[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19253-19256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9112]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24927; File No. 812-12210]


State Farm Life Insurance Company, et al.

April 5, 2001.
AGENCY: Securities and Exchange Commission (the ``Commission'' or 
``SEC'').

ACTION: Notice of Application for an order under Section 11 of the 
Investment Company Act of 1940 (the 1940 Act'' or ``Act'') permitting 
certain exchange offers between certain unit investment trusts and 
certain open-end management investment companies.

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    Applicants: State Farm Insurance Company (``Life Company''), State 
Farm Life and Accident Assurance Company (``Accident Company''), State 
Farm Life Insurance Company Variable Annuity Separate Account (``Life 
Company VA Separate Account''), State Farm Life and Accident Assurance 
Company Variable Annuity Separate Account (``Accident Company VA 
Separate Account,'' and together with the Life Company VA Separate 
Account, the ``Separate Accounts'' and individually, a ``Separate 
Account''), State Farm Mutual Fund Trust (the ``Retail Fund'') and 
State Farm VP Management Corp. (``VP Management Corp.'').
    Summary of Application: Applicants seek an order to permit 
exchanges between individual deferred variable annuity contracts 
(``Contracts'') of the Separate Accounts or any future Contracts 
offered by Life Company, Accident Company or any current and future 
affiliated insurance company (``Future Contracts'') and Retail Fund or 
any other registered, open-end management investment companies 
sponsored, organized and advised by a subsidiary of State Farm Mutual 
Automobile Insurance Company (``Auto Company''), the parent of Life 
Company, Accident Company and VP Management Corp. (``Future Funds, and 
together with Retail Fund, the ``Funds''). Auto Company together with 
its subsidiaries are referred to collectively as ``State Farm.''
    Filing Date: The Application was filed on August 7, 2000, and 
amended and restated on April 3, 2001.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. Any 
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 27, 2001, and should be accompanied by 
proof of service on the Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the writer's interest, the reason for the request, and the 
issues contested. Persons 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 Alan Goldberg, 
Bell, Boyd & Lloyd LLC, 70 W. Madison, Suite 3300, Chicago, IL 60602.

FOR FURTHER INFORMATION CONTACT: Yolanda L. Ross, Senior Counsel, or 
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

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

Applicants' Representations

    1. Life Company and Accident Company are each stock life insurance 
companies organized under the laws of Illinois and wholly-owned by Auto 
Company Life Company and Accident Company issue the Contracts.
    2. The Life Company VA Separate Account is a separate account of 
Life Company holding assets relating to the Contracts. Accident Company 
VA Separate Account is a separate account of Accident Company holding 
assets relating to Contracts. Each is registered as a unit investment 
trust under the 1940 Act. Each Separate Account currently has six 
separate subaccounts, each of which invests in a single corresponding 
portfolio of State Farm

