[Federal Register Volume 64, Number 217 (Wednesday, November 10, 1999)]
[Notices]
[Pages 61372-61375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29435]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24122; File No. 812-11744]


Hartford Life Insurance Company, et al.

November 3, 1999.
AGENCY: The Securities Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to Section 26(b) of 
the Investment Company Act of 1940 (the ``Act'') approving certain 
substitutions of securities.

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SUMMARY OF APPLICATION: Applicants request an order to permit the 
substitution of shares of Hartford Advisers HLS fund, Inc. (``Advisers 
HLS fund'') for shares of American Century VP Advantage Fund (``VP 
Advantage Fund''), a series fund of American Century Variable 
Portfolios, Inc. (``ACVP, Inc.''), currently held by Hartford Life 
Insurance Company Separate Account Two (the ``Account'') to support 
certain variable annuity contracts (collectively the ``Contracts'') 
issued by Hartford.

APPLICANTS: Hartford Life Insurance Company (``Hartford'') and the 
Account.

FILING DATE: The application was filed on August 11, 1999, and amended 
and restated on October 29, 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 November 29, 1999, and should be accompanied 
by proof of service on Applicants, in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the writer's interest, the reason for the request, and the 
issues contested. Persons may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, DC 20549-0609. Applicants, c/o Christopher M. 
Grinnell, Esq., Associate Counsel, Hartford Life and Annuity Insurance 
Company, 200 Hopmeadow Street, Simsbury, CT 06089. Copy to David S. 
Goldstein, Esq., Sutherland Asbill & Brennan LLP, 1275 Pennsylvania 
Avenue, N.W., Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Jane g. Heinrichs, Senior Counsel, at 
(202) 942-0699, or Susan M. Olson, Branch Chief, at (202) 942-0672, 
Office of Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 Fifth Street, N.W., 
Washington, DC 20549-0102 (Tel. (202) 942-8090).

Applicant's Representations

    1. Hartford is a stock life insurance company incorporated in 
Connecticut. Hartford is a subsidiary of Hartford Fire Insurance 
Company and ultimately controlled by Hartford Financial Services Group. 
Hartford is engaged in the business of writing individual and group 
life insurance and annuity contracts in all the District of Columbia. 
Hartford is the depositor and of the Account.
    2. Hartford established the Account on June 2, 1989, as a 
segregated investment account under Connecticut law. Under Connecticut 
law, the assets of the Account attributable to the Contracts and any 
other variable annuity contracts through which interests in the 
Accounts are issued are owned by Hartford but are held separately from 
all other assets of Hartford for the benefit of the owners of, and the 
persons entitled to payments under, the Contracts and the other 
variable annuity contracts issued through the Account. Consequently, 
the assets in the Account are not chargeable with liabilities arising 
out of any other business that Hartford may conduct. Income, gains and 
losses, realized and unrealized, from the Account's assets are credited 
to or charged against the Account without regard to the income, gains 
or losses arising out of any other business that Hartford may conduct. 
The Account is a ``separate account'' as defined by Rule O-1(e) under 
the Act, and is registered with the Commission as a unit investment 
trust.\1\ The Account is currently divided into several subaccounts. 
Sixteen of the subaccounts of the Account are available through the 
Contracts. Each subaccount invests exclusively in a corresponding 
management investment company. The assets of the Account support the 
Contracts and other variable annuity contracts issued through the 
Account. Interests in the Account offered through the Contracts have 
been registered under the Securities Act of 1933 (``1933 Act'') on 
Forms N-4 (File No. 33-19946 and File No. 33-59541).
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    \1\ File No. 811-07295.
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    3. American Century Variable Portfolios, Inc. (``ACVP, Inc.'') A

[[Page 61373]]

