[Federal Register Volume 67, Number 70 (Thursday, April 11, 2002)]
[Notices]
[Pages 17730-17736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8805]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25510; File No. 812-12624]


Notice of Application

April 5, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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

    Applicants: Merrill Lynch Life Insurance Company (``MLLIC''), 
Merrill Lynch Variable Life Separate Account (``Separate Account 1''), 
Merrill Lynch Life Variable Life Separate Account II (``Separate 
Account 2''), Merrill Lynch Life Variable Annuity Separate Account 
(``Separate Account 3''), Merrill Lynch Life Variable Annuity Separate 
Account A (``Separate Account 4''), ML Life Insurance Company of New 
York (``MLNY''), ML of New York Variable Life Separate Account 
(``Separate Account 5''), ML of New York Variable Life Separate Account 
II (``Separate Account 6''), ML of New York Variable Annuity Separate 
Account (``Separate Account 7''), and ML of New York Variable Annuity 
Separate Account A (``Separate Account 8'') (except for MLLIC and MLNY, 
each a ``Separate Account''; Separate Accounts 1 through 8 collectively 
referred to herein as the ``Separate Accounts'') (all foregoing parties 
collectively referred to herein as the ``Applicants'').
    Summary of Application: The Applicants request an order pursuant to 
Section 26(c) of the 1940 Act to permit the substitution of shares of 
the Large Cap Core Focus Fund and Core Bond Focus Fund of the Merrill 
Lynch Variable Series Funds, Inc. and the Core Bond Strategy Portfolio 
of the Merrill Lynch Series Fund, Inc. (collectively, the ``Replacement 
Portfolios'') for shares of the Natural Resources Focus Fund and Global 
Bond Focus Fund of the Merrill Lynch Variable Series Funds, Inc. 
(collectively, the ``Substituted Portfolios'') currently held by the 
Separate Accounts.
    Filing Date: The application was filed on August 31, 2001, and 
amended and restated on January 25, 2002, April 3, 2002 and April 5, 
2002.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested person may request a hearing 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 April 29, 2002, and 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 Edward W. 
Diffin, Jr., Esq., Merrill Lynch Insurance Group, 7 Roszel Road, 
Princeton, New Jersey 08540-6205 and Stephen E. Roth, Esq., Sutherland 
Asbill & Brennan LLP, 1275 Pennsylvania Ave., NW., Washington, DC 
20004.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or 
William J. Kotapish, Assistant Director, 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 5th Street, NW., 
Washington, DC 20549-0102 [tel. (202) 942-8090].

Applicants' Representations

    1. MLLIC is a stock life insurance company that is domiciled in 
Arkansas. Its operations include both life insurance and annuity 
products. As of December 31, 2001, MLLIC had assets of approximately 
$15.5 billion. MLLIC is authorized to operate as a life insurance 
company in forty-nine states, the District of Columbia, the U.S. Virgin 
Islands, Guam and Puerto Rico. MLLIC was originally incorporated under 
the laws of the State of Washington, on January 27, 1986, and 
redomesticated to the State of Arkansas on August 31, 1991. MLLIC is a 
wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc. MLLIC is 
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. MLLIC 
is the depositor and sponsor of Separate Accounts 1-4.
    2. Separate Account 1 is a separate investment account of MLLIC and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 1 serves as a funding vehicle for certain variable life 
insurance contracts issued by MLLIC (collectively, ``Second Generation 
MLLIC VLI Contracts''). Separate Account 1 is a ``separate account'' as 
defined in Section 2(a)(37) of the 1940 Act.
    3. Separate Account 2 is a separate investment account of MLLIC and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 2 serves as a funding vehicle for certain variable life 
insurance contracts issued by MLLIC (collectively, ``First Generation 
MLLIC VLI Contracts''). Separate Account 2 is a ``separate account'' as 
defined in Section 2(a)(37) of the 1940 Act.
    4. Separate Account 3 is a separate investment account of MLLIC and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 3 serves as a funding vehicle for certain variable annuity 
insurance contracts issued by MLLIC (``MLLIC Portfolio Plus 
Contracts''). Separate Account 3 is a ``separate account'' as defined 
in Section 2(a)(37) of the 1940 Act.
    5. Separate Account 4 is a separate investment account of MLLIC and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 4 serves as a funding vehicle for certain variable annuity 
insurance contracts issued by MLLIC (collectively, ``MLLIC Retirement 
Plus Contracts''). Separate Account 4 is a ``separate account'' as 
defined in Section 2(a)(37) of the 1940 Act.
    6. MLNY is a stock life insurance company that is organized under 
the laws of the State of New York. MLNY is an indirect wholly owned 
subsidiary of Merrill Lynch & Co., Inc. MLNY is authorized to sell life 
insurance and annuities in nine states, and had approximately $1.3 
billion of assets under management as of December 31,