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Variable Product Trust (the ``Trust''), an open-end management 
investment company. Shares of the Trust are currently sold exclusively 
to separate accounts of Life Company and Accident Company to fund 
benefits under variable annuity and variable life contracts.
    3. The Funds are composed of the Retail Fund and Future Funds. The 
Retail Fund offers two classes of shares. Class A shares are offered 
with a maximum front-end sales charge of 3%, a distribution fee of 
0.25% pursuant to Rule 12b-1 under the Act (``Rule 12b-1 fee'') and a 
shareholder servicing fee of 0.25% not subject to Rule 12b-1. Class B 
shares are offered with a maximum contingent deferred sales charge of 
3%, a distribution Rule 12b-1 fee of 0.65% and shareholder servicing 
fee of 0.25% not subject to Rule 12b-1. The contingent deferred sales 
charge is imposed according to the following schedule: first year--3%; 
second year--2.75%; third year--2.75%; fourth year--2.5%; fifth year--
2%; and sixth year--1%. The Retail Fund also will offer an 
institutional class of shares, which will not be able to participate in 
an offer of exchange. Each portfolio of the Retail Fund will pay an 
advisory fee and certain other expenses. Future Funds may have similar 
types of fees and expenses.
    4. VP Management Corp. is wholly-owned by Auto Company, and is 
registered as a broker-dealer under the Securities Exchange Act of 
1934. VP Management Corp. distributes the Contracts and will distribute 
the shares of the Retail Fund and any Future Funds.
    5. Life Company offers Contracts to individuals through the Life 
Company VA Separate Account, and Accident Company offers Contracts to 
individuals through the Accident Company VA Separate Account. A 
Contract Owner may choose to have purchase payments invested in any of 
the respective Separate Account's subaccounts. Subject to certain 
limitations, Contract Owners may transfer subaccount units at net asset 
value among the various subaccounts. Applicants may deduct a surrender 
charge when a Contract Owner makes a withdrawal or surrenders the 
Contract during the first seven years of the Contract, but does not 
deduct any sales charge from premium payments. Applicants calculate the 
surrender charge as a percentage of the amount withdrawn or surrendered 
that is not eligible for a free withdrawal as described in the 
Application. The applicable percentage is 7% the first year of the 
Contract, and declines by 1% in each following year, until it reaches 
0% in the eighth year of the Contract. Applicants deduct from each 
Contract, or respective Separate Account, a daily charge for mortality 
and expense risk currently equal on an annual basis to 1.15% of net 
assets, and an annual administrative fee (currently $30) on each 
Contract anniversary, on the surrender date or on the annuity date.
    6. Proposed Exchange from Contracts to Funds. The Funds propose to 
offer Contract Owners who desire to surrender their Contracts or 
withdraw part of their Accumulation Value (as defined in the Contract) 
and use the proceeds to purchase either Class A or Class B shares of 
the Funds (except in limited circumstances), the option to transfer 
such proceeds directly to the Funds for the purchase of such shares. 
Applicants will waive any otherwise applicable surrender charge on the 
surrenders or withdrawals in connection with an exchange. Any front-end 
sales charge usually imposed on purchases of Class A Fund shares will 
be imposed on Class A Fund shares purchased with that portion, if any, 
of the redemption proceeds of a Contract on which the Contract Owner 
would have paid a surrender charge had it not been waived. Any front-
end sales charge usually imposed on purchases of Fund shares will be 
waived with respect to Fund shares purchased with that portion, if any, 
of the redemption proceeds of a Contract on which a Contract Owner 
would not have paid a surrender charge. Any contingent deferred sales 
charge usually imposed on redemption of Class B Fund shares will be 
imposed on Class B Fund shares purchased with that portion, if any, of 
the redemption proceeds of a Contract on which the Contract Owner would 
have paid a surrender charge had it not been waived. Any contingent 
deferred sales charge will be calculated as if the Class B Fund shares 
were held as of the date of the Contract was held and the Class B Fund 
shares were purchased at the time the purchase payments were made. For 
those Contract Owners whose surrender charge would have been less than 
the front-end sales charge on Class A Fund shares had Life Company or 
Accident Company imposed the surrender charge at the time of the 
exchange, Applicants will apply the proceeds of the exchange solely to 
Class B Fund shares.
    7. Proposed Exchange from the Funds to the Contracts. The Life 
Company, the Accident Company and the Separate Accounts propose to 
offer Fund shareholders who desire to redeem their shares (including 
shares acquired through the reinvestment of dividends and distributions 
arising from ownership of shares of the Funds) and use the redemption 
proceeds to purchase a Contract, the option to transfer such redemption 
proceeds directly from the Funds to Applicants along with an 
application for a Contract. The contingent deferred sales charge 
customarily imposed on redemption of Fund shares will be waived; and 
any surrender charge on the subsequent surrender of the Contracts will 
be waived to the extent such Contracts were purchased with the 
redemption proceeds of Class A Fund shares. Any surrender charge on the 
subsequent surrender of the Contracts will be imposed to the extent 
such Contracts were purchased with the redemption proceeds of Class B 
Fund shares. Any surrender charge will be calculated as if the Contract 
were held as of the date the Fund shares were held and the purchase 
payments under the Contract were made at the time the Fund shares were 
purchased.
    8. Each exchange would be effected at the relative net asset values 
of the securities exchanged, and would be priced according to Rule 22c-
1 under the Act. Applicants would, in their sole discretion, determine 
to whom an exchange offer would be made, the time period during which 
the exchange offer would be in effect, and when to terminate an 
exchange offer. Applicants may establish fixed periods of time for 
certain exchanges (a ``window'') of at least 60 days. No open-ended 
exchange offer would be terminated or its terms amended materially 
without prominent notice to any shareholder or Contract Owners subject 
to that offer of the impending termination or amendment at least 60 
days prior to that offer of the termination or the effective date of 
the amendment; provided, however, that no such notice would be required 
if, under extraordinary circumstances either: (a) there was a 
suspension in redemption of the exchanged security under section 22(e) 
of the Act or rules thereunder; or (b) the offering company was 
temporarily to delay or cease the sale of the security because it was 
unable to invest amounts effectively in accordance with applicable 
investment objectives, policies and restrictions.
    9. Applicants, subject to certain conditions more fully described 
in the Application, propose to retain the flexibility to impose holding 
periods, to limit exchanges by any one investor and to exclude specific 
Funds (or series or classes of shares thereof) from exchange offers, 
with the aim of curbing any pattern of abuse that might appear. No 
holding period will be imposed in connection with an exchange unless 
either no sales load is imposed on the

