[Federal Register Volume 65, Number 66 (Wednesday, April 5, 2000)]
[Notices]
[Pages 17932-17934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8295]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24370; File No. 812-11890]


Fidelity Investments Life Insurance Company, et al.

March 29, 2000.
AGENCY: The Securities and Exchange Commission (``Commission'').

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

-----------------------------------------------------------------------

    Applicants: Fidelity Investments Life Insurance Company (``FILI''), 
Fidelity Investments Variable Annuity Account I (``Account I''), Empire 
Fidelity Investments Life Insurance Company (``EFILI''), Empire 
Fidelity Investments Variable Annuity Account A (``Account A'') and 
Fidelity Brokerage Services, Inc. (``FBSI'') (hereinafter 
``Applicants'').
    Summary of Application: Applicants request an order to permit the 
substitution of shares of Variable Insurance Products Fund III Mid Cap 
Portfolio Initial Class (``Mid Cap''), a fund affiliated with FILI and 
EFILI, for shares of Strong Discovery Fund II Portfolio 
(``Discovery''), a fund currently held by Account I and Account A to 
support certain deferred and immediate variable annuity contracts. 
FILI's and EFILI's variable annuity contracts are referred to herein as 
the ``Contracts.''
    Filing Date: The Application was filed on December 15, 1999, and 
was amended and restated on March 23, 2000.
    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 April 28, 2000, 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, c/o Jorden Burt 
Boros Cicchetti Berenson & Johnson, LLP, 1025 Thomas Jefferson Street, 
NW, Suite 400 East, Washington, DC 20007-0805, Attention: Michael 
Berenson, Esq.

FOR FURTHER INFORMATION CONTACT: Jane G. Heinrichs, Senior Counsel, at 
(202) 942-0699, or William J. Kotapish, Assistant Director, 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 is available for a fee from the 
Commission's Public Reference Branch of the Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0102 (Tel. (202) 942-8090).

Applicants' Representations

    1. FILI is a stock life insurance company organized under the laws 
of the State of Utah. FILI was organized under the laws of the 
Commonwealth of Pennsylvania and redomesticated to Utah in 1992. FILI 
offers life insurance policies and annuity contracts in 49 states and 
the District of Columbia.
    2. EFILI is a stock life insurance company organized under the laws 
of the State of New York. EFILI offers life insurance policies and 
annuity contracts solely in the State of New York.
    3. EFILI is a direct, wholly-owned subsidiary of FILI. FILI is a 
direct, wholly-owned subsidiary of FMR Corp., the parent company of the 
group of companies commonly known as Fidelity Investments.
    4. Account I is a separate account of FILI which acts as a funding 
vehicle for FILI's deferred and immediate variable annuity contracts. 
Account A is a separate account of EFILI which acts as a funding 
vehicle for EFILI's deferred and immediate variable annuity contracts. 
Account I and Account A are referred to herein as ``Separate 
Accounts.''
    5. The assets of Account I and Account A are owned by FILI and 
EFILI, respectively. The obligations under FILI's Contracts are 
obligations of FILI and the obligations under EFILI's Contracts are 
obligations of EFILI. FILI and EFILI are required to maintain 
sufficient assets in Account I and Account A, respectively, to meet 
anticipated obligations of the Contracts.
    6. The assets of Account I and the assets of Account A are kept 
separate from the other assets of FILI and EFILI, respectively. The 
income, gains, and losses of each of the Separate Accounts, whether or 
not realized, are credited to or charged against the Separate Account 
without regard to other income, gains, or losses of any other separate 
account or arising out of any other business FILI or EFILI may conduct.
    7. Account I and Account A each has 28 investment divisions 
(``Subaccounts''), each of which invests exclusively in a single 
underlying mutual fund portfolio registered as an open end management 
investment company. The 28 portfolios are members of five different 
mutual fund families: Fidelity (13 portfolios), Morgan Stanley Asset 
Management (four portfolios), Strong (three portfolios), PBHG (five 
portfolios) and Warburg Pincus (three portfolios). The portfolios span 
a wide variety of investment objectives and policies.
    8. Account I was established by FILI as a separate account on July 
22, 1987, pursuant to a resolution of FILI's Board of Directors. 
Account I is a unit investment trust (``UIT'') and has filed a 
registration statement with the Commission on Form N-4 (Registration 
No. 33-24400) for the purpose of registering Account I under the 1940