[[Page 17731]]

2001. MLNY is the depositor and sponsor of Separate Accounts 5-8.
    7. Separate Account 5 is a separate investment account of MLNY and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 5 serves as a funding vehicle for certain variable life 
contracts issued by MLNY (``First Generation MLNY VLI Contracts''). 
Separate Account 5 is a ``separate account'' as defined in Section 
2(a)(37) of the 1940 Act.
    8. Separate Account 6 is a separate investment account of MLNY and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 6 serves as a funding vehicle for certain variable life 
contracts issued by MLNY (``Second Generation MLNY VLI Contracts''). 
Separate Account 6 is a ``separate account'' as defined in Section 
2(a)(37) of the 1940 Act.
    9. Separate Account 7 is a separate investment account of MLNY and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 7 serves as a funding vehicle for certain variable annuity 
contracts issued by MLNY (``MLNY Portfolio Plus Contracts''). Separate 
Account 7 is a ``separate account'' as defined in Section 2(a)(37) of 
the 1940 Act.
    10. Separate Account 8 is a separate investment account of MLNY and 
is registered under the 1940 Act as a unit investment trust. Separate 
Account 8 serves as a funding vehicle for certain variable annuity 
contracts issued by MLNY (``MLNY Retirement Plus Contracts'') (together 
with the Second Generation MLLIC VLI Contracts, First Generation MLLIC 
VLI Contracts, MLLIC Portfolio Plus Contracts, MLLIC Retirement Plus 
Contracts, First Generation MLNY VLI Contracts, Second Generation MLNY 
VLI Contracts and MLNY Portfolio Plus Contracts, the ``Variable 
Contracts''). Separate Account 8 is a ``separate account'' as defined 
in Section 2(a)(37) of the 1940 Act.
    11. Merrill Lynch, Pierce, Fenner & Smith, Incorporated 
(``MLPF&S'') serves as principal underwriter and distributor for the 
Variable Contracts. MLPF&S was organized in 1958 under the laws of the 
State of Delaware and is registered as a broker-dealer under the 
Securities Exchange Act of 1934. It is a member of the National 
Association of Securities Dealers, Inc. MLPF&S may enter into selling 
agreements with other broker-dealers registered under the Securities 
Exchange Act of 1934 whose representatives are authorized by applicable 
law to sell the Variable Contracts.
    12. Merrill Lynch Series Fund, Inc. (``Series Fund'') is registered 
as an open-end management investment company under the 1940 Act (File 
No. 811-3091) and currently offers nine separate investment portfolios, 
one of which would be involved in the proposed substitutions. The 
Series Fund issues a separate series of shares of common stock in 
connection with each portfolio, and has registered such shares under 
the Securities Act of 1933 (``1933 Act'') on Form N-1A (File No. 2-
69062). Each separate series offers only one class of shares. Merrill 
Lynch Investment Managers, L.P. (``MLIM'') serves as the investment 
manager to each portfolio. MLIM is an indirect subsidiary of Merrill 
Lynch & Co., Inc. MLIM receives an investment advisory fee from each 
portfolio it manages.
    13. Merrill Lynch Variable Series Funds, Inc. (``Variable Series 
Funds'') is registered as an open-end management investment company 
under the 1940 Act (File No. 811-3290) and currently offers nineteen 
separate investment portfolios, four of which would be involved in the 
proposed substitutions. The Variable Series Funds issues a separate 
series of shares of common stock in connection with each portfolio, and 
has registered such shares under the 1933 Act on Form N-1A (File No. 2-
74452). Each separate series offers two classes of shares, Class A 
shares and Class B shares. The sole distinction between Class A shares 
and Class B shares is the imposition of a distribution fee of 0.15% on 
Class B shares pursuant to Rule 12b-1 under the 1940 Act. Under the 
proposed substitutions, shareholders of the Substituted Portfolios 
would receive Class A shares of the Replacement Portfolio. MLIM serves 
as the investment manager to each portfolio, for which it receives 
investment advisory fees.
    14. The following chart sets out the investment objectives and 
certain policies of each Substituted Portfolio and each Replacement 
Portfolio, as stated in their respective prospectuses and statements of 
additional information.