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security to be acquired or such sales load imposed is less than the 
maximum that would be allowed if the restrictions in Rule 11a-3(b)(4) 
under the Act applied to the transaction. Any such holding period will 
be established by the offering entity and will apply uniformly to all 
security holders of the class specified.
    10. Applicants represent that at the commencement of the exchange 
offers, and as long as the offers remain in effect, the prospectus of 
each applicable Contract and Fund will: (a) Describe the terms of each 
offer; (b) disclose any surrender charge, sales charge or 
administrative fee that would be imposed in connection with the 
exchange program; (c) disclose that each exchange offer is subject to 
termination and its terms are subject to change; and (d) describe the 
tax implications of the exchanges including, if appropriate, a 
description of any adverse tax consequences of an exchange.
    11. Applicants request that the Commission order extend to: (a) all 
future Contracts issued by Life Company, Accident Company or any 
current and future State Farm insurance company, to the separate 
accounts relating to any such Contracts, and to the underwriters 
distributing the Contracts (``Future Contracts''); and (b) all Future 
Funds.

Applicants' Legal Analysis

    1. Section 11(a) of the Act provides, in pertinent part, that it 
shall be unlawful for any registered open-end company or any principal 
underwriter for such a company to make or cause to be made an offer to 
the holder of a security of such company, or of any other open-end 
investment company, to exchange that security for a security in the 
same or another such company on any basis other than the relative net 
asset values of the respective securities to be exchanged, unless the 
terms of the offer have first been submitted to and approved by the 
Commission. Section 11(c) of the Act provides that, irrespective of the 
basis of exchange, Commission approval is required for any offer of 
exchange of any security of a registered unit investment trust for the 
securities of any other investment company. Accordingly, although 
Applicants believe that the proposed exchanges are at relative net 
asset value, Commission approval is required for the proposed exchanges 
because of the involvement of the Separate Accounts, each of which is a 
registered unit investment trust. Applicants state that they cannot 
rely on Rule 11a-2 nor rule 11a-3 because neither rule permits 
exchanges between a unit investment trust separate account and an open-
end investment company that is not a separate account.
    2. The legislative history of section 11 indicates that its purpose 
is to provide the Commission with an opportunity to review the terms of 
certain offers of exchange to ensure that a proposed offer is not being 
made ``solely for the purpose of exacting additional selling charges.'' 
H. Rep. No. 2639, 76th Cong., 2d Sess. 8 (1940). One of the practices 
Congress sought to prevent through Section 11 was the practice of 
inducing investors to switch securities so that the promoter could 
charge investors another sales load.
    3. The proposed exchange offers will be based on the relative net 
asset values of the interests exchanged. Applicants represent that the 
offers of exchange will not generate duplicative sales charges or any 
other duplicative revenues, but will offer the Contract Owners and Fund 
shareholders the opportunity to use proceeds from one investment to 
acquire an interest in a different investment at a cost less than would 
apply in the absence of the exchange offer. Pursuant to each exchange 
offer, sales charges that would otherwise apply to the exchanged 
securities or the acquired securities are waived in certain cases.
    4. In each exchange, Applicants emphasize that in no case will more 
than the full sales load on one security be assessed in connection with 
the exchanged and acquired security. Accordingly, Applicants submit the 
relief they request is consistent with the policies and purposes of 