[[Page 17933]]

Act and to register its deferred variable annuity contracts under the 
Securities Act of 1933 (the ``1933 Act''). Account I has also filed a 
registration statement under the 1933 Act for its immediate variable 
annuity contracts (Registration No. 33-54926).
    9. Account A was established by EFILI as a separate account under 
the laws of the State of New York on July 15, 1991, pursuant to a 
resolution of EFILI's Board of Directors. Account A is a UIT and has 
filed a registration statement on Form N-4 (Registration No. 33-42376) 
for the purpose of registering Account A under the 1940 Act and 
registering its deferred variable annuity contracts under the 1933 Act. 
Account A has also filed a registration statement under the 1933 Act 
for its immediate variable annuity contracts (Registration No. 33-
54924).
    10. FBSI is the principal underwriter for all the Contracts. FBSI 
is registered with the Commission under the Securities Exchange Act of 
1934 (the ``1934 Act'') as a broker/dealer and is a member of the 
National Association of Securities Dealers, Inc.
    11. The Contracts are immediate variable annuity contracts 
(``Immediate Contracts'') and deferred variable annuity contracts 
(``Deferred Contracts''). FILI's and EFILI's Immediate Contracts are 
identical in all respects material to the Application except as 
specifically noted herein below. FILI's and EFILI's Deferred Contracts 
are also identical in all respects material to the Application except 
as specifically noted herein below.
    12. The Deferred Contracts are offered as non-qualified contracts 
and Individual Retirement Annuity contracts. The Immediate Contracts 
are offered as non-qualified contracts, Individual Retirement Annuity 
contracts, and Section 403(b) tax-sheltered annuity contracts. 
Contracts offered on a non-qualified basis are purchased with after-tax 
dollars. Contracts offered as Individual Retirement Annuities can be 
purchased only with dollars rolled over from other individual 
retirement arrangements, 403(b) plans or qualified plans. Contracts 
offered as Section 403(b) tax-sheltered annuities can be purchased only 
with dollars in 403(b) arrangements.
    13. Deferred Contracts have no front-end or contingent deferred 
sales load.
    14. There are currently no limits on the number of permitted 
transfers among Subaccounts under Deferred Contracts. FILI reserves the 
right to limit the number of permitted transfers to not less than five 
per years, and, for Contracts issued after May 1, 1997, to impose a 
transfer fee for transfers in excess of twelve per calendar year. 
Currently FILI imposes no transfer fee and no limit on the number of 
transfers. EFILI reserves the right to limit the number of permitted 
transfers to not less than six per years, and to impose a charge not to 
exceed $15 per transfer for transfers in excess of six per year. 
Currently EFILI imposes no transfer fee and no limit on the number of 
transfers.
    15. Deferred Contracts have an annual maintenance charge of $30. 
This charge is currently waived for any Deferred Contract containing at 
least $25,000 of premium payments. This charge may be reduced or waived 
for FILI's Deferred Contracts issued under certain sponsored 
arrangements.
    16. Deferred Contracts impose daily charges against the assets of 
the Separate Accounts attributable to the contracts at an annual rate 
of 0.80%. Of this amount, 0.75% is for the assumption of mortality and 
expense risks, and 0.05% is an administrative charge.
    17. Immediate Contracts have no front end or contingent deferred 
sales load.
    18. There are currently no limits on the number of permitted 
transfers among Subaccounts under Immediate Contracts. FILI and EFILI 
