[Federal Register Volume 66, Number 70 (Wednesday, April 11, 2001)]
[Notices]
[Pages 18830-18836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8902]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24925; File No. 812-12368]


New England Life Insurance Company, et al.

April 5, 2001.

AGENCY: The Securities and Exchange Commission (``SEC'' or 
``Commission''.

Summary of the Application: The Section 26 Applicants request an order 
pursuant to section 26(b) of the 1940 Act to permit certain registered 
unit investment trusts to substitute Class A shares of the MetLife 
Stock Index Portfolio (the ``Replacement Portfolio'') of the 
Metropolitan Series for shares of the Westpeak Stock Index Series (the 
``Substituted Portfolio,'' and together with the Replacement Portfolio, 
the ``Portfolios'') of the Zenith Fund currently held by those unit 
investment trusts. The Section 17(b) Applicants request an order 
pursuant to section 17(b) of the 1940 Act to permit certain in-kind 
transactions in connection with the substitution.

Applicants: New England Life Insurance Company (``NELICO''), New 
England Variable Life Separate Account (``Separate Account 1''), 
Metropolitan Life Insurance Company (``MetLife''), The New England 
Variable Account (``Separate Account 2'') (together with Separate 
Account 1, the ``Separate Accounts''), the Metropolitan Series Fund, 
Inc. (``Metropolitan Series''), and the New England Zenith Fund (the 
``Zenith Fund''). NELICO, MetLife, and the Separate Accounts are 
collectively referred to herein as the ``Section 26 Applicants.'' The 
Section 26 Applicants, the Metropolitan Series, and the Zenith Fund are 
collectively referred to herein as the ``Section 17(b) Applicants'' or 
``Applicants.''

Filing Date:  The application (``Application'') was filed on December 
19, 2000 and amended and restated on April 5, 2001.

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 26, 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., Washington, DC 20549-0609. Applicants, c/o Thomas Lenz, 
Esq. and Marie C. Swift, Esq., New England Life Insurance Company, 501 
Boylston Street, Massachusetts 02116. Copy to Stephen E. Roth, Esq. and 
Kimberly J. Smith, Esq., Sutherland Asbill & Brennan LLP, 1275 
Pennsylvania Ave., NW., Washington, DC 20004-2415.

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

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, NW., 
Washington, DC 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. NELICO is a life insurance company that is domiciled in 
Massachusetts. Its operations include both life insurance and annuity 
products as well as financial and retirement services. As of September 
30, 2000, NELICO had assets of approximately $8.1 billion. NELICO is 
authorized to operate as a life insurance

[[Page 18831]]