Rules 11a-2 and 11a-3 under the 1940 Act and that the exchange would 
satisfy the sales load requirements of rules 11a-2 and 11a-3 under the 
Act if such rules applied. Those rules would permit the imposition of 
the full sales charge on an acquired security where, as here, no other 
sales charges are imposed in connection with the exchanges. Applicants 
assert that their proposal to impose sales charges on certain exchanges 
has been designed to result in the exchanging investor more nearly 
bearing his or her fair share of sales expense.
    5. Applicants assert that the Commission, in adopting Rule 11a-3 
under the Act, did not prohibit or restrict exchange offers where the 
acquired mutual fund shares involve a Rule 12b-1 fee. They further 
assert that the Commission recognized the possibility that the acquired 
security might have a Rule 12b-1 fee, by considering that as a factor 
in calculating the holding period for deferred sales charges.
    6. Under the Contracts, a $30 annual administrative charge will be 
deducted for the year of the surrender pursuant to Rule 6c-8 upon full 
surrender of the Contract. Applicants submit that the imposition of 
this charge in connection with exchanges is fair and reasonable and 
consistent with the spirit and purpose of Rules 11a-2 and 11a-3 under 
the Act. Failure to impose this charge would result in exchanging 
investors avoiding their fair share of the costs of administering the 
Contracts. Applicants represent that the administrative charge is not 
designed to yield a profit to any Applicant, and is used solely to 
cover the Applicants' administrative costs.
    7. The proposed exchanges may constitute taxable events for the 
investors involved. Nevertheless, the Funds and the Contracts being 
offered pursuant to the exchange program incorporate features which are 
markedly different from each other. The differences, for example, 
include different underlying media; the presence of annuity coverage; 
differences in the timing, nature and amount of charges; and different 
tax consequences. Applicants submit, therefore, that the features of a 
security being offered may very well provide a useful complement to the 
security then owned by the investor. The security offered may also 
provide a useful alternative to the security then owned by the investor 
and may be more appropriate to the current economic, investment and tax 
needs of the investor. Full disclosure of the particulars of each 
exchange offer will be made in the prospectus or statement of 
additional information, as appropriate, for the relevant security being 
offered.
    8. Applicants submit that providing class relief is appropriate. 
All exchanges that would be permitted under the order would be on the 
same terms as the exchanges between the Separate Accounts and the 
Funds. Therefore, there would be no possibility of the switching abuses 
Congress sought to prevent through section 11. Without class relief, 
before Contract Owners and Fund shareholders could be given additional 
exchange options, Applicants would have to apply for and obtain 
additional exemptive orders. Applicants believe that these additional 
applications would present no new issues under the Act not already 
addressed in their Application.
    9. Applicants believe that for the reasons set forth above, none of 
the abuses which Section 11 was enacted to prevent would be present. 
Applicants submit that the proposed offers of

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exchange are consistent with the intent and purpose of section 11, and 
would provide a benefit to Contract owners and Fund shareholders by 
providing new investment options, and an attractive way to exchange 
existing interests in the Contracts for interests in open-end 
management investment companies.

Conclusion

    For the reasons summarized above, Applicants request that the 
Commission issue an order under Sections 11(a) and 11(c) of the Act 
approving the exchange offers described in the Amended Application.


    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-9112 Filed 4-12-01; 8:45 am]
BILLING CODE 8010-01-M