[Federal Register Volume 66, Number 239 (Wednesday, December 12, 2001)]
[Notices]
[Pages 64318-64324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30648]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-25311; File No. 812-12566]
First Allmerica Financial Life Insurance Co., et al.; Notice of
Application
December 5, 2001.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of an Application for an order pursuant to section 26(c)
of the Investment Company Act of 1940 (the ``1940 Act'') approving the
proposed substitutions of securities and pursuant to section 17(b) of
the Act exempting related transactions from section 17(a) of the Act.
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Applicants: First Allmerica Financial Life Insurance Company
(``First Allmerica''), Fulcrum Separate Account of First Allmerica
Financial Life Insurance Company (the ``First Allmerica Separate
Account''), Allmerica Financial Life Insurance and Annuity Company
(``Allmerica Financial Life''), Fulcrum Separate Account of Allmerica
Financial Life Insurance and Annuity Company (the ``Allmerica Financial
Life Separate Account''), Allmerica Investment Trust (``AIT''), The
Fulcrum Trust (``Fulcrum''), and Gabelli Capital Series Funds, Inc.
(``Gabelli'') (collectively, the ``Applicants'').
Summary of Application: Applicants request an order approving the
substitution of shares of three series of AIT and one series of Gabelli
for shares of series of Fulcrum held by the First Allmerica Separate
Account and the Allmerica Financial Life Separate Account to support
variable life insurance contracts or variable annuity contracts
(collectively, the ``Variable Contracts'') issued by First Allmerica or
Allmerica Financial Life. Applicants also request an order exempting
them from section 17(a) of the 1940 Act to the extent necessary to
permit the Applicants to, by means of in-kind redemptions and
purchases, carry out the above-referenced substitutions of securities.
Filing Date: The application was filed on July 3, 2001 and amended
and restated on December 4, 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 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 December 27, 2001, and 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 requester'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, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, Richard M. Reilly, President, Allmerica Financial
Life, 440 Lincoln Street, Worcester, MA 01653, and copy to George M.
Boyd, Esq., First Allmerica, Office of the General Counsel, N-440, 440
Lincoln Street, Worcester, MA 01653.
FOR FURTHER INFORMATION CONTACT: Kenneth C. Fang, Attorney, 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 may be obtained for a fee from
the Public Reference Branch of the Commission, 450 Fifth Street, NW,
Washington, DC 20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. First Allmerica was organized under the laws of Massachusetts in
1844. Effective October 16, 1995, First Allmerica converted from a
mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its
present name. First Allmerica is a wholly-owned subsidiary of Allmerica
Financial Corporation (``AFC'').
2. Allmerica Financial Life is a life insurance company organized
under the laws of Delaware in July 1974. Allmerica Financial Life is an
indirect, wholly-owned subsidiary of First Allmerica, which in turn is
a wholly-owned subsidiary of AFC.
3. The First Allmerica Separate Account and the Allmerica Financial
Life Separate Account (the ``Applicant Separate Accounts'') are
separate accounts for which either First Allmerica or Allmerica
Financial Life (the ``Applicant Insurance Companies'') serves as
sponsor and depositor. First Allmerica serves as sponsor and depositor
of the First Allmerica Separate Account. Allmerica Financial Life
serves as sponsor and depositor of the Allmerica Financial Life
Separate Account.
4. Each of the two Applicant Separate Accounts is a segregated
asset account of the indicated Applicant Insurance Company, and each is
registered under the 1940 Act as a unit investment trust. Each of the
respective Applicant Separate Accounts is used by the Applicant
Insurance Company of which it is a part to fund certain variable
annuity or variable life contracts. Certain sub-accounts of the
respective Applicant Separate Accounts are
[[Page 64319]]
dedicated to owning shares of one of the investment portfolios of
Fulcrum. Accordingly, each Fulcrum sub-account reflects the investment
performance of that portfolio of Fulcrum in which the sub-account
invests.
