an order pursuant to Section 17(b) of the
1940 Act exempting the in-kind redemptions and purchases from the
provisions of Section 17(a). Section 17(b) of the 1940 Act provides
that the Commission may grant an order exempting a proposed transaction
from Section 17(a) if evidence establishes that: (1) The terms of the
proposed transaction, including the consideration to be paid or
received, are fair and reasonable and do not involve overreaching on
the part of any person concerned; (2) the proposed transaction is
consistent with the policy of each registered investment company
concerned; and (3) the proposed transaction is consistent with the
general purposes of the 1940 Act.
6. Applicants represent that, if effected in accordance with the
procedures described in the application and summarized herein, the
substitutions are consistent with the general purposes of the 1940 Act
and do not present any of the conditions or abuses that the 1940 Act
was designed to prevent. Applicants state that the consideration to be
paid by each Ameritas Portfolio, and received by each of the Replaced
Funds, will be fair and reasonable and will not involve overreaching
because the substitutions will not result in the dilution of the
interests of any affected contractholders and will not effect any
change in economic interest, contract value or the dollar value of any
Variable Contract held by an affected contractholder. The in-kind
redemptions and purchases will be done at values consistent with the
policies of both the Replaced Funds and the Ameritas Portfolios and
will satisfy the procedural safeguards of Rule 17a-7. Both AIC and the
Subadviser of the relevant Ameritas Portfolio will review all the asset
transfers to assure that the assets meet the objectives of the relevant
Ameritas Portfolio and that they are valued under the appropriate
valuation procedures of the Replaced Fund and such Ameritas Portfolio.
The in-kind redemption proceeds will consist of the same securities
that are currently held by the Replaced Funds. In addition, in seven of
the nine substitutions, the organization responsible for providing
portfolio management services to the Ameritas Portfolio and the
Replaced Portfolio will be the same, and the Ameritas Portfolio
involved in substitutions 8 and 9 generally invest in a narrow range of
securities and must adhere to strict limits in their investment
practices. Applicants represent that the transactions are consistent
with the policies of each investment company involved and the general
purposes of the 1940 Act, and comply with the requirements of Section
17(b).
7. Applicants state that the facts and circumstances in the
application are sufficient to assure that the substitutions will be
carried out in a manner that is consistent with Section 17(b) and 26(b)
of the 1940 Act and that the terms and conditions to which the relief
Applicants request hereby will be subject are consistent with orders
the Commission has issued in the past under similar circumstances.
Conclusion
Applicants assert that, for the reasons summarized above, the
requested order approving the substitutions and related transactions
involving in-kind transactions should be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-26523 Filed 10-8-99; 8:45 am]
BILLING CODE 8010-01-M