[Federal Register Volume 66, Number 49 (Tuesday, March 13, 2001)]
[Notices]
[Pages 14603-14607]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6352]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24889; File No. 812-12372]


Allianz Life Insurance Company of North America, et al.

March 9, 2001.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order of approval under Section 
26(b) and order of exemption under Sections 6(c) and 17(b) of the 
Investment Company Act of 1940 (the ``1940 Act'').

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    Applicants: Allianz Life Insurance Company of North America 
(``Allianz Life''), Allianz Life Variable Account A (``Allianz Account 
A''), Allianz Life Variable Account B (``Allianz Account B''), 
Preferred Life Insurance Company of New York (``Preferred Life'') and 
Preferred Life Variable Account C (``Preferred Life Account C''). 
Allianz Life and Preferred Life are collectively referred to as 
``Insurance Company Applicants.'' Allianz Account A, Allianz Account B 
and Preferred Life Account C are collectively referred to as ``Separate 
Account Applicants,'' and together with the Insurance Company 
Applicants are referred to as ``Applicants.''
SUMMARY OF THE APPLICATION: The Applicants request an order of approval 
to permit the substitution of shares of the Franklin Templeton Variable 
Insurance Products Trust's (the ``Trust'') Templeton Pacific Growth 
Securities Fund (the ``Pacific Growth Fund'' or the ``Replaced Fund'') 
with shares of the Trust's Templeton International Securities Fund (the 
``International Fund'' or the ``Substituting Fund'') and to permit 
certain in-kind redemptions and purchases of the portfolio securities 
of these funds and the combination of subaccounts in connection with 
the substitution.
    Filing Date: Applicants filed an application on December 21, 2000. 
Applicants represent that they will file an amended and restated 
application during the notice period to conform to the representations 
set forth herein.
    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 March 28, 2001, 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, NW., 20549-0609. Applicants, c/o Joan E. Boros, Jorden Burt 
Boros Cicchetti & Johnson, LLP, 1025 Thomas Jefferson Street, NW., 
Suite 400 East, Washington, DC 20007-0806, and c/o Lynn Stone, 
Blazzard, Grood & Hasenauer, P.C., 943 Post Road East, P.O. Box 5108, 
Westport, Connecticut 06881.

FOR FURTHER INFORMATION CONTACT: Harry Eisenstein, Senior Counsel, or 
Keith Carpenter, Branch Chief, Division of Investment Management, 
Office of Insurance Products, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Allianz Life was organized under the laws of the state of 
Minnesota in 1896. Allianz Life offers fixed and variable life 
insurance and annuities and group life, accident and health insurance. 
Allianz Life is licensed to do direct business in 49 states and the 
District of Columbia. Allianz Life is a wholly-owned subsidiary of 
Allianz Versicherungs AG Holding.
    2. Preferred Life was organized under the laws of the state of New 
York. Preferred Life offers annuities and group life, group accident 
and health insurance and variable annuity products. Preferred Life is 
licensed to do business in six states, including New York and the 
District of Columbia. Preferred Life is a wholly-owned subsidiary of 
Allianz Life Insurance Company of North America, which is a wholly-
owned subsidiary of Allianz Versicherungs AG Holding.
    3. Allianz Account A is a segregated asset account of Allianz Life. 
Allianz Account A was established by Allianz Life on May 31, 1985, 
under Minnesota insurance laws. Allianz Account A is used to fund 
certain life insurance policies issued by Allianz Life. Allianz Account 
A is divided into several subaccounts, each of which invests in and 
reflects the investment performance of a specific underlying registered 
investment company or portfolio thereof. Allianz Account A is 
registered as a unit investment trust under the 1940 Act.
    4. Allianz Account B is a segregated asset account of Allianz Life. 
Allianz Account B was established by Allianz Life on May 31, 1985, 
under Minnesota insurance laws. Allianz Account B is used to fund 
certain variable annuity contracts issued by Allianz Life. Allianz 
Account B is divided into several subaccounts, each of which invests in 
and reflects the investment performance of a specific underlying 
registered investment company or portfolio thereof. Allianz Account B 
is registered as a unit investment trust under the 1940 Act.
    5. Preferred Life Account C is a segregated asset account of 
Preferred Life. Preferred Life Account C was established by Preferred 
Life on February 26, 1988 under New York insurance laws. Preferred Life 
Account C is used to fund certain variable annuity contracts issued by 
Preferred Life. Preferred Life Account C is divided into several 
subaccounts, each of which invests in and reflects the investment 
performance of a specific underlying registered investment company or 
portfolio thereof. Preferred Account C is registered as a unit 
investment trust under the 1940 Act.
    6. The segregated asset accounts support certain variable annuity 
contracts and variable life policies (collectively, the ``Contracts'') 
issued by the Insurance Company Applicants. Under the Contracts, the 
Insurance Company Applicants reserved the right to substitute one of 
the variable investment options with another variable investment option 
after