5. Each Applicant Separate Account is administered and accounted
for as part of the general business of the Applicant Insurance Company
of which it is a part. The income, gains or losses (realized or
unrealized) of each Applicant Separate Account are credited to or
charged against the assets of that Separate Account, without regard to
income, gains or losses of such Applicant Insurance Company. Each
Applicant Separate Account is a ``separate account'' as defined by the
1940 Act.
6. Each of the Applicant Separate Accounts serves as a funding
vehicle for certain Variable Contracts. As the Variable Contracts are
currently structured, holders of any of the Variable Contracts
(``Contractholders'') may select one or more of the investment options
available under the Variable Contract held by allocating premiums
payable under such contract to that sub-account of the relevant
Applicant Separate Account that corresponds to the investment option
desired. Thereafter, Contractholders accumulate funds, on a tax-
deferred basis, based on the investment experience of the selected sub-
account(s). Contractholders may, during the life of the contract, make
unlimited transfers of accumulation values among the sub-accounts
available under the Variable Contract held. Depending on the type of
Variable Contract, the first six or twelve transfers in a contract year
are guaranteed to be free of any transfer charge.
7. AIT is registered under the 1940 Act as an open-end diversified
investment company and currently consists of 14 different Funds, three
of which, the Select Capital Appreciation Fund (``SCAF''), the Select
International Equity Fund (``SEIF'') and the Select Growth and Income
Fund (``SGIF'') are involved in the proposed substitution. Currently
shares of each Fund are purchased only by the separate accounts
established by First Allmerica or Allmerica Financial Life for the
purpose of funding variable annuity contracts and variable life
insurance policies.
8. Allmerica Financial Investment Management Services, Inc.
(``AFIMS'' and/or the ``Manager'') serves as the investment adviser to
AIT. AFIMS is an indirect, wholly-owned, subsidiary of AFC and
maintains its principal offices at 440 Lincoln Street, Worcester,
Massachusetts 01653. Under the terms of a management agreement between
AIT and AFIMS (the ``Management Agreement''), AFIMS manages AIT's
business affairs and has general responsibility for the management of
the investments of the Funds, subject to the control of the Board of
Trustees of AIT.
9. AFIMS, at its expense, has contracted with investment sub-
advisers to manage the investments of the Funds. T. Rowe Price
Associates, Inc., (``T. Rowe Price''), 100 East Pratt Street,
Baltimore, MD 21202, serves as sub-adviser for SCAF. Bank of Ireland
Asset Management (U.S.) Ltd. (``Bank of Ireland''), 26 Fitzwilliam
Place, Dublin 2, Ireland and 75 Holly Hill Lane, Greenwich, CT 06830,
serves as sub-adviser for SIEF. J.P. Morgan Investment Management Inc.
(``J.P. Morgan''), 522 Fifth Avenue, New York, NY 10036, serves as sub-
adviser for SGIF.
10. AFIMS is responsible for the payment of all fees to the sub-
advisers. Other than the expenses specifically assumed by AFIMS under
the Management Agreement, all expenses incurred in the operation of AIT
are borne by AIT. For its services, AFIMS is entitled to receive a fee
from each Fund of AIT, based on the average daily net asset value of
each Fund. In addition, AFIMS has voluntarily undertaken to reimburse
each Fund for its fees and expenses that exceed the applicable expense
limitation set for that Fund. AFIMS has declared voluntary expense
limitations of 1.35% for SCAF, 1.50% for SIEF and 1.10% for SGIF of
each Fund's average daily assets through December 31, 2001. The expense
limitations may be removed at any time after a Fund's first fiscal year
of operations with notice to existing shareholders. Actual expenses
have been well below such expense limitations for the three Funds.
11. Fulcrum is registered under the 1940 Act as an open-end
diversified investment company and currently consists of four different
portfolios, all of which, are involved in the proposed substitution.
They are the Global Interactive/Telecomm Portfolio (``GITP''), the
International Growth Portfolio (``IGP''), the Growth Portfolio (``GP'')
and the Value Portfolio (``VP''). Currently, shares of the Portfolios
may be sold only to: (a) Life insurance company separate accounts to
serve as the underlying investment medium for variable annuity and
variable life insurance contracts; (b) qualified retirement plans, as
permitted by Treasury Regulations; and (c) life insurance companies and
advisers to the Portfolios and their affiliates.