----------------------------------------------------------------------------------------------------------------
                 Substituted portfolios                                   Replacement portfolios
----------------------------------------------------------------------------------------------------------------
  Natural Resources Focus Fund of the Variable Series     Large Cap Core Focus Fund of the Variable Series Funds
                         Funds
 
Investment Objective:                                    Investment Objective:
    Capital appreciation and protection of purchasing       To seek high total investment return.
     power of shareholder's capital through investments
     primarily in equity securities of companies with
     substantial natural resource assets
Investment Policies:                                     Investment Policies:
    The Fund generally invests in a portfolio               The Fund tries to choose investments that will
     consisting of domestic and foreign companies in a       increase in value by investing primarily in a
     variety of natural resource-related sectors, such       diversified portfolio of equity securities of large
     as mining, energy, chemicals, paper, steel, or          capitalization companies located in the United
     agriculture. Under certain economic circumstances,      States. The Fund uses an investment approach that
     the Fund may concentrate its investments in one or      blends growth and value. Current income from
     more of these sectors (although it will not invest      dividends and interest are not an important
     more than 25% of its assets in any one industry         consideration in selecting portfolio securities.
     within a sector). The Fund is non-diversified,
     which means that it can invest more of its assets
     in fewer companies than other funds
 
  Global Bond Focus Fund of the Variable Series Funds       Core Bond Focus Fund of the Variable Series Funds
 
Investment Objective:                                    Investment Objective:
    To provide high total investment return                 Primarily to obtain a high level of current income,
                                                             and secondarily, to seek capital appreciation when
                                                             consistent with its primary objective.
Investment Policies:                                     Investment Policies:

[[Page 17732]]

 
    The Fund invests in a global portfolio of fixed-        The Fund invests in fixed-income securities of any
     income securities denominated in various                kind and maturity rated investment grade by a
     currencies, including multinational currency            Nationally Recognized Statistical Rating
     units. The Fund invests in fixed-income securities      Organization. The Fund invests most of its assets
     that have a credit rating of A or better by             in securities issued by U.S. companies, but may
     Standard and Poor's or by Moody's commercial paper      also invest in securities issued by foreign
     rated A-1 by Standard & Poor's Prime-1 by Moody's       companies if they are denominated in U.S. dollars.
     or obligations that MLIM has determined to be of        The Fund's investments emphasize current income
     similar creditworthiness                                more than growth of capital.
                                                             Core Bond Strategy Portfolio of the Series Fund
 
                                                         Investment Objective:
                                                            Primarily to provide a high level of current income,
                                                             and secondarily, to seek capital appreciation.
                                                         Investment Policies:
                                                            The Portfolio invests at least 65% of its assets in
                                                             debt securities of any kind and maturity that have
                                                             a rating within the four highest grades of Moody's
                                                             or Standard & Poor's.
----------------------------------------------------------------------------------------------------------------

    15. The following chart describes the fees payable for advisory and 
subadvisory services for the year ending December 31, 2001, expressed 
as an annual percentage of average daily net assets, by each 
Substituted Portfolio and each Replacement Portfolio.