company in all states, the District of Columbia and Puerto Rico. NELICO 
was originally organized as New England Variable Life Insurance 
Company, a stock life insurance company, in Delaware in 1980, and was a 
wholly owned subsidiary of New England Mutual Life Insurance Company. 
On August 30, 1996, New England Mutual Life Insurance Company merged 
with and into MetLife. MetLife became the parent of New England 
Variable Life Insurance Company, which changes its name to ``New 
England Life Insurance Company,'' and changed its domicile from the 
State of Delaware to the Commonwealth of Massachusetts. NELICO is the 
depositor and sponsor of Separate Account 1.
    2. Separate Account 1 is a separate investment account of NELICO 
and is registered under the 1940 Act as a unit investment trust. 
Separate Account 1 serves as a funding vehicle for certain variable 
life insurance contracts issued by NELICO (collectively, ``NELICO Life 
Contracts''). Separate Account 1 is a ``separate account'' as defined 
in Section 2(a)(37) of the 1940 Act.
    3, MetLife is a life insurance company that is domiciled in New 
York, and is a wholly owned subsidiary of MetLife, Inc., a publicly 
traded company that provides insurance and financial services to 
individual and group customers. With approximately $301 billion of 
assets under management as of September 30, 2000, MetLife provides 
individual insurance and investment products to approximately nine 
million households in the United States. MetLife also provides group 
insurance and investment products to corporations and other 
institutions employing over thirty three million employees and members. 
MetLife operates as a life insurance company in all fifty states, the 
District of Columbia, Puerto Rico, and all provinces of Canada. MetLife 
is the depositor and sponsor of Separate Account 2.
    4. Separate Account 2 is a separate investment account MetLife and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 2 serves as a funding vehicle for certain variable annuity 
contracts originally issued by New England Mutual Life Insurance 
Company, and subsequent to its merger with and into MetLife, by MetLife 
(``MetLife Va Contracts'') (together with the NELICO Life Contracts, 
the ``Variable Contracts''). Separate Account 2 is a ``separate 
account'' as defined in Section 2(a)(37) of the 1940 Act.
    5. New England Securities Corporation ``NES'', serves as principal 
underwriter and distributor for the Variable Contracts. NES is an 
indirect wholly owned subsidiary of NELICO. NES is registered as a 
broker-dealer under the Securities Exchange Act of 1934 and is a member 
of the National Association of Securities Dealers, Inc. NES may enter 
into selling agreements with other broker-dealers registered under the 
Securities Exchange Act of 1934 whose representatives are authorized by 
applicable law to sell the Variable Contracts.
    6. The Zenith Fund is registered as an open-end management 
investment company under the 1940 Act (File No. 811-3728) and currently 
offers sixteen separate investment portfolios, one of which would be 
involved in the proposed substitution. The Zenith Fund issues a 
separate series of shares of beneficial interest in connection with 
each portfolio, and has registered such shares under the Securities Act 
of 1933 (``1933 Act'') on form N-1A (File No. 2-83538). New England 
Investment Management, LLC (``NEIM'') serves as the investment manager 
to each portfolio except the Capital Growth Series, which is managed by 
Capital Growth Management Limited Partnership. NEIM (formerly named TNE 
Advisers, Inc.) is an indirect wholly owned subsidiary of NELICO. NEIM 
receives an investment advisory fee from each portfolio it manages. 
NEIM has contracted with subadvisers to make the day-to-day investment 
decision for all portfolios it manages. Subadvisers are compensated by 
NEIM, and not by the Zenith Fund. NEIM derives the amounts that it pays 
the subadvisers from its own investment advisory fees. Westpeak 
Investment Advisors, L.P. (``WIA'') is the subadviser to the 
Substituted Portfolio.
    7. The Metropolitan Series is registered as an open-end management 
investment company under the 1940 Act (File No. 811-3618) and currently 
offers twenty separate investment portfolios, one of which would be 
involved in the proposed substitution. The Metropolitan Series issues a 
separate series of shares of beneficial interest in connection with 
each portfolio, and has registered such shares under the 1933 Act on 
Form N-1A (File No. 2-80751). MetLife serves as the investment manager 
to each portfolio, for which it receives investment advisory fees. 
MetLife is also responsible for the day-to-day investment decisions for 
certain portfolios it manages, including the Replacement Portfolio. 
MetLife has contracted with subadvisers to make the day-to-day 
investment decisions for other portfolios it manages. Subadvisers are 
compensated by MetLife, and not by the Metropolitan Series. MetLife 
derives the amounts that it pays the subadvisers from its own 
investment advisory fees.\1\
---------------------------------------------------------------------------

    \1\ Effective May 1, 2001 NEIM will become the investment 
adviser for the Replacement Portfolio and MetLife will become the 
subadviser for the Replacement Portfolio. Applicants state that this 
change will have no effect on the management fees imposed on the 
Replacement Portfolio.
---------------------------------------------------------------------------

    8. The following chart sets out the investment objectives and 
certain policies of the Substituted Portfolio and the Replacement 
Portfolio, as stated in their respective prospectuses and statements of 
additional information.

------------------------------------------------------------------------
       Substituted portfolio                Replacement portfolio
------------------------------------------------------------------------
Investment Objective:
  Investment results that            To equal the performance of the S&P
   correspond to the composite        500 Index.
   price and yield performance of
   the Standard & Poor's 500
   Composite Stock Price Index
   (``S&P 500 Index'').
Investment Policies:
  WIA attempts to replicate the      The Portfolio will normally invest
   composite price and yield          most of its assets in common
   performance, before expenses, of   stocks included in the S&P 500
   the S&P 500 Index, which is        Index. The S&P 500 Index consists
   dominated by large                 of 500 common stocks, most of
   capitalization stocks. WIA will    which are listed on the New York
   ordinarily invest the              Stock Exchange. The Portfolio will
   Portfolio's assets in all of the   be managed by purchasing the
   500 stocks included in the S&P     common stock of all the companies
   500 Index. WIA collects data       in the S&P 500 Index. The stocks
   each day on the proportions of     included in the S&P 500 Index are
   the 500 stocks included in the     issued by companies among those
   S&P 500 Index. Each month, WIA     whose outstanding stock have the
   purchases and sells stocks as      largest aggregate market value,
   necessary to replicate the         although stocks that are not among
   proportions of stocks included     the 500 largest are included in
   in the S&P 500 Index.              the S&P 500 Index for
                                      diversification purposes.