12. AFIMS serves as overall manager of Fulcrum and is responsible
for managing the Trust's daily business and has general responsibility
for the management of the investments of the Portfolios. Sub-advisers
have been hired to handle the day-to-day investment management of the
Portfolios. The sub-advisers' activities are subject to general
oversight by the Trustees and AFIMS. GAMCO Investors, Inc. (``GAMCO''),
One Corporate Center, Rye, NY 10580-1434 serves as the sub-adviser of
both GITP and VP. Bee & Associates (``Bee''), a division of Denver
Investment Advisors LLC, serves as the sub-adviser of IGP. Analytic
Investors, Inc. (``Analytic'') serves as the sub-adviser of GP.
13. For these services, each Portfolio pays an overall management
fee, computed and accrued daily and paid monthly, based on its average
daily net assets. The overall fee varies based on the performance of
that Portfolio (after expenses) compared to that of an appropriate
benchmark. The sub-adviser receives 80% of the fee, and AFIMS receives
the remaining 20%. For the period beginning on the effective date of a
Portfolio Manager Agreement with a new sub-adviser and ending with the
last day of the twelfth full calendar month thereafter, each Portfolio
pays a monthly advisory fee calculated at an annual rate of 0.80% of
the Portfolio's average daily net assets. After the first 12 full
calendar months with a new sub-adviser, as described above, each
Portfolio pays a monthly advisory fee equal to a basic fee, plus or
minus an incentive fee. The monthly basic fee equals one-twelfth of the
annual basic fee rate of 2.0% multiplied by average daily net assets
over the previous 12 months. The incentive fee ranges from-2.0% to
+2.0% on an annual basis, depending on a comparison of the Portfolio's
performance (reflecting a deduction of portfolio expenses) and the
performance of a selected benchmark index over the past 12 months.
14. In addition, AFIMS has agreed to limit operating expenses and
reimburse those expenses to the extent that each Portfolio's ``other
expenses'' (i.e., expenses other than management fees) exceed the
expense limitations set for the Portfolios. For the two years following
the date that the expense limitations end and subject to certain
conditions, each Portfolio will reimburse AFIMS for any Portfolio
expenses it reimbursed pursuant to the expense limitations. AFIMS
currently limits the ``other expenses'' for GITP and IGP to an annual
rate of 1.50% of average daily net assets; the limitation on ``other
expenses'' for GP and VP is an annual rate of 1.20% of average daily
net assets.
[[Page 64320]]
15. Gabelli was organized on April 3, 1993 as a Maryland
corporation. Its address is 7 Hanover Square, New York, NY, 10004.
Gabelli currently consists of one series, Gabelli Capital Asset Fund
(``GCAF'' or a ``Fund'') which is available to the public only through
the purchase of certain variable annuity and variable life insurance
contracts issued by The Guardian Insurance & Annuity Company, Inc.
(``GIAC''). Subject to approval of this application, the Participation
Agreement between GCAF and GIAC will be amended to permit the purchase
of GCAF shares by the Applicant Separate Accounts. GCAF's primary goal
is to seek growth of capital. The Fund's secondary goal is to produce
current income. The Fund invests primarily in equity securities of
companies that are selling in the public market at a significant
discount to their ``private market value.'' Private market value is the
value at which the Fund's sub-adviser believes informed investors would
be willing to pay for a company.
16. Guardian Investor Services Corporation (``GISC''), located at 7
Hanover Square, New York, NY 10004, supervises the performance of
administrative and professional services provided to the Fund by
others, including the Fund's sub-adviser. GISC, which also pays the
fees of the sub-adviser, serves as investment adviser to 14 funds with
aggregate assets of over $7.8 billion as of March 31, 2001. As
compensation for its services and related expenses borne by GISC, the
Fund pays GISC a fee based on the value of the Fund's average daily net
assets. Gabelli Funds, LLC, located at One Corporate Center, Rye, NY
10580-1434, manages the Fund's assets as the Fund's sub-adviser. The
sub-adviser is a New York limited liability company organized in 1999
as successor to a company organized in 1980 and is a wholly-owned
subsidiary of Gabelli Asset Management, Inc., a publicly held company.
As compensation for its services and the related expenses borne by the
sub-adviser, GISC pays the sub-adviser a fee based on a percentage of
the value of the Fund's average daily nets assets. Neither GISC nor
Gabelli Funds, LLC is affiliated with the Applicant Insurance
Companies.
