[Federal Register Volume 67, Number 59 (Wednesday, March 27, 2002)]
[Notices]
[Pages 14743-14746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7289]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25490; File No. 812-12714]


Integrity Life Insurance Company, et al.; Notice of Application

March 20, 2002.
AGENCY: Securities and Exchange Commission (``SEC or ``Commission'')

ACTION: Notice of application for an order pursuant to pursuant to 
section 26(c) of the Investment Company Act of 1940 (the ``Act''), 
approving substitution of shares of one registered management 
investment company with shares of another registered management 
investment company.

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SUMMARY OF APPLICATION: Applicants seek an order approving the proposed 
substitution of shares of the Touchstone High Yield Fund for shares of 
the Morgan Stanley High Yield Portfolio (the ``Substitution'').

APPLICANTS: Integrity Life Insurance Company (``Integrity''), Separate 
Account II of Integrity Life Insurance Company (``Integrity Separate 
Account''), National Integrity Life Insurance Company (``National 
Integrity''), Separate Account II of National Integrity Life Insurance 
Company (``National Integrity Separate Account'') and Touchstone 
Advisors, Inc. (``Touchstone'') (collectively, the ``Applicants'').

FILING DATE: The application was filed on December 7, 2001 and amended 
and restated on March 18, 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 must be received by the 
Commission by 5:30 p.m. on April 15, 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 requester's interest, the reason for the request, and the 
issues contested. Persons who wish to be notified of a hearing may 
request notification by writing to the Secretary of the Commission.

ADDRESSES: For the Commission: Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. For 
Applicants: P.O. Box 740074, Louisville, Kentucky, 40202-3319.

FOR FURTHER INFORMATION CONTACT: Alison Toledo, Senior Counsel, or 
Lorna

[[Page 14744]]

MacLeod, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

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

Applicants' Representations

    1. The Integrity Separate Account was established under Ohio law in 
1992. The Integrity Separate Account is registered under the Act as a 
unit investment trust and is used to fund variable annuity contracts 
issued by Integrity. One Integrity variable annuity contract (the 
``Integrity Contract'') is affected by this application.
    2. National Integrity is a stock life insurance company organized 
under the laws of New York. National Integrity is a direct subsidiary 
of Integrity and an indirect subsidiary of Western and Southern Life 
Insurance Company.
    3. The National Integrity Separate Account was established under 
New York law in 1992. The National Integrity Separate Account is 
registered under the Act as a unit investment trust and is used to fund 
variable annuity contracts issued by National Integrity. One National 
Integrity variable annuity contract (the ``National Integrity 
Contract'') is affected by this application (collectively, Integrity 
Contracts and National Integrity Contracts referred to as the 
``Contracts'').
    4. Purchase payments under the Contracts are allocated to one or 
more subaccounts of the Separate Accounts. Income, gains and losses, 
whether or not realized, from assets allocated to the Separate Accounts 
are, as provided in the Contracts, credited to or charged against the 
Separate Accounts without regard to other income, gains or losses of 
Integrity and National Integrity, as applicable. The assets maintained 
in the Separate Accounts will not be charged with any liabilities 
arising out of any other business conducted by Integrity or National 
Integrity, as applicable. Nevertheless, all obligations arising under 
the Contracts, including the commitment to make annuity payments or 
death benefit payments, are general corporate obligations of Integrity 
and National Integrity. Accordingly, all of the assets of each of 
Integrity and National Integrity are available to meet its obligations 
under its Contracts.
    5. Touchstone, a subsidiary of Western and Southern Life Insurance 
Company, is an investment adviser registered under the Investment 
Advisers Act of 1940. As of December 31, 2001, Touchstone had $1.6 
billion in assets under management.
    6. Each of the Contracts permits allocations of accumulation value 
to available subaccounts that invest in specific investment portfolios 
of underlying mutual funds. At the time of filing this application, the 
Integrity Contract offered 50 portfolios and the National Integrity 
Contract offered 31 portfolios. Both Contracts offer the Morgan Stanley 
High Yield Portfolio of the Universal Institutional Funds, Inc. (the 
``Universal Funds'').
    7. Both Contracts permit transfers of accumulation value from one 
subaccount to another subaccount at any time prior to annuitization, 
subject to certain restrictions and charges. No sales charge applies to 
such a transfer of accumulation value among Subaccounts. The Contracts 
permit up to twelve free transfers during any contract year. A fee of 
$20 may be imposed on transfers in excess of twelve in a contract year. 
Transfers must be at least $250, or, if less, the entire amount in the 
subaccount from which value is to be transferred. A variety of types of 
automatic scheduled transfers are permitted without charge and are not 
counted against the twelve free transfers in a contract year.
    8. Each of the Contracts reserves the right, upon notice to 
contractowners, to add, combine or remove subaccounts, or to withdraw 
assets from one subaccount and put them into another subaccount. The 
reserved right is disclosed in each Contract's prospectus.
    9. The Morgan Stanley High Yield Portfolio, a separate series of 
the Universal Funds, is currently an investment option under the 
Contracts. The Universal Funds is an open-end management investment 
company registered under the Act. The Morgan Stanley High Yield 
Portfolio is managed by Morgan Stanley Asset Management, Inc. 
(``MSAM'').
    10. The investment objective of the Morgan Stanley High Yield 
Portfolio is to seek above-average total return over a market cycle of 
three to five years by investing primarily in high yield securities 
(commonly referred to as ``junk bonds''). The total annual expenses of 
the Morgan Stanley High Yield Portfolio for the fiscal year ended 
December 31, 2000 were .80% of average daily net assets (.26% in 
management fees and .54% in other expenses). Absent voluntary 
reimbursements by MSAM, those expenses would have been 1.04% (.50% in 
management fees and .54% in other expenses). As of December 31, 2001, 
the Morgan Stanley High Yield Portfolio had $52.9 million in assets. As 
of December 31, 2001, the average annual total returns of the Morgan 
Stanley High Yield Portfolio, whose inception date is August 31, 1992, 
were as follows:

