[Federal Register Volume 67, Number 15 (Wednesday, January 23, 2002)]
[Notices]
[Pages 3244-3248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1572]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25365; File No. 812-12540]


Massachusetts Mutual Life Insurance Company, et al.

January 15, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

[[Page 3245]]


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

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

SUMMARY OF APPLICATION: Applicants request an order to permit the 
substitution of Class II shares of MML Equity Index Fund (``MML Fund'') 
for shares of Dreyfus Life and Annuity Index Fund d/b/a Dreyfus Stock 
Index Fund (``Dreyfus Fund'') and an order to permit in-kind 
transactions in connection with the substitution.

APPLICANTS: Massachusetts Mutual Life Insurance Company 
(``MassMutual'') and Massachusetts Mutual Variable Life Separate 
Account I (the ``Separate Account'').

FILING DATE: The application was filed on June 4, 2001, and amended and 
restated on January 11, 2002.

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 February 7, 2002, 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 Jennifer B. 
Sheehan, Esq., Massachusetts Mutual Life Insurance Company, 1295 State 
Street, Springfield, Massachusetts 01111-0001.

FOR FURTHER INFORMATION CONTACT: Mark Cowan, Senior Counsel, or William 
Kotapish, Assistant Director, Office of Insurance Products, Division of 
Investment Management, (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 20549-0102, (202) 942-8090.

Applicants' Representations

    1. MassMutual is a mutual life insurance company established under 
the laws of Massachusetts on May 14, 1851. MassMutual's home office is 
located in Springfield, Massachusetts. MassMutual is currently licensed 
to transact life, accident and health insurance business in all states, 
the District of Columbia, Puerto Rico, and certain provinces of Canada.
    2. The Separate Account was established as a separate account under 
the laws of Massachusetts on July 13, 1988, pursuant to a resolution of 
the board of directors of MassMutual. The Separate Account is 
registered with the Commission as a unit investment trust under the Act 
(File No. 811-08075). The Separate Account is divided into various 
segments that fund certain variable life insurance policies issued by 
MassMutual. The segment affected by the application, the Large Case 
Variable Plus Segment, is divided into eight divisions. Only one of 
these divisions, the Dreyfus Index Division, is affected by the 
application. The Dreyfus Index Division invests in the Dreyfus Fund. 
The Dreyfus Fund is an underlying investment option for Large Case 
Variable Life Plus, which is the variable life insurance policy funded 
by the Large Case Variable Plus Segment of the Separate Account (the 
``Policy'').
    3. The Dreyfus Fund is a no-load, open-end management investment 
company. The Dreyfus Corporation (``Dreyfus'') is the investment 
adviser to the Dreyfus Fund. Dreyfus has engaged its affiliate, Mellon 
Equity Associates (``Mellon''), to serve as the Dreyfus Fund's index 
manager. The investment objective of the Dreyfus Fund is to seek to 
match the total return of the Standard & Poor's 500 Composite Stock 
Price Index (``S&P 500''). The Dreyfus Fund generally invests in all 
500 stocks in the S&P 500 in proportion to their weighting in the S&P 
500.
    4. The total annual fund operating expenses of the Dreyfus Fund for 
2000 expressed as a percentage of average net assets were 0.26% with 
management fees at 0.25% and other expenses at 0.01%. The average 
annual total return of the Dreyfus Fund was -9.28% for the one-year 
period ended December 31, 2000, 11.94% for the three-year period ended 
December 31, 2000, 17.98% for the five-year period ended December 31, 
2000, 16.97% for the ten-year period ended December 31, 2000, and 
14.79% for the period from its inception on September 29, 1989 to 
December 31, 2000. As of March 31, 2001, the Dreyfus Fund had 
approximately $55,773,583.55 in assets.
    5. The MML Fund, a separate series of MML Series Investment Fund, 
is the proposed substitute portfolio for the Dreyfus Fund. MML Series 
Investment Fund is a no-load open-end management investment company. 
The investment objective of the MML Fund is to provide investment 
results that correspond to the price and yield performance of publicly 
traded common stocks in the aggregate, as represented by the S&P 500. 
MassMutual serves as the investment adviser to MML Series Investment 
Fund pursuant to various investment management agreements with respect 
to each of its series. Deutsche Asset Management, Inc. (``Deutsche'') 
serves as the sub-adviser to the MML Fund.
    6. The total annual fund operating expenses of the MML Fund's Class 
II shares for 2000 expressed as a percentage of average net assets were 
0.29% annualized with management fees at 0.10% and other expenses at 
0.19%.\1\ The average annual total return of the MML Fund's Class II 
shares was -9.43% for the one-year period ended December 31, 2000, 
11.92% for the three-year period ended December 31, 2000, and 15.92% 
for the period from its inception on May 1, 1997 to December 31, 2000. 
Because Class II shares commenced operation on May 1, 2000, performance 
for those shares is based on the performance of Class I shares adjusted 
to reflect the lower expenses of Class II shares. As of March 31, 2001, 
the MML Fund had approximately $63,045,950.21 in assets.
---------------------------------------------------------------------------