17. Applicant Insurance Companies have approved a proposal to make
certain substitutions of shares held in sub-accounts of the Applicant
Separate Accounts. Specifically, they have proposed to substitute (a)
shares of SCAF for shares of GITP (b) shares of the SIEF for shares of
IGP, (c) shares of SGIF for shares of GP, and (d) shares of GCAF for
shares of VP. Applicants submit that the proposed substitutions are in
the best interest of Contractholders.
18. SCAF and GITP have comparable investment objectives and seek to
achieve these objectives by investing in equity securities and
utilizing similar investment strategies. While recognizing that GITP
has a more narrow focus than SCAF, Applicants have concluded that the
investment objectives and policies of SCAF are sufficiently similar to
those of GITP that the essential objectives and risk expectations of
Contractholders can continue to be met. In addition, Applicants state
that AIT does not include a fund focusing exclusively on
telecommunication investments, and there is no fund advised by Gabelli
Funds, LLC, with a telecommunications focus that can serve as an
underlying fund for variable contracts. Applicants believe that, to the
extent that there are differences between the investment objectives and
policies of SCAF and GITP, the proposed substitution represents a
transfer to a more conservative and a more diversified portfolio.
Applicants believe that the proposed substitution will benefit
Contractholders in that (a) SCAF has a larger asset base than GITP
which should provide certain economies of scale and lower expenses, and
(b) SCAF has better one-year and since inception performance records
than GITP. Applicants believe that GITP has not grown to a size to
allow it to operate efficiently. As shown in the table below, SCAF has
a larger asset base than GITP, which should provide certain economies
of scale, resulting in lower expenses, compared to GITP. The net assets
of each Fund, as of March 31, 2001 are as follows:
------------------------------------------------------------------------
Net Assets
------------------------------------------------------------------------
Select Capital Appreciation Fund....... $433.3 Mllion.
Global Interactive/Telecomm Portfolio.. $4.3 Million.
------------------------------------------------------------------------
Applicants assert that, as a result of the proposed substitution,
the Contractholders who currently invest in GITP will benefit from the
lower expenses of SCAF. Applicants state that SCAF has a better
performance record than GITP for the one-year and since inception
periods. For example, for the one-year period ending December 31, 2000,
SCAF out-performed GITP with an average annual total return 33.2%
higher than that of GITP. Applicants have no reason to believe that, in
the near-term, the performance of GITP will match or exceed that of
SCAF. Applicants also believe that the substitution would provide for
Contractholders a more predictable advisory fee. SCAF's investment
advisory fee is an annual rate of 1.00% for the first $100 million of
assets, 0.90% on the next $150 million, 0.80% on the next $250 million,
0.70% over $500 million and 0.65% over $1 billion. GITP's fee can vary
from 0% to 4.00% depending on performance (for the year ended December
31, 2000, the advisory fee for GITP was 2.47% while the advisory fee
for SCAF was 0.87%). For the foregoing reasons, Applicants submit that
the proposed substitution of shares of SCAF for shares of GITP is in
the best interest of Contractholders.
19. SIEF and IGP have similar investment objectives and seek to
achieve these objectives by investing in similar types of equity
securities and utilizing comparable investment strategies. While
recognizing that SIEF focuses on the stocks of large cap companies and
IGP focuses on small cap stocks, Applicants have concluded that the
investment objectives and policies of SIEF are sufficiently similar to
those of IGP that the essential objectives and risk expectations of
Contractholders can continue to be met. Applicants believe that the
proposed substitution will benefit Contractholders in that (a) SIEF has
a larger asset base than IGP which should provide certain economies of
scale and lower expenses, and (b) SIEF has a better long-term
performance record. Applicants do not believe that IGP has grown to a
size to allow it to operate efficiently. As shown in the table below,
SIEF has a larger asset base than IGP, which should provide certain
economies of scale, resulting in lower expenses, compared to SIEF. The
net assets of each Fund, as of March 31, 2001 are as follows:
[[Page 64321]]
------------------------------------------------------------------------
Net Assets
------------------------------------------------------------------------
Select International Equity Fund....... $571.6 Million.
International Growth Portfolio......... $1.6 Million.