----------------------------------------------------------------------------------------------------------------
                 Substituted portfolios                                   Replacement portfolios
----------------------------------------------------------------------------------------------------------------
                    Name                        Percent                       Name                      Percent
----------------------------------------------------------------------------------------------------------------
Natural Resources Focus Fund Annual Advisory       0.65   Large Cap Core Focus Fund Annual Advisory     \1\ 0.45
 Fees.                                                     Fees.
Global Bond Focus Fund Annual Advisory Fees.       0.60   Core Bond Focus Fund Annual Advisory Fees..   \2\ 0.43
                                                          Core Bond Strategy Portfolio Annual          \3\ 0.33
                                                           Advisory Fees.
----------------------------------------------------------------------------------------------------------------
\1\ The Large Cap Core Focus Fund pays an annual advisory fee based on the average daily value of the Fund's net
  assets, as follows: 0.50% of the average daily net assets not exceeding $250 million, 0.45% of the next $50
  million, 0.425% of the next $100 million, and 0.40% of the amount in excess of $400 million.
\2\ The Core Bond Focus Fund pays an annual advisory fee based on the aggregate daily value of the net assets of
  the Fund and another fund managed by MLIM (the High Current Income Fund). The annual advisory fee, based upon
  the aggregate average daily value of the combined portfolios' net assets, is 0.50% of the average daily net
  assets not exceeding $250 million, 0.45% of the next $250 million, and 0.40% of the amount in excess of $500
  million.
\3\ The Core Bond Strategy Portfolio pays an annual advisory fee based upon the aggregate average daily value of
  the Portfolio and eight other portfolios that are managed by MLIM. The annual advisory fee, based upon the
  aggregate average daily value of the nine combined portfolios' net assets, is 0.50% of the average daily net
  assets not exceeding $250 million, 0.45% of the next $50 million, 0.40% of the next $100 million, 0.35% of the
  next $400 million, and 0.30% of the amount in excess of $800 million.

    16. The following chart describes the total operating expenses 
(before and after any waivers and reimbursements) for the year ended 
December 31, 2001, expressed as an annual percentage of average daily 
net assets, of the Substituted Portfolios and the Replacement 
Portfolios. Neither the Substituted Portfolios nor shares of the 
Replacement Portfolios have adopted any plan pursuant to Rule 12b-1 
under the 1940 Act.

------------------------------------------------------------------------
                                       Substituted
                                        portfolio:        Replacement
                                         natural        portfolio: large
                                     resources focus     cap core focus
                                           fund               fund
------------------------------------------------------------------------
Management Fees...................              0.65%              0.45%
Other Expenses....................              0.33%              0.08%
Total Operating Expenses..........              0.98%              0.53%
Less Expense Waivers and                          N/A                N/A
 Reimbursements...................
Net Operating Expenses............              0.98%              0.53%
------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                                                     Replacement portfolios
                                                                 Substituted   ---------------------------------
                                                                  portfolio:                        Core bond
                                                                 global bond    Core bond focus      stragegy
                                                                  focus fund          fund          portfolio
----------------------------------------------------------------------------------------------------------------
Management Fees..............................................            0.60%            0.43%            0.33%
Other Expenses...............................................            0.19%            0.08%            0.11%
Total Operating Expenses.....................................            0.79%            0.51%            0.44%
Less Expense Waivers and Reimbursements......................              N/A              N/A              N/A
Net Operating Expenses.......................................            0.79%            0.51%            0.44%
----------------------------------------------------------------------------------------------------------------


[[Page 17733]]