    \1\ MassMutual has agreed to bear the expenses (other than 
management and administrative fees, interest, taxes, brokerage 
commissions, and extraordinary expenses) of the MML Fund's Class II 
shares in excess of 0.19% through April 30, 2002. The expenses shown 
include this waiver/reimbursement. Without the waiver/reimbursement, 
the MML Fund's other expenses would have been 0.24% and its total 
annual operating expenses would have been 0.34%.
---------------------------------------------------------------------------

    7. Applicants state that both the Dreyfus Fund and the MML Fund 
have substantially similar investment objectives. Each seeks to achieve 
results that track, as closely as possible (before deduction for 
expenses), the returns of the S&P 500. In seeking to achieve its 
investment objective, each fund tries to minimize its deviation from 
the S&P 500 and to reduce its ``tracking error.'' A correlation to the 
S&P 500 of 1.00% would mean perfect correlation. The MML Fund seeks a 
correlation of at least .98%, while the Dreyfus Fund seeks a 
correlation of at least .95%. Under Mellon's management, the Dreyfus 
Fund generally holds all the stocks in the S&P 500 in proportion to 
their index weightings. In contrast, Deutsche uses a method known as 
``optimization,'' which is a statistical sampling technique, to manage 
the portfolio of the MML Fund. Under an ``optimization'' strategy, the 
MML Fund may not hold

[[Page 3246]]

all the stocks in the S&P 500. Instead, the MML Fund first buys stocks 
that make up the larger portions of the S&P 500's value in roughly the 
same proportion as the S&P 500. In selecting the smaller company 
stocks, however, Deutsche tries to match the industry and risk 
characteristics of all the smaller companies in the S&P 500 without 
buying all the stocks. The MML Fund will invest at least 80% of its 
assets in securities of companies in the S&P 500. The MML Fund will 
also use derivatives, such as index futures and options, to help the 
MML Fund approach the returns of a fully-invested portfolio. This 
approach attempts to maximize the MML Fund's liquidity and returns 
while minimizing costs.
    8. Applicants state that the proposed substitution is part of 
MassMutual's plan to consolidate all index funds under its management 
with one advisory firm with index management expertise, namely 
Deutsche. MassMutual believes that by placing all index fund assets 
with one manager, MassMutual can enhance its ability to negotiate lower 
overall investment sub-advisory fees, which would ultimately benefit 
policyowners.
    9. On November 9, 2001, the Commission granted MassMutual exemptive 
relief from, among other provisions, Section 15(a) of the Act (the 
``Sub-Advisers Order''). The Sub-Advisers Order permits MassMutual, as 
the investment adviser, to employ or replace sub-advisers without 
submitting such action for the approval of shareholders of affected 
series. Shareholders of the MML Fund previously approved the multi-
manager arrangement at the April 3, 2000 shareholders meeting.
    10. Applicants propose to exercise their rights to substitute the 
MML Fund for the Dreyfus Fund by substituting Class II shares of the 
MML Fund for shares of the Dreyfus Fund. MassMutual will schedule the 
substitution to occur as soon as practicable following the issuance by 
the Commission of the order of approval requested in this application.
    11. The substitution will take place at the relative net asset 
values determined on the date of the substitution in accordance with 
section 22 of the Act and Rule 22c-1 thereunder. Therefore, there will 
be no financial impact to any policyowner as a result of the 
substitution. The substitution will be effected by having the Dreyfus 
Index Division redeem its shares of the Dreyfus Fund at the net asset 
value calculated on the date of the substitution. MassMutual would use 
the proceeds of its redemption of shares of the Dreyfus Fund to 
purchase Class II shares of the MML Fund.
    12. In the alternative, if Dreyfus were to determine that a cash 
redemption by MassMutual from the Dreyfus Fund would adversely affect 
the remaining Dreyfus Fund shareholders, Dreyfus may require that 
MassMutual redeem its interest ``in-kind'' by taking its proportionate 
share of each of the securities owned by the Dreyfus Fund. In that 
case, the substitution will be effected by MassMutual contributing to 
the MML Fund all the securities it receives from the Dreyfus Fund in 
exchange for an amount of Class II shares equal to the fair market 
value of the securities contributed. The transaction will be effected 
in conformity with Rule 17a-7 under the Act to the extent possible.
    13. The substitution requested in this application will be 
described in a notice that will be mailed to policyowners along with 
the current prospectus for the MML Fund. The notice will describe the 
reasons for engaging in the substitution. In addition, the notice will 
inform affected policyowners that prior to the substitution and for 30 
days after the substitution they will have the opportunity to 
reallocate their account value currently in the Dreyfus Index Division 
to the remaining divisions or that they may remain invested in the 
Dreyfus Index Division until the substitution, at which time the 
division's underlying shares will be substituted for shares of the MML 
Fund.
    14. Any transfers out of the Dreyfus Fund from the date of notice 
until the substitution occurs and any transfers by affected 
policyowners out of the MML Fund from the date of substitution through 
the 30 day period following the substitution will not be assessed a 
transfer fee and will not be counted as a free transfer. After the 
order of approval is issued by the Commission, a second notice will be 
provided to all affected policyowners advising them of the pending 
substitution and of their ability to transfer, free of charge, to any 
other division or to remain invested in the Dreyfus Index Division 
until the substitution. Within five days after the substitution, 
MassMutual will send affected policyowners written confirmation that 
the substitution has occurred.
    15. MassMutual will pay all expenses and transaction costs of the 
substitution, including brokerage expenses, if any; none will be borne 
by policyowners. Affected policyowners will not incur any fees or 
charges in connection with the substitution, nor will their rights or 
the obligations of MassMutual under the Policy be altered in any way. 
The substitution will not cause fees and charges under the Policy 
currently being paid by policyowners to be greater after the 
substitution than before the substitution. The substitution will have 
no adverse tax consequences to policyowners and will in no way alter 
the tax benefits to policyowners.