[[Page 18832]]

 
                                     The Portfolio also expects to
                                      invest, as a principal investment
                                      strategy, in securities index
                                      futures contracts and/or related
                                      options to simulate full
                                      investments in the S&P 500 Index
                                      while retaining liquidity, to
                                      facilitate trading, to reduce
                                      transaction costs or to seek
                                      higher return when these
                                      derivatives are priced more
                                      attractively than the underlying
                                      security. Also, since the
                                      portfolio attempts to keep
                                      transaction costs low, the
                                      portfolio manager generally will
                                      rebalance the Portfolio only if it
                                      deviates from the S&P 500 Index by
                                      a certain percent. MetLife
                                      monitors the tracking performance
                                      of the Portfolio through
                                      examination of the ``correlation
                                      coefficient''. A perfect
                                      correlation would produce a
                                      coefficient of 1.00. The Portfolio
                                      will attempt to maintain a target
                                      correlation coefficient of at
                                      least .95.
------------------------------------------------------------------------

    9. The following chart compares the fees payable for advisory and 
subadvisory services for the year ending December 31, 2000, expressed 
as an annual percentage of average daily net assets, by the Substituted 
Portfolio and the Replacement Portfolio.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Substituted portfolio                                                 Replacement portfolio (Class A) \2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                             Subadvisory fees  (paid by
            Advisory fees                 Subadvisory fees  (paid by adviser)                   Advisory fees                         adviser)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.25%................................  0.10%                                      0.25%                                     Prior to 5/1/01--none;
                                                                                                                            after 5/1/01--at cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
\2\ Beginning in January of 2001, Class B shares of the Replacement Portfolio, upon which fees are imposed under a plan adopted pursuant to Rule 12b-1
  under the 1940 Act, became available for the allocation of purchase payments and contract value under certain MetLife VA Contracts.

    10. The following chart compares the total operating expenses 
(before and after any waivers and reimbursements) for the year ended 
December 31, 2000, expressed as an annual percentage of average daily 
net assets, of the Substituted Portfolio and the Replacement Portfolio. 
Neither the Substituted Portfolio nor Class A shares of the Replacement 
Portfolio have adopted any plan pursuant to Rule 12b-1 under the 1940 
Act.

------------------------------------------------------------------------
                                                             Replacement
                                               Substituted    portfolio
                                                portfolio     (Class A)
------------------------------------------------------------------------
Management fees.............................          .25%          .25%
Other expenses..............................           .08           .03
                                             ---------------------------
Total operating expenses....................           .33           .28
Less expense waivers and reimbursements.....            --            --
Net operating expenses......................          .33%          .28%
------------------------------------------------------------------------

    11. Pursuant to their authority under the respective Variable 
Contracts and the prospectuses describing the same, and subject to the 
approval of the Commission under section 26(b) of the 1940 Act, NELICO 
and MetLife propose to substitute Class A shares of the Replacement 
Portfolio for shares of the Substituted Portfolio in the Separate 
Accounts (the ``Substitution''). Following this transaction, the 
Separate Accounts will each have two subaccounts holding shares of the 
Replacement Portfolio. The Separate Accounts will each combine the two 
subaccounts holding shares of the Replacement Portfolio by transferring 
shares on the same date from one of the subaccounts holding shares of 
the Replacement Portfolio to the other subaccount holding shares of the 
Replacement Portfolio. The net effect will be to eliminate one of the 
subaccounts in each Separate Account. The Replacement Portfolio would 
receive monies or in-kind securities from the Substituted Portfolio as 
a result of the Substitution.
    12. The Section 26 Applicants state that the investment objectives 
and policies of the Replacement Portfolio are substantially similar to 
those of the Substituted Portfolio so that Variable Contract owners 
will have reasonable continuity in investment and risk expectations. In 
addition, the Section 26 Applicants state that the types of investment 
advisory and administrative services provided to the Replacement 
Portfolio are comparable to the types of investment advisory and 
administrative services provided to the Substituted Portfolio.
    13. The Section 26 Applicants state that the Substitution is part 
of efforts by NELICO and MetLife to make their Variable Contracts more 
efficient to administer and oversee and, thus, more cost-efficient and 
attractive to customers. According to the Section 26 Applicants, the 
Substitution reflects a determination by NELICO and MetLife that 
Variable Contract owners should have available under their Variable 
Contracts a more cost efficient mutual fund with good prospects for 
growth to help Variable Contract owners meet their investment goals 
under the Variable Contracts. In particular, the Section 26 Applicants 
point out that replacing the Substituted Portfolio with the Replacement 
Portfolio is appropriate