------------------------------------------------------------------------
                                                               Life of
    1 year        3 years        5 years        10 years      portfolio
------------------------------------------------------------------------
       5.87%         -4.33%         -1.50%            n/a         4.13%
------------------------------------------------------------------------

    11. The Touchstone High Yield Fund is a separate series of the 
Touchstone Variable Series Trust, an open-end management investment 
company registered under the Act. It is currently not an investment 
option under the Contracts. The Touchstone High Yield Fund is managed 
by Touchstone.
    12. The investment objective of the Touchstone High Yield Fund is 
to achieve a high level of current income as its main goal, with 
capital appreciation as a secondary consideration, by investing 
primarily in high yield securities. The total annual expenses of the 
Touchstone High Yield Fund for the fiscal year ended December 31, 2000 
were .80% of average daily net assets (.10% in management fees and .70% 
in other expenses). Absent voluntary reimbursements by Touchstone 
Advisors, Inc., those expenses would have been 1.50% (.60% in 
management fees and .90% in other expenses). However, on February 21, 
2002, Touchstone's Board of Directors voted to amend the investment 
advisory agreement with the Touchstone High Yield Fund to decrease the 
contractual management fee before waivers and reimbursements to .50% 
effective May 1, 2002. As of December 31, 2001, the Touchstone High 
Yield Fund had $17.2 million in assets. As of December 31, 2001, the 
average annual total returns of the Touchstone High Yield Fund, whose 
inception date is May 17, 1999, were as follows:

[[Page 14745]]



------------------------------------------------------------------------
                                                               Life of
    1 year        3 years        5 years        10 years      portfolio
------------------------------------------------------------------------
       5.38%            n/a            n/a            n/a        -2.07%
------------------------------------------------------------------------

    13. Applicants seek an order permitting the substitution of shares 
of Touchstone High Yield Fund for shares of the Morgan Stanley High 
Yield Portfolio. The Substitution will take place at the portfolios' 
relative net asset values determined on the date of the Substitution in 
accordance with Section 22 of the Act and Rule 22c-1 thereunder with no 
change in the amount of any contractowner's cash value or death benefit 
or in the dollar value of his or her investment in either of the 
subaccounts. Accordingly, there will be no financial impact on any 
contractowner. The Substitution will be effected by having each of the 
subaccounts that invests in the Morgan Stanley High Yield Portfolio 
redeem its shares at the net asset value calculated on the date of the 
Substitution and purchase shares of the Touchstone High Yield Fund at 
the net asset value calculated on the same date.
    14. The Substitution will be described in supplements to the 
prospectuses for the Contracts (``Stickers'') filed with the Commission 
and mailed to contractowners. The Stickers will give contractowners 
notice of the Substitution and will describe the reasons for engaging 
in the Substitution. The Stickers will also inform contractowners with 
value allocated to a subaccount investing in the Morgan Stanley High 
Yield Portfolio that no additional amount may be allocated to those 
subaccounts on or after the date of the Substitution. In addition, the 
Stickers will inform affected contractowners that they will have the 
opportunity to reallocate accumulation value:
     Prior to the Substitution from the subaccounts investing 
in the Morgan Stanley High Yield Portfolio, and
     For 30 days after the Substitution from the subaccounts 
investing in Touchstone High Yield Fund to subaccounts investing in 
other portfolios available under the respective Contracts, without the 
imposition of any transfer charge or limitation and without diminishing 
the number of free transfers that may be made in a given contract year.
    15. The prospectuses for the Contracts, as supplemented by the 
Stickers, will reflect the Substitution. Each contractowner will be 
provided with a prospectus for the Touchstone High Yield Fund before 
the Substitution. Within five days after the Substitution, Integrity 
and National Integrity will each send affected contractowners written 
confirmation that the Substitution has occurred.
    16. Integrity and National Integrity, as applicable, will pay all 
expenses and transaction costs of the Substitution, including all 
legal, accounting and brokerage expenses relating to the Substitution. 
No costs will be borne by contractowners. Affected contractowners will 
not incur any fees or charges as a result of the Substitution, nor will 
their rights or the obligations of the Applicants under the Contracts 
be altered in any way. The Substitution will not cause the fees and 
charges under the Contracts currently being paid by contractowners to 
be greater after the Substitution than before the Substitution. The 
Substitution will have no adverse tax consequences to contractowners 
and will in no way alter the tax benefits to contractowners.
    17. Applicants believe that their request satisfies the standards 
for relief of section 26(c) of the Act, as set forth below, because the 
affected contractowners will have:
    (1) Contract value allocated to a subaccount invested in a 
portfolio with an investment objective and investment policies 
substantially similar to the investment objective and policies of the 
substituted portfolio--both the Morgan Stanley High Yield Portfolio and 
the Touchstone High Yield Fund seek a high return by investing 
primarily in high yield securities;
    (2) superior performance to that of the substituted portfolio--the 
Touchstone High Yield Fund has consistently outperformed the Morgan 
Stanley High Yield Portfolio since its inception; and
    (3) current total annual expenses that are the same as those of the 
substituted portfolio--the Touchstone High Yield Fund has the same 
current total annual expenses as the Morgan Stanley High Yield 
Portfolio and anticipates decreasing its gross expenses as it achieves 
economies of scale through asset growth.

