[Federal Register Volume 67, Number 167 (Wednesday, August 28, 2002)]
[Notices]
[Pages 55280-55286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-21953]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25715; File No. 812-12632]


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

August 21, 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, as amended (``1940 Act'') approving 
certain substitutions of securities, and pursuant to section 17(b) of 
the 1940 Act exempting related transactions from section 17(a) of the 
1940 Act.

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APPLICANTS: Phoenix Life Insurance Company (``Phoenix'') and PHL 
Variable

[[Page 55281]]

Insurance Company (``PHL Variable'') (together, the ``Phoenix Insurance 
Companies''), and Phoenix Life Variable Accumulation Account (``Phoenix 
VA Account''), Phoenix Life Variable Universal Life Account (``Phoenix 
VUL Account''), and PHL Variable Accumulation Account (``PHL VA 
Account'') (collectively, the ``Separate Accounts'' and, with the 
Phoenix Insurance Companies, the ``Applicants'').

SUMMARY OF THE APPLICATION: Applicants request an order to permit the 
substitution of securities issued by the Federated Fund for U.S. 
Government Securities II (``Federated Fund''), a portfolio of Federated 
Insurance Series (``Federated Trust''), for securities issued by the 
Phoenix-Federated U.S. Government Bond Series (``Phoenix-Federated 
Fund''), a series of The Phoenix Edge Series Fund (``Phoenix Trust''), 
held by the Separate Accounts, and to permit certain in-kind 
redemptions and purchases in connection with the substitution (``In-
Kind Transaction'').

FILING DATE: The application was filed on September 14, 2001 and was 
amended and restated on August 15, 2002.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing on the application by writing to the 
Secretary of the Commission and serving Applicants with a copy of the 
request, personally or by mail. Hearing requests must be received by 
the Commission by 5:30 p.m. on September 16, 2002 and should be 
accompanied by proof of service on the Applicants, in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of writer's interest, the reason for the 
request, and the issues contested. Persons may request notification of 
the date of the hearing by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Ruth S. 
Epstein, Esq., Dechert, 1775 Eye Street, NW., Washington, DC 20006-
2401.