[[Page 18833]]

and in the best interests of Variable Contract owners, who will benefit 
from an underlying fund with more than $4 billion in assets, as 
compared to the less than $300 million in assets of the Substituted 
Fund; with lower expenses; and with good prospects for growth.
    14. NELICO and MetLife will effect the Substitution on or about 
April 27, 2001 following the issuance of the requested order as 
follows: As of the effective date of the Substitution (``Effective 
Date''), shares of the Substituted Portfolio will be redeemed in cash 
or in-kind by NELICO and MetLife. The proceeds of such redemptions will 
then be used to purchase shares of the Replacement Portfolio either by 
cash purchases or in-kind purchases, with each subaccount of the 
Separate Accounts investing the proceeds of its redemption from the 
Substituted Portfolio in the Replacement Portfolio.
    15. All redemptions of shares of the Substituted Portfolio and 
purchases of shares of the Replacement Portfolio will be effected in 
accordance with Rule 22c-1 of the 1940 Act. The Substitution will take 
place at relative net asset value with no change in the amount of any 
Variable Contract owner's contract value or death benefit or in the 
dollar value of his or her investments in any of the subaccounts. 
Variable Contract owners will not incur any additional fees or charges 
as a result of the Substitution, nor will their rights or NELICO's and 
MetLife's obligations under the Variable Contracts be altered in any 
way. All expenses incurred in connection with the Substitution, 
including legal, accounting, transactional, and other fees and 
expenses, including brokerage commissions, will be paid by NELICO and 
MetLife. In addition, the Substitution will not impose any tax 
liability on Variable Contract owners. The Substitution will not cause 
the Variable Contract fees and charges currently paid by existing 
Variable Contract owners to be greater after the Substitution than 
before the Substitution. Neither NELICO nor MetLife will exercise any 
right it may have under the Variable Contracts to impose restrictions 
on transfers under the Variable Contracts for a period of at least 
thirty days following the Substitution.
    16. For each period (not to exceed a fiscal quarter) during the 24 
months following the date of the Substitution, NELICO and MetLife will 
reimburse (on the last business day of any such period) any subaccount 
available through a Variable Contract and investing in the Replacement 
Portfolio such that the sum of the Replacement Portfolio operating 
expenses (taking into account expense waivers and reimbursements) 
together with subaccount expenses \3\ for such period on an annualized 
basis will not exceed the following limits (which equal, for each 
Variable Contract, the Substituted Portfolio operating expenses, 0.33%, 
together with any subaccount expenses for the fiscal year prior to the 
Substitution) for those Variable Contract owners who were Variable 
Contract owners on the date of the Substitution:
---------------------------------------------------------------------------

    \3\ Subaccount expenses refer to those asset-based expenses that 
are deducted on a daily basis from subaccount assets, and either 
reflected in the calculation of subaccount unit values (for 
``unitized'' Variable Contracts) or deducted as a percentage of a 
Variable Contract's share of subaccount assets (for ``non-unitized'' 
Variable Contracts). Examples of subaccount expenses may include the 
mortality and expense risk charge or administrative charge.