    17. Pursuant to their authority under the respective Variable 
Contracts and the prospectuses describing the same, and subject to the 
approval of the Commission under Section 26(c) of the 1940 Act, MLLIC 
and MLNY propose to substitute shares of the Replacement Portfolios for 
shares of the Substituted Portfolios in the Separate Accounts (the 
``Substitutions'') as follows: Substitute shares of the Core Bond 
Strategy Portfolio for shares of the Global Bond Focus Fund under 
certain of the First Generation MLLIC VLI Contracts, the Second 
Generation MLLIC VLI Contracts, certain of the First Generation MLNY 
VLI Contracts, and the Second Generation MLNY VLI Contracts; (b) 
substitute shares of the Large Cap Core Focus Fund for shares of the 
Natural Resources Focus Fund under the MLLIC Portfolio Plus Contracts, 
the MMLIC Retirement Plus Contracts, the MLNY Portfolio Plus Contracts, 
and the MLNY Retirement Plus Contracts; and (c) substitute shares of 
the Core Bond Focus Fund for shares of the Global Bond Focus Fund under 
the MLLIC Retirement Plus Contracts and the MLNY Retirement Plus 
Contracts.
    18. Following these transactions, each Separate Account will have 
two subaccounts holding shares of the Replacement Portfolios. Each 
Separate Account will combine the two subaccounts holding shares of 
each Replacement Portfolio by transferring shares on the same date from 
one of the subaccounts holding shares of the Replacement Portfolio to 
the other subaccount holding shares of the Replacement Portfolio. The 
net effect of the Substitutions will be to eliminate the subaccount in 
each Separate Account relating to the Substituted Portfolios.
    19. Applicants submit that the investment objectives and policies 
of the Substituted Portfolios are relatively narrow, and their 
investment strategies may result in more volatile performance. 
Particularly, the Natural Resources Focus Fund's investments are 
concentrated in natural resource-related sectors and the Global Bond 
Focus Fund, a non-diversified fund, concentrates its assets in a 
relatively small number of investments, which increases its risk 
exposure. Further, the Board of Directors of the Variable Series Funds 
has determined to liquidate the Substituted Portfolios. After 
considering the limited prospects for growth in the Substituted 
Portfolios and their poor performance and asset growth to date, the 
Applicants determined that it would be both difficult to find 
replacement funds which mirror their investment objectives and 
policies, and inadvisable to do so. Rather, Applicants determined that 
it was in the best interests of Variable Contract owners to substitute 
them into portfolios currently available under the Variable Contracts 
that have comparable, albeit broader, investment objectives. Each 
Variable Contract offers either one or the other, but not both of the 
Replacement Portfolios for the Global Bond Focus Fund.
    20. The Substitutions are necessary due to the impending 
liquidation of the Substituted Portfolios by the Variable Series Funds. 
In addition, MLLIC and MLNY believe that the elimination of these 
investment options will make their Variable Contracts more efficient to 
administer and oversee and thus, more cost-efficient and attractive to 
customers. The Replacement Portfolios have gathered more assets and 
have generally performed better than the Substituted Portfolios over 
time, as shown in the charts below.

                                             Substituted Portfolios
----------------------------------------------------------------------------------------------------------------
                                                      Global Bond Focus Fund       Natural Resources Focus Fund
                                                 ---------------------------------------------------------------
                      Year                         Net assets (in                  Net assets (in
                                                    thousands) at    Net change     thousands) at    Net change
                                                     December 21                     December 31
----------------------------------------------------------------------------------------------------------------
2001............................................           $26,801      (22.65%)           $11,358      (30.18%)
2000............................................            34,649      (25.32%)            16,268       11.92%
1999............................................            46,399      (33.16%)            14,535       (6.47%)
1998............................................            69,416       (8.79%)            15,540      (42.40%)
1997............................................            76,107      (18.55%)            26,979      (40.31%)
----------------------------------------------------------------------------------------------------------------


                                             Substituted Portfolios
----------------------------------------------------------------------------------------------------------------
                                                                                                     Natural
                         Average annual total return                             Global bond     resources focus
                                                                                 focus fund           fund
----------------------------------------------------------------------------------------------------------------
One Year....................................................................           (3.20%)          (11.00%)
Five Years..................................................................            0.48%             3.08%
Ten Years...................................................................  ................            5.39%
Since Inception.............................................................            3.22%             4.51%
                                                                                (July 1, 1993)    (June 1, 1998)
----------------------------------------------------------------------------------------------------------------


                                                                 Replacement Portfolios
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Large cap core focus fund         Core bond focus fund           Core bond strategy fund
                                                         -----------------------------------------------------------------------------------------------
                          Year                            Net assets (in                  Net assets (in                  Net assets (in
                                                           thousands) at    Net change     thousands) at    Net change     thousands) at    Net change
                                                            December 31                     December 31                     December 31
--------------------------------------------------------------------------------------------------------------------------------------------------------
2001....................................................        $597,713        (21.51%)        $646,147         27.38%         $130,204         10.26%
2000....................................................         761,558        (20.53%)         507,248         (6.69%)         118,088         (1.60%)
1999....................................................         958,313         11.06%          543,578         (8.53%)         120,007         (8.90%)
1998....................................................         862,897         (1.39%)         594,301         12.61%          131,729          5.60%

[[Page 17734]]