FOR FURTHER INFORMATION CONTACT: H. Yuna Peng, Attorney, at (202) 942-
0676, 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 is available for a fee from the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. Phoenix is a life insurance company originally chartered in 
Connecticut in 1851 and redomiciled to New York in 1992. Phoenix sells 
life insurance policies and variable annuity contracts and variable 
life insurance policies through its own field force of agents and 
through brokers.
    2. PHL Variable is an indirect wholly-owned subsidiary of Phoenix. 
PHL Variable is a Connecticut stock company formed on April 24, 1981. 
PHL Variable sells variable annuity contracts through its own field 
force of agents and through brokers.
    3. The Phoenix VA Account and the Phoenix VUL Account are separate 
accounts of Phoenix created on June 21, 1982 and June 17, 1985, 
respectively. The PHL VA Account is a separate account of PHL Variable 
created on December 7, 1994. The Separate Accounts own virtually all of 
the issued and outstanding shares of the Phoenix-Federated Fund.
    4. The Separate Accounts are segregated asset accounts of the 
Phoenix Insurance Companies. Each Separate Account is registered with 
the Commission as a unit investment trust under the 1940 Act. The 
Separate Accounts fund the respective variable benefits available under 
the variable annuity contracts and variable life insurance policies 
(the ``Contracts'') issued by the Phoenix Insurance Companies. Each of 
the Separate Accounts is divided into subaccounts, which invest in 
shares of mutual funds, or series thereof, corresponding to the 
investment designation of the respective subaccount. Units of interest 
in the Separate Accounts under the Contracts are registered under the 
Securities Act of 1933, as amended (``1933 Act'').
    5. The Contracts offer a range of investment options, which include 
all series of the Phoenix Trust and series of other variable insurance 
products funds that are managed by unaffiliated advisers, including the 
Federated Fund. Contract owners or participants may allocate 
contributions or premium payments among these variable options and any 
fixed investment options available under the Contract. Contributions or 
premium payments allocated to variable funding options are held in 
corresponding subaccounts of the appropriate Separate Accounts.
    6. The Phoenix Trust is an open-end management investment company 
of the series type registered under the 1940 Act (File No. 811-04642) 
and its shares are registered under the 1933 Act on Form N-1A (File No. 
033-05033). The Phoenix Trust currently has twenty-seven separate 
series (nine new series are in the process of being organized). The 
Phoenix Trust is a variable insurance products fund that currently 
offers its shares exclusively to the Separate Accounts, although the 
Phoenix Trust may in the future offer its shares to other insurance 
company separate accounts and qualified retirement or pension plans.
    7. Phoenix Variable Advisors, Inc. (``PVA'') currently is the 
investment adviser to fifteen series of the Phoenix Trust. PVA is 
registered as an investment adviser under the Investment Advisers Act 
of 1940, as amended (the ``Advisers Act''). PVA is an indirect wholly-
owned subsidiary of Phoenix.
    8. The Phoenix-Federated Fund is a series of the Phoenix Trust. The 