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 that might, in effect, force shareholders 
dissatisfied with the substituted security to redeem their shares, 
thereby possibly incurring either a loss of the sales load deducted 
from initial premium payments, an additional sales load upon 
reinvestment of the redemption proceeds, or both. Moreover, in the 
insurance product context, a contractowner forced to redeem may suffer 
adverse tax consequences. Section 26(c) affords this protection to 
investors by preventing a depositor or trustee of a unit investment 
trust that holds shares of one issuer from substituting for those 
shares the shares of another issuer, unless the Commission approves 
that substitution.
    3. 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 have reserved the right to make such a substitution under 
the Contracts and this reserved right is disclosed in each Contract's 
prospectus.
    4. Substitutions have been common where the substitute portfolio 
has investment objectives and policies that are similar to those of the 
eliminated portfolio, current expenses that are similar to or lower 
than those of the eliminated portfolio, and performance that is similar 
to or better than that of the eliminated portfolio. The Morgan Stanley 
High Yield Portfolio and the Touchstone High Yield Fund have 
substantially similar investment objectives and policies. The current 
total annual expenses for each of the portfolios are .80%. The 
Touchstone High Yield Fund has had consistently better performance than 
the Morgan Stanley High Yield Portfolio since its inception.
    5. 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, are consistent with the protection of investors 
and the purposes fairly intended by the Act:

[[Page 14746]]

    (1) The Touchstone High Yield Fund is an appropriate portfolio to 
which to move contractowners with value allocated to the Morgan Stanley 
High Yield Portfolio because the portfolios have substantially similar 
investment objectives and policies.
    (2) The costs of the Substitution, including any brokerage costs, 
will be borne by Integrity and National Integrity and will not be borne 
by contractowners. No charges will be assessed to effect the 
Substitution.
    (3) The Substitution will be at the net asset values of the 
respective shares without the imposition of any transfer or similar 
charge and with no change in the amount of any contractowner's cash 
value or death benefit or in the dollar value of his or her investment 
of either of the subaccounts.
    (4) The Substitution will not cause the fees and charges under the 
Contracts currently being paid by contractowners to be greater after 
the Substitution than before the Substitution and in each case will 
result in contractowners' contract values being moved to a portfolio 
with the same current total annual expenses (including lower current 
management fees) than the current total annual expenses of the Morgan 
Stanley High Yield Portfolio.
    (5) Touchstone will cap total annual expenses of the Touchstone 
High Yield Fund at .80% of average daily net assets for a two-year 
period beginning on the date of the Substitution.
    (6) All contractowners will be given notice of the Substitution 
prior to the Substitution and will have an opportunity for 30 days 
after the Substitution to reallocate accumulation value among other 
available subaccounts without the imposition of any transfer charge or 
limitation and without being counted as one of the contractowner's free 
transfers in a contract year.
    (7) Within five days after the Substitution, Integrity and National 
Integrity will send to its affected contractowners written confirmation 
that the Substitution has occurred.
    (8) For those contractowners who are contractowners on the date of 
the Substitution, Integrity and National Integrity will not increase 
Separate Account or Contract fees and expenses for a two-year period 
beginning on the date of the Substitution.
    (9) The Substitution will in no way alter the insurance benefits to 
contractowners or the contractual obligations of Integrity and National 
Integrity.
    (10) The Substitution will have no adverse tax consequences to 
contractowners and will in no way alter the tax benefits to 
contractowners.

Conclusion

    Applicants request an order of the Commission pursuant to section 
26(c) of the Act approving the Substitution. 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.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7289 Filed 3-26-02; 8:45 am]
BILLING CODE 8010-01-P