[[Page 14604]]

appropriate notice. Moreover, the Insurance Company Applicants are 
entitled to limit further investment in a variable investment option if 
the respective Insurance Company Applicants deem the variable 
investment option inappropriate. Thus, the Contracts permit the 
Insurance Company Applicants to substitute the respective class of 
shares of the Replaced Fund with the corresponding class of shares of 
the Substituting Fund.
    7. The Trust was organized as a Massachusetts business trust on 
April 26, 1988. The Trust includes a number of funds, including the 
Replaced fund and the Substituting Fund. Shares of the Replaced fund 
are sold to the Separate Account Applicants for the purpose of funding 
the Contracts. The Pacific Growth Fund is managed by Franklin Advisers, 
Inc. (``FAI'') and Templeton Asset Management Ltd.--Hong Kong branch 
(``TAM Hong Kong'') is the sub-adviser. Neither FAI nor TAM Kong is 
affiliated with the Applicants. Templeton investment Counsel, Inc. 
(``TIC'') manages the International Fund. TIC is not affiliated with 
the Applicants. The Trust currently offers two classes of shares for 
the Pacific Growth Fund and the International Fund. The Class 1 shares 
and Class 2 shares represent proportionate interests in each fund's 
assets and are identical except that the Class 2 shares bear the 
expense of the Class 2 distribution plan. The Trust is registered as an 
open-end management investment company under the 1940 Act its shares 
are registered as securities under the Securities Act of 1933.
    8. The Applicants have determined that due to the fact that the 
Replaced Fund (i) has diminished in size, apparently due to lack of 
interest, (ii) has had a negative performance history and higher 
expense ratios, and (iii) has been subject to excessive market timing, 
it would be best for the respective Insurance Company Applicants and 
the Owners to substitute the shares of the Replaced Fund with shares of 
another mutual fund or portfolio having similar objectives. 
Accordingly, Applicants request the Commission's approval to effect the 
substitution of the respective class of shares of the Replaced Fund 
with a corresponding class of shares of the Substituting Fund (the 
``Substitution'').
    9. For the Class 1 shares of the Pacific Growth Fund held on behalf 
of their respective Separate Account Applicants at the close of 
business on the date selected for the Substitution, the Insurance 
Company Applicants will redeem those shares for cash or in-kind. 
Simultaneously, the Insurance Company Applicants, on behalf of their 
respective Separate Account Applicants, will place a purchase order for 
Class 1 shares of the International Fund so that each purchase will be 
for the exact amount of the redemption proceeds, which may be partly or 
wholly-in kind. The Insurance Company Applicants will act likewise, on 
behalf of their respective Separate Account Applicants with respect to 
the Class 2 shares of the Replaced and Substituting Funds. Accordingly, 
at all times monies attributable to Contract owners (``Owners'') then 
invested in the Replaced Fund will remain fully invested and will 
result in no change in the amount of any Owner's contract value, death 
benefit or investment in the applicable Separate Account Applicant. 
Moreover, by substituting corresponding classes of shares of the 
Replaced and Substituting Funds, the Owners who were subject to a 12b-1 
distribution plan will continue to be subject to such plan. Those 
Owners who were not subject to a 12b-1 distribution plan will not be 
subject to such plan after the Substitution.
    10. In connection with the redemption of all shares of the Replaced 
Fund, it is anticipated that the replaced Fund will incur brokerage 
fees and expenses in connection with such redemption. To alleviate that 
potential impact, the redemption will be effected partly for cash and 