 
1997....................................................         875,064         10.17%          527,770         (1.97%)         124,746          5.73%
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                             Replacement Portfolios
----------------------------------------------------------------------------------------------------------------
                                                                                                    Core bond
                Average annual total return                  Large cap core    Core bond focus      strategy
                                                               focus fund           fund            portfolio
----------------------------------------------------------------------------------------------------------------
One Year..................................................           (7.39%)             6.68%             7.83%
Five Years................................................            9.42%              6.07%             6.36%
Ten Years.................................................           10.18%              6.55%             6.94%
Since Inception...........................................           13.78%              9.36%            10.04%
                                                            (April 29, 1982)  (April 29, 1982)    (Jan. 7, 1981)
----------------------------------------------------------------------------------------------------------------

    21. MLLIC and MLNY will effect the Substitutions as soon as 
practicable following the issuance of the requested order as follows. 
As of the effective date of the Substitutions (``Effective Date''), 
shares of each Substituted Portfolio will be redeemed in cash by MLLIC 
and MLNY. The proceeds of such redemptions will then be used to 
purchase shares of each Replacement Portfolio by cash purchases, with 
each subaccount of the Separate Accounts investing the proceeds of its 
redemption from a Substituted Portfolio in the corresponding 
Replacement Portfolio.
    22. All redemptions of shares of the Substituted Portfolios and 
purchases of shares of the Replacement Portfolios will be effected in 
accordance with Rule 22C-1 under the 1940 Act. The Substitutions will 
take place at relative net asset value with no change in the amount of 
any Variable Contract owner's contract value or death benefit or in the 
dollar value of his or her investments in any of the subaccounts. 
Variable Contract owners will not incur any additional fees or charges 
as a result of the Substitutions, nor will their rights or MLLIC's and 
MLNY's obligations under the Variable Contracts be altered in any way. 
All expenses incurred in connection with the Substitutions, including 
legal, accounting, transactional, and other fees and expenses, 
including brokerage commissions, will be paid by MLLIC and MLNY. In 
addition, the Substitutions will not impose any tax liability on 
Variable Contract owners. The Substitutions will not cause the Variable 
Contract fees and charges currently paid by existing Variable Contract 
owners to be greater after the Substitutions than before the 
Substitutions. Neither MLLIC nor MLNY will exercise any right it may 
have under the Variable Contracts to impose restrictions on transfers 
under the Variable Contracts for a period of at least thirty days 
following the Substitutions.
    23. For each period (not to exceed a fiscal quarter) during the 24 
months following the date of the Substitutions, MLLIC and MLNY will 
reimburse (on the last business day of any such period) any subaccount 
available through a Variable Contract and investing in a Replacement 
Portfolio such that the sum of the Replacement Portfolio operating 
expenses (taking into account expense waivers and reimbursements) 
together with subaccount expenses\4\ for such period on an annualized 
basis will not exceed the following limits (which equal, for each 
Variable Contract, the respective Substituted Portfolio's net operating 
expenses, together with any subaccount expenses, for the fiscal year 
prior to the Substitutions) for those Variable Contract owners who were 
Variable Contract owners on the date of the Substitutions:
---------------------------------------------------------------------------

    \4\ Subaccount expenses refer to those asset-based expenses that 
are deducted on a daily basis from subaccount assets and reflected 
in the calculation of subaccount unit values. Examples of subaccount 
expenses may include the mortality and expense risk charge or 
administrative expenses.

----------------------------------------------------------------------------------------------------------------
                                                                                  Expense cap
                                                              --------------------------------------------------
                      Variable contracts                                                            Core bond
                                                                Large cap core  Core bond focus      strategy
                                                                  focus fund          fund          portfolio
----------------------------------------------------------------------------------------------------------------
MLLIC Investor Life..........................................              N/A              N/A            1.69%
MLLIC Investor Life Plus.....................................              N/A              N/A            1.69%
MLLIC Estate Investor Single.................................              N/A              N/A            1.69%
MLLIC Estate Investor Joint..................................              N/A              N/A            1.69%
MLLIC Prime Plan V...........................................              N/A              N/A            1.39%
MLLIC Prime Plan VI..........................................              N/A              N/A            1.54%
MLLIC Prime Plan 7...........................................              N/A              N/A            1.69%
MLLIC Prime Plan Investor....................................              N/A              N/A            1.69%
MLLIC Portfolio Plus.........................................            2.28%              N/A              N/A
MLLIC Retirement Plus........................................            2.33%            2.14%              N/A
MLNY Prime Plan V............................................              N/A              N/A            1.39%
MLNY Prime Plan VI...........................................              N/A              N/A            1.54%
MLNY Prime Plan 7............................................              N/A              N/A            1.69%
MLNY Prime Plan Investor.....................................              N/A              N/A            1.69%
MLNY Investor Life...........................................              N/A              N/A            1.69%