------------------------------------------------------------------------
                                                             Expense cap
                     Variable contract                      (in percent)
------------------------------------------------------------------------
NELICO Zenith Life One....................................          0.78
NELICO Zenith Flexible Life...............................          0.93
NELICO Zenith Variable Whole Life.........................          0.93
NELICO Zenith Survivorship Life...........................          1.08
NELICO Zenith Survivorship Life Plus......................          0.33
NELICO American Gateway Series............................          0.33
NELICO Zenith Life........................................          0.68
 
NELICO Zenith Life Plus...................................          0.93
NELICO Zenith Life Executive 65...........................          0.93
NELICO Zenith Executive Advantage Plus....................          0.33
NELICO Zenith Executive Advantage 2000....................          0.33
NELICO Zenith Life Plus II................................          0.93
MetLife Zenith Accumulator................................          1.68
------------------------------------------------------------------------

    In addition, for those Variable Contract owners who owned a 
Variable Contract for which mortality and expense risk charges are not 
subaccount expenses (i.e., NELICO Zenith Survivorship Life Plus, NELICO 
American Gateway Series, NELICO Zenith Executive Advantage Plus, or 
NELICO Zenith Executive Advantage 2000) on the date of the 
Substitution, NELICO will not increase current mortality and expense 
risk charges for a period of 24 months following the date of the 
Substitution.
    17. Each of NELICO and MetLife reserves the right to substitute 
shares of one portfolio for shares of another, under the NELICO Life 
Contracts and the MetLife VA Contracts, respectively, and this right 
has been disclosed in the prospectuses. Variable Contract owners were 
notified of the Application by means of a supplement to the prospectus 
for each of the Variable Contracts that disclose that the Section 26 
Applicants intended to file the Application and seek approval for the 
Substitution.
    18. Further, before the Effective Date, a notice (``Pre-
Substitution Notice''), in the form of an additional supplement to the 
prospectuses for the Variable Contracts, will be mailed to Variable 
Contract owners setting forth the scheduled Effective Date and advising 
Variable Contract owners that contract values attributable to 
investments in the Substituted Portfolio will be transferred to the 
Replacement Portfolio, without charge and, when relevant, without 
counting toward the number of transfers permitted without charge, on 
the Effective Date. The Pre-Substitution Notice will state that, from 
the date the Application was filed with the Commission through the date 
30 days after the substitution, Variable Contract owners may make a 
transfer of contract value from the subaccount corresponding to the 
Substituted Portfolio (before the Substitution) and make a transfer of 
contract value from the subaccount corresponding to the Replacement 
Portfolio (after the Substitution) to any other subaccount without 
charge and without those transfers counting toward the number permitted 
without charge under the Variable Contract (regardless of whether 
during the accumulation period or the annuity period). In addition, 
within five days after the Substitution, any Variable Contract owners 
who were affected by the Substitution will be sent a written notice 
informing them that the Substitution was carried out and advising them 
of their transfer rights (``Post-Substitituon Notice'').

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act prohibits any depositor or trustee 
of a unit investment trust that invests exclusively in the securities 
of a single issuer from substituting the securities of another issuer 
without the approval of the Commission. Section 26(b) provides that 
such approval shall be granted by order of the Commission, if the 
evidence establishes that the substitution is consistent with the 
protection of investors and the purposes of the 1940 Act.
    2. Section 26(b) was intended to provide for Commission scrutiny of 
proposed substitutions which could, in effect, force shareholders 
dissatisfied with the substitute security to redeem their shares, 
thereby possibly incurring a loss of the sales load deducted from 
initial purchase payments, an additional sales load upon reinvestment 
of the

[[Page 18834]]