partly for portfolio securities redeemed ``in-kind.'' The Trust has 
informed Applicants that it will cooperate with Applicants to effect 
the redemptions partly in-kind and in cash. In addition, Applicants 
will use the in-kind and cash redemption proceeds to purchase shares of 
the Substituting Fund. In effecting the in-kind redemptions and 
transfers, the Trust has informed the Applicants that it will comply 
with the requirements of Rule 17a-7 under the 1940 Act and the 
procedures established thereunder by the Board of Trustees of the 
Trust.
    11. As noted above, the portfolio securities received from the in-
kind redemption will be used together with the cash proceeds to 
purchase the shares of the Substituting Fund. The Applicants have 
determined that partially effecting the redemption of shares of the 
Replaced fund in-kind is appropriate, based on the similarity of 
certain types of the portfolio securities that may be held by the 
Replaced Fund and the Substituting Fund. The Trust has advised the 
Applicants that the valuation of any in-kind transactions will be made 
on a basis consistent with the normal valuation procedures of the 
Replaced fund and that of the Substituting Fund.
    12. The full net asset value of the redeemed shares held by the 
Separate Account Applicants will be reflected in the Owner's contract 
values following the Substitution. The Applicants represent that the 
Owners will not bear any expenses for the Substitution so that the full 
net asset value of redeemed shares of the Replaced fund held by the 
Separate Account Applicants will be reflected in the Owners' contract 
values following the Substitution.
    13. The Trust is fully advised of the terms of the Substitution. 
Applicants anticipate that until the Substitution occurs, the Trust 
will conduct the trading of portfolio securities in accordance with the 
investment objectives and strategies stated in the Replaced Fund's 
prospectuses and in a manner that provides for the anticipated 
redemptions of shares held by the Separate Account Applicants.
    14. Applicants have determined, based on advice of counsel familiar 
with insurance laws, that the Contracts allow the Substitution as 
described in the application, and that the transactions can be 
consummated as described therein under applicable insurance laws and 
under the Contracts. These contractual provisions have also been 
disclosed in the prospectus or statements of additional information 
relating to the Contracts. In addition, prior to effecting the 
Substitution, Applicants will have complied with any regulatory 
requirements they believe are necessary to complete the transactions in 
each jurisdiction where the Contracts are qualified for sale.
    15. Owners will not directly or indirectly incur any expense, 
including brokerage expenses, as a result of the Substitution, and the 
rights or obligations of the Insurance Company Applicants under the 
applicable Contracts will not be altered in any way. The proposed 
Substitution will not have any adverse tax consequences to Owners. The 
proposed Substitution will not cause Contract fees and charges 
currently being paid by existing Owners to be greater after the 
proposed Substitution than before the proposed Substitution. The 
proposed Substitution will not be treated as transfers for the purpose 
of assessing transfer charges. The Insurance Company Applicants will 
not, with respect to shares substituted, exercise any right it may have 
under the Contracts to impose additional restrictions on transfers for 
a period of thirty-one days from the mailing of the a notice of the 
Substitution (the ``Notice'') to the Owners (the ``Free Transfer 
Period''). In addition, such a transfer will not be counted as a 
transfer request under any contractual provisions of the Contracts that 
limit the