------------------------------------------------------------------------
Applicants assert that, as a result of the proposed substitution,
the Contractholders who currently invest in IGP will benefit from the
lower expenses of SIEF. Applicants state that SIEF has a better long-
term performance record than IGP. For example, the return for SIEF for
the five-year period ended December 31, 2000 was 12.26% compared to
3.26% for IGP for the period of March 2, 1996 through December 31,
2000. Applicants have no reason to believe that, in the near-term, the
performance of IGP will match or exceed that of SEIF. Applicants also
believe that the substitution would provide for Contractholders a more
predictable advisory fee. SIEF's investment advisory fee is an annual
rate of 1.00% for the first $100 million of assets, 0.90% on the next
$150 million and 0.85% on assets over $250 million. IGP's fee can vary
from 0% to 4.00% depending on performance (for the year ended December
31, 2000, the advisory fee for IGP was 3.71% while the advisory fee for
SIEF was 0.88%). For the foregoing reasons, Applicants submit that the
proposed substitution of shares of SIEF for shares of IGP is in the
best interest of Contractholders.
20. SGIF and GP have similar investment objectives and seek to
achieve these objectives by investing in similar types of equity
securities and utilizing comparable investment strategies. Applicants
have concluded that the investment objectives and policies of SGIF are
sufficiently similar to those of GP that the essential objectives and
risk expectations of Contractholders can continue to be met. Applicants
believe that the proposed substitution will benefit Contractholders in
that (a) SGIF has a larger asset base than GP, which may provide
certain economies of scale and lower expenses, and (b) SGIF has a
better long-term performance record. Applicants do not believe that GP
has grown to a size to allow it to operate efficiently. As shown in the
table below, SGIF has a larger asset base than GP, which should provide
certain economies of scale, resulting in lower expenses, compared to
GP. The net assets of each Fund, as of March 31, 2001 are as follows:
------------------------------------------------------------------------
Net Assets
------------------------------------------------------------------------
Select Growth and Income Fund.......... $680.1 Million.
Growth Portfolio....................... $2.5 Million.
------------------------------------------------------------------------
Applicants assert that, as a result of the proposed substitution,
the Contractholders who currently invest in GP will benefit from the
lower expenses of SGIF. Applicants state that SGIF has a better long-
term performance record than GP. For example, the return for SGIF for
the five-year period ended December 31, 2000 was 12.83% compared to
5.40% for GP for the period of December 1, 1996 through December 31,
2000. Applicants have no reason to believe that in the near-term the
performance of GP will match or exceed that of SGIF. Applicants also
believe that the substitution would provide for Contractholders a more
predictable advisory fee. SGIF's investment advisory fee is an annual
rate of 0.75% on the first $100 million of assets, 0.70% on the next
$150 million and 0.65% on assets over $250 million. GP's fee can vary
from 0% to 4.00% depending on performance (for the year ended December
31, 2000, the advisory fee for GP was 0.14% while the advisory fee for
SGIF was 0.67%). For the foregoing reasons, Applicants submit that the
proposed substitution of shares of SGIF for shares of GP is in the best
interest of Contractholders.
21. GCAF and VP have similar investment objectives and seek to
achieve these objectives by investing in similar types of equity
securities and utilizing comparable investment strategies. Applicants
have concluded that the investment objectives and policies of GCAF are
sufficiently similar to those of VP that the essential objectives and
risk expectations of Contractholders can continue to be met. Applicants
believe that the proposed substitution will benefit Contractholders in
that (a) GCAF has a larger asset base than VP which may provide certain
economies of scale and lower expenses, (b) GCAF has a comparable
performance record to that of VP, and (c) GCAF and VP are served by
affiliated companies within the same investment advisory organization.
Applicants do not believe that VP has grown to a size to allow it to
operate efficiently. As shown in the table below, GCAF has a larger
asset base than VP, which should provide certain economies of scale,
resulting in lower expenses, compared to VP. The net assets of each
Fund, as of March 31, 2001 are as follows:
------------------------------------------------------------------------
Net assets
------------------------------------------------------------------------
Gabelli Capital Asset Fund............. $156.8 Million.
Value Portfolio........................ $7.1 Million.