Maryland corporation, is registered under the Act as an open-end 
management investment company of the series type (file No. 811-5188). 
ACVP, Inc. currently comprises six funds, one of which, American 
Century VP Advantage Fund (``VP Advantage Fund''), would be involved in 
the proposed substitution. ACVP, Inc. Issues a separate series of 
shares of beneficial interest in connection with each fund. Those 
shares are registered under the 1933 Act on Form N-1A (File No. 33-
14567). American Century Investment Management, Inc. (``ACIM`') serves 
as the investment adviser to ACVP, Inc.
    4. Advisers HLS Fund, a Maryland corporation, is registered under 
the Act as an open-end management investment company (File No. 811-
03659). HL Investment Advisers, LLC (``HL Adviors'') is the investment 
manager to Advisers HLS Fund. In addition, under HL Advisor's general 
management, Wellington Management Company, LLP (``Wellington 
Management'') serves as investment sub-adviser to the Advisers HLS 
Fund.
    5. ACIM, investment adviser to ACVP, Inc. and VP Advantage Fund, 
has informed the Applicants that it wishes to halt all management and 
operations associated with VP Advantage Fund. Applicants understand 
that VP Advantage Fund was established with the expectation that it 
would be offered as an investment option for variable annuity contracts 
and variable life insurance policies underwritten by various insurance 
companies. However, according to ACIM, VP Advantage Fund has not been 
utilized by as many insurance companies as originally anticipated. 
Consequently, it does not believe that VP Advantage Fund has attracted 
sufficient assets to grow to an efficient size. Moreover, Applicants 
are advised by ACIM that VP Advantage Fund is no longer being actively 
marketed to other insurance company separate accounts. As a 
consequence, the assets of VP Advantage Fund are not growing. 
Applicants assert that they anticipate that the size of the fund may 
shrink, perhaps rapidly, causing fund expenses to rise and making the 
fund an unsatisfactory investment option for the Contracts.
    6. VP Advantage Fund seeks long-term capital growth and current 
income by investing approximately forty percent (40%) of its assets in 
equity securities, forty percent (40%) in fixed income securities and 
the remaining twenty percent (20%) in cash and cash equivalents. For 
the equity portion of the fund, the fund managers invest in stocks of 
companies they believe will increase in value over time. Although most 
of the equity portion of the fund will be invested in U.S. companies, 
there is no limit on the amount of assets the fund can invest in 
foreign companies. The fixed income and cash portions of the fund will 
be invested only in obligations of the U.S. government and its agencies 
and instrumentalities. The fixed income securities in which the fund 
may invest include direct obligations of the United States, such as 
Treasury bonds, notes and bonds and obligations (including mortgage-
backed and other asset-backed securities) issued or guaranteed by 
agencies and instrumentalities of the U.S. government that are 
established under an act of Congress. Under normal market conditions, 
the fixed income portion is expected to have a weighted average 
maturity of three to ten years, and the cash portion is expected to 
have a weighted average maturity of six months or less. Securities will 
be chosen based on their income level and price stability.
    7. Advisers HLS Fund seeks maximum long-term total return. The fund 
actively allocates its assets among three categories: equity 
securities, debt securities, and money market instruments. Asset 
allocation decisions are based on Wellington Management's judgment of 
the projected investment environment for financial assets, relative 
fundamental values, the attractiveness of each asset category, and 
expected future returns of each asset category. Wellington Management 
does not attempt to engage in short-term market timing among assets 
categories and asset allocation is in Wellington Management's 
discretion. As a result, shift in asset allocation are expected to be 
gradual and continuous and the fund will normally have some portion of 
its assets invested in each asset category. The fund may invest up to 
twenty percent (20%) of its total assets in securities of non-U.S. 
counties. The fund's investments in equity securities whose 
characteristics include a leadership position within an industry, a 
strong balance sheet, a high return on equity, sustainable or 
increasing dividends, a strong management team and a globally 
competitive position. The debt securities in which the fund may invest 
include securities issued or guaranteed by the U.S. government and its 
agencies or instrumentalities, securities rated investment grade, or if 
unrated, securities deemed by Wellington Management to be of comparable 
quality.
    8. The Contracts are flexible premium group variable annuity 
contracts which may be marketed for issuance in connection with certain 
retirement programs that qualify for Federal income tax benefits under 
Section 401,403, 408 or 457 of the Internal Revenue Code. The Contracts 
provide for the accumulation of values on a variable basis, fixed 
basis, or both, during the accumulation period, and provide settlement 
or annuity payment options on a variable basis, fixed basis, or both.
    9. Under the Contracts, Hartford reserves the right, after 
appropriate notice, to modify the terms of the Contracts to, among 
other things, reflect a change in the operation of the Account or to 
add or withdraw any investment options offered through the Account. 
Applicants assert that such rights include the right to substitute the 
shares of another management investment company for shares of a fund.
    10. Hartford proposes to substitute shares of Advisers HLS Fund for 
shares of VP Advantage Fund (the ``Substitution''). The Substitution 
will be performed by transferring accumulated account values from the 
subaccount holding shares of the VP Advantage Fund to the subaccount 
holding shares of the Advisers HLS Fund.
    11. Applicants assert that the investment objective of Advisers HLS 
Fund is substantially identical to that of the VP Advantage Fund. The 
proposed Substitution would move Contract owners currently invested in 
VP Advantage Fund to a much larger fund with substantially the same 
risk and reward characteristics. Advisers HLS Fund has had lower 
expense ratios than VP Advantage Fund during the last three years. In 
addition, while Advisers HLS Fund has the prospect of future growth, VP 
Advantage Fund is expected to shrink in size and to cease operations in 
the future as it is no longer being actively marketed to other 
insurance company separate accounts and is not growing. Finally, 
Advisers HLS Fund has had better cumulative performance over the past 
three fiscal years than has VP Advantage Fund.
    12. The following charts show the approximate year-end net asset 
level, ratio of operating expenses as a percentage of average net 
assets, and annual total returns for each of the past three years for 
the VP Advantage Fund and Advisers HLS Fund:

[[Page 61374]]



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                                                                   Net Assets at
                                                                   year-end (in    Expense ratio   Total return
                                                                    thousands)       (percent)       (percent)
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VP Advantage fund: \2\
    1996........................................................         $25,230             .98            9.25
    1997........................................................          25,244             .99           12.83
    1998........................................................          26,308            1.00           17.19
Advisers HLS Fund: \3\
    1996........................................................       5,879,529             .63           16.62
    1997........................................................       8,283,912             .63           24.51
    1998........................................................      11,805,411             .63           24.66
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\2\ VP Advantage Fund pays a daily investment management fee based upon the average daily net assets of the fund
  at an annual rate of 1.000%
\3\ Advisers HLS Fund pays a daily investment management fee based upon the average daily net assets of the fund
  at an annual rate of 0.616%.

    13. For the foregoing reasons, Applicants propose that Contract 
owners currently invested in VP Advantage Fund would be better off if 
shares of Advisers HLS Fund are substituted for shares of VP Advantage 
Fund.
    14. By supplements to the various prospectuses for the Contracts 
and the Account, Hartford will notify all owners of the Contracts of 
its intention to cease to offer the VP Advantage Fund subaccount and to 
effect the Substitution. The supplements for the Account advise 
Contract owners that from the date of the supplement until the date of 
the Substitution, Contract owners are permitted to transfer all amounts 
under a Contract invested in the affected subaccount on the date of the 
supplement to another subaccount and/or the general account available 
under a Contract without such transfers counting as a ``free'' transfer 
permitted under a Contract, if the Contracts limit or restrict 
transfers. The supplements also inform Contract owners that Hartford 
will not exercise any rights reserved under any Contract to impose 
additional restrictions on such transfers until at least thirty (30) 
days after the proposed Substitution.
    15. Hartford will redeem the VP Advantage Fund shares for cash and, 
the same day, apply the redemption proceeds to the purchase of Advisers 
HLS Fund shares. The Substitution will take place at relative net asset 
value with no change in the amount of any Contract Owner's Contract 
value or death benefit or in the dollar value of his or her investment 
in the Account. As a result, Contract owners will remain fully 
invested. Contract owners will not incur any fees or charges as a 
result of the Substitution, nor will their rights or Hartford's 
obligations under the Contracts be altered in any way. All expenses 
incurred in connection with the Substitution, including legal, 
accounting and other fees and expenses, will pay by Hartford. In 
addition, the Substitution will not impose any tax liability on 
Contract owners. The Substitution will not cause the Contract fees and 
charges currently being paid by existing Contract owners to be greater 
after the Substitution than before the Substitution. The Substitution 
will not be treated as a transfer for purposes of assessing transfer 
charges or for determining the number of remaining permissible 
transfers in a Contract year. Hartford will not exercise any right it 
may have under the Contracts to impose additional restrictions on 
transfers under any of the Contracts for a period of at least thirty 
(30) days following the Substitution.
    16. In addition to the prospectus supplements distributed to owners 
or Contracts, within five (5) days after the Substitution, any Contract 
owner who was affected by the Substitution will be set a written notice 
informing them that the Substitution was carried out and that they may 
make one transfer of all Contract values under a Contract invested in 
the affected subaccount on the date of the notice to another subaccount 
available under their Contract without that transfer counting as one of 
a limited number of transfers permitted in a Contract year free of 
charge, if the Contract limits or restricts transfers. The notice will 
also reiterate the fact that Hartford will not exercise any right 
reserved by it under the Contracts to impose additional restrictions on 
transfer until at least thirty (30) days after the Substitution. If 
applicable, the notice as delivered in certain states may also explain 
that, under the insurance regulations of those states, Contract owners 
who are affected by the substitution may exchange their Contracts for 
fixed-benefit annuity contracts issued by Hartford (or one of its 
affiliates) during the sixty (60) days following the proposed 
substitution. The notice will be preceded or accompanied by a current 
prospectus for Advisers HLS Fund.
    17. Hartford is also seeking approval of the proposed substitution 
from any state insurance regulators whose approval may be necessary or 
appropriate.