[[Page 14605]]

number of transfers that may be made without charge.
    16. The Insurance Company Applicants have supplemented the 
prospectuses for the Contracts to reflect the Substitution. Within five 
days after the Substitution, the Insurance Company Applicants will send 
to Owners the Notice which will identify the shares of the Replaced 
Fund that have been eliminated and the shares of the Replaced Fund that 
have been eliminated and the shares of the Substituting Fund that have 
been substituted. The Insurance Company Applicants will include in such 
mailing the applicable prospectus supplement for the Contracts of the 
Separate Account Applicants describing the Substitution. For those 
Contracts that already include the Substituting Fund as an underlying 
variable investment option, the Insurance Company Applicants do not 
intend to mail a copy of the prospectus for the substituting Fund to 
the Owners, because they already will have received a copy of those 
prospectuses in the ordinary course. For those Contracts that do not 
include the Substituting Fund, the applicable Insurance Company 
Applicants will have amended the applicable registration statement and 
will provide a copy of the prospectus supplement of the Contract and 
the prospectus of the Substituting Fund with the notice. Owners will be 
advised in the Notice that for a period of thirty-one days from the 
mailing of the Notice, Owners may transfer all assets, as substituted, 
to any other available subaccount without charge or limitation, and 
such transfers will not be counted toward any applicable limitation on 
transfers.
    17. The annual operating expenses of the Replaced Fund and the 
Substituting Fund as of December 31, 2000 as a percentage of average 
daily net assets are as follows:

                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                Class 1 shares              Class 2 shares
                                                         -------------------------------------------------------
                                                            Pacific    International    Pacific    International
                                                          growth fund       fund      growth fund       fund
----------------------------------------------------------------------------------------------------------------
Advisory and Fund Administrative Charges................         1.00           .78          1.00           .78
Distribution Expenses...................................          .00           .00           .25           .25
Other Expenses..........................................          .10           .09           .10           .09
                                                         -------------------------------------------------------
      Total Expenses....................................         1.10           .87          1.31          1.12
----------------------------------------------------------------------------------------------------------------

    18. As of December 31, 2000, the Replaced Fund and the Substituting 
Fund had the following net assets:

                              [In millions]
------------------------------------------------------------------------
           Class 1 shares                       Class 2 shares
------------------------------------------------------------------------
Pacific growth                           Pacific
     fund        International fund    growth fund    International fund
------------------------------------------------------------------------
      $50.0             $776.5               $.3            $187.1
------------------------------------------------------------------------

    19. Applicants represent that the Insurance Company Applicants do 
not, and will not for three years, receive any direct or indirect 
benefit from the Substituting Fund or its adviser (or the adviser's 
affiliates) that exceeds the amount it had received from the Replaced 
Fund, its adviser, and/or the adviser's affiliates, including 12b-1, 
shareholder service, administration or other service fees, revenue 
sharing or other arrangement, either with specific reference to the 
Substituting Fund or as part of an overall business arrangement.

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act provides that ``[i]t shall be 
unlawful for any depositor or trustee of a registered unit investment 
trust holding the security of a single issuer to substitute another 
security for such security unless the [Commission] shall have approved 
such substitution.'' Section 26(b) of the 1940 Act was enacted as part 
of the Investment Company Act Amendments of 1970. Prior to the 
enactment of these amendments, a depositor of a unit investment trust 
could substitute new securities for those held by the trust by 
notifying the trust's security holders of the substitution within five 
(5) days after the substitution. In 1966, the Commission, concerned 
with the high sales charges then common to most unit investment trusts 
and the disadvantageous position in which such charges placed investors 
who did not want to remain invested in the substituted security, 
recommended that Section 26 be amended to require that a proposed 
substitution of the underlying investments of a trust receive prior 
Commission approval.
    2. Applicants represent that the purposes, terms, and conditions of 
the Substitution are consistent with the principles and purposes of 
Section 26(b) and do not entail any of the abuses that Section 26(b) is 
designed to prevent. Owners will be assessed no charges whatsoever in 
connection with the Substitution and their annual fund expense ratios 
are expected to decrease. In addition, to the extent an Owner does not 
wish to participate in the Substitution, he or she will have thirty one 
days to transfer to any other option available under the relevant 
Contract prior to the Substitution and after the Substitution without 
any transfer fee. Moreover, as described below, Applicants assert that 
the Owners will be substituted into a Substituting Fund whose 
investment objectives, policies and expenses are substantially similar 
or identical in all material respects to those of the Replaced Fund.
    3. Applicants submit that the Substitution does not present the 
type of costly forced redemption or other harms that Section 26(b) was 
intended to guard against and is consistent with the protection of 
investors and the purposes fairly intended by the 1940 Act and assert 
the following in support of this contention:
    (a) The Substitution will continue to fulfill Owners' objectives 
and risk expectations, because the investment objectives of the Pacific 
Growth Fund are substantially similar to those of the International 
fund;
    (b) After receipt of the Notice informing an Owner of the 
Substitution, an Owner may request that his or her assets be 
reallocated to another subaccount at any time during the Free Transfer 
Period. The Free Transfer Period provides sufficient time for Owner to 
consider their reinvestment options;
    (c) The Substitution will be at net asset value of the respective 
shares, without the imposition of any transfer or similar charge;
    (d) Neither the Owners, the Replaced Fund nor the Substituting Fund 
will bear any cost of the Substitution, and accordingly, the 
Substitution will have no impact on the Owners' Contract values;