------------------------------------------------------------------------
Applicants assert that, as a result of the proposed substitution,
the Contractholders who currently invest in VP will benefit from the
lower expenses of GCAF. Applicants state that GCAF and VP have
comparable long-term performance records, which have resulted in
favorable returns for investors. For example for the five-year period
ended December 31, 2000, GCAF had a return of 17.46% compared to 18.23%
for VP for the period of December 1, 1996 through December 31, 2000.
Assuming the proposed substitution is approved, VP shareholders would
continue to receive the potential benefits from having the same
organization serve as sub-adviser. Applicants also believe that the
substitution would provide for Contractholders a more predictable
advisory fee. GCAF's investment advisory fee is an annual rate of
1.00%. VP's fee can vary from 0% to 4.00% depending upon performance
(for the year ended December 31, 2000, the advisory fee for VP was
2.58% while the
[[Page 64322]]
advisory fee for SCAF was 1.00%). For the foregoing reasons, Applicants
submit that the proposed substitution of shares of GCAF for shares of
VP is in the best interest of Contractholders.
22. Applicants state that, as of the effective date of the
substitutions, shares of GITP, IGP, GP and VP (the ``Replaced
Portfolios'') held by the various Applicant Separate Accounts will be
redeemed by the Applicant Insurance Companies. The proceeds of such
redemptions, which may be effected in-kind, will then be used to
purchase the appropriate number of shares of SCAF, SIEF, SGIF and GCAF
(the ``Replacement Funds''). Since it is anticipated that the proposed
substitution will be effected by in-kind transfer of assets,
Contractholders will be fully invested at all times. The proposed
substitutions will take place at net asset value with no change in the
amount of any Contractholder's account value, cash value or death
benefit or in the dollar value of his or her investment in either of
the Applicant Separate Accounts. Contractholders will not incur any
fees or charges as a result of the proposed substitutions, nor will
their rights or the Applicant Insurance Companies' obligations under
the Variable Contracts be altered in any way. All expenses incurred in
connection with the proposed substitutions, including legal, accounting
and other fees and expenses, including brokerage fees, if any, will be
paid by the Applicant Insurance Companies. In addition, the proposed
substitutions will not impose any tax liability on Contractholders. The
proposed substitutions will not cause the Variable Contract fees and
charges currently being paid by existing Contractholders to be greater
after the proposed substitutions than before the proposed
substitutions. Applicant Insurance Companies agree that, for those
Contractholders who are Contractholders on the Effective Date of the
substitutions, Applicant Insurance Companies will not increase the
asset-based or non-asset-based charges under the Variable Contracts for
a period of 24 months following the Effective Date of the substitution,
except to the extent of any increase in premium taxes charged by one or
more states. The Applicant Insurance Companies further agree that if
the total operating expenses for any Replacement Fund (net of any
expense waiver or reimbursement) for any period (not to exceed a fiscal
quarter) during the 24 months following the Effective Date of the
substitution exceeds on an annualized basis the relevant Maximum Fund
Expense Limit as stated below (which is the net expense ratio for each
corresponding Replaced Portfolio for the fiscal year ended December 31,
2000), the Applicant Insurance Companies will make a corresponding
reduction in the expenses for the relevant sub-account(s) of the
Applicant Separate Accounts (either by reducing or waiving sub-account
expenses for that corresponding period or by reimbursing the sub-
account on the last day of the period). The Maximum Fund Expense Limits
for the Replacement Funds are: 3.97% for the SCAF sub-account; 5.21%
for the SIEF sub-account; 1.34% for the SGIF sub-account; and 3.78% for
the GCAF sub-account. The proposed substitutions (and any transfer in
advance of the substitution) will not be subject to a transfer charge
and will not be counted toward any limit on transfers guaranteed not to
be subject to a transfer charge.
23. By supplements to the various prospectuses for the Variable
Contracts and Applicant Separate Accounts, all owners of the Variable
Contracts have been notified of the Applicant Insurance Companies'
intention to take the necessary actions, including seeking the order
requested by the application to substitute shares of the Underlying
Funds as described herein. The supplements for the Applicant Separate
Accounts advised Contractholders that from the date of the supplement
until a date at least 30 days after the proposed substitution, each
owner may make one transfer, free of charge and without limitation, of
all amounts allocated to the GITP, IGP, GP or VP sub-accounts,
respectively, to another sub-account. That transfer will not be counted
toward the limit on transfers guaranteed not to be subject to a
transfer charge. Contractholders will also receive a current prospectus
relating to SCAF, SIEF, SGIF and GCAF (unless the Contractholder has
already received that prospectus).