proceeds of redemption, or both. The section was designed to forestall 
the ability of a depositor to present holders of interest in a unit 
investment trust with situations in which a holder's only choice would 
be to continue an investment in an unsuitable underlying security, or 
to elect a costly and, in effect, forced redemption. The Section 26 
Applicants submit that the Substitution meets the standards set forth 
in section 26(b) and that, if implemented, the Substitution would not 
raise any of the aforementioned concerns that Congress intended to 
address when the 1940 Act was amended to include this provision.
    3. The Section 26 Applicants assert that the replacement of the 
Substituted Portfolio with the Replacement Portfolio is consistent with 
the protection of Variable Contract owners and the purposes fairly 
intended by the policy and provisions of the 1940 Act and, thus, meets 
the standards necessary to support an order pursuant to section 26(b) 
of the 1940 Act. The Section 26 Applicants contend that the investment 
objectives, policies, and strategies of the Replacement Portfolio are 
substantially comparable to those of the Substituted Portfolio.
    4. NEIM currently serves as investment adviser for the Substituted 
Portfolio. Investment management decisions for the Substituted 
Portfolio are made by WIA in its capacity as subadviser. Prior to 
August 1, 1993, Back Bay Advisors served as subadviser to the 
Substituted Portfolio. The investment adviser for the Replacement 
Portfolio is MetLife, who also oversees the daily investment management 
decisions. Effective May 1, 2000, NEIM, which will have been renamed 
MetLife Advisers, LLC, will become the investment adviser for the 
Replacement Portfolio, and MetLife will become the subadviser.
    5. The Section 26 Applicants state that the Replacement Portfolio 
had significantly more assets as of December 31, 2000 as compared to 
the Substituted Portfolio, which has not gathered as many assets as 
expected by NELICO and MetLife. The Section 26 Applicants state that 
the Replacement Portfolio, accordingly, benefits from greater economies 
of scale. Further, the expense ratio for the Replacement Portfolio as 
of December 31, 2000 was lower than the expense ratio for the 
Substituted Portfolio. The Section 26 Applicants state that, since both 
portfolios hold all 500 securities in the S&P Index in the same 
proportion as the index, the respective expense ratios of the 
portfolios are the primary cause of tracking error (i.e., the 
difference between the performance of the Replacement Portfolio and the 
performance of the S&P 500 Index). The Section 26 Applicants 
anticipate, accordingly, that the Replacement Portfolio's tracking 
error will be lower, over time, than the Substituted Portfolio's 
tracking error.
    6. The following table compares the respective asset levels and 
expense ratios of the two portfolios as of December 31, 2000. The table 
also compares performance data as of December 31, 2000 for the two 
portfolios as well as for the S&P 500 Index.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Expense ratios  Performance  (as of December 31, 2000)
                                                                                                   (for the year ---------------------------------------
               Portfolio                   Fund adviser or subadviser    Asset levels  (as of 12/  ended  12/31/
                                                                                  31/00)             00)  (in                                 In percent
                                                                                                     percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Substituted Portfolio..................  Westpeak Investment Advisors,              $268,989,000             .33  1 year...................          9.0
                                          L.P. (subadviser).
                                                                                                                  5 year...................         17.8
                                                                                                                  10 year..................         17.0
                                                                                                                  Since inception (May 1,           14.2
                                                                                                                   1987).
Replacement Portfolio..................  MedLife (adviser).............           $3,999,903,000             .28  1 year...................          9.3
                                                                                                                  5 year...................         17.9
                                                                                                                  10 year..................         17.0
                                                                                                                  Since inception (May 1,           16.1
                                                                                                                   1987).
S&P 500 Stock Index....................                                                                           1 year...................          9.1
                                                                                                                  5 year...................         18.3
                                                                                                                  10 year..................         17.4
                                                                                                                  Since inception May 1,            14.7
                                                                                                                   1987.
                                                                                                                  Since inception May 1,            16.5
                                                                                                                   1990.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    7. Apart from the replacement of the underlying investment vehicle, 
the rights of the Variable Contract owners and the obligations of 
NELICO and MetLife under the Variable Contracts would not be altered by 
the Substitution except, of course, that Variable Contract owners will 
not have the right to allocate contract value to subaccounts that 
invest in the Substituted Portfolio. Variable Contract owners will not 
incur any additional tax liability as a result of the Substitution. 
NELICO and MetLife will bear the costs of any legal or accounting fees 
of the Substitution and transactional expenses, including brokerage 
commissions, in liquidating or transferring the assets of the 
Substituted Portfolio and purchasing shares of the Replacement 
Portfolios to be able to make payment to the Separate Accounts in 
connection with the Substitution.
    8. From the date the Application is filed with the Commission to 
the date 30 days after the Effective Date, Variable Contract owners 
will have the right to make a transfer of contract value from the 
subaccounts invested in the Substituted Portfolio (before the 
Substitution) and to make a transfer of contract value from the 
subaccount corresponding to the Replacement Portfolio (after the 
Substitution) to any other subaccount without charge and without those 
transfers counting toward the number permitted under the Variable 
Contracts (regardless of whether during the accumulation period or the 
annuity period). Each Variable Contract owner has received a prospectus 
supplement regarding the Substitution and will, prior to the Effective 
Date, receive a prospectus for the Replacement Portfolio. A Pre-