Phoenix-Federated Fund invests primarily in debt obligations of the 
U.S. government, its agencies and instrumentalities, including 
mortgage-backed securities. Its investment adviser is PVA, which has 
retained Federated Investment Management Company (``Federated'') as 
subadviser. In that capacity, Federated performs all day-to-day 
portfolio management of the Phoenix-Federated Fund. Federated, a 
Delaware business trust with principal offices at 1001 Liberty Avenue, 
Pittsburgh, Pennsylvania, is a wholly-owned subsidiary of Federated 
Investors, Inc., and is not an affiliated person of PVA, the Phoenix 
Insurance Companies, or the Separate Accounts within the meaning of 
section 2(a)(3) of the 1940 Act.
    9. The Phoenix-Federated Fund is available only through Phoenix-
Federated Fund subaccounts offered under the Contracts. As of February 
16, 2001, the Phoenix-Federated Fund subaccounts are not available for 
allocations of Contract value, either by premium payment or transfer of 
account value, except by Contract owners who, at or prior to that time, 
had Contract value allocated to the Phoenix-Federated Fund subaccounts.
    10. The Federated Trust is an open-end management investment 
company of the series type registered under the 1940 Act (File No. 811-
08042) and its shares are registered under the 1933 Act on Form N-1A 
(File No. 033-69268). The Federated Trust currently has thirteen 
series. The Federated Trust is a variable insurance products fund whose 
shares are available exclusively to separate accounts of insurance 
companies writing variable life

[[Page 55282]]

insurance policies and variable annuity contracts, including the 
Separate Accounts. Under Fund Participation Agreements between the 
Phoenix Insurance Companies, Federated Trust, and Federated Trust's 
distributor (the ``distributor''), the distributor pays the Phoenix 
Insurance Companies a fee for administrative services provided by the 
Phoenix Insurance Companies to their Contract owners. The amount of the 
fee is computed at an annual rate of 0.25% of the average daily net 
asset value of shares held in subaccounts for which the respective 
Phoenix Insurance Company provides administrative services. The 
distributor's payments to the Phoenix Insurance Companies are for 
administrative services only and do not constitute payment in any 
manner for investment advisory services. The Federated Trust changed 
its name from Insurance Management Series to Federated Insurance Series 
on November 14, 1995.
    11. The Federated Fund is a series of the Federated Trust. Like the 
Phoenix-Federated Fund, the Federated Fund invests primarily in U.S. 
Government securities, including mortgage-backed securities issued by 
U.S. government agencies. Federated, as its investment adviser, 
provides day-to-day portfolio management for the Federated Fund.
    12. The Federated Fund is not affiliated with the Phoenix Insurance 
Companies except as the Separate Accounts may be deemed affiliates of 
the Federated Fund by virtue of their ownership of shares of the 
Federated Fund.
    13. Applicants propose to substitute shares of the Federated Fund 
for shares of the Phoenix-Federated Fund (the ``Substitution''). 
Although the investment objectives for the Phoenix-Federated Fund and 
the Federated Fund are stated differently, the two Funds have 
substantially similar investment strategies and anticipated risks, as 
described in the table below.