[[Page 17735]]

 
MLNY Investor Life Plus......................................              N/A              N/A            1.69%
MLNY Portfolio Plus..........................................            2.28%              N/A              N/A
MLNY Retirement Plus.........................................            2.33%            2.14%              N/A
----------------------------------------------------------------------------------------------------------------

    24. Variable Contract owners have been notified of the amended and 
restated application by means of a supplement to the prospectus for 
each of the Variable Contracts that discloses that the Applicants have 
filed the amended and restated application and seek approval for the 
Substitutions.
    25. Further, before the Effective Date, a notice (``Pre-
Substitution Notice'') in the form of an additional supplement to the 
prospectuses for the Variable Contracts, will be mailed to Variable 
Contract owners setting forth the scheduled Effective Date and advising 
Variable Contract owners that contract values attributable to 
investments in the Substituted Portfolios will be transferred to the 
Replacement Portfolios, without charge and without counting toward the 
number of transfers permitted without charge, on the Effective Date. 
The Pre-Substitution Notice will state that, from the date the amended 
and restated application was filed with the Commission through the date 
30 days after the Substitutions, Variable Contract owners may make one 
transfer of contract value from the subaccount corresponding to the 
Substituted Portfolios (before the Substitutions) or the Replacement 
Portfolios (after the Substitutions) to any other subaccount without 
charge and without that transfer counting toward the number permitted 
without charge under the Variable Contract. In addition, within five 
days after the Substitutions, any Variable Contract owners who were 
affected by the Substitutions will be sent a written notice informing 
them that the Substitutions were carried out and advising them of their 
transfer rights (``Post-Substitution Notice'').

Applicants' Legal Analysis

    1. Section 26(c) of the 1940 Act prohibits any depositor or trustee 
of a unit investment trust that invests exclusively in the securities 
of a single issuer from substituting the securities of another issuer 
without the approval of the Commission. Section 26(c) provides that 
such approval shall be granted by order of the Commission, if the 
evidence establishes that the substitution is consistent with the 
protection of investors and the purposes of the 1940 Act.
    2. Section 26(c) was intended to provide for Commission scrutiny of 
proposed substitutions which could, in effect, force shareholders 
dissatisfied with the substitute security to redeem their shares, 
thereby possibly incurring a loss of the sales load deducted from 
initial purchase payments, an additional sales load upon reinvestment 
of the proceeds of redemption, or both. The section was designed to 
forestall the ability of a depositor to present holders of interests in 
a unit investment trust with situations in which a holder's only choice 
would be to continue an investment in an unsuitable underlying 
security, or to elect a costly and, in effect, forced redemption. The 
Applicants submit that the Substitutions meet the standards set forth 
in Section 26(c) and that, if implemented, the Substitutions would not 
raise any of the aforementioned concerns that Congress intended to 
address when the 1940 Act was amended to include this provision.
    3. The replacement of the Substituted Portfolios with the 
Replacement Portfolios is consistent with the protection of Variable 
Contract owners and the purposes fairly intended by the policy and 
provisions of the 1940 Act and, thus, meets the standards necessary to 
support an order pursuant to Section 26(c) of the 1940 Act. The 
Variable Series Funds is liquidating the Substituted Portfolios as a 
result of a Board determination that the performance of each 
Substituted Portfolio, in light of its narrow investment objectives and 
increased potential risk, has not met expectations and has generally 
lagged behind the performance of relevant stock market indices. As a 
result of these liquidations, the Applicants must transfer their 
Contract owners to a different investment option. The Applicants 
determined that it was in the best interests of the Contract owners to 
substitute them into currently available portfolios that have 
comparable, albeit broader, investment objectives. In addition, 
Applicants assert that the types of securities in which the Replacement 
Funds invest are virtually identical to those of their respective 
Substituted Portfolios.
    4. MLIM currently serves as investment adviser for both the 
Substituted Portfolios and the Replacement Portfolios. Thus, the level 
of services and quality provided by MLIM will remain unchanged after 
the Substitutions. Further, the asset levels of the relevant classes of 
shares of the Replacement Portfolios should lead to lower expense 
ratios over time.
    5. Apart from the replacement of the underlying investment vehicle, 
the rights of the Variable Contract owners and the obligations of MLLIC 
and MLNY under the Variable Contracts would not be altered by the 
Substitutions except that Variable Contract owners will not have the 
right to allocate contract value to subaccounts that invest in the 
Substituted Portfolios. In each case, however, the Substituted 
Portfolio has already been closed to additional allocations of premium 
and contract value. Variable Contract owners will not incur any 
additional tax liability as a result of the Substitutions. MLLIC and 
MLNY will bear the costs of any legal or accounting fees of the 
Substitutions and transactional expenses, including brokerage 
commissions.
    6. From the date the amended and restated application is filed with 
the Commission to the date 30 days after the Effective Date, Variable 
Contract owners will have the right to make one transfer of contract 
value from the subaccounts invested in a Substituted Portfolio (before 
the Substitutions) or a Replacement Portfolio (after the Substitutions) 
to any other subaccount without charge and without that transfer 
counting toward the number permitted under the Variable Contract 
(regardless of whether during the accumulation period or the annuity 
period). Each Variable Contract owner will receive a prospectus 
supplement regarding the Substitutions and will, prior to the Effective 
Date, receive a prospectus for the relevant Replacement Portfolio. A 
Pre-Substitution Notice (in the form of an additional prospectus 
supplement) will also be mailed to Variable Contract owners prior to 
the Effective Date. The Pre-Substitution Notice will set forth the