reserve the right to limit the number of permitted transfers to not 
less than six per year. Immediate Contracts have no transfer charges.
    19. Immediate Contracts have no annual contract fee.
    20. Immediate Contracts impose daily charges against the assets of 
the Separate accounts attributable to the contracts at an annual rate 
of 1.00%. Of this amount, 0.75% is for the assumption of mortality and 
expense risks, and 0.25% is an administrative charge.
    21. The Contracts expressly reserve FILI's and EFILI's right to 
make additions to, deletions from, or substitutions for any of the 
investment portfolios in which the Subaccounts invest, subject to 
obtaining all necessary approvals.
    22. Mid Cap is not currently an investment option under the 
Contracts. It will be added as an investment option effective April 30, 
2000. In this regard, FILI and EFILI will each create a new subaccount 
of their respective Separate Accounts. The new subaccounts will hold 
the shares of Mid Cap.
    23. FILI and EFILI propose to exercise their contractual right to 
eliminate Discovery as an investment option under the Contracts, and to 
substitute shares of Mid Cap. The subaccounts currently holding shares 
of Discovery would be merged into the subaccounts already holding 
shares of Mid Cap following the substitution. The substitution would 
not result in a reduction in the number of variable investment options 
under the Contracts, which would remain at 28. The substitution will 
take place (contingent upon the requested Order) on a date selected by 
FILI and EFILI, currently anticipated to be on or about May 29, 2000.
    24. As more fully described below, Applicants believe the 
substitution will benefit Contract owners by eliminating an investment 
option that has had poor investment performance and replacing it with 
an investment option having a similar investment objective and better 
historical performance, and which Applicants believe is likely to have 
better investment performance in the future. In addition, Mid Cap has 
had and is expected to continue to have a lower expense ratio than 
Discovery, providing an additional benefit to Contract owners.
    25. The April 30, 2000, prospectuses for the Contracts will 
disclose the date of the substitution Affected Contract owners (those 
with Contract values allocated to Discovery) will be notified soon 
after the Order is granted (if indeed it is) advising them of (1) the 
pending substitution and of their ability to transfer free of charge to 
one or more of the remaining subaccounts of their choice in advance of 
the substitution, and (2) their ability to remain in the subaccount 
that invests in Discovery until the date of the substitution, and the 
fact that if they do so they will have values transferred to the new 
subaccount that will invest in Mid Cap on the date of the substitution.
    26. Contract owners who elect to remain in the Discovery subaccount 
through the date of the substitution will receive confirmations 
evidencing the substitution in accordance with the provisions of the 
1934 Act. Confirmations will be delivered the day after the 
substitution is effected. The confirmation will be accompanied by a 
notice reminding Contract owners of their ability to transfer without 
charge to other subaccounts. Presently, there are no transfer charges 
under the Contracts. However, if such charges are imposed, Contract 
owners affected by the substitution will be given 60 days after the 
substitution to make transfers without charge.
    27. FILI and EFILI have sought to provide continuity of investment 
choice following the substitution, and believe that Discovery and Mid 
Cap offer important similarities. The investment objective of both 
Discovery and Mid Cap