24. In addition to the prospectus supplements distributed to owners
of Variable Contracts, within five days after the proposed
substitutions, any Contractholders who were affected by the
substitutions will be sent a written notice informing them that the
substitutions were carried out and that they may make one transfer,
free of charge for at least 30 days after the proposed substitution and
without limitation, of all account value under a Variable Contract
invested in any one of the affected sub-accounts on the date of the
notice to another sub-account available under their Variable Contract.
That transfer will not count as one of the number of transfers per year
guaranteed to be free of charge. The notice will also state that the
Applicant Insurance Companies will not exercise any rights reserved by
either under any of the Variable Contracts to impose additional
restrictions on transfers until at least 30 days after the proposed
substitutions. The notice as delivered in certain states also may
explain that, under the insurance regulations in those states,
Contractholders who are affected by the substitutions may exchange
their Variable Contracts for fixed-benefit life insurance contracts or
annuity contracts, as applicable, issued by the Applicant Insurance
Companies (or one of their affiliates) during the 60 days following the
proposed substitutions.
25. The Applicant Insurance Companies are also seeking approval of
the proposed substitutions from any state insurance regulators whose
approval may be necessary or appropriate.
Applicants' Legal Analysis
1. Section 26(c) of the 1940 Act requires the depositor of a
registered unit investment trust holding the securities of a single
issuer to receive Commission approval before substituting the
securities held by the trust. Section 26(c) was added to the 1940 Act
by the Investment Company Amendments Act of 1970. Prior to the
enactment of the 1970 amendments, a depositor of a unit investment
trust could substitute new securities for those held by the trust by
notifying the trust's security holders of the substitution within five
days of the substitution. In 1966, the Commission, concerned with the
high sales charges then common to most unit investment trusts and the
disadvantageous position in which such charges placed investors who did
not want to remain invested in the substituted fund, recommended that
section 26 be amended to require that a proposed substitution of the
underlying investments of a trust receive prior Commission approval.
Congress responded to the Commission's concerns by enacting section
26(b) (now (c)) to require that the Commission approve all
substitutions by the depositor of investments held by the unit
investment trusts.
2. The proposed substitutions appear to involve substitutions of
securities within the meaning of section 26(c) of the Act. Applicants
therefore request an order from the Commission pursuant to section
26(c) approving the proposed substitutions.
3. The Variable Contracts expressly reserve for the Applicant
Insurance Companies the right, subject to compliance with applicable
law, to substitute shares of another investment company for shares of
an investment
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company held by a Separate Account or a sub-account of a Separate
Account. The prospectuses for the Variable Contracts and the Separate
Accounts contain appropriate disclosure of this right. The Applicant
Insurance Companies each reserved this right of substitution both to
protect themselves and their Contractholders in situations where either
might be harmed or disadvantaged by circumstances surrounding the
issuer of the shares held by one or more of their separate accounts and
to afford the opportunity to replace such shares where to do so could
benefit itself and Contractholders.
4. Under the proposed substitution of shares of SCAF for shares of
GITP, shares of SIEF for shares of IGP, shares of SGIF for shares of GP
and shares of GCAF for shares of VP, the interests of Contractholders
will be better served primarily because each of the current funds would
be replaced by a fund with a comparable investment objective, but with
a significantly larger asset base, potentially resulting in lower
expenses. In addition each of the proposed replacement funds has a
superior or matching performance record compared to the respective
current funds.
5. Applicants anticipate that Contractholders will be at least as
well off with the proposed array of separate accounts and sub-accounts
after the proposed substitutions as they have been with the array of
separate accounts and sub-accounts offered prior to the substitutions.
The proposed substitutions retain for Contractholders the investment
flexibility, which is a central feature of the Variable Contracts.
