[Federal Register Volume 64, Number 238 (Monday, December 13, 1999)]
[Notices]
[Pages 69576-69578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32212]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24187; File No. 812-11332]


SAFECO Life Insurance Company and SAFECO Life Deferred Variable 
Annuity Account

December 7, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to Section 26(b) of 
the Investment Company Act of 1940, as amended (``1940 Act'') approving 
the proposed substitution of securities.

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SUMMARY OF APPLICATION: Applicants request an order approving the 
proposed substitution of shares of the Growth Portfolio, Northwest 
Portfolio, and Bond Portfolio of the SAFECO Resource Series Trust for 
shares of the Growth & Income Portfolio, Northwest Portfolio, and 
Income Portfolio of the Composite Deferred Series, Inc., respectively, 
each held by SAFECO Life Deferred Variable Annuity Account to support 
individual flexible premium deferred variable annuity contracts (the 
``Contracts'') issued by SAFECO.

APPLICANTS: SAFECO Life Insurance Company (``SAFECO)'') and SAFECO Life 
Deferred Variable Annuity Account (``SAFECO Account'') (together, 
``Applicants'').

FILING DATE: The application was filed on September 28, 1998, and 
amended and restated on June 17, 1999, October 19, 1999 and December 6, 
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 December 28, 1999, and should be accompanied 
by proof of service on the 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 SEC.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, DC 20549-0609. Applicants, c/o William E. 
Crawford, Esq., SAFECO Life Insurance Company, 15411 N.E. 51st Street, 
Redmond, WA 98052.

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 (tel. (202) 942-8090)).

Applicants' Representations

    1. SAFECO is a stock life insurance company organized under the 
laws of the state of Washington on January 23, 1957. SAFECO is a wholly 
owned subsidiary of SAFECO Corporation, a holding company whose 
subsidiaries are engaged primarily in insurance and financial service 
businesses. SAFECO writes individual and group life, accident and 
health insurance and annuities. SAFECO is licensed to do business in 
the District of Columbia and all states except New York.
    2. Effective December 31, 1997, SAFECO acquired WM Life Insurance 
Company (``WM Life''), and WM Life became a wholly owned subsidiary of 
SAFECO. WM Life was the depositor of WM Life Deferred Variable Annuity 
Account (``WM Life Account'') at the time WM Life was acquired by 
SAFECO. However, as of June 30, 1998, WM Life was merged into SAFECO, 
and WM Life ceased to exist as a separate insurance company. SAFECO 
filed (1) an amendment to WM Life Account's registration statement on 
Form N-4 under the 1940 Act to reflect the renaming of WM Life Account 
as ``SAFECO Deferred Variable Annuity Account; '' and (2) a new 
registration statement on Form N-4 under the Securities Act of 1933 
(``1933 Act'').
    3. WM Life established the WM Life Account on December 23, 1986, as 
a segregated investment account under Arizona law. The WM Life Account 
was, and the SAFECO Account is, a ``separate account'' as defined by 
Rule 0-1(e) under the 1940 Act, and is registered under the 1940 Act as 
a unit investment trust (File No. 811-4961). The SAFECO Account's 
assets support the Contracts, and the Contracts have been registered 
under the 1933 Act (File No. 33-11011).
    4. The SAFECO Account currently is divided into six active 
subaccounts, three of which invest solely in corresponding portfolios 
(each, a ``Portfolio'') of the Composite Deferred Series, Inc. 
(``Composite Fund''), and three of which invest in corresponding 
Portfolios of the Scudder Variable Life Investment Fund. The three 
Portfolios of the Composite Fund available through the SAFECO Account 
are the only Portfolios involved in the substitutions discussed in the 
Application.
    5. The Composite Fund was incorporated under the laws of the state 
of Washington on December 8, 1986, and is registered under the 1940 Act 
as an open-end management investment company (File No. 811-4962). The 
Composite Fund is a series investment company as defined by rule 189f-2 
under the 1940 Act and currently comprises three Portfolios: Growth & 
Income Portfolio, Northwest Portfolio; and Income Portfolio. The 
Composite Fund has registered shares issued in connection with these 
Portfolios under the 1933 Act. WM Advisors, Inc. (``Adviser'') (which 
was an affiliate of WM Life and is now an affiliate of SAFECO) is the 
investment manager of the Composite Fund.
    6. SAFECO Resource Series Trust (``Trust'') was organized as a 
Delaware business trust on May 13, 1993. The Trust is registered under 
the 1940 Act as an open-end management investment company (File No. 
811-4717). The Trust is a series investment company as defined by Rule 
18f-2 under the 1940 Act and currently comprises six series, three of 
which are involved in the substitutions discussed in the application: 
Growth Portfolio; Northwest Portfolio; and Bond Portfolio. The Trust 
has registered shares issued in connection with these series under the 
1933 Act. SAFECO Asset Management Company an affiliate of SAFECO, 
serves as the investment manager of each series of the Trust.
    7. The Contracts are flexible premium deferred variable annuity 
contracts. The Contracts originally were issued by WM Life. However, 
SAFECO became the depositor for the Contracts following the June 30, 
1998 merger of WM Life into SAFECO, and the intact transfer of the WM 
Life Account to SAFECO.
    8. The Contracts permit an unlimited number of transfers to be made 
from the subaccounts of the applicable separate account at any time 
before the annuity date. No charge is imposed on any transfer. Each 
transfer must be at least $1,000 or the entire amount in that 
subaccount if less than $1,000. No transfers are permitted after the 
annuity date.
    9. SAFECO, on its own behalf and on behalf of the SAFECO Account, 
proposes to make certain substitutions of shares held in the SAFECO 
Account. SAFECO proposes to substitute: (1) shares of the Trust's 
Growth Portfolio for shares of the Composite Fund's Growth & Income 
Portfolio, (2) shares of the Trust's Northwest Portfolio for