[[Page 14606]]

    (e) The Substitution will in no way alter the contractual 
obligations of the respective Insurance Company Applicants or the 
rights and privileges of Owners under the Contracts:
    (f) The Substitution will in no way alter the tax benefits to 
Owners; and
    (g) The Substitution is expected to confer certain economic 
benefits on Owners by virtue of enhanced asset size and lower expenses, 
as described above.
    4. Applicants contend that the Substituting Fund and the Replaced 
Fund share similar investment objectives. The Pacific Growth Fund and 
the International Fund seek to provide long-term capital growth. The 
Pacific Growth Fund pursues its objectives by investing primarily in 
common stocks of Pacific Rim companies and under normal conditions at 
least 65% of its total assets in equity securities that trade in 
Pacific Rim markets, including those in emerging markets. The 
International Fund pursues its objectives by investing at least 65% of 
its total assets in equity securities of companies located outside the 
U.S., including those in emerging markets. The manager for each of 
these funds employs the same investment philosophy of bottom-up, value-
oriented, long-term selection of portfolio securities. Thus, both funds 
invest primarily in equity securities of companies located outside the 
U.S. and employ the same investment selection strategy. Moreover, 
Morningstar, Inc. classifies the Pacific Growth and International Funds 
as large capitalization stock funds.
    5. Applicants assert that the primary difference between the 
Pacific Growth Fund and the International Fund is their concentration 
in a particular region. As of September 30, 2000, the International 
Fund invested approximately 57% in European issuers and approximately 
21% in Asian issuers. As of September 30, 2000, the Pacific Growth Fund 
invested 65% in Asian issuers. The Applicants do not believe that these 
differences are significant, particularly because of the lack of 
interest in the Pacific Growth Fund, as shown in its smaller size, and 
the more concentrated regional focus of the Pacific Growth Fund is 
likely to be a factor in its lower performance. The Applicants also 
considered that Owners likely invest in the Pacific Growth Fund as a 
means to diversify their assets into foreign equity securities. The 
International Fund will also enable Owners to achieve this 
diversification goal. Accordingly, Applicants believe that the 
International Fund is a suitable replacement for Owners to continue 
their investment in foreign equity securities.
    6. Applicants state that the Insurance Company Applicants have 
specifically determined that the Substituting Fund is an approximate 
investment vehicle for Owners who have allocated value to the Replaced 
Fund and that the Substitution will be consistent with Owners' 
investment objectives.
    7. Applicants assert that the fees and expenses of the Substituting 
Fund have historically been less than those of the Replaced Fund and, 
accordingly, that the proposed Substitution poses no concerns in 
connection with the fees and expenses that will arise therefrom.
    8. Applicants assert that the Substituting Fund has significantly 
more assets than the Replaced Fund. It is expected that the lower 
expense ratios should continue as a result of the significantly greater 
assets of the Substituting Fund.
    9. Applicants state that the returns of the Substituting Fund have 
consistently been substantially higher than the returns of Replaced 
Fund. While there is no guarantee that past performance will continue, 
Applicants state that the Substitution is not expected to give rise to 
diminution in performance or other adverse effects on Contract values.
    10. Section 17(a)(1) of the 1940 Act prohibits any affiliated 
person of a registered investment company, or an affiliated person of 
an affiliated person, from selling any security or other property to 