[[Page 18835]]

Substitution Notice (in the form of an additional prospectus 
supplement) regarding the Substitution will also be mailed to Variable 
Contract owners prior to the Effective Date. The Pre-Substitution 
Notice will set forth the scheduled Effective Date and advise Variable 
Contract owners of their transfer rights. The Effective Date will be no 
earlier than twenty days after the mailing of the Pre-Substitution 
Notice.
    9. The Section 26 Applicants note that, in accordance with the 
terms of each of the Variable Contracts, no sales charges or surrender 
charges will apply to transfers in connection with the Substitution, 
and NELICO and MetLife represent that no such charge shall be imposed. 
In addition, within five days after the Substitution, any Variable 
Contract owners who were affected by the Substitution will be sent a 
Post-Substitution Notice informing them that the Substitution was 
carried out and advising them of their transfer rights. The Section 26 
Applicants assert that the procedures to be implemented are sufficient 
to assure that each Variable Contract owner's cash values immediately 
after the Substitution shall be equal to the cash value immediately 
before the Substitution, and that the Substitution will not affect the 
value of the interests of those owners of other NELICO and MetLife 
variable contracts (other than the Variable Contracts) who currently 
have contract value allocated to any of the portfolios of the Zenith 
Fund or Metropolitan Series.
    10. Any in-kind redemptions and purchases for purposes of the 
Substitution will be effected in a manner consistent with the 
investment objectives and policies of the Substituted Portfolio and the 
Replacement Portfolio. MetLife will review the securities holdings of 
the Substituted Portfolio and determine which portfolio holdings of the 
Substituted Portfolio would be suitable investments for the Replacement 
Portfolio in the overall context of such portfolio's investment 
objectives and policies and consistent with its management of the 
Replacement Portfolio. The Section 17(b) Applicants state that 
securities to be paid out as redemption proceeds and subsequently 
contributed to the Replacement Portfolio to effect the contemplated in-
kind purchases of shares will be valued based on the normal valuation 
procedures of the redeeming and purchasing Portfolios. The redeeming 
and purchasing values will be the same. Consistent with Rule 17a-7(d) 
under the 1940 Act, no brokerage commissions, fees or other 
remuneration will be paid in connection with the in-kind transactions.
    11. Section 17(a)(1) and (a)(2) of the 1940 Act generally prohibit 
any affiliated person of a registered investment company, or any 
affiliated person of an affiliated person, from selling any security or 
other property to such registered investment company and from 
purchasing any security or other property from such registered 
investment company. NELICO and MetLife anticipate that the Substitution 
will be done by redeeming shares of the Substituted Portfolio in-kind 
rather than in cash and then using those assets to purchase shares of 
the Replacement Portfolio. Redemptions and purchases in-kind involve 
the purchase of property from a registered investment company and the 
sale of property to a registered investment company by NELICO and 
MetLife, each an affiliated person of those investment companies.
    12. Pursuant to section 17(a)(1) of the 1940 Act, the section 17(b) 
Applicants may be considered affiliates of one another based upon the 
definition of ``affected person'' under section 2(a)(3) of the 1940 
Act. Because the Substitution may be effected, in part, by means of in-
kind redemptions and subsequent purchases of shares, and also by means 
of in-kind transactions, the Substitution may be deemed to involve one 
or more purchases or sales of securities or property between 
affiliates.
    13. Section 17(b) of the 1940 Act provides that the Commission may, 
upon application, grant an order exempting any transaction from the 
prohibitions of Section 17(a) if the evidence establishes that: (i) The 
terms of the proposed transaction, including the consideration to be 
paid or received, are reasonable and fair and do not involve 
overreaching on the part of any person concerned; (ii) the proposed 
transaction is consistent with the policy of each registered investment 
company concerned, as recited in its registration statement and records 
filed under the 1940 Act; and (iii) the proposed transaction is 
consistent with the general purposes of the 1940 Act.
    14. The Section 17(b) Applicants assert that the terms under which 
the in-kind redemptions and purchases will be effected are reasonable 
and fair and do not involve overreaching on the part of any person. 
According to the Section 17(b) Applicants, the use of in-kind 
redemptions of such subaccounts is intended to reduce costs and thereby 
benefit Variable Contract owners. The Section 17(b) Applicants further 
contend that the transactions will not cause Variable Contract owner 
interests to be diluted, and represent that the proposed transactions 
will take place at relative net asset value in conformity with the 
requirements of section 22(c) of the 1940 Act and Rule 22c-1 thereunder 
with no change in the amount of any Variable Contract owner's contract 
value or death benefit or in the dollar value of his or her investment 
in any of the Separate Accounts. Variable Contract owners will not 
suffer any adverse tax consequences as a result of the Substitution. 
Fees and charges under the Variable Contracts will not increase because 
of the Substitution.
    15. The Section 17(b) Applicants state that the in-kind redemptions 
and purchases will be transacted in a manner consistent with the 
policies of both the Substituted Portfolio and the Replacement 
Portfolio, as recited in their registration statements. According to 
the section 17(b) Applicants, MetLife will review the securities 
holdings of the Substituted Portfolio and determine which portfolio 
holdings of the Substituted Portfolio would be suitable investments for 
the Replacement Portfolio in the overall context of such Portfolio's 
investment objectives and policies and consistent with the management 
of the Replacement Portfolio.
    16. The Section 17(b) Applicants assert that the Substitution, as 
described herein, is consistent with the general purposes of the 1940 
Act as stated in the Findings and Declaration of Policy in Section 1 of 
the 1940 Act and that the proposed transactions do not present any of 
the conditions or abuses that the 1940 Act was designed to prevent. The 
Section 17(b) Applicants represent that the securities to be paid out 
as redemption proceeds and subsequently contributed to the Replacement 
Portfolio to effect the contemplated in-kind purchases of shares will 
be valued based on the normal valuation procedures of the redeeming 
Substituted Portfolio and purchasing Replacement Portfolio. The Section 
17(b) Applicants state that there will accordingly be no change in 
value to any Variable Contract owner as a result of the Substitution.
    17. The Section 17(b) Applicants request that the Commission issue 
an order pursuant to section 17(b) of the 1940 Act exempting the 
Substitution from the provisions of section 17(a) to the extent 
necessary to permit the Substitution effected, in part, by means of in-
kind redemptions and purchases of shares, and also by means of in-kind 
transactions. The Section 17(b) Applicants submit that, for all of the 
reasons stated above, the terms of the proposed in-kind redemptions and 
purchases of shares described above,