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shares of the Composite Fund's Northwest Portfolio, and (3) shares of 
the Trust's Bond Portfolio for shares of the Composite Fund's Income 
Portfolio.
    10. The proposed substitutions are principally the result of the 
acquisition by SAFECO of WM Life whereby WM Life became a wholly owned 
subsidiary of SAFECO. SAFECO is seeking to consolidate the assets of 
the Composite Fund with those of other management investment company 
portfolios having substantially identical or very similar investment 
objectives that are advised by affiliated persons of SAFECO. SAFECO 
believes that the consolidation will simplify the structure of the 
mutual fund portfolios, and that the reduction in duplicative 
portfolios will provide better service and less confusion to Contract 
owners.
    11. Applicants represent that the assets of the Composite Fund 
would remain stagnant or decline because the shares of the Composite 
Fund are available only through purchase of the Contracts, and no new 
Contracts are being sold by WM Life. By contrast, shares of the Trust 
are sold to other separate accounts of SAFECO and may be sold to other 
life insurance companies and qualified retirement plans. Applicants 
state that the assets of the Trust are likely to increase, which will 
likely result in lower expenses to Contract owners in the long run.
    12. Applicants represent that the Composite Fund's Portfolios have 
substantially similar investment objectives as the Trust's Portfolios. 
The Trust's Northwest Portfolio and the Composite Fund's Northwest 
portfolio each seek capital growth by investing in securities of 
companies located in the same five states: Alaska, Idaho, Montana, 
Oregon and Washington. The Trust's Growth Portfolio and the Composite 
Fund's Growth & Income Portfolio each seek capital growth and current 
income by investing in a diversified pool of common stocks, although 
each may also invest in bonds and preferred stocks. The Trust's Bond 
Portfolio and the Composite Fund's Income Portfolio each seek to 
provide a high level of current income that is consistent with capital 
stability by investing primarily in debt securities.
    13. Applicants represent that the Trust's Portfolios will all have 
higher expense ratios than the Composite's Portfolios. Applicants state 
that the pro forma expense ratio for the Growth Portfolios is .77%, 
while the expense ratio for the Composite Fund's Growth & Income 
Portfolio during 1998 was .60%. Applicants state that the pro forma 
expense ratio for the Trust's Northwest Portfolio will be .89% while 
1998's expense ratio for the Composite Fund's Northwest Portfolio was 
.66%. In addition, Applicants state that the pro forma expense ratio 
for the Bond Portfolio is .89%, while the expense ratio for the 
Composite Fund's Income Portfolio during 1998 was .67%.
    14. To prevent current Contract owners with values allocated to the 
Composite Fund Portfolios from paying higher expenses resulting from 
the substitution, SAFECO will reduce the mortality and expense risk 
charge at the separate account level for such Contract owners to the 
extent necessary to offset the amount by which each Trust series' 
expense ratio after the substitution exceeds the 1998 expense ratio 
level of the corresponding Composite Fund Portfolio. Applicants 
represent, therefore, that the total expenses borne by these Contract 
owners--the sum of the mortality and expense risk charge and the Trust 
series expenses--will remain the same and not increase as a result of 
the substitution. SAFECO guarantees that this mortality and expense 
risk charge deduction will remain in effect until January 1, 2003. By 
this date, the majority of Contract owners with values allocated to the 
Composite Fund Portfolios will no longer be subject to the contingent 
deferred sales charge on withdrawals. After that date, SAFECO will 
waive any remaining contingent deferred sales charges applicable to the 
Contracts.
    15. SAFECO believes that by making the proposed substitutions, it 
can continue to serve the interests of owners of the Contracts in that: 
(1) Substituting certain portfolios of the Trust will allow owners of 
the Contracts to continue to participate in underlying funds having 
substantially identical or substantially similar investment objectives 
as the Portfolios of the Composite Fund currently available through the 
SAFECO Account; and (2) the owners of the Contracts will continue to 
receive the benefits of professional portfolio management while 
increasing SAFECO's ability (a) to control the expenses associated with 
the management and administration of the portfolios available through 
the SAFECO Account, and (b) to ensure quality and timeliness of 
services.
    16. The registration statement for the SAFECO Account and the 
Contract discloses that SAFECO intends to eliminate the Portfolios of 
the Composite Fund and substitute other mutual fund portfolios in the 
near future. If the Commission approves the proposed substitution, 
SAFECO will prepare a supplement to the prospectus for the Contracts 
and the SAFECO Account, informing all Contract owners that on the date 
of the proposed substitution, the specified Trust series will replace 
the Composite Fund Portfolios as the underlying investments for the 
subaccounts. The supplement also will (1) remind Contract owners that 
they may transfer Contract value in any one of the affected subaccounts 
to another subaccount(s) free of charge and (2) describe the mortality 
and expense risk charge reduction that SAFECO will provide to Contract 
owners with values allocated to the subaccounts currently investing in 
Composite Fund Portfolios.
    17. The proposed substitutions will take place at relative net 
asset values with no change in the amount of any owner's Contract or 
Contract value or in the dollar value of his or her investment in the 
separate account. Contract owners will not incur any fees or charges as 
a result of the proposed substitutions nor will their rights or 
SAFECO's obligations under the Contract be altered in any way. SAFECO 
will pay all expenses incurred in connection with the proposed 
substitutions, including legal, accounting, and other fees and 
expenses. The proposed substitutions will not cause the Contract or 
SAFECO Account fees and charges currently being paid by existing 
Contract owners to be greater after the proposed substitutions than 
before the proposed substitutions. In addition, neither the proposed 
substitutions nor the reduction in the mortality and expense risk 
charge at the separate account level will impose any tax liability on 
Contract owners.
    18. In addition to the prospectus supplement to be distributed to 
owners of Contracts, within five days after the proposed substitutions, 
any Contract owners who were affected by the substitution will be sent 
a written notice informing them that the substitutions took place and 
reminding them of their transfer rights.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to Section 26(b) of the 1940 Act approving the substitutions by SAFECO 
of shares held by corresponding subaccounts of the SAFECO Account as 
follows: (1) Shares of the Trust's Growth Portfolio for shares of the 
Composite Fund's Growth & Income Portfolio; (2) shares of the Trust's 
Northwest Portfolio for shares of the Composite Fund's Northwest 
Portfolio; and (3) shares of the Trust's Bond Portfolio for shares of 
the Composite Fund's Income Portfolio.
    2. Section 26(b) of the 1940 Act requires the depositor of a 
registered unit investment trust holding the securities of a single 
issuer to receive