Applicants' Legal Analysis

    1. Section 26(b) of the Act requires the depositor of a registered 
unit investment trust holding the securities of a single issuer to 
obtain Commission approval before substituting the securities held by 
the trust. Specifically, Section 26(b) states:

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. 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 policy and provisions of this title.

    2. Applicants state that the Substitution appears to involve a 
substitution of securities within the meaning of Section 26(b) of the 
Act and request that the Commission issue an order pursuant to Section 
26(b) of the Act approving the Substitution.
    3. The Contracts reserve the right for Hartford, after appropriate 
notice, to modify the terms of the Contracts to, among other things, 
reflect a change in the operation of the Account or to add or withdraw 
any investment options offered through the Account. Applicants assert 
that such rights include the right to substitute the shares of another 
management investment company for shares of any fund. Applicants 
further assert that the prospectuses for the Contracts and the Account 
contain appropriate disclosure of this right.
    4. Applicants assert that in the case of the proposed Substitution 
of shares of Advisers HLS Fund for shares of VP Advantage Fund, VP 
Advantage Fund would be replaced with a larger fund with a 
substantially identical investment objective and substantially

[[Page 61375]]

similar risk and reward characteristics. In addition, Advisers HLS Fund 
has had lower expense ratios for each of the most recent three fiscal 
years. Further, cumulative investment performance for Advisers HLS Fund 
has been better than for VP Advantage Fund over the same period. 
Moreover, Applicants state that Advisers HLS Fund has the potential for 
future growth where VP Advantage Fund is not growing, is expected to 
shrink and to eventually close. Applicants assert that Contract owners 
would benefit from the proposed Substitution.
    5. Applicants assert that Contract owners will not be disadvantaged 
by the elimination of the VP Advantage Fund subaccount and that the 
proposed Substitution does not materially diminish for Contract owners 
investment flexibility, which is a central feature of the Contracts. If 
the proposed Substitution is carried out, all Contract owners will 
continue to be permitted to allocate purchase payments and transfer 
Contract values between and among several subaccounts in accordance 
with the terms of the Contracts.
    6. Applicants state that the proposed Substitution is not the type 
of Substitution which Section 26(b) was designed to prevent. Unlike 
traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner which permanently 
affected all the investors in the trust, the Contracts provide each 
Contract owner with the right to exercise his or her own judgment and 
transfer Contract values into other subaccounts. Moreover, Applicants 
state that the Contracts will offer Contract owners the opportunity to 
transfer amounts out of the affected subaccounts into any of the 
remaining subaccounts without cost or other disadvantage. Applicants 
assert that the Substitution, therefore, will not result in the type of 
costly forced redemption which Section 26(b) was designed to prevent.
    7. Applicants assert that the proposed substitution is also unlike 
the type of substitution which Section 26(b) was designed to prevent in 
that by purchasing a Contract, Contract owners select much more than a 
particular investment company in which to invest their account values. 
Applicants state that they also select the specific type of annuity 
benefits offered by Hartford under their Contract as well as other 
rights and privileges set forth in the Contract. Contract owners may 
also have considered Hartford's size, financial condition, type and its 
reputation for service in selecting their Contract. Applicants maintain 
that these factors will not change as a result of the proposed 
substitution.

Conclusion

    Applicants assert that, for the reasons summarized above, the 
Substitution is consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-29435 Filed 11-9-99; 8:45 am]
BILLING CODE 8010-01-M