[[Page 17934]]

is to seek capital growth. Both Discovery and Mid Cap normally invest 
the bulk of their assets in equity securities, although both can invest 
in other types of instruments as well. Both can invest in domestic as 
well as foreign securities. Both can invest in growth stocks or value 
stocks.
    28. Minor differences between the two funds exist. For example, Mid 
Cap has somewhat less flexibility in its choice of investments, with a 
policy of investing at least 65% of its assets in securities of 
companies with medium market capitalizations, while Discovery may 
invest 100% of its assets in securities of companies of any size.
    29. After the substitution, Contract owners invested in Mid Cap 
instead of Discovery will still be invested in a portfolio seeking 
capital growth primarily through investment in equity securities.
    30. The net expense ratio for Mid Cap is lower than for Discovery. 
For the fiscal year ended December 31, 1999, the expense ratio for 
Discovery was 1.10% and the gross expense ratio for Mid Cap was 3.34%. 
Mid Cap's expenses, however, are subject to a voluntary 1.00% cap, 
which can be eliminated at any time. If this voluntary cap is 
eliminated and Mid Cap's expense ratio exceeds 1.00% at any time before 
July 1, 2001, FILI and EFILI will reimburse, from their general account 
assets, the accounts of their respective Contract owners who have been 
affected by the substitution to the extent necessary to limit the 
expenses actually incurred to 1.00%. Any reimbursement will be 
calculated on the same basis as under the voluntary cap currently in 
place and will be made by FILI's or EFILI's purchase of additional 
units (or fractional units) of the Mid Cap subaccount for the benefit 
of the accounts of their respective ``substituted'' Contract owners.
    31. For the fiscal years ended December 31, 1998, 1997, and 1996 
Discovery's total return was 7.3%, 11.4%, and 0.8%, respectively. In 
each year the fund trailed significantly the performance of its 
benchmark, the Standard & Poor's Composite Stock Price Index (``S & P 
500''), which had returns of 28.58% in 1998, 33.36% in 1997 and 22.96% 
in 1996. Mid Cap's operations did not commence until December 28, 1998. 
Through September 30, 1999, Mid Cap's 1999 year to date total return 
was 12.8% and Discovery's was negative 16.61%. During the same period 
the S & P 500's return was 5.36%. Mid Cap has substantially 
outperformed Discovery in 1999, and the Applicants expect that it will 
continue to do so.
    32. Applicants represent that (1) the substitution will be effected 
by redeeming shares of Discovery in cash on the date of the 
substitution at net asset value and using the proceeds to purchase 
shares of Mid Cap at net asset value on the same date; (2) Contract 
owners will not incur any fees or charges, including brokerage costs, 
as a result of the transfer of values from Discovery to Mid Cap; (3) 
all Contract values will remain unchanged and fully invested; (4) the 
substitution will not increase Contract or Separate Account fees and 
charges after the substitution; (5) Contract owners' rights and FILI's 
EFILI's obligations under the Contracts will not be altered in any way; 
and (6) all expenses incurred in connection with the substitution, 
including legal, accounting and other expenses, will be paid by FILI 
and EFILI. In addition, as of the date of filing the Application, 
Applicants represent that to the best of their knowledge, the 
substitution will not result in any adverse federal income tax 
consequences for Contract owners. Following the substitution, the sub-
accounts of FILI and EFILI that invest in Discovery will be terminated.

Applicants' Legal Analysis and Conditions

    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; and 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. Section 26(b) protects the expectations that the UIT will 
accumulate shares of a particular issuer. That Section insures that 
unnecessary or burdensome sales loads, additional reinvestment costs, 
or other charges will not be incurred due to an unapproved substitution 
of securities.
    3. Applicants represent that the purposes, terms, and conditions of 
the substitution are consistent with the protections for which Section 
26(b) was designed and will not result in any of the harms which 
Section 26(b) was designed to prevent.
    4. Any Contract owner who does not want his or her assets allocated 
to Mid Cap would be able to transfer assets to any one or more of the 
other subaccounts available under his or her Contract without charge. 
Such transfers could be made prior to or after the date of the 
substitution. Contract owners would, in all cases, have alternative 
investment options available, and Contract owners could transfer their 
assets at any time to those alternative options without the imposition 
of transfer charges or other sales charges.
    5. The substitution will be effected at net asset value in 
conformity with Section 22 of the 1940 Act and Rule 22c-1 thereunder. 
Contract owners will not incur any fees or charges as a result of the 
transfer of account values from any Portfolio. There will be no 
increase in the Contract or Separate Account fees and charges after the 
substitution. All contract values will remain unchanged and fully 
invested. In addition, as of the date of filing of the Application, 
Applicants represent that to the best of their knowledge the 
substitution will not result in any adverse federal income tax 
consequences for Contract owners.
    6. In light of the foregoing facts and representations, Applicants 
believe that the request to allow the substitution meets the applicable 
standards for an order under Section 26(b) of the 1940 Act. The 
application is consistent with applicable precedent. The staff of the 
Commission has previously granted similar requests for orders pursuant 
to Section 26(b) of the 1940 Act.

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 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-8295 Filed 4-4-00; 8:45 am]
BILLING CODE 8010-01-M