[[Page 18836]]

including the consideration to be paid or received, are reasonable and 
fair to Variable Contract owners invested in each and do not involve 
overreaching on the part of any person; and furthermore, granting the 
relief requested herein for the Substitution that may be effected in 
part by means of in-kind redemptions and purchases of shares is 
appropriate, in the public interest, and consistent with the policies 
of each of the Portfolios and the general purposes of the 1940 Act.

Applicants' Conditions

    For purposes of the approval sought pursuant to section 26(b) of 
the 1940 Act, the Substitution described in the Application will not be 
completed, unless all of the following conditions are met.
    1. The Commission shall have issued an order (i) approving the 
Substitution under section 26(b) of the 1940 Act, and (ii) exempting 
any in-kind redemptions and purchases from the provisions of section 
17(a) of the 1940 Act as necessary to carry out the transactions 
described in the Application.
    2. Each Variable Contract owner will have been sent (i) copy of the 
effective prospectus relating to the Replacement Portfolio and any 
necessary amendments to the prospectuses relating to the Variable 
Contracts, (ii) prior to the Effective Date, a Pre-Substitution Notice 
describing the terms of the Substitution and the rights of the Variable 
Contract owners in connection with the Substitution, and (iii) if 
affected by the Substitution, a Post-Substitution Notice within five 
days after the Substitution informing them that the Substitution was 
carried out and advising them of their transfer rights.
    3. NELICO and MetLife shall have satisfied themselves that (i) the 
Variable Contracts allow the substitution of portfolios in the manner 
contemplated by the Substitution and related transactions described 
herein, (ii) the transactions can be consummated as described in this 
Application under applicable insurance laws, and (iii) that any 
applicable regulatory requirements in each jurisdiction where the 
Variable Contracts are qualified for sale, have been complied with to 
the extent necessary to complete the transaction.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-8902 Filed 4-10-01; 8:45 am]
BILLING CODE 8010-01-M