Applicants' Legal Analysis

    1. Section 26(c) of the Act makes it 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 approves the substitution. The Commission will approve 
such a substitution if the evidence establishes that it is consistent 
with the protection of investors and the purposes fairly intended by 
the policy and provisions of the Act.
    2. The purpose of Section 26(c) is to protect the expectation of 
investors in a unit investment trust that the unit investment trust 
will accumulate shares of a particular issuer by preventing 
unscrutinized substitutions which might, in effect, force shareholders 
dissatisfied with the substituted security to redeem their shares, 
thereby possibly incurring either the deduction of a sales load from 
premium payments, a sales load upon reinvestment of the redemption 
proceeds, or both. Moreover, in the insurance product context, a policy 
owner forced to redeem may suffer adverse tax consequences. Section 
26(c) affords protection to investors by preventing a depositor or 
trustee of a unit investment trust holding the shares of one issuer 
from substituting for those shares of another issuer, unless the 
Commission approves that substitution.
    3. Applicants believe that their request satisfies the standards 
for relief of Section 26(c), as set forth below, because:
     The substitution involves investment options with 
substantially similar investment objectives;
     After the substitution, affected policyowners will be 
invested in a fund whose actual performance has been substantially 
similar on a historical basis to that of the Dreyfus Fund;
     After the substitution, affected policyowners will be 
invested in a fund whose expenses are similar to those of the Dreyfus 
Fund; and
     After the substitution, affected policyowners will benefit 
from increased efficiency and enhanced management and oversight 
capabilities due to the consolidation of index management under one 
index manager for MassMutual and its affiliates, which

[[Page 3247]]