[[Page 17736]]

scheduled Effective Date and advise Variable Contract owners of their 
transfer rights. The Effective Date will be no earlier than 20 days 
after the mailing of the Pre-Substitution Notice.
    7. The Applicants note that, in accordance with the terms of each 
of the Variable Contracts, no sales charges or surrender charges will 
apply to transfers in connection with the Substitutions, and MLLIC and 
MLNY represent that no such charge shall be imposed. In addition, 
within five days after the Substitutions, any Variable Contract owners 
who were affected by the Substitutions will be sent a Post-Substitution 
Notice informing them that the Substitutions were carried out and 
advising them of their transfer rights. The Applicants assert that the 
procedures to be implemented are sufficient to assure that each 
Variable Contract owner's cash values immediately after the 
Substitutions shall be equal to the cash value immediately before the 
Substitutions, and that the Substitutions will not affect the value of 
the interests of those owners of other MLLIC and MLNY variable 
contracts (other than the Variable Contracts) who currently have 
contract value allocated to any of the portfolios of the Series Fund or 
the Variable Series Funds.

Applicants' Conditions

    For purposes of the approval sought pursuant to Section 26(c) of 
the 1940 Act, the Substitutions described in the third amended and 
restated application will not be completed, unless all of the following 
conditions are met.
    1. The Commission shall have issued an order approving the 
Substitutions under Section 26(c) of the 1940 Act, as necessary to 
carry out the transactions described in the third amended and restated 
application.
    2. Each Variable Contract owner will have been sent (a) prior to 
the Effective Date, a copy of the effective prospectus relating to the 
relevant Replacement Portfolio, (b) prior to the Effective Date, a Pre-
Substitution Notice describing the terms of the Substitutions and the 
rights of the Variable Contract owners in connection with the 
Substitutions, and (c) if affected by the Substitutions, a Post-
Substitution Notice within five days after the Substitutions informing 
them that the Substitutions were carried out and advising them of their 
transfer rights.
    3. MLLIC and MLNY shall have satisfied themselves that (a) the 
Variable Contracts allow the substitution of portfolios in the manner 
contemplated by the Substitutions and related transactions described 
herein, (b) the transactions can be consummated as described in the 
third amended and restated application under applicable insurance laws, 
and (c) that any applicable regulatory requirements in each 
jurisdiction where the Variable Contracts are qualified for sale have 
been complied with to the extent necessary to complete the transaction.
    Applicants assert that, for the reasons summarized above, the 
proposed Substitutions meet the standards of Section 26(c) of the Act 
and that the requested order should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-8805 Filed 4-10-02; 8:45 am]
BILLING CODE 8010-01-P