such registered investment company. Section 17(a)(2) of the 1940 Act 
prohibits any of the persons described above from purchasing any 
security or other property from such registered investment company. 
Section 2(a)(3) of the 1940 Act defines the term ``affiliated'' person. 
The proposed Substitution will be effected in part through in-kind 
redemptions and purchases and may be deemed to entail the indirect 
purchase of shares of the related Substituting Fund with portfolio 
securities of the Replaced Fund, and the indirect sale of securities of 
the Replaced Fund for shares of the Substituting Fund.
    11. In addition, the Insurance Company Applicants, as appropriate, 
will combine the subaccount investing in the Pacific Growth Fund and 
the continuing subaccount investing in the International Fund. 
Applicants state that the Insurance Company Applicants could be said to 
be transferring unit values between their respective subaccounts and 
that, the transfer of unit values could be said to involve purchase and 
sale transactions between subaccounts that are affiliated persons. 
Applicants further state that the sale and purchase transactions 
between subaccounts could be said to come within the scope of Section 
17(a)(1) and 17(a)(2) of the 1940 Act, respectively, and that the 
Substitution involving the combination of subaccounts may require an 
exemption from Section 17(a) of the 1940 Act, pursuant to Section 17(b) 
of the 1940 Act.
    12. Section 17(b) of the 1940 Act provides that the commission may 
grant an Order exempting transactions prohibited by Section 17(a) of 
the 1940 Act upon application if evidence establishes that:
    (a) The terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve over-reaching on the part of any person concerned;
    (b) The proposed transaction is consistent with the investment 
policy of each registered investment company concerned, as recited in 
its registration statement and reports filed under the 1940 Act; and
    (c) The proposed transaction is consistent with the general 
purposes of the 1940 Act.
    The Applicants represent that the terms of the proposed 
transactions, as described in this Application, are: reasonable and 
fair, including the consideration to be paid and received; do not 
involve over-reaching; are consistent with the policies of the Replaced 
Fund of the Trust; and are consistent with the general purposes of the 
1940 Act.
    13. Applicants represent that for all the reasons stated above with 
regard to Section 26(b) of the 1940 Act, the Substitution is reasonable 
and fair. It is expected that existing and future Owners will benefit 
from the consolidations of assets in the Substituting Fund. The 
transactions effecting the Substitution will be effected in conformity 
with Section 22(c) of the 1940 Act and Rule 22c-1 thereunder. Moreover, 
the partial in-kind redemptions of portfolio securities of the Replaced 
Fund will be effected in conformity with Rule 17a-7 under the 1940 Act 
and the procedures of the Trust established pursuant to Rule 17a-7. 
Applicants contend that the Owners' interests after the Substitution, 
in practical economic terms, will not differ in any measurable way from 
such interests immediately prior to the Substitution and that, in each 
case, the consideration to be received and paid is, therefore, 
reasonable and fair.

Applicants' Conclusions

    Applicants submit, for all the reasons stated herein, that their 
requests meet the standards set out in Sections 6(c), 17(b) and 26(b) 
of the 1940 Act and that

[[Page 14607]]

an Order should, therefore, be granted. Accordingly, Applicants request 
an Order pursuant to Sections 6(c), 17(b) and 26(b) of the 1940 Act 
approving the substitution of shares of the Pacific Growth Fund with 
shares of the International Fund.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-6352 Filed 3-12-01; 8:45 am]
BILLING CODE 8010-01-M