MassMutual believes will ultimately benefit policyowners by allowing 
MassMutual to negotiate overall lower fees.
    4. The purposes, terms and conditions of the substitution are 
consistent with the principles and purposes of Section 26(c) and do not 
entail any of the abuses that Section 26(c) is designed to prevent. 
Applicants believe that the MML Fund will better serve policyowner 
interests because its performance returns and its expenses have been, 
or are estimated to be, similar to those of the Dreyfus Fund and 
because maintaining a relationship with a single index fund manager 
will increase efficiency and enhance management. In addition, 
MassMutual believes that Deutsche, the newly appointed sub-adviser for 
the MML Fund, by using the ``optimization'' method, has a better 
ability to achieve closer correlation to the S&P 500 than Mellon, the 
Dreyfus Fund's manager, because optimization attempts to maximize 
liquidity and returns while minimizing costs. Although the MML Fund 
currently has a slightly higher expense ratio than the Dreyfus Fund, 
the economies of scale that can be achieved as assets are consolidated 
with one manager may tend to reduce the expense ratio of the MML Fund. 
The anticipated lower expenses and the prior performance record of MML 
Fund's new investment sub-adviser reinforce the Applicants' belief that 
the MML Fund will better serve policyowner interests. Applicants assert 
that the Commission has routinely approved substitutions of this type. 
Moreover, MassMutual has reserved the right of substitution in the 
Policy and disclosed this reserved right in the prospectus for the 
Policy.
    5. MassMutual believes that a multi-manager approach for its fund 
offerings will serve shareholder and policyowner demands for investment 
variety, while preserving MassMutual's role to perform due diligence 
and oversight. The Sub-Advisers Order would allow MassMutual the 
flexibility to retain and/or change sub-advisers without incurring the 
significant time and costs necessary to obtain shareholder approval. 
The substitution is another step in establishing an overall structure 
that will increase MassMutual's ability to affect administration, 
management and oversight of the investment options underlying its 
products, including its variable insurance products. The purpose of the 
substitution is to provide policyowners with improved investment 
options through enhanced investment performance. The multi-manager 
structure will give MassMutual the means to more directly monitor the 
overall manner in which investment options, including the MML Fund, 
available through MassMutual products are managed and administered. 
MassMutual will have greater flexibility to react to poor performance 
or mismanagement by a service provider, including sub-advisers, than is 
currently available.
    6. The substitution will not result in the type of costly forced 
redemption that Section 26(c) was intended to guard against and, for 
the following reasons, is consistent with the protection of investors 
and the purposes fairly intended by the Act:
    (a) The MML Fund has an investment objective substantially similar 
to that of the Dreyfus Fund and permits policyowners continuity of 
their investment objectives and expectations.
    (b) The costs of the substitution, including any brokerage costs, 
will be borne by MassMutual and will not be borne by policyowners. No 
charges will be assessed to effect the substitution.
    (c) The substitution will be at the net asset value of the 
respective shares, without the imposition of any transfer or similar 
charge and with no change in the amount of any policyowner's 
accumulation value.
    (d) The policyowners will be given notice prior to the substitution 
and will have an opportunity to reallocate value among other available 
divisions without imposing any transfer charge or limitation and 
without counting the transfer as one of the free transfers permitted 
during a policy year.
    (e) Within five days after the substitution, MassMutual will send 
to affected policyowners written confirmation that the substitution has 
occurred.
    (f) MassMutual has agreed to bear that portion of the annual fund 
operating expenses of the MML Fund's Class II shares in excess of 0.26% 
on an annualized basis for any fiscal quarter during the two-year 
period beginning on the date of the substitution. In addition, for 
those policyowners who are policyowners on the date of the 
substitution, MassMutual will not increase Separate Account or Policy 
expenses for a two-year period beginning on the date of the 
substitution.
    (g) The substitution will in no way alter the insurance benefits to 
policyowners or the contractual obligations of MassMutual.
    (h) The substitution will have no adverse tax consequences to 
policyowners and will in no way alter the tax benefits to policyowners.
    7. Section 17(a)(1) of the Act prohibits any affiliated person of a 
registered investment company, or an affiliated person of such an 
affiliated person, from selling any security or other property to such 
registered investment company. Section 17(a)(2) of the Act prohibits 
any of the persons described above from purchasing any security or 
other property from such registered investment company.
    8. The substitution may involve a transfer of portfolio securities 
by the Dreyfus Fund to the Separate Account. Immediately thereafter, 
the Separate Account would purchase shares of the MML Fund with the 
portfolio securities received from the Dreyfus Fund. As the Separate 
Account and the MML Fund could be viewed as affiliated persons of one 
another by virtue of being under common control as contemplated by 
section 2(a)(3)(C) of the Act, it is conceivable that this aspect of 
the substitution could be viewed as being prohibited by Section17(a). 
In addition, ``affiliated person of another person'' is defined in 
Section 2(a)(3)(E) as, ``if such other person is an investment company, 
any investment adviser thereof'' and in section 2(a)(3)(F) as, ``if 
such other person is an unincorporated investment company not having a 
board of directors, the depositor thereof.'' Therefore, as the 
investment adviser to the MML Fund and the depositor of the Separate 
Account, MassMutual is an affiliate of each thereby rendering the MML 
Fund and the Separate Account second tier affiliates of each other.
    9. Accordingly, Applicants are, to the extent necessary, also 
seeking relief from Section 17(a). Section 17(b) of the Act provides 
that the Commission may grant an order exempting transactions 
prohibited by section 17(a) of the Act upon application if evidence 
establishes that: (a) The terms of the proposed transaction, including 
the consideration to be paid or received, are reasonable and fair and 
do not involve overreaching on the part of any person concerned; (b) 
the proposed transaction is consistent with the investment policy of 
each registered investment company concerned, as recited in its 
registration statement and reports filed under the Act; and (c) the 
proposed transaction is consistent with the general purposes of the 
Act.
    10. Applicants represent that the terms of the proposed transaction 
as described in this application are (a) reasonable and fair, including 
the consideration to be paid and received, and do not involve 
overreaching, (b) consistent with the policies of the affected 
registered investment

