[Federal Register Volume 67, Number 123 (Wednesday, June 26, 2002)]
[Notices]
[Pages 43184-43193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16061]


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

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25617; File No. 812-12614]


The Travelers Insurance Company, et al.

June 19, 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 ``Act'') approving certain 
substitutions of securities and for an order of

[[Page 43185]]

exemption pursuant to section 17(b) of the Act.

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

Applicants: The Travelers Insurance Company (``Travelers Insurance''), 
The Travelers Life and Annuity Company (``Travelers L & A''), The 
Travelers Fund U for Variable Annuities (``Fund U''), The Travelers 
Separate Account TM for Variable Annuities (``Account TM''), The 
Travelers Separate Account TM II for Variable Annuities (``Account TM 
II''), Travelers Separate Account QP for Variable Annuities (``Account 
QP''), The Travelers Separate Account Five for Variable Annuities 
(``Account Five''), The Travelers Separate Account Six for Variable 
Annuities (``Account Six''), and The Travelers Fund UL III for Variable 
Life Insurance (``Fund UL III'').

Filing Date: The application was filed on August 31, 2001 and amended 
and restated on June 19, 2002.

Summary of Application: Applicants request an order to permit the 
substitutions by Travelers Insurance and Travelers L & A of shares of 
securities of various portfolios (each a ``Fund'' or ``Portfolio'') 
issued by certain management investment companies (each a ``Management 
Company'') and held by one or more of Fund U, Account TM, Account TM 
II, Account QP, Account Five, Account Six, and Fund UL III, (the 
``Accounts'') to support variable annuity or variable life insurance 
contracts issued by Travelers or Travelers L & A (collectively, 
``Contracts''), as follows: (1) Shares of AIM Capital Appreciation 
Portfolio for shares of OCC Equity, (2) shares of AIM Capital 
Appreciation Portfolio for shares of Montgomery Growth Fund, (3) shares 
of TST U.S. Government Securities Portfolio for shares of Templeton 
Global Income Securities Fund Class I, (4) shares of TST Quality Bond 
Portfolio for shares of CitiStreet Diversified Bond Fund, (5) shares of 
Dreyfus Small Cap Portfolio for shares of Delaware Small Cap Value 
Series, (6) shares of TST U.S. Government Securities Portfolio for 
shares of Putnam Diversified Income Portfolio, and (6) shares of TST 
U.S. Government Securities Portfolio for shares of Smith Barney High 
Income Portfolio. Applicants also request an order exempting them from 
the provisions of section 17(a) of the Act to the extent necessary to 
permit Travelers Insurance and Travelers L & A to carry out certain of 
the substitutions by redeeming shares of: (1) CitiStreet Diversified 
Bond Fund in kind and using the redemption proceeds to purchase shares 
of TST Quality Bond Portfolio; (2) Montgomery Growth Fund and OCC 
Equity in kind and using the redemption proceeds to purchase shares of 
AIM Capital Appreciation Portfolio; and (3) Templeton Global Income 
Securities Fund Class I, Putnam Diversified Income Portfolio, and Smith 
Barney High Income Portfolio in kind and using the redemption proceeds 
to purchase shares of TST U.S. Government Securities Portfolio.

Hearing or Notification of Hearing: An order granting the amended and 
restated 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, personally or by mail. Hearing requests should be received by 
the Commission by 5:30 p.m. on July 11, 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 20549-0506. Applicants, c/o Kathleen A. 
McGah, Esq., Deputy General Counsel, The Travelers Life and Annuity 
Company, One Tower Square, Hartford, CT 06183. Copy to David S. 
Goldstein, Esq., Sutherland Asbill & Brennan LLP, 1275 Pennsylvania 
Avenue, NW, Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Harry Eisenstein, Senior Counsel, at 
(202) 942-0670, or Zandra Bailes, Branch Chief, at (202) 942-0677, 
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 (tel. (202) 942-8090).

Applicants' Representations

    1. Travelers Insurance is a stock insurance company chartered in 
1864 in Connecticut and continuously engaged in the insurance business 
since that time. It is licensed to conduct life insurance business in 
all fifty states, the District of Columbia, Puerto Rico, Guam, the U.S. 
and British Virgin Islands, and the Bahamas. Travelers Insurance is an 
indirect wholly-owned subsidiary of Citigroup, Inc. As of December 31, 
2001, Travelers Insurance had consolidated assets of approximately $77 
billion. For purposes of the Act, Travelers Insurance is the depositor 
and sponsor of the following variable annuity and variable life 
insurance separate accounts: Account TM, Fund U, Account QP, Account 
Five, and Fund UL III.
    2. Travelers L & A is a stock life insurance company chartered in 
1973 in Connecticut and continuously engaged in the insurance business 
since that time. It is licensed to conduct life insurance business in a 
majority of the states of the United States, the District of Columbia, 
and Puerto Rico. Travelers L & A is an indirect wholly-owned subsidiary 
of Citigroup, Inc. As of December 31, 2001, Travelers L & A had assets 
of approximately $12 billion. For purposes of the Act, Travelers L & A 
is the depositor and sponsor of the following variable annuity separate 
accounts: Account TM II and Account Six.
    3. Under Connecticut law, the assets of each respective Account 
attributable to the Contracts are owned either by Travelers Insurance 
or Travelers L & A, but are held separately from the other assets of 
Travelers Insurance or Travelers L & A for the benefit of the owners 
of, and the persons entitled to payment under, those Contracts. To the 
extent so provided under the applicable Contracts, that portion of the 
assets of any such Account equal to the reserves and other contract 
liabilities with respect to that Account are not chargeable with 
liabilities arising out of any other business Travelers Insurance or 
Travelers L & A may conduct. Income, gains and losses, realized or 
unrealized, from the assets of each Account are credited to or charged 
against that Account without regard to the other income, gains, or 
losses of Travelers Insurance or Travelers L & A. Each Account is a 
``separate account'' as defined by Rule 0-1(e) under the Act and is 
registered with the Commission as a unit investment trust. Each Account 
is comprised of a number of subaccounts, and each subaccount invests 
exclusively in a Portfolio or Fund.
    4. The Contracts are flexible premium variable annuity and variable 
life insurance contracts. The variable annuity Contracts provide for 
the accumulation of values on a variable basis, fixed basis, or both, 
during the accumulation period, and provide settlement or annuity 
payment options on a variable or fixed basis. The variable life 
insurance Contracts provide for the accumulation of values on a 
variable basis, fixed basis, or both throughout the

[[Page 43186]]

insured's life and for a death benefit, upon the death of the insured. 
Under each of the Contracts, other than the Travelers Universal Annuity 
(Fund U), Travelers Insurance and Travelers L & A reserve the right to 
substitute shares of one Fund or Portfolio for shares of another, 
including a Fund or Portfolio of a different Management Company.
    5. A Contract owner may transfer all or any part of the Contract 
value from one subaccount to any other subaccount or a fixed account as 
long as the Contract remains in effect for variable life insurance 
contracts, and at any time up to 30 days before the due date of the 
first annuity payment for variable annuity contracts. For many of the 
variable annuity contracts, Travelers Insurance and Travelers L & A 
reserve the right to limit the number of transfers to one per six-month 
period.
    6. Currently, there is no charge for transfers. However, Travelers 
Insurance and Travelers L & A both reserve the right under certain of 
their respective Contracts to assess a transfer charge of up to $10.00 
on transfers in excess of twelve per year for variable annuity 
contracts and six per year for variable life insurance contracts.
    7. Travelers Insurance and Travelers L & A, on behalf of themselves 
and their Accounts propose a series of substitutions of shares held in 
those Accounts. The table below summarizes the proposed substitutions.

------------------------------------------------------------------------
         Contract(s)            Replaced fund(s)      Replacing fund(s)
------------------------------------------------------------------------
Fund U:
    Travelers Universal       Putnam Diversified    TST U.S. Government
     Annuity (``UA'').         Income Portfolio.     Securities
                                                     Portfolio.
                              Templeton Global
                               Income Securities
                               Portfolio
                              Smith Barney High
                               Income Portfolio
Fund UL III:
    Corporate Owned Life      CitiStreet            TST Quality Bond
     Insurance (``COLI'').     Diversified Bond      Portfolio.
                               Fund.
                              Delaware Small Cap    Dreyfus Small Cap
                               Value Series.         Portfolio.
                              Putnam Diversified    TST U.S. Government
                               Income Portfolio.     Securities
                                                     Portfolio.
    Corporate Owned Life      CitiStreet            TST Quality Bond
     Insurance 2000 (``COLI    Diversified Bond      Portfolio.
     2000'').                  Fund.
                              Delaware Small Cap    Dreyfus Small Cap
                               Value Series.         Portfolio.
Accounts TM and TM II:
    Travelers Marquis         OCC Equity Portfolio  AIM Capital
     Portfolios                                      Appreciation
     (``Marquis'').                                  Portfolio.
                              Montgomery Growth
                               Fund
Account QP:
    Gold Track..............  Templeton Global      TST U.S. Government
                               Income Securities     Securities
                               Portfolio.            Portfolio.
    Gold Track Select.......  OCC Equity Portfolio  AIM Capital
                                                     Appreciation
                                                     Portfolio.
                              Montgomery Growth
                               Fund
                              Templeton Global      TST U.S. Government
                               Income Securities     Securities
                               Portfolio.            Portfolio.
Accounts Five and Six:
    Travelers Retirement      OCC Equity Portfolio  AIM Capital
     Annuity (``TRA'').                              Appreciation
                                                     Portfolio.
                              Montgomery Growth
                               Fund
------------------------------------------------------------------------

    8. Applicants believe that for each proposed substitution, the 
investment objectives and policies of the replacing Fund(s) or 
Portfolio(s) are sufficiently similar to those of the replaced Fund(s) 
or Portfolio(s) that Contract owners will have reasonable continuity in 
investment expectations. Applicants also believe that the proposed 
substitutions will better serve the interests of Contract owners 
because, in each case, the replacing Fund or Portfolio has lower fees 
or expenses, superior or comparable performance, and either a larger 
asset base than the replaced Fund or Portfolio or one that is growing 
rather than shrinking.
    9. Each Management Company is registered as an open-end management 
investment company under the Act. Further, each is a series investment 
company as defined by Rule 18f-2 under the Act and issues separate 
series of shares of stock (for corporations) or of beneficial interest 
(for business trusts) in connection with each Fund or Portfolio. The 
shares of each Fund or Portfolio are registered under the 1933 Act on 
Form N-1A. The table below lists each Management Company, its type of 
business entity and the date established, 1940 Act file number, total 
number of Funds or Portfolios comprising the management company, the 
specific Funds or Portfolios involved in the proposed substitutions, 
and their 1933 Act file numbers.

----------------------------------------------------------------------------------------------------------------
                                                                      Total of
      Trust or corporation           Entity (date)       1940 Act      number     Involved funds or    1933 Act
                                                         file No.     fund(s)        portfolios        file No.
----------------------------------------------------------------------------------------------------------------
Travelers Series Fund (``TSF'').  MD Corp. (2/22/94).    811-08372           15  Putnam Diversified    33-756444
                                                                                  Income Portfolio;
                                                                                  AIM Capital
                                                                                  Appreciation
                                                                                  Portfolio; Smith
                                                                                  Barney High
                                                                                  Income Portfolio.
Travelers Series Trust (``TST'')  MA business trust       811-6465           19  U.S. Government        33-43618
                                   (10/11/91).                                    Securities
                                                                                  Portfolio;
                                                                                  Quality Bond
                                                                                  Portfolio.
The Montgomery Funds III          DE business trust      811-08782            9  Growth Fund.......     33-84450
 (``Montgomery'').                 (8/24/94).
Dreyfus Variable Investment Fund  MA business trust       811-5125           13  Small Cap              33-13690
 (``Dreyfus'').                    (8/31/90).                                     Portfolio.
Franklin Templeton Variable       MA business trust      811-05583           27  Templeton Global       33-23493
 Insurance Products Trust          (4/26/88).                                     Income Securities
 (``Templeton'').                                                                 Fund.

[[Page 43187]]

 
OCC Accumulation Trust (``OCC'')  MA business trust      811-08512           12  Equity Portfolio..     33-78944
                                   (5/12/94).
Delaware Group Premium Fund       DE business trust       811-5162           19  Small Cap Value        33-14363
 (``Delaware'').                   (12/15/99).                                    Series.
CitiStreet Funds, Inc.            MD Corp. (12/92)...     811-7450            4  Diversified Bond       33-57536
 (``CitiStreet'').                                                                Fund.
----------------------------------------------------------------------------------------------------------------

    10. The investment objective, investment strategy or key 
investments, investment advisers, and management fees for each 
Portfolio or Fund are described below. The Funds and Portfolios are 
grouped together by the proposed replacing Fund or Portfolio.
    11. In each group, the first set of accompanying charts shows the 
approximate year-end size (in net assets), expense ratio (ratio of 
operating expenses as a percentage of average net assets), and annual 
total returns for each of the past three years for each of the Funds 
and Portfolios involved in the proposed substitutions. Funds and 
Portfolios marked with an asterisk in these charts have fiscal years 
ending on October 31st.
    12. In each group, the second set of charts shows the approximate 
annual management fees, other expenses, and total expenses of each of 
the Funds or Portfolios involved in the proposed substitutions both 
before and after any expense reimbursement or fee waivers. The 
management fees and expenses shown are those for the 2001 fiscal year. 
Funds and Portfolios marked with an asterisk in these charts have 
fiscal years ending on October 31st.

Group 1 Replacing Fund

    13. The investment objective of the AIM Capital Appreciation 
Portfolio is capital appreciation. The Portfolio invests primarily in 
common stocks of companies the subadviser believes are likely to 
benefit from new or innovative products, services, or processes, as 
well as those that have experienced above-average, long-term growth in 
earnings and have excellent prospects for future growth. Travelers 
Investment Adviser, Inc. (``TIA'') serves as investment adviser to the 
Portfolio and AIM Capital Management serves as subadviser. AIM Capital 
Appreciation Portfolio pays a monthly investment management fee based 
on an annual rate of 0.80% of the average daily net assets of the 
Portfolio. Applicants propose to substitute shares of AIM Capital 
Appreciation Portfolio for shares of OCC Equity Portfolio and 
Montgomery Growth Portfolio.

Group 1 Replaced Funds

    14. The investment objective of the OCC Equity Portfolio is long-
term capital appreciation. The Portfolio invests primarily in equity 
securities that the investment adviser believes are undervalued in the 
marketplace. OpCap Advisors serves as the investment adviser to the 
Portfolio and PIMCO serves as the Portfolio's subadviser. Equity 
Portfolio pays an investment management fee at the annual rate of 0.80% 
of the first $400 million of average daily net assets, 0.75% on the 
next $400 million of average daily net assets and 0.70% of assets in 
excess of $800 million of average daily net assets.
    15. The investment objective of Montgomery Growth is long-term 
capital appreciation by investing in growth-oriented U.S. companies. 
The Fund may invest in U.S. companies of any size, but invests at least 
65% of its total assets in those companies whose shares have a total 
stock market value of at least $1 billion. Montgomery Asset Management, 
LLC serves as investment adviser to the Fund. The Growth Fund pays a 
monthly investment management fee based on an annual rate of 1.00% of 
the average daily net assets of the Fund.

----------------------------------------------------------------------------------------------------------------
                                                                   Net assets at
                                                                   year-end (in    Expense ratio   Total return
                                                                     millions)     (in percent)
----------------------------------------------------------------------------------------------------------------
AIM Capital Appreciation Portfolio: \*\
    1999........................................................            $300            0.84           32.41
    2000........................................................             435            0.83           36.53
    2001........................................................             224            0.83          -43.46
OCC Equity Portfolio:
    1999........................................................           70.51            0.91             2.5
    2000........................................................           88.61            0.95             9.9
    2001........................................................           78.78            0.93            -7.0
Montgomery Growth Fund:
    1999........................................................           19.65            1.25           20.79
    2000........................................................           21.07            1.25           -9.06
    2001........................................................           14.39            1.25          -20.75
----------------------------------------------------------------------------------------------------------------


                          [Amounts in percent]
------------------------------------------------------------------------
                                            Before           After
                 Fund                    reimbursement   reimbursement
                                         or fee waiver   or fee waiver
-----------------------------------------------------------------------
AIM Capital Appreciation Portfolio \*\            0.80            0.80
                                                  0.03            0.03
                                       -----------------
                                       -----------------

[[Page 43188]]

                                       -----------------
                                       -----------------
                                       =================
                                                  2.23            0.25
                                       -----------------
------------------------------------------------------------------------

Group 2  Replacing Funds

    16. The investment objective of the TST U.S. Government Securities 
Portfolio is current income and total return by investing in debt 
securities of the highest quality. The Portfolio invests in U.S. 
Treasury notes and bonds and obligations of U.S. government 
instrumentalities and federal agencies. Travelers Asset Management 
Company LLC serves as investment adviser to the Portfolio. U.S. 
Government Securities Portfolio pays a monthly investment management 
fee based on an annual rate of 0.32% of the average daily net assets of 
the Portfolio. Applicants propose to substitute shares of TST U.S. 
Government Securities Portfolio for shares of the Templeton Global 
Income Securities Fund, shares of the Smith Barney High Income 
Portfolio, and those shares of Putnam Diversified Income Portfolio that 
fund contracts issued through the Fund U Account.

Group 2  Replaced Funds

    17. The investment objective of the Putnam Diversified Income 
Portfolio is high current income consistent with preservation of 
capital. The Portfolio invests primarily in debt securities of U.S. and 
foreign governments and corporations. The Portfolio may invest in 
securities with a wide range of credit qualities. The Portfolio's 
duration will generally vary from 3 to 7 years depending on market 
conditions and the subadviser's outlook for interest rates. Individual 
securities may be of any duration. TIA serves as investment adviser to 
the Portfolio, and Putnam Investment Management, Inc. serves as 
subadviser. Putnam Diversified Income Portfolio pays a monthly 
investment management fee based on an annual rate of 0.75% of the 
average daily net assets of the Portfolio.
    18. The investment objective of the Templeton Global Income 
Securities Fund is high current income, consistent with preservation of 
capital with a secondary objective of capital appreciation. Under 
normal circumstances, the Fund invests at least 65% of its total assets 
in the debt securities of governments and their political subdivisions 
and agencies, supranational organizations, and companies located 
anywhere in the world, including emerging markets. This Fund may invest 
up to 35% of net assets in below investment grade debt (not rated lower 
than B). Average weighted maturity is generally 5 to 15 years. Franklin 
Advisers, Inc. serves as the investment adviser to the Fund and 
Templeton Investment Counsel, LLC serves as subadviser. Templeton 
Global Income Securities Fund pays a monthly investment management fee 
based on an annual rate of 0.60% of the average daily net assets of the 
Fund.
    19. The investment objective of the Smith Barney High Income 
Portfolio is high current income and secondarily, capital appreciation. 
The Portfolio invests primarily in high-yielding, corporate debt 
obligations, and preferred stock of U.S. and foreign issuers. The 
Portfolio invests primarily in below investment grade securities, but 
may not invest more than 10% of its assets in securities rated lower 
than B, or in unrated securities of comparable quality. Although the 
Portfolio may invest in securities of any maturity, under current 
market conditions, it has an average remaining maturity of between 5 
and 10 years. Smith Barney Fund Management LLC serves as investment 
adviser to the Portfolio. Smith Barney High Income Portfolio pays a 
monthly investment management fee based on an annual rate of 0.60% of 
the average daily net assets of the Portfolio.

----------------------------------------------------------------------------------------------------------------
                                                                   Net assets at
                                                                   year-end  (in   Expense ratio   Total return
                                                                     millions)     (in percent)    (in percent)
----------------------------------------------------------------------------------------------------------------
TST U.S. Government Securities Portfolio:
    1999........................................................          $61.62            0.48           -4.23
    2000........................................................           90.97            0.48           14.53
    2001........................................................          126.49            0.45            5.82
Putnam Diversified Income Portfolio*:
    1999........................................................             156            0.83            1.80
    2000........................................................             141            0.87            0.21
    2001........................................................             128            0.90            4.60
Templeton Global Income Securities Fund:
    1999........................................................           90.54            0.65           -5.79
    2000........................................................           81.17            0.72            4.32
    2001........................................................           63.78            0.71            2.55
Smith Barney High Income Portfolio*:
    1999........................................................             199            0.66            5.28
    2000........................................................             191            0.66           -3.54
    2001........................................................             176            0.67           -8.08
----------------------------------------------------------------------------------------------------------------


[[Page 43189]]


                          [Amounts in percent]
------------------------------------------------------------------------
                                              Before           After
                  Fund                     reimbursement   reimbursement
                                           or fee waiver   or fee waiver
------------------------------------------------------------------------
TST U.S. Government Securities..........            0.32            0.32
                                                    0.13            0.13
                                         -------------------------------
                                                    0.45            0.45
                                         ===============================
TSF Putnam Diversified Income Portfolio*            0.75            0.75
                                                    0.15            0.15
                                         -------------------------------
                                                    0.90            0.90
                                         ===============================
Templeton Global Income Securities Fund             0.60            0.60
 Class I................................
                                                    0.11            0.11
                                         -------------------------------
                                                    0.71            0.71
                                         ===============================
TSF Smith Barney High Income Portfolio*.            0.60            0.60
                                                    0.07            0.07
                                                    0.67            0.67
 
------------------------------------------------------------------------

Group 3  Replacing Fund

    20. The investment objective of the TST Quality Bond Portfolio is 
current income, moderate capital volatility, and total return. The 
Portfolio invests in investment-grade debt securities and generally 
maintains an average duration of 5 years or less. Travelers Asset 
Management International Company LLC serves as investment adviser to 
the Portfolio. Quality Bond Portfolio pays a monthly investment 
management fee based on an annual rate of 0.32% of the average daily 
net assets of the Portfolio. Applicants propose to substitute shares of 
TST Quality Bond Portfolio for shares of the CitiStreet Diversified 
Bond Fund.

Group 3  Replaced Fund

    21. The investment objective of the CitiStreet Diversified Bond 
Fund is maximum long-term total return (capital appreciation and 
income). The Fund invests in the following types of bonds, which are 
listed in order of importance, investment grade corporate debt, U.S. 
government bonds, foreign government bonds, mortgage-related 
securities, asset-backed securities and high-yield bonds. CitiStreet 
Funds Management LLC serves as investment adviser to the Fund. Western 
Asset Management Company, Salomon Brothers Asset Management and SsgA 
Funds Management each serve as a subadviser to the Fund. CitiStreet 
Diversified Bond Fund pays a monthly investment management fee based on 
an annual rate of 0.25% of the average daily net assets of the Fund and 
an additional subadvisory fee at a maximum rate of 0.35% (currently 
0.20%) of the average daily net assets.

----------------------------------------------------------------------------------------------------------------
                                                                   Net assets at
                                                                   year-end  (in   Expense ratio   Total return
                                                                     millions)                     (in percent)
----------------------------------------------------------------------------------------------------------------
TST Quality Bond Portfolio:
    1999........................................................          $59.34            0.54            1.09
    2000........................................................           73.37            0.49            6.97
    2001........................................................          151.91            0.45            7.13
CitiStreet Diversified Bond Fund
    1999........................................................             254            0.60           -2.74
    2000........................................................             284            0.62           12.35
    2001........................................................             531            0.65            6.86
----------------------------------------------------------------------------------------------------------------


                          [Amounts in percent]
------------------------------------------------------------------------
                                              Before           After
                  Fund                     reimbursement   reimbursement
                                           or fee waiver   or fee waiver
------------------------------------------------------------------------
TST Quality Bond Portfolio..............            0.32            0.32
                                                    0.13            0.13
                                         -------------------------------
                                                    0.45            0.45
                                         ===============================
CitiStreet Diversified Bond Fund........            0.45            0.45
                                                    1.00            1.00
                                         -------------------------------
                                                    1.45            1.45
------------------------------------------------------------------------


[[Page 43190]]

Group 4  Replacing Fund

    22. The investment objective of the Dreyfus Small Cap Portfolio is 
maximum capital appreciation. The Portfolio primarily invests in small 
cap companies with total market capitalizations of less than $2 billion 
at the time of purchase. The Portfolio invests in both growth stocks 
and value stocks and may include preferred stocks and convertible 
securities. Dreyfus serves as investment adviser to the Portfolio. 
Small Cap Portfolio pays a monthly management fee based on an annual 
rate of 0.75% of the average daily net assets of the Portfolio. 
Applicants propose to substitute shares of the Dreyfus Small Cap 
Portfolio for shares of the Delaware Small Cap Value Series.

Group 4  Replaced Fund

    23. The investment objective of the Delaware Small Cap Value Series 
is capital appreciation. The Portfolio invests in the common stocks of 
companies generally having a market capitalization of less than $1.5 
billion and whose market value appears low relative to their underlying 
value or future earnings potential. Delaware Management Company serves 
as investment adviser to the Portfolio. Small Cap Value Series pays a 
monthly investment management fee based on an annual rate of 0.75% of 
the first $500 million of average daily net assets, 0.70% on the next 
$500 million of average daily net assets, 0.65% on the next $1.5 
billion of average daily net assets and 0.60% on average daily net 
assets in excess of $2.5 billion.

----------------------------------------------------------------------------------------------------------------
                                                                   Net assets at
                                                                   year-end  (in   Expense ratio   Total return
                                                                     millions)     (in percent)    (in percent)
----------------------------------------------------------------------------------------------------------------
Dreyfus Small Cap Portfolios:
    1999........................................................          $1,296            0.78           23.15
    2000........................................................             688            0.78           13.31
    2001........................................................             687            0.79           -6.12
Delaware Small Cap Value Series:
    1999........................................................              95            0.85           -4.86
    2000........................................................             104            0.83           18.18
    2001........................................................             153            0.84           11.84
----------------------------------------------------------------------------------------------------------------


                          [Amounts in percent]
------------------------------------------------------------------------
                                              Before           After
                  Fund                     reimbursement   reimbursement
                                           or fee waiver   or fee waiver
------------------------------------------------------------------------
Dreyfus Small Cap Portfolio.............            0.75            0.75
                                                    0.04            0.04
                                         -------------------------------
                                                    0.79            0.79
                                         ===============================
Delaware Small Cap Value Series.........            0.75            0.73
                                                    0.11            0.11
                                         -------------------------------
                                                    0.86            0.84
------------------------------------------------------------------------

    24. Applicants propose to rationalize and consolidate their 
underlying Portfolio and Fund offerings among the Contracts. The 
rationalization and consolidation effort and resulting proposed 
substitutions arise from two factors. First, after the merger between 
Travelers Group Inc. and Citicorp, there were several asset management 
divisions/groups within the new company, Citigroup. Applicants state 
that a review process resulted in a plan to realign some of the 
underlying fund/portfolio offerings and/or to rationalize the 
offerings. Second, contemporaneously, Travelers Insurance and Travelers 
L & A conducted a reevaluation of the array of investment options 
offered within each Contract. The goal of the reevaluation was to 
identify and establish an updated, current array of investment options 
for the Contracts and respond to distributor feedback regarding 
offerings in various variable annuity and life insurance contracts. 
Travelers Insurance and Travelers L & A added several new options to 
the Contracts this past May 1 and, where possible, closed off the 
proposed replaced Portfolios and Funds to new investments as of that 
date. Applicants state that, in addition, as a result of the fund/
portfolio rationalization, a number of mergers and liquidations of 
funds or portfolios managed by several Travelers Insurance affiliates 
have or will soon occur. Carrying out the proposed substitutions would 
complete the rationalization process.
    25. Applicants believe that the rationalization will make the 
Contracts more competitive in both wholesale and retail markets and 
more efficient to administer and manage. Applicants believe that the 
proposed substitutions will improve Contract owner understanding of the 
investment options under the Contracts by reducing the potential for 
confusion arising from multiple underlying Portfolios or Funds of 
similar type and reduce the administrative burden of operating 
subaccounts by limiting the number that Applicants must maintain for 
each Contract.
    26. Applicants believe that they have selected the proposed 
replaced Portfolios and Funds fairly. Applicants state that the 
Portfolios and Funds proposed for replacement, as well as the proposed 
replacing Portfolios and Funds, are a mix of affiliated and 
unaffiliated Portfolios and Funds. For each of the proposed 
substitutions the replacing Portfolio or Fund has a lower total expense 
ratios than the replaced Portfolio or Fund.
    27. Also, Applicants note that the replacing Portfolio or Fund has 
average annual total returns that are better or comparable to the 
replacement Portfolio or Fund.
    28. With respect to the Group 1 substitutions, Applicants also 
state that, although the AIM Capital Appreciation Portfolio (``AIM 
Capital'') and the OCC Equity Portfolio (``OCC Equity'') have

[[Page 43191]]

identical investment objectives, they pursue their objectives with 
somewhat different strategies. AIM Capital invests in common stocks of 
companies with new or innovative products, services, or processes and 
those with above-average long-term growth in earnings, whereas OCC 
Equity invests in undervalued equity securities. Still, Contract owners 
purchasing shares of the substituted Portfolio will be able to invest 
in stocks with the potential to increase significantly in value.
    29. With respect to the Group 1 substitutions, Applicants further 
state that AIM Capital and the Montgomery Growth Fund (``Montgomery 
Growth'') have substantially identical investment objectives as well as 
very similar strategies for reaching their goals: Montgomery Growth 
invests in growth-oriented stocks and may invest in cash whereas AIM 
Capital invests primarily in common stocks and tries to select 
companies with new or innovative products, services, and processes. 
Applicants believe that, after the proposed substitution, Contract 
owners would continue to invest in a growth-oriented Portfolio that 
seeks domestic equity stocks of a wide variety of the companies with 
growth potential.
    30. With respect to the Group 2 substitutions, Applicants state 
that one of the investment objectives of the TST U.S. Government 
Securities Portfolio (``TST Government'') is to have the highest credit 
quality in its portfolio, which is not an objective of the Templeton 
Global Income Securities Fund Class I (``Global Income''). Likewise, 
Global Income Securities has an objective of preservation of capital, 
not shared with TST Government. Both Portfolios, however, share the 
objective of seeking income as well as capital appreciation and both 
pursue these objectives by investing in debt securities.
    31. As to the other Group 2 substitutions, Applicants contend that 
TST Government, Putnam Diversified Income Portfolio (``Putnam 
Diversified''), and Smith Barney High Income Portfolio (``Smith Barney 
Income'') have somewhat similar investment objectives in that they all 
seek current income; except that TST Government also seeks highest 
credit quality and total return, Putnam Diversified seeks preservation 
of capital, and Smith Barney Income has a secondary objective of 
capital appreciation. The Portfolios also have a similar strategy of 
achieving these objectives. Applicants state that, even though these 
three Portfolios focus their investments in different grades of debt 
securities, the proposed substitutions would not necessarily frustrate 
Contract owners' investment goals. Applicants believe that, after the 
proposed substitution, Contract owners will still have the ability to 
invest primarily in debt securities. Moreover, TST Government has a 
lower risk profile than Putnam Diversified or Smith Barney Income.
    32. As to the Group 3 substitutions, Applicants contend that the 
investment objectives of the TST Quality Bond Portfolio (``Quality 
Bond'') are substantially similar to CitiStreet Diversified Bond Fund 
(``Diversified Bond''). Quality Bond and Diversified Bond both seek 
total return, which entails an element of capital appreciation along 
with income. Whereas Quality Bond invests only in investment-grade debt 
securities, Diversified Bond invests in a broad range of debt 
securities. Applicants believe that, after the proposed substitution, 
Contract owners would continue to invest in a Portfolio in which the 
primary component of its strategy is to seek current income by 
investing in debt securities.
    33. As to the Group 4 substitutions, Applicants contend that the 
Dreyfus Small Cap Portfolio (``Dreyfus Small Cap'') and the Delaware 
Small Cap Value Series (``Delaware Small Cap'') have identical 
investment objectives. Applicants state that their investment 
strategies are similar except that Dreyfus Small Cap invests in growth 
stocks and stocks that cannot easily be categorized as either growth or 
value as well as value stocks. Applicants believe that, after the 
proposed substitution, Contract owners would still be invested in a 
Portfolio that invests in small cap companies that have prospects for 
future earnings.
    34. Applicants state that, by supplements to the various May 1, 
2001 prospectuses for the Contracts and the Accounts, all owners of the 
Contracts have been notified of Travelers Insurance's and Travelers L & 
A's intention to take the necessary actions, including seeking the 
order requested by the application, to substitute shares of the 
Portfolios and Funds as described therein. The supplements about the 
proposed substitutions advised Contract owners that from the date of 
the supplement, Travelers Insurance and Travelers L & A will not 
exercise any rights reserved under any Contract to impose restrictions 
on or charges for transfers until at least 30 days after the proposed 
substitutions. The supplements also advised Contract owners that if the 
proposed substitutions are carried out, then each Contract owner 
affected by a substitution will be sent a written notice (described 
below) informing them of the fact and details of the substitutions.
    35. The proposed substitutions will take place at relative net 
asset value with no change in the amount of any Contract owner's 
account value or death benefit or in the dollar value of his or her 
investment in any of the Accounts. Contract owners will not incur any 
fees or charges as a result of the proposed substitutions, nor will 
their rights or Travelers Insurance's and Travelers L & A's obligations 
under the Contracts be altered in any way. All expenses incurred in 
connection with the proposed substitutions, including brokerage 
commissions and legal, accounting, and other fees and expenses, will be 
paid by Travelers Insurance or Travelers L & A. In addition, the 
proposed substitutions will not impose any tax liability on Contract 
owners. The proposed substitutions will not cause the Contract fees and 
charges currently being paid by existing Contract owners to be greater 
after the proposed substitutions than before the proposed 
substitutions. The proposed substitutions will not be treated as a 
transfer for the purpose of assessing transfer charges or for 
determining the number of remaining permissible transfers in a Contract 
year. Travelers Insurance and Travelers L & A will not exercise any 
right it may have under the Contracts to impose any restrictions on or 
charges for transfers (and will suspend any restrictions on transfers) 
under any of the Contracts for a period of at least 30 days following 
the substitutions.
    36. In addition to the supplements distributed to owners of 
Contracts, within five days after the proposed substitutions, any 
Contract owners who are affected by a substitution will be sent a 
written notice informing them that the substitutions were carried out. 
The notice will also reiterate the fact that Travelers Insurance and 
Travelers L & A will not exercise any rights reserved by it under any 
of the Contracts to impose any restrictions on or charges for transfers 
(and will suspend any restrictions on transfers) until at least 30 days 
after the proposed substitutions. Current prospectuses for the new 
Funds or Portfolios will precede or accompany the notices.
    37. As to all proposed substitutions, to the extent that the 
annualized expenses of a replacing Portfolio or Fund exceeds, for each 
fiscal period (such period being less than 90 days) during the twenty-
four months following the substitutions, the 2001 net expense level of 
the Portfolio or Fund it replaces, Travelers Insurance and

[[Page 43192]]

Travelers L & A will, for each Contract outstanding on the date of the 
substitutions, make a corresponding reduction in separate account (or 
subaccount) expenses on the last day of each such fiscal period, such 
that the amount of the Portfolio's or Fund's expenses, together with 
those of the corresponding separate account (or subaccount) will, on an 
annualized basis, be no greater than the sum of the net expenses of the 
replaced Portfolio or Fund and the net expenses of the separate account 
(or subaccount) for the 2001 fiscal year. In addition, for twenty-four 
months following the substitutions, Travelers Insurance and Travelers L 
& A will not increase asset-based fees or charges under the Contracts.
    38. Travelers Insurance and Travelers L & A are also seeking 
approval of the proposed substitutions from any state insurance 
regulators whose approval may be necessary or appropriate.

Applicants' Legal Analysis

    1. Section 26(c) of the Act requires the depositor of a registered 
unit investment trust holding the securities of a single issuer to 
receive Commission approval before substituting the securities held by 
the trust. Prior to the enactment of this provision in 1970, a 
depositor of a unit investment trust could substitute new securities 
for those held by the trust by notifying the trust's security holders 
of the substitution within five days of the substitution. In 1966, the 
Commission, concerned with the high sales charges then common to most 
unit investment trusts and the disadvantageous position in which such 
charges placed investors who did not want to remain invested in the 
substituted fund, recommended that the Act be amended to require that a 
proposed substitution of the underlying investments of a trust receive 
prior Commission approval.
    2. Applicants state that all the Contracts, except one, expressly 
reserve for Travelers Insurance and Travelers L & A the right, subject 
to compliance with applicable law, to substitute shares of one 
Portfolio or Fund held by subaccount of an Account for another. 
Applicants state that the prospectuses for the Contracts and the 
Accounts contain appropriate disclosure of this right.
    3. Applicants state that Travelers Insurance and Travelers L & A 
reserved this right of substitution both to protect themselves and 
their Contract owners in situations where either might be harmed or 
disadvantaged by circumstances surrounding the issuer of the shares 
held by one or more of their separate accounts and to afford the 
opportunity to replace such shares where to do so could benefit itself 
and Contract owners.
    4. Applicants maintain that Contract owners will be better served 
by the proposed substitutions. Applicants anticipate that the 
replacement of certain unpopular Portfolios or Funds will result in a 
Contract that is administered and managed more efficiently, and one 
that is more competitive with other variable products in both wholesale 
and retail markets. For all of the proposed substitutions, the new 
Portfolio or Fund historically has had comparable or superior 
investment performance than the Portfolios or Funds that it would 
replace. More significantly, each new Portfolio or Fund has had lower 
expenses in recent years than the Portfolios or Funds that it would 
replace. Applicants state that for all of the proposed substitutions, 
the new Portfolios or Funds are either substantially the same or more 
conservative in their investment objective(s) or strategies or both, 
than the Portfolios or Funds that they would replace. Likewise, 
Applicants believe that a majority of the new Portfolios or Funds have 
a substantially similar or lower investment risk profile than the 
Portfolios or Funds each would replace.
    5. In addition to the foregoing, Applicants generally submit that 
the proposed substitutions meet the standards that the Commission and 
its staff have applied to similar substitutions that have been approved 
in the past.
    6. Applicants anticipate that Contract owners will be at least as 
well off with the proposed array of subaccounts to be offered after the 
proposed substitutions as they have been with the array of subaccounts 
offered before the substitutions. The proposed substitutions retain for 
Contract owners the investment flexibility which is a central feature 
of the Contracts. If the proposed substitutions are carried out, all 
Contract owners will be permitted to allocate purchase payments and 
transfer accumulated values and contract values between and among the 
remaining subaccounts as they could before the proposed substitutions.
    7. Applicants assert that each of the proposed substitutions is not 
the type of substitution which Section 26(c) was designed to prevent. 
Unlike traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner which permanently 
affected all the investors in the trust, the Contracts provide each 
Contract owner with the right to exercise his or her own judgment and 
transfer accumulation and contract values into other subaccounts. 
Moreover, the Contracts will offer Contract owners the opportunity to 
transfer amounts out of the affected subaccounts into any of the 
remaining subaccounts without cost or other disadvantage. The proposed 
substitutions, therefore, will not result in the type of costly forced 
redemption which Section 26(c) was designed to prevent.
    8. Applicants maintain that the proposed substitutions also are 
unlike the type of substitution which Section 26(c) was designed to 
prevent in that by purchasing a Contract, Contract owners select much 
more than a particular investment company in which to invest their 
account values. They also select the specific type of insurance 
coverage offered by Travelers Insurance and Travelers L & A under their 
Contracts as well as numerous other rights and privileges set forth in 
the Contract. Contract owners may also have considered Travelers 
Insurance's and Travelers L & A's size, financial condition, type, and 
its reputation for service in selecting their Contract. These factors 
will not change because of the proposed substitutions.
    9. Applicants submit that, for all the reasons stated above, the 
proposed substitutions are consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act.
    10. Section 17(a)(1) of the Act, in relevant part, prohibits any 
affiliated person of a registered investment company, or any affiliated 
person of such person, acting as principal, from knowingly selling any 
security or other property to that company. Section 17(a)(2) of the Act 
generally prohibits the persons described above, acting as principals, 
from knowingly purchasing any security or other property from the 
registered investment company. Section 17(b) of the Act provides that 
the Commission may, upon application, grant an order exempting any 
transaction from the prohibitions of Section 17(a) if the evidence 
establishes that: (1) 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; (2) 
the proposed transaction is consistent with the policy of each 
registered investment company concerned, as recited in its registration 
statement and records filed under the Act; and (3) the proposed 
transaction is consistent with the general purposes of the Act.
    11. Applicants submit that the terms of the proposed substitutions 
by

[[Page 43193]]

Travelers Insurance and Travelers L & A including the consideration to 
be paid and received, as described in the application, are reasonable 
and fair and do not involve overreaching on the part of any person 
concerned. In addition, Applicants submit that the proposed 
substitutions are consistent with the general purposes of the Act.
    12. Applicants maintain that the terms of the proposed 
transactions, including the consideration to be paid and received by 
each Portfolio or Fund involved, are reasonable, fair and do not 
involve overreaching principally because the transactions do not cause 
owners' interests under a Contract to be diluted and because the 
transactions will conform with all but one of the conditions enumerated 
in Rule 17a-7. The proposed transactions will take place at relative 
net asset value with no change in the amount of any Contract owner's 
Contract or cash value or death benefit or in the dollar value of his 
or her investment in any of the Accounts. Even though Travelers 
Insurance, Travelers L & A, TSF, TST and CitiStreet may not rely on 
Rule 17a-7, Applicants believe that the Rule's conditions outline the 
type of safeguards that result in transactions that are fair and 
reasonable to registered investment company participants and preclude 
overreaching in connection with an investment company by its affiliated 
persons.
    13. Applicants state that the board of directors of TSF and 
CitiStreet and the board of trustees of TST have adopted or will adopt 
procedures, as required by paragraph (e)(1) of Rule 17a-7, pursuant to 
which the Portfolios or Funds of each may purchase and sell securities 
to and from their affiliates. Travelers Insurance, Travelers L & A, 
TSF, TST and CitiStreet will carry out the proposed substitutions in 
conformity with all of the conditions of Rule 17a-7 and TSF's, TST's 
and CitiStreet's procedures thereunder, except that the consideration 
paid for the securities being purchased or sold may not be entirely 
cash. Nevertheless, the circumstances surrounding the proposed 
substitutions will be such as to offer the same degree of protection to 
each Portfolio of TSF and the affected Funds of TST and CitiStreet from 
overreaching that Rule 17a-7 provides to them generally in connection 
with their purchase and sale of securities under that Rule in the 
ordinary course of their business. In particular, because of the 
circumstances surrounding the proposed Travelers Insurance and 
Travelers L & A substitutions, TSF, TST, CitiStreet and the other 
affected Portfolios could not ``dump'' undesirable securities on TST or 
TSF, or retain its desirable securities for themselves. Nor can 
Travelers Insurance and Travelers L & A effect the proposed 
transactions at a price that is disadvantageous to any TSF Portfolio, 
TST Fund or CitiStreet Fund. Although the transactions may not be 
entirely for cash, each will be effected based upon (1) the independent 
market price of the portfolio securities valued as specified in 
paragraph (b) of Rule 17a-7, and (2) the net asset value per share of 
each Portfolio or Fund involved valued in accordance with the 
procedures disclosed in the respective Management Company's 
registration statement and as required by Rule 22c-1 under the Act. No 
brokerage commission, fee, or other remuneration will be paid to any 
party in connection with the proposed transactions. In addition, the 
board of directors of TSF and the board of trustees of TST will 
subsequently review these proposed substitutions and make the 
determinations required by paragraph (e)(3) of Rule 17a-7.
    14. Applicants state that the proposed redemption of shares of 
Putnam Diversified, Smith Barney Income, Montgomery Growth, OCC Equity, 
Diversified Bond and Global Income is consistent with the investment 
policy of each, as these are recited in its registration statement, 
provided that the shares are redeemed at their net asset value in 
conformity with Rule 22c-1 under the Act.
    15. Applicants state that the sale of shares of Quality Bond, AIM 
Capital, and TST Government as contemplated by the proposed 
substitution, is consistent with the investment policy of each, as 
recited in its registration statement, provided that (1) the shares are 
sold at their net asset value, and (2) the portfolio securities are of 
the type and quality that the affected portfolios has acquired with the 
proceeds from share sales had the shares been sold for cash. To assure 
that the second of these conditions is met, Travelers Insurance and 
Travelers L & A will examine the portfolio securities being offered to 
Quality Bond, AIM Capital, and TST Government and accept only those 
securities as consideration for shares that it would have acquired for 
in a cash transaction.
    16. Applicants assert that the proposed substitutions, as described 
herein, are each consistent with the general purposes of the Act as 
stated in the Findings and Declaration of Policy in section 1 of the 
Act. The proposed transactions do not present any of the conditions or 
abuses that the Act was designed to prevent. In particular, section 
1(b)(2) and (3) of the Act state, among other things, that the national 
public interest and the interest of investors are adversely affected 
``when investment companies are organized, operated, managed, or their 
portfolio securities are selected in the interest of directors, 
officers, investment advisers, depositors, or other affiliated persons 
thereof, * * * or in the interests of other investment companies or 
persons engaged in other lines of business, rather than in the interest 
of all classes of such companies' security holders; * * * when 
investment companies issue securities containing inequitable or 
discriminatory provisions, or fail to protect the preferences and 
privileges of the holders of their outstanding securities.'' Applicants 
assert that the conditions found in Rule 17a-7 prevent the abuses 
described in section 1(b)(2) and (3) of the Act. Applicants further 
assert that, for all the reasons stated in section IV of the 
application, the abuses described in section 1(b)(2) and (3) of the Act 
will not occur in connection with the proposed substitutions.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-16061 Filed 6-25-02; 8:45 am]
BILLING CODE 8010-01-P