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Commission approval before substituting the securities held by the 
trust. Section 26(b) also states 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 policy and provisions of the 1940 Act.
    3. The Contract expressly reserves to the depositor (originally WM 
Life) the right, subject to compliance with applicable law, to 
substitute shares of another open-end registered investment company for 
shares of an open-end registered investment company held by a 
subaccount of the separate account. Applicants represent that the 
statement of additional information for the Contract and the SAFECO 
Account contains appropriate disclosure of this right.
    4. This right of substitution was reserved to protect the depositor 
and the Contract owners in situations where either might be harmed or 
disadvantaged by circumstances surrounding the issuer of the shares 
held by one or more of the depositor's separate accounts, and to afford 
the opportunity to replace such shares where to do so could benefit the 
depositor and Contract owners.
    5. Applicants represent that the Trust's Growth Portfolio, 
Northwest Portfolio, and Bond Portfolio are each suitable and 
appropriate investment vehicles for Contract owners. The investment 
objectives of each of the Trust Portfolios involved in the substitution 
are substantially similar to the investment objectives of the 
corresponding Composite Fund Portfolio.
    6. Applicants anticipate that Contract owners will be at least as 
well off with the proposed array of investment options offered after 
the proposed substitutions as they have been with the array of 
investment options offered prior to the substitutions. The proposed 
substitutions retain investment flexibility for Contract owners, which 
is a central feature of the Contracts. All Contract owners will be 
permitted to allocate purchase payments to and transfer Contract values 
among and between the same number of investment subaccounts (with 
substantially the same investment objectives) as they could before the 
proposed substitutions.
    7. Applicants assert that none of the proposed substitutions is 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 Contract provides each 
Contract owner with the right to exercise his or her own judgment and 
transfer account values into other investment subaccounts. Moreover, 
SAFECO 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. The proposed substitutions, 
therefore will not result in the type of costly forced redemption which 
Section 26(b) was designed to prevent.
    8. In addition, the proposed substitutions are 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 Contract values. 
They also select the specific type of insurance coverage offered under 
their Contract as well as numerous other rights and privileges set 
forth in the Contract. Contract owners may also have considered the 
depositor's size, financial condition, type and its reputation for 
service in selecting their Contract. None of these factors will 
diminish as a result of the proposed substitutions.
    9. Finally, whereas the assets of the Composite Fund can be 
expected to remain stagnant or decline since no new Contracts are being 
sold, the proposed substitutions will allow Contract owners to 
participate in mutual fund portfolios that are being actively sold 
through other separate accounts, and therefore the assets of the Trust 
are likely to increase.

Conclusion

    Applicants submit that, for all the 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-32212 Filed 12-10-99; 8:45 am]
BILLING CODE 8010-01-M