[[Page 3248]]

companies, and (c) consistent with the general purposes of the Act.
    11. Applicants submit that the described in-kind redemption 
transaction is reasonable and fair. It is expected that policyowners 
will benefit from an in-kind redemption as proposed by virtue of the 
fact that the MML Fund will be able to acquire portfolio securities 
that are consistent with its objectives and policies without incurring 
(or lessening) any brokerage costs and, at the same time, the Dreyfus 
Fund will also save brokerage costs.
    12. The transaction pursuant to which the substitution will be 
effected, including the possible redemption of shares of the Dreyfus 
Fund on an in-kind basis and the corresponding purchase of shares of 
the MML Fund, will be effected in conformity with section 22(c) of the 
Act and Rule 22c-1 thereunder. Policyowners will not incur any fees or 
charges as a result of the transfer of value pursuant to the 
substitution. Policyowners' rights and privileges and Applicants' 
obligations under the Policy thereunder will not be affected by the 
substitution. Expenses incurred in connection with the substitution, 
including legal, accounting, brokerage, and other expenses, will not be 
borne by policyowners. Policy values will remain unchanged and fully 
invested following the consummation of the substitution. Accordingly, 
policyowner interests after the substitution, in practical economic 
terms, will not differ in any measurable way from such interests 
immediately prior to the substitution. In each case, therefore, the 
consideration to be received and paid is reasonable and fair.
    13. The investment objectives and policies of the MML Fund are 
substantially similar to the investment objectives and policies of the 
Dreyfus Fund. In this regard, the substitution is consistent with the 
findings required by section 17(b) of the Act.
    14. The substitution is consistent with the general purposes of the 
Act as enunciated in the Findings and Declaration of Policy in section 
1 of the Act. The proposed transaction does not present any of the 
issues or abuses that the Act is designed to prevent. Policyowners will 
be fully informed as to the terms of the substitution, as described 
above, and will have an opportunity to reallocate investments prior to 
and following the substitution.
    15. Applicants request an order of the Commission pursuant to 
section 26(c) of the Act approving the substitution and an order of 
exemption pursuant to section 17(b) of the Act in connection with 
aspects of the substitution that may be deemed to be prohibited by 
Section 17(a), as described above. Section 26(c), in pertinent part, 
provides that the Commission shall issue an order approving a 
substitution of securities if the evidence establishes that it is 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act. For the reasons and 
upon the facts set forth above, the requested order meets the standards 
set forth in Section 26(c) and should, therefore, be granted. Section 
17(b) of the Act provides that the Commission may grant an order 
exempting transactions prohibited by section 17(a) of the Act upon 
application subject to certain conditions. Applicants represent that 
the proposed in-kind redemption transactions meet all of the 
requirements of section 17(b) of the Act and that an exemption should 
be granted, to the extent necessary, from the provisions of Section 
17(a).

Applicants' Conclusion

    Applicants assert that, for the reasons summarized above, the 
requested orders approving the substitution and exempting the in-kind 
transaction should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-1572 Filed 1-22-02; 8:45 am]
BILLING CODE 8010-01-P