6. None of the proposed substitutions is of the type that section
26(c) was designed to prevent. Unlike traditional unit investment
trusts where a depositor could only substitute an investment security
in a manner which permanently affected all the investors in the trust,
the Variable Contracts provide each Contractholder with the right to
exercise his or her own judgment and transfer account values into other
sub-accounts. Moreover, the Variable Contracts will offer
Contractholders the opportunity to transfer amounts out of the affected
sub-accounts into any of the remaining sub-accounts without cost or
other disadvantage. The proposed substitutions, therefore, will not
result in the type of costly forced redemption, which section 26(c) was
designed to prevent.
7. The proposed substitutions also are unlike the types of
substitutions which section 26(c) was designed to prevent in that by
purchasing a Variable Contract, Contractholders select much more than a
particular investment company in which to invest their account values.
They also select the specific type of insurance coverage offered by
either or both of the Applicant Insurance Companies under their
Variable Contract as well as numerous other rights and privileges set
forth in the Variable Contract. Contractholders may also have
considered each or both Applicant Insurance Companies' size, financial
condition, type and its reputation for service in selecting their
Variable Contract. These factors will not change as a result of the
proposed substitutions.
8. Applicants submit that, for all the reasons stated above, the
proposed substitutions are consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
1940 Act.
9. Applicants also request an order under section 17(b) exempting
them from the provisions of section 17(a) to the extent necessary to
effect the proposed substitutions by means of in-kind redemptions and
purchases of shares.
10. Section 17(a)(1) and (2) of the 1940 Act, in relevant part,
prohibits any affiliated person of a registered investment company, or
any affiliated person of such a person, or any principal underwriter
for such company (collectively, ``Transaction Affiliates''), acting as
principal, from knowingly selling or purchasing any security or other
property to that company. Applicants may be deemed to be Transaction
Affiliates of one another based upon this definition.
11. Because the proposed substitutions may be effected by means of
an in-kind redemption and a subsequent purchase of shares, also in an
in-kind transaction, the substitutions may be deemed to involve one or
more purchases or sales of securities or property between Transaction
Affiliates. Because the Applicant Separate Accounts (as well as other
separate accounts of the Applicant Insurance Companies) are registered
collectively with the Commission as a single unit investment trust of
which the Applicant Insurance Companies are the depositors, the
Applicant Separate Accounts are affiliated persons of each other.
Further, because each of the Applicant Separate Accounts are under the
common control of the Applicant Insurance Companies, they are all
affiliated persons of each other.
12. 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: 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; the proposed
transaction is consistent with the policy of each registered investment
company concerned, as recited in its registration statement and reports
filed under the 1940 Act; and the proposed transaction is consistent
with the general purposes of the 1940 Act.
13. Applicants submit that, to the extent that the substitutions
are deemed to involve principal transactions among Transaction
Affiliates, the manner in which such substitutions are to be
implemented are sufficient to assure that such transactions do not
involve overreaching on the part of any Applicant or other person, and
are fair and reasonable and consistent with the policies and purposes
underlying the 1940 Act. Applicants further submit that neither the
Underlying Funds nor either of the Applicant Separate Accounts will be
participating in the substitutions or subsequent combination on a basis
less advantageous than that of any other participant. Finally,
Applicants state that, but for the fact that the substitutions may be
effected by means of in-kind redemption and purchase transactions,
rather than in cash, the procedures would comply with all of the
conditions of rule 17a-7 under the 1940 Act. Accordingly, Applicants
request an order of the Commission pursuant to section 17(b) of the
1940 Act to permit the substitutions and related transactions described
in this Application. Applicants also submit that the proposed
substitutions are consistent with the policies of each of the Applicant
Separate Accounts and the Underlying Funds and with the general
purposes of the 1940 Act.
The Applicants represent that, for all the reasons stated above,
the terms of the proposed substitutions as set forth in the
application, including any consideration to be paid and received, are
reasonable and fair to: (a) The Applicant Insurance Companies; (b) AIT,
Fulcrum and Gabelli and their funds/portfolios; and (c) the
Contractholders invested in such funds/portfolios; and do not involve
overreaching on the part of any person concerned. Furthermore, the
Applicants represent that the proposed substitutions will be consistent
with the policies of the Applicant Insurance Companies, AIT, Fulcrum
and Gabelli as stated in the current registration statement and reports
filed under the 1940 Act by each and with the general purposes of the
1940 Act.
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For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30648 Filed 12-11-01; 8:45 am]
BILLING CODE 8010-01-P