----------------------------------------------------------------------------------------------------------------
                                      Removed fund: Phoenix-Federated fund    Substituted fund: Federated fund
----------------------------------------------------------------------------------------------------------------
Investment Objective...............  Total return, by investing primarily   Current income, by investing
                                      in debt obligations of the U.S.        primarily in a diversified
                                      government, its agencies and           portfolio of U.S. government
                                      instrumentalities.                     securities.
Principal Investment Strategies....  Under normal circumstances, the        The Federated Fund invests primarily
                                      Phoenix-Federated Fund will invest     in U.S. government securities,
                                      at least 80% of its total assets in    including mortgage-backed
                                      debt obligations of the U.S.           securities issued by U.S.
                                      government, its agencies and           government agencies.
                                      instrumentalities, including
                                      mortgage-backed securities.
Principal Risks....................   Interest Rate Risk..........   Interest Rate Risk.
                                      Prepayment Risk.............   Prepayment Risk.
                                      Credit Risk.................   Credit Risk.
                                                                             Liquidity Risk.
----------------------------------------------------------------------------------------------------------------

    14. Federated provides the day-to-day portfolio management for both 
the Phoenix-Federated Fund and the Federated Fund, as investment 
adviser to the Federated Fund and subadviser to the Phoenix-Federated 
Fund.
    15. The Federated Fund has lower overall expenses than the Phoenix-
Federated Fund. The chart below shows the investment advisory fees, 
other expenses and total expenses of the Phoenix-Federated Fund and the 
Federated Fund for the year ending December 31, 2001, expressed as a 
percentage of average daily net assets.

------------------------------------------------------------------------
                                           Removed fund:    Substituted
                                             Phoenix-          fund:
                                          Federated Fund  Federated Fund
                                            in 2001 (in      2001  (in
                                             percent)        percent)
------------------------------------------------------------------------
Advisory Fee............................            0.60            0.60
Shareholder Services Fee................             N/A            0.25
Other Expenses..........................            0.86            0.14
                                         -------------------------------
      Total Expenses....................            1.46            0.99
      Total Expenses of Waivers and                 0.90            0.74
       Reimbursements...................
------------------------------------------------------------------------

    16. The Federated Fund is substantially larger than the Phoenix-
Federated Fund. As of December 31, 2001, the net assets of the 
Federated Fund were approximately $300.4 million, while the net assets 
of the Phoenix-Federated Fund were approximately $15.1 million.
    17. The Phoenix-Federated Fund and the Federated Fund each pays an 
investment advisory fee equal, on an annual basis, to 0.60% of the 
fund's average daily net assets. Under its subadvisory agreement with 
Federated, PVA pays Federated a subadvisory fee in the amount of 0.30% 
of the Phoenix-Federated Fund's average daily net assets up to $25 
million, 0.25% on the next $25 million, and 0.20% on the next $50 
million. The fee is negotiable on amounts over $100 million.
    18. Under the terms of a shareholder services agreement between the 
Federated Fund and Federated Shareholder Services, an affiliate of 
Federated, the Federated Fund may pay a fee in an amount up to 0.25% of 
its average annual net assets to Federated Shareholder Services for 
providing certain shareholder services. The Federated Fund did not pay 
or accrue the shareholder services fee during the year ending December 
31, 2001. The Federated Fund has no present intention of paying or 
accruing the shareholder services fee during the year ending December 
31, 2002.
    19. Total expenses net of waivers and reimbursements have been 
restated to reflect the effect of current reimbursement arrangements as 
if they had been in effect during all of 2001. PVA currently reimburses 
the Phoenix-Federated Fund expenses, other than advisory fees, to the 
extent such expenses exceeded, on an annual basis, 0.30% of the Fund's 
total average daily net assets. This arrangement has been in

