[Federal Register Volume 66, Number 93 (Monday, May 14, 2001)]
[Notices]
[Pages 24413-24417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12024]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. IC-24974; File No. 812-12154]


Western-Southern Life Assurance Co., et al.

May 7, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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SUMMARY OF APPLICATION: Applicants request an order approving the 
proposed substitution of shares of the Touchstone Variable Series 
Trust's (``TVST'') Touchstone High Yield Portfolio for shares of TVST's 
Touchstone Income Opportunity Portfolio held by Western-Southern Life 
Assurance Company Separate Account 1 (``Separate Account 1'') and 
Western-Southern Life Assurance Company Separate Account 2 (``Separate 
Account 2'') to support certain variable annuity contracts (the 
``Contracts'').

APPLICANTS: Western-Southern Life Assurance Company (``WSLAC''), 
Separate Account 1 and Separate Account 2.

FILING DATE: The application was filed on June 30, 2000 and amended on 
April 13, 2001, and April 27. 2001.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
parties may request a hearing on this application by writing to the 
Secretary of the Commission and serving Applicants with a copy of the 
request, in person or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on June 1, 2001, and 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 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 Donald J. 
Wuebbling, Esq., Western-Southern Life Assurance Company, 400 Broadway, 
Cincinnati, Ohio 45202, and Kevin L. Cooney, Esq., Frost Brown Todd 
LLC, 2200 PNC Center, 201 East Fifth Street, Cincinnati, Ohio 45202.

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

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

Applicants' Representations

    1. WSLAC is a stock life insurance company organized under the laws 
of the State of Ohio on December 1, 1980. WSLAC is a wholly owned 
subsidiary of The Western and Southern Life Insurance Company, a stock 
life insurance company originally organized under the laws of the State 
of Ohio on February 23, 1888 (``WSLIC''). WSLAC is in the business of 
issuing insurance and annuity contracts. WSLAC is the depositor and 
sponsor, as those terms have been interpreted by the Commission with 
respect to variable annuities separate accounts, of both Separate 
Account 1 and Separate Account 2.
    2. Separate Account 1 and Separate Account 2 (together, the 
``Separate Accounts'') were established by WSLAC as separate investment 
accounts under Ohio law. The board of directors of WSLAC established 
Separate Account 1 on July 27, 1992 and Separate Account 2 on June 1, 
1994. The Separate Accounts are registered under the 1940 Act as unit 
investment trusts and interests in the Separate Accounts are offered 
through the Contracts which are registered under the Securities Act of 
1933 (the ``1933 Act'') on Form N-4. Each Separate Account is currently 
divided into 19 sub-accounts. Contract owners also may invest in a 
fixed rate option, backed by the general assets of WSLAC. Each sub-
account invests exclusively in shares representing an interest in a 
separate corresponding portfolio of (``TVST'') or certain unaffiliated 
investment companies.
    3. The Contracts include three variable annuity contracts 
identified as Touchstone Gold Variable Annuity (the ``Gold Contract''), 
Touchstone Select Variable Annuity (the ``Select Contract'') and 
Touchstone Advisor Variable Annuity (the ``Advisor Contract'').
    4. The Gold Contract is a flexible purchase payment contract 
designed for individual investors and group plans. Payments made by 
owners of a Gold Contract are invested in one more sub-accounts of 
Separate Account 1 or in a fixed-rate option through WSLAC's general 
account (the ``Fixed Account''). The Gold Contract offers four fixed 
annuity income options and a death benefit payable to the designated 
beneficiary if the annuitant dies prior to the Income Date as defined 
in the Gold Contract. Withdrawals from a Gold Contract generally are 
subject to a contingent deferred sales charge ranging from 7% on 
amounts withdrawn less than one year after the date of the purchase 
payment to 0% on amounts withdrawn at least seven years after the date 
of the purchase payment. Additional charges related to the Gold 
Contract are: a Contract Maintenance charge of $35 each year during the 
first ten years of the Contract and the lesser of $35 and 0.17% of 
Contract Value after the tenth anniversary of the Contract Date; a 
Contract Administration charge at an effective annual rate of 0.15%; 
and

[[Page 24414]]

a Mortality and Expense Risk charge at an effective annual rate of 
1.20%.
    5. The Select Contract is a flexible premium contract designed for 
individual investors and group plans. Payments made by owners of a 
Select Contract are invested in one or more sub-accounts of Separate 
Account 1 or in the Fixed Account. The Select Contract offers five 
income payment options and three death benefit options payable to the 
designated beneficiary if the owner dies prior to the Income Date as 
defined in the Select contract. Withdrawals from a Select Contract 
generally are subject to a contingent deferred sales charge ranging 
from 8% on amounts withdrawn less than one year after the date of the 
purchase payment to 0% on amounts withdrawn at least seven years after 
the date of the purchase payment. Additional charges related to the 
Select Contract are: A Contract Maintenance charge of $40 each year 
during the first ten years of the Contract and the lesser of $40 and 
0.14% of Contract Value after the tenth anniversary of the Contract 
Date; a Contract Administration charge at an effective annual rate of 
0.15%; and a Mortality and Expense Risk charge with a standard death 
benefit an effective annual rate of 1.20%, an annual step up death 
benefit an effective annual rate of 1.30%, and a 6% accumulating death 
benefit an effective annual rate of 1.40%.
    6. The Advisor Contract is a flexible purchase payment contract 
designed for individual investors and group plans. Payments made by 
owners of an Advisor Contract are invested in one or more sub-accounts 
of Separate Account 2. Withdrawals from an Advisor Contract are not 
subject to a contingent deferred sales charge. The Advisor Contract 
offers four fixed annuity income options and a death benefit payable to 
the designated beneficiary if the annuitant dies prior to the Income 
Date as defined in the Advisor Contract. Charges related to the Select 
Contract are: A Contract Maintenance charge of $35 each year; a 
Contract Administration charge at an effective annual rate of 0.10%; 
and a Mortality and Expense Risk charge at an effective annual rate of 
0.70%.
    7. Subject to certain limitations, an owner of any Contract may 
transfer all or part of the Contract Value among the sub-accounts and, 
if applicable, the Fixed Account. The owner of a Contract is limited to 
one transfer among sub-accounts in a 30-day period, a minimum transfer 
amount generally of $250, one transfer from one or more sub-accounts to 
the Fixed Account per Contract Year, and one transfer from the Fixed 
Account to one or more sub-accounts per Contract Year with a maximum 
transfer amount of 25% of the Fixed Account value.
    8. TVST was organized as a Massachusetts business trust as of 
February 7, 1994. TVST is registered under the 1940 Act as an open-end 
diversified management investment company and the shares offered by 
TVST are registered under the 1933 Act.
    9. TVST is currently comprised of 11 investment portfolios (each a 
``TVST Portfolio,'' and together the ``TVST Portfolios''): Touchstone 
Small Cap Value, Touchstone Emerging Growth, Touchstone International 
Equity, Touchstone Income Opportunity, Touchstone High Yield, 
Touchstone Value Plus, Touchstone Growth & Income, Touchstone Enhanced 
30, Touchstone Balanced, Touchstone Bond and Touchstone Standby Income, 
all of which are investment options under each of the Contracts.
    10. Touchstone Advisors, Inc. (``Touchstone''), an indirect 
subsidiary of WSLAC, serves as the investment advisor and sponsor for 
the TVST Portfolios. Touchstone has engaged sub-advisers for each TVST 
Portfolio for which it acts as adviser and the sub-advisers are 
responsible for the day-to-day investment management of the assets of 
those TVST Portfolios. The sub-adviser of the Touchstone Income 
Opportunity Portfolios is Alliance Capital management L.P. The sub-
adviser of Touchstone High Yield Portfolio is Fort Washington 
Investment Advisors, Inc. (``Fort Washington''). Fort Washington is a 
subsidiary of WSLIC, which is also the parent of WSLAC and Touchstone.
    11. The investment objective of the Touchstone High Yield Portfolio 
is to seek to achieve a high level of current income as a main goal 
with capital appreciation as a secondary goal. To achieve this 
objective, the Touchstone High Yield Portfolio invests primarily (at 
least 65% of total assets) in non-investment grade debt securities of 
domestic corporations. The Portfolio's investments may include: (a) 
Securities of foreign companies (up to 15%), but only up to 5% of its 
assets in securities of foreign companies that are denominated in a 
currency other than the U.S. dollar; (b) debt securities of issuers in 
emerging market countries (up to 10%); (c) mortgage-related securities 
and other types of loans and loan participations; and (d) securities 
issued by the U.S. government, its agencies or instrumentalities and 
securities of foreign governments.
    12. Expense and performance information for the Touchstone High 
Yield Portfolio from the date it commenced operations (May 1, 1999) 
through December 31, 2000, and information about its size and portfolio 
composition at December 31, 1999, and December 31, 2000, is set forth 
in the tables below.

                              [In percent]
------------------------------------------------------------------------
                                               Touchstone high yield
                                                     portfolio
                                         -------------------------------
                                           For the year   For the period
                                           ended  12/31/   ended  12/31/
                                                00              99
------------------------------------------------------------------------
Expense Information:
    Expense ratio before waiver and                 1.50            1.53
     reimbursement......................
    Expense ratio after waiver and                  0.80            0.80
     reimbursement......................
        Contractual Management Fee......            0.60            0.60
        12b-1 Fees......................            None            None
        Other expenses..................            0.20            0.20
Performance Information:
    Total return *......................          (0.70)         (8.11)
------------------------------------------------------------------------
* Exclusive of charges that apply to the sub-accounts.


[[Page 24415]]


------------------------------------------------------------------------
                                               Touchstone high yield
                                                     portfolio
                                         -------------------------------
                                             12/31/00        12/31/99
------------------------------------------------------------------------
Asset Information:
Net assets..............................     $15,748,310     $14,915,932
Portfolio Composition as a percentage of
 net assets:
    Corporate debt (percent)............            87.5            95.6
    Convertible debt (percent)..........            02.2            00.0
    Cash and other assets net of                    10.3            04.4
     liabilities (percent)..............
------------------------------------------------------------------------

    13. The investment objective of the Touchstone Income Opportunity 
Portfolio is to seek to achieve a high level of current income as a 
main goal and to increase the value of its shares, if consistent with 
its main goal. To achieve this objective, the Touchstone Income 
Opportunity Portfolio invests primarily in debt securities. The debt 
securities will generally be more risky non-investment grade corporate 
and government securities (up to 100% of total assets). Government 
securities include both domestic and foreign government securities. The 
Touchstone Income Opportunity Portfolio's investment may include: (a) 
Securities of foreign companies (up to 100%), but only up to 30% of its 
assets in securities of foreign companies that are denominated in a 
currency other than the U.S. dollar; (b) debt securities that are 
emerging market securities (up to 65%); (c) mortgage-related 
securities, loans and loan participations; and (d) currency futures and 
option contracts.
    14. Expense and performance information for the Touchstone Income 
Opportunity Portfolio for the last four fiscal years, and information 
about its size and portfolio composition at December 31, 1999, and 
December 31, 2000, is set forth in the tables below.

                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                    Touchstone income opportunity portfolio for the year ended
                                                 ---------------------------------------------------------------
                                                     12/31/00        12/31/99        12/31/98        12/31/97
----------------------------------------------------------------------------------------------------------------
Expense Information:
    Expense ratio before waiver and                         1.36            1.29            1.25            1.72
     reimbursement..............................
    Expense ratio after waiver and reimbursement            0.85            0.85            0.85            0.85
    Contractual Management Fee..................            0.65            0.65            0.65            0.65
    12b-1 Fees..................................            None            None            None            None
    Other Expenses..............................            0.20            0.20            0.20            0.20
Performance Information:
    Total return *..............................          (1.10)            2.74         (12.27)          12.03
----------------------------------------------------------------------------------------------------------------
\1\ Exclusive of charges that apply to the sub-accounts.


----------------------------------------------------------------------------------------------------------------
                                                           Touchstone income opportunity portfolio
                                            --------------------------------------------------------------------
                                                          12/31/00                          13/21/99
----------------------------------------------------------------------------------------------------------------
Asset Information:
    Net assets.............................  $18,888,658......................  $25,487,559
Portfolio Composition as a percentage of
 net assets:
    Corporate debt (percent)...............  42.6.............................  52.2
    Sovereign government obligations         41.1.............................  45.3
     (percent).
    Warrants (percent).....................  00.0.............................  00.0
    Cash and other assets net of             16.3.............................  02.5
     liabilities (percent).
----------------------------------------------------------------------------------------------------------------

    15. WSLAC has been informed that the Board of Trustees of TVST has 
determined that as of an appropriate date after the issuance of the 
requested order from the Commission, it does not intend to offer the 
Touchstone Income Opportunity Portfolio as an available investment to 
the sub-accounts of Separate Account 1 and Separate Account 2. WSLAC, 
on behalf of Separate Account 1 and Separate Account 2, has determined 
that it would be in the best interest of the Contract owners to effect 
the proposed substitution.
    16. WSLAC, on its own behalf and on behalf of Separate Account 1 
and Separate Account 2, proposes to substitute shares of TVST 
Touchstone High Yield Portfolio for shares of TVST Touchstone Income 
Opportunity Portfolio currently held by corresponding sub-accounts of 
Separate Account 1 and Separate Account 2.

Applicant's Legal Analysis

    1. The Applicants request an order pursuant to section 26(b) of the 
1940 Act approving the proposed substitution. Section 26(b) provides, 
in pertinent part, that ``it shall be unlawful for any depositor or 
trustee of a registered unit investment trust holding the security of a 
single issuer to substitute another security for such security unless 
the Commission shall have approved such substitution.'' Section 26(b) 
also provides that the Commission shall approve the substitution of the 
evidence establishes that the substitution is consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.
    2. Applicants submit that the Touchstone High Yield Portfolio is 
the Portfolio with the investment objective that is most similar to the 
investment objective of the Touchstone Income Opportunity Portfolio. 
Both Portfolios seek to achieve a high level of current

[[Page 24416]]

income, with capital appreciation as a secondary consideration.
    3. Applicants assert that the investment strategies of the two 
Portfolios are similar in many respects. Both Portfolios invest 
primarily in non-investment grade debt securities. Both Portfolios may 
invest in debt securities of domestic companies, foreign companies, the 
U.S. government and foreign governments. The investment strategy of the 
Touchstone High Yield Portfolio and the Touchstone Income Opportunity 
Portfolio differ. For example, the Touchstone High Yield Portfolio must 
invest at least 65% of its total assets in debt securities of domestic 
corporations. The Touchstone Income Opportunity Portfolio, on the other 
hand, may invest up to 100% of its assets in debt securities of either 
foreign companies or foreign governments or a combination thereof. In 
addition, the Touchstone Income Opportunity Portfolio may invest up to 
65% of its assets in debt securities that are emerging market 
securities, while the Touchstone High Yield Portfolio must limit its 
investments in debt securities of issuers in emerging market countries 
to 10% of its assets.
    4. Applicants state that the proposed substitution of Contract 
Values and Account Values to the Touchstone High Yield Portfolio will 
be made in the same manner as any other transfer among sub-accounts, 
except no transfer charge otherwise applicable will be made. The 
substitution will not count against any limit on the permitted number 
of transfers. In connection with the substitution, shares remaining in 
the Touchstone Income Opportunity sub-accounts will be redeemed and the 
cash proceeds thereof will be applied to the purchase of shares of the 
Touchstone High Yield Portfolio, in each case at the net asset value 
determined in accordance with the requirements of the 1940 Act.
    5. According to the Applicants, the current expense levels of the 
Touchstone High Yield Portfolio are more favorable to the affected 
Contract owners. The current expense ratio of the Touchstone High Yield 
Portfolio after waiver and reimbursement is 0.80%, which is 0.05% lower 
than the current expense ratio of the Touchstone Income Opportunity 
Portfolio after waiver and reimbursement. Touchstone has agreed to 
waive its fees under the sponsor agreement between Touchstone and TVST 
or to reimburse certain other fees and expenses of the Touchstone High 
Yield Portfolio, such that after such waivers and reimbursements, the 
aggregate operating expenses of the Touchstone High Yield Portfolio do 
not exceed 0.80% of its average daily net assets on an annualized 
basis. Touchstone has agreed that it will continue to waive fees and 
reimburse the Touchstone High Yield Portfolio as described above 
through December 31, 2001.
    6. WSLAC or Touchstone will pay all expenses and transaction costs 
of the substitution, including any related brokerage fees. Contract 
owners will not bear any expenses, transaction costs or fees in 
connection with the substitution.
    7. Applicants submit that the substitution will not cause the fees 
and charges under the Contracts currently being paid by Contract owners 
to be greater after the substitution than before the substitution. The 
rights of the Contract owners and the obligations of WSLAC under the 
Contracts will not be altered in any way.
    8. Applicants represent that in the event that the TVST Touchstone 
High Yield Portfolio has operating expenses (taking into account 
expense waivers and reimbursements) for any fiscal period (not to 
exceed a fiscal quarter) during the 24 months following the date of the 
proposed substitutions equal on an annualized basis to an amount 
greater than 0.85%, WSLAC will make adjustments to the expenses for the 
sub-accounts that invest in the TVST Touchstone High Yield Portfolio 
for those Contract owners who were Contract owners on the date of 
substitution. These adjustments will limits those Contract owners' 
expenses so that the amount of the new portfolio's operating expenses 
together with the corresponding sub-account's asset-based expenses paid 
during such period on an annualized basis will be no greater than the 
sum of the replaced portfolio's expenses after waivers and 
reimbursements (i.e., 0.85%) together with the corresponding sub-
account's asset-based expenses during the fiscal year preceding the 
proposed substitution, which were as follows:

------------------------------------------------------------------------
                                                          Sub-account
                                                       expense limit (as
                                                        a percentage of
                       Contract                        average daily net
                                                       asset sub-account
                                                          value on an
                                                         annual basis)
------------------------------------------------------------------------
Gold Contract........................................               1.35
Select Contract:
  Option 1...........................................               1.35
  Option 2...........................................               1.45
  Option 3...........................................               1.55
Advisor Contract.....................................                .80
------------------------------------------------------------------------

    In addition, for those Contract owners who were Contract owners on 
the date of the substitution, WSLAC will not increase asset-based or 
non-asset-based expenses for a period of 24 months following the date 
of the substitution, except to the extent of any increase in premium 
taxes charged by one or more states. The non-asset-based expenses 
include the Contract Maintenance Charge and Surrender Charges.
    9. Applicants submit that the proposed substitution will not result 
in any adverse tax consequences to any Contract owner.
    10. Applicants state that WSLAC has notified Contract owners of the 
proposed substitution and will permit Contract owners to make one 
transfer from the Touchstone Income Opportunity sub-account to any of 
the other available sub-accounts at any time before the proposed 
substitution is completed without the assessment of any charge that 
might otherwise apply. Within 5 days after the proposed substitution is 
completed, WSLAC will send to Contract owners who were affected by the 
substitution a notice informing them that they may transfer all amounts 
that were transferred from the TVST Touchstone Income Opportunity sub-
account to the TVST Touchstone High Yield sub-account as part of the 
substitution, such additional transfer will not count against any limit 
on the number of permitted transfers, and no charges that might 
otherwise apply will be imposed on such additional transfer. The 
Contract owners who were affected by the substitution will have 30 days 
from the date of such post-substitution notice to make this additional 
``free'' transfer from the TVST Touchstone High Yield sub-account.
    11. The Applicants submit that the proposed substitution is 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act and is not the 
type of substitution that section 26(b) was designed to prevent. Unlike 
traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner that permanently affected 
all the investors in the trust, the Contracts provide each Contract 
owner with the right to exercise his or her own judgment and transfer 
account values into other sub-accounts. Moreover, WSLAC will offer 
contract owners the opportunity to transfer amounts out of the 
Touchstone Income Opportunity sub-account without cost or other 
disadvantage. The proposed substitution, therefore, will not result in 
the type of costly forced redemption that section 26(b) was designed to 
prevent. In addition, other factors that may have influenced a Contract 
owner to purchase a Contract, such as the reputation of WSLAC and

[[Page 24417]]

the type of insurance coverage and benefits provided by the Contract, 
will remain the same.

Conclusion

    Applicants assert that, for the reasons summarized above, the terms 
of the proposed substitution meet the standards set forth in section 
26(b) of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12024 Filed 5-11-01; 8:45 am]
BILLING CODE 8010-01-M