[[Page 55283]]

effect since May 1, 2002, and may be discontinued at any time. During 
2001, the Phoenix-Federated Fund's total expenses net of waivers and 
reimbursements were 0.82% of the Phoenix-Federated Fund's total average 
daily net assets, based on reimbursement arrangements in place at 
various times during the year.
    20. The table below shows the one, five, and ten year performance 
for each of the Funds, in addition to the lifetime performance, through 
December 31, 2001:

----------------------------------------------------------------------------------------------------------------
                                One year (in   Five years (in
                                  percent)        percent)        Ten years        Life of fund (in percent)
----------------------------------------------------------------------------------------------------------------
Phoenix-Federated Fund.......            5.01             N/A             N/A  10.59 (Dec. 15, 1999).
Federated Fund...............            7.03            6.66             N/A  6.28 (Mar. 28, 1994).
----------------------------------------------------------------------------------------------------------------

    21. Applicants state that each of the Contracts reserves to 
Applicants the right, subject to compliance with applicable law, to 
substitute shares of another fund for shares of the Phoenix-Federated 
Fund held by the Separate Accounts. The prospectuses describing the 
Contracts contain disclosure of this right.
    22. Applicants have provided their respective Contract owners and 
participants with disclosure of the proposed Substitution through 
prospectuses or prospectus supplements, as appropriate. Applicants will 
send Contract owners and participants confirmation of the Substitution 
within five days after the Substitution is effected.
    23. Applicants state that, as described above, the two Funds have 
substantially similar investment strategies and their day-to-day 
portfolio management is performed by Federated, within the same 
investment group. For these reasons, the two Funds effectively 
represent duplicative options under the Contracts. This duplication 
presents an unnecessary source of complexity and possible confusion for 
Contract owners deciding how to allocate account value under the 
Contracts.
    24. Moreover, Applicants state that the Phoenix-Federated Fund, 
which commenced operations in December 1999, has not proved to be a 
popular investment option under the Contracts and has never grown to a 
viable size. As of December 31, 2001, the Phoenix-Federated Fund had 
only approximately $15.1 million in assets, of which approximately $6.0 
million represents the value of the initial seed money. As a 
consequence of its small size, the gross expenses of the Phoenix-
Federated Fund remain high, in the range of 1.46% of average net 
assets. While the Phoenix-Federated Fund's adviser currently waives or 
reimburses a significant portion of these expenses, it is under no 
obligation to continue to do so. Finally, since the Contracts no longer 
offer the Phoenix-Federated Fund as an investment option to Contract 
owners who have not previously allocated account value to it, there is 
no reasonable likelihood that the Phoenix-Federated Fund will grow 
appreciably in the future.
    25. Applicants assert that the Substitution is proposed to 
eliminate the above-described duplication by consolidating the assets 
of the Phoenix-Federated Fund into the larger Federated Fund. With this 
goal in mind, Applicants believe that the Substitution will: (i) 
Facilitate Contract owner understanding of the underlying investment 
options for the Contracts and reduce the potential for Contract owners 
to be confused by two separate underlying investment options that 
invest in similar types of securities (i.e., securities issued or 
guaranteed by the United States government, its agencies or 
instrumentalities); and (ii) provide Contract owners who have their 
Contract values currently allocated to the Phoenix-Federated Fund with 
an investment in a larger fund that permits greater efficiency and 
diversification in its portfolio holdings, benefits from economies of 
scale, and has lower overall expenses.
    26. The Phoenix Insurance Companies and PVA will not receive for 
three years from the date of the Substitution any direct or indirect 
benefit from the Federated Fund, its adviser or underwriter, or from 
affiliates of the Federated Fund, its adviser or underwriter, in 
connection with assets attributable to Contracts affected by the 
Substitution, at a higher rate than the Phoenix Insurance Companies or 
PVA were contractually entitled to receive from the Phoenix Federated 
Fund, its adviser or underwriter, or from any of their affiliates, 
including without limitation, Rule 12b-1 fees, shareholder service or 
administrative or other service fees, revenue sharing or other 
arrangements. The Phoenix Insurance Companies represent that the 
Substitution and their selection of the Federated Fund is not motivated 
by any financial consideration paid to or to be paid to the Phoenix 
Insurance Companies or any of their affiliates by the Federated Fund, 
its adviser or underwriter, or by the affiliates of the Federated Fund, 
its adviser or underwriter.
    27. Applicants assert that the proposed Substitution is designed to 
provide Contract owners and participants with an opportunity to 
continue their investment in a similar investment option without 
interruption and without any cost to them. In this regard, the Phoenix 
Insurance Companies will be responsible for expenses incurred in 
connection with the Substitution and related filings and notices, 
including legal, accounting and other fees and expenses. On the 
effective date of the Substitution, the amount of any Contract owner's 
or participant's Contract value or the dollar value of a Contract 
owner's or participant's investment in the relevant Contract will not 
change as a result of the Substitution.
    28. Applicants state that they have filed with the Commission and 
have sent to all existing and new Contract owners and participants 
prospectuses or supplements to prospectuses containing a description of 
the proposed Substitution (the ``Notice''). The Notice disclosed the 
impact of the Substitution on fees and expenses at the underlying fund 
level. The Notice informed affected Contract owners and participants 
(i.e., those Contract owners or participants who have Contract value 
allocated to the Phoenix-Federated Fund subaccount) that they will have 
the opportunity to reallocate Contract value:
    a. prior to the Substitution, from the Phoenix-Federated Fund 
subaccount; or
    b. for thirty days after the Substitution, from the Federated Fund 
subaccount to other subaccounts available under the respective 
Contracts without the imposition of any transfer charge or limitation 
and without diminishing the number of free transfers that may be made 
in a given contract year. Existing Contract owners and participants who 
have not previously received a prospectus for the Federated Fund, and 
new Contract owners and participants, have been or will be sent a 
prospectus for the Federated Fund.
    29. Applicants state that confirmation of the Substitution (the 
``Confirmation'')

[[Page 55284]]

will be mailed to affected Contract owners and participants within five 
days after the Substitution is effected (the ``Substitution Date''). 
The Confirmation will disclose: (i) That the Substitution was carried 
out; and (ii) that affected Contract owners and participants will have 
the opportunity to reallocate Contract value for thirty days after the 
Substitution from the Federated Fund subaccount to other subaccounts 
available under the respective Contracts without the imposition of any 
transfer charge or limitation and without diminishing the number of 
free transfers that may be made in a given contract year.
    30. Applicants state that it is expected that the Substitution will 
be effected by redeeming the shares of the Phoenix-Federated Fund in 
kind on the Substitution Date at their net asset value. Those assets 
will then be contributed in kind to the Federated Fund to purchase its 
shares at their net asset value on the same date.
    31. In-kind redemptions and contributions will be done in a manner 
consistent with the investment objectives, policies and diversification 
requirements of the Federated Fund and the Phoenix-Federated Fund. All 
assets subject to in-kind redemption and purchase will be valued based 
on the normal valuation procedures of the Federated Fund and the 
Phoenix-Federated Fund, as set forth in the registration statements for 
the Federated Trust and the Phoenix Trust. To the extent that any 
shares are redeemed otherwise than in kind, the Phoenix Insurance 
Companies will assume any related brokerage costs.
    32. Applicants assert that the significant terms of the 
Substitution described above include:
    a. The Federated Fund will have investment objectives, investment 
strategies and anticipated risks that are compatible with or similar to 
those of the Phoenix-Federated Fund.
    b. The fees and expenses of the Federated Fund are lower than those 
of the Phoenix-Federated Fund.
    c. To the extent that any shares are redeemed otherwise than in 
kind, the Phoenix Insurance Companies will be responsible for brokerage 
costs incurred in connection with those redemptions.
    d. Affected Contract owners and participants may, prior to the 
Substitution, transfer assets from the Phoenix-Federated Fund 
subaccount to another subaccount available under their Contract and, 
for thirty days after the Substitution, transfer assets from the 
Federated Fund subaccount to another subaccount available under their 
Contract without the imposition of any transfer charge or limitation 
and without diminishing the number of free transfers that may be made 
in a given contract year.
    e. The Substitution will be effected at the relative net asset 
value of the respective shares of the Phoenix-Federated Fund and the 
Federated Fund in conformity with section 22(c) of the 1940 Act and 
Rule 22c-1 thereunder, without the imposition of any transfer or 
similar charge by Applicants, and with no change in the amount of any 
Contract owner's or participant's Contract value or in the dollar value 
of any Contract owner's or participant's investment in such Contract.
    f. Contract owners and participants will not incur any fees or 
charges as a result of the proposed Substitution, nor will their rights 
or the Phoenix Insurance Companies' obligations under the Contracts be 
altered in any way. The Phoenix Insurance Companies will be responsible 
for expenses incurred in connection with the proposed Substitution and 
related filings and notices, including legal, accounting and other fees 
and expenses. The proposed Substitution will not cause the Contract 
fees and charges currently being paid by existing Contract owners to be 
greater after the proposed Substitution than before the proposed 
Substitution.
    g. Redemptions in kind and contributions in kind will be done in a 
manner consistent with the investment objectives, policies and 
diversification requirements of the Phoenix-Federated Fund and the 
Federated Fund. Consistent with Rule 17a-7(d) under the 1940 Act, no 
brokerage commissions, fees (except customary transfer fees) or other 
remuneration will be paid in connection with the In-Kind Transaction.
    h. The Substitution will not be counted as a new investment 
selection in determining the limit, if any, on the total number of 
investment options that Contract owners and participants can select 
during the life of a Contract.
    i. Applicants do not believe that the Substitution will have 
adverse tax consequences to Contract owners and the Substitution will 
not alter in any way the annuity or life benefits, tax benefits or any 
contractual obligations of Applicants.
    j. Contract owners and participants may withdraw amounts under the 
Contracts or terminate their interest in a Contract, under the 
conditions that currently exist, including payment of any applicable 
withdrawal or surrender charge.
    k. Contract owners and participants affected by the Substitution 
will be sent written confirmation of the Substitution that identify the 
substitutions made on behalf of that Contract owner or participant 
within five (5) days following the Substitution Date.
    33. Applicants state that they will not complete the Substitution 
unless all of the following conditions are met:
    a. The Commission shall have issued an order approving the 
Substitution under section 26(c) of the 1940 Act.
    b. The Commission shall have issued an order exempting the In-Kind 
Transaction from the provisions of section 17(a) of the 1940 Act, to 
the extent necessary to carry out the Substitution as described herein.
    c. Each Contract owner or participant will have been mailed the 
Notice and current prospectuses for the Contracts and the Federated 
Fund.
    d. Applicants will have satisfied themselves, based on advice of 
counsel familiar with insurance laws, that the Contracts allow the 
substitution of funds as described in this application, and that the 
transactions can be consummated as described herein under applicable 
insurance laws and under the various Contracts.
    e. Applicants will have complied with any regulatory requirements 
they believe are necessary to complete the transactions in each 
jurisdiction where the Contracts are qualified for sale.

Applicants' Legal Analysis

    1. Section 26(c) of the 1940 Act provides that it shall be unlawful 
for any depositor or trustee of a registered unit investment trust 
holding the security of a single issuer to substitute another security 
for such security unless the Commission shall have approved such 
substitution; and the Commission shall issue an order approving such 
substitution if the evidence establishes that it is consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the 1940 Act.
    2. Applicants submit that the Contracts reserve to Applicants the 
right, subject to compliance with applicable law, to substitute shares 
of the Federated Fund for shares of the Phoenix-Federated Fund held by 
the Separate Accounts. Applicants assert that they have reserved this 
right of substitution both to protect themselves and their Contract 
owners and participants in situations where either might be harmed or 
disadvantaged by events affecting the issuer of the securities held by 
a Separate Account and to preserve the opportunity to replace such 
shares in certain situations where a substitution could benefit 
themselves and their Contract owners and participants.

[[Page 55285]]

    3. Applicants assert that the proposed Substitution protects the 
Contract owners and participants who have allocated Contract value to 
the Phoenix-Federated Fund by: (i) Providing an underlying investment 
option for the subaccounts invested in the Phoenix-Federated Fund that 
invests in similar types of securities as those in which the Phoenix-
Federated Fund invests; (ii) providing such Contract owners and 
participants with simpler and more focused disclosure documents; and 
(iii) providing such Contract owners and participants with an 
investment option with the same investment advisory fee and lower total 
expenses than the current investment option.
    4. Applicants submit that the proposed Substitution meets the 
standards that the Commission and its staff generally have applied to 
other substitutions that have been approved. The Substitution is not 
the type of substitution that Section 26(c) was designed to prevent. 
Unlike traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner that permanently affected 
all the investors in the trust, the Contracts provide each Contract 
owner and participant with the right to exercise his own judgment and 
transfer Contract values into any other available variable and/or fixed 
investment option. Additionally, the proposed Substitution will not, in 
any manner, reduce the nature or quality of the available investment 
options. Moreover, Applicants will offer Contract owners and 
participants the opportunity to transfer amounts out of the affected 
subaccount without any cost or other penalty that may otherwise have 
been imposed until thirty days after the Substitution Date. The 
proposed Substitution, therefore, will not result in the type of costly 
forced redemption that Section 26(c) was designed to prevent.
    5. Applicants submit that the proposed Substitution is also unlike 
the type of substitution that Section 26(c) was designed to prevent in 
that, by purchasing a Contract, Contract owners and participants select 
much more than a particular underlying fund in which to invest their 
Contract values. Contract owners, in purchasing a Contract, also select 
the specific type of insurance coverage offered by Applicants under the 
applicable Contract, as well as numerous other rights and privileges 
set forth in the Contract. It is likely that, in choosing to purchase a 
Contract, the Contract owner also may have considered the size, 
financial condition, and reputation for service of the Phoenix 
Insurance Companies. None of these considerations and factors will 
change as a result of the proposed Substitution.
    6. Section 17(a)(1) of the 1940 Act prohibits any affiliated person 
of a registered investment company, or any affiliated person of such a 
person, acting as principal, from knowingly selling any security or 
other property to that company. Section 17(a)(2) of the 1940 Act 
generally prohibits the same persons, acting as principals, from 
knowingly purchasing any security or other property from the registered 
investment company.
    7. Section 17(b) of the 1940 Act provides that the Commission may, 
upon application, issue an order exempting any proposed transaction 
from the provisions of Section 17(a) if evidence establishes that:
    a. the terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned;
    b. the proposed transaction is consistent with the policy of each 
registered investment company concerned, as recited in its registration 
statement and reports filed under the 1940 Act; and
    c. the proposed transaction is consistent with the general purposes 
of the 1940 Act.
    8. Applicants assert that the proposed In-Kind Transaction, 
including the consideration to be paid and received, are reasonable and 
fair and do not involve overreaching on the part of any person 
concerned. Applicants maintain that the terms of the proposed 
Substitution, including the consideration to be paid and received, are 
reasonable, fair and do not involve overreaching because: (i) The 
proposed Substitution will not adversely affect or dilute the interests 
of Contract owners and participants; (ii) with respect to those 
securities for which market quotations are readily available, the 
proposed Substitution will comply with the conditions set forth in Rule 
17a-7, other than the requirement relating to cash consideration; and 
(iii) with respect to those securities for which market quotations are 
not readily available, the proposed Substitution will be effected in 
accordance with the Phoenix-Federated Fund's and the Federated Fund's 
normal valuation procedures, as set forth in the registration 
statements of the Phoenix Trust and the Federated Trust.
    9. Applicants submit that the In-Kind Transaction will be effected 
at the respective net asset values of the Phoenix-Federated Fund and 
the Federated Fund, as determined in accordance with the procedures 
disclosed in the registration statements of the Phoenix Trust and the 
Federated Trust and as required by Rule 22c-1 under the 1940 Act. The 
In-Kind Transaction will not change the dollar value of any 
participant's or Contract owner's investment in any of the Separate 
Accounts, the value of any Contract, the accumulation value or other 
value credited to any Contract, or the death benefit payable under any 
Contract. After the proposed In-Kind Transaction, the value of a 
Separate Account's investment in the Federated Fund will equal the 
value of its investment in the Phoenix-Federated Fund before the In-
Kind Transaction.
    10. Applicants assert that the proposed In-Kind Transaction will 
comply in substance with the principal conditions of Rule 17a-7. 
Applicants will assure themselves that the Phoenix Trust and the 
Federated Trust will carry out the proposed In-Kind Transaction in 
conformity with the conditions of Rule 17a-7 (or, as applicable, the 
Phoenix-Federated Fund's and the Federated Fund's normal valuation 
procedures, as set forth in the registration statements of the Phoenix 
Trust and the Federated Trust), except that the consideration paid for 
the securities being purchased or sold will not be cash. The proposed 
In-Kind Transaction will be effected based upon the independent current 
market price of the portfolio securities as specified in paragraph (b) 
of Rule 17a-7. The proposed In-Kind Transaction will comply with 
paragraph (d) of Rule 17a-7 because no brokerage commission, fee or 
other remuneration will be paid to any party in connection with the 
proposed In-Kind Transaction. Furthermore, a written record of the 
proposed In-Kind Transaction will be maintained and preserved in 
accordance with paragraph (f) of Rule 17a-7.
    11. Applicants submit that even though the proposed In-Kind 
Transaction will not comply with the cash consideration requirement of 
paragraph (a) of Rule 17a-7, the terms of the proposed In-Kind 
Transaction will offer to the Phoenix-Federated Fund and the Federated 
Fund the same degree of protection from overreaching that Rule 17a-7 
generally provides in connection with the purchase and sale of 
securities under that Rule in the ordinary course of business. In 
particular, because all of the portfolio securities of the Phoenix-
Federated Fund will be transferred to the Federated Fund, and these 
portfolio securities were selected and retained, or will be selected 
between the date of this application and the Substitution Date,

[[Page 55286]]

without regard to the proposed In-Kind Transaction, none of the parties 
will be in a position to ``dump'' undesirable securities on either the 
Phoenix-Federated Fund or the Federated Fund or to transfer desirable 
securities to other advisory clients. Nor can the Phoenix Insurance 
Companies (or any of their affiliates) effect the proposed In-Kind 
Transaction at a price that is disadvantageous to the Phoenix-Federated 
Fund or the Federated Fund.
    12. Applicants submit that the proposed redemption of shares of the 
Phoenix-Federated Fund will be consistent with the investment policies 
of the Phoenix-Federated Fund, as recited in the current registration 
statement of the Phoenix Trust, provided that the shares are redeemed 
at their net asset value in conformity with Rule 22c-1 under the 1940 
Act. Likewise, the proposed sale of shares of the Federated Fund for 
investment securities is consistent with the investment policy of the 
Federated Fund, as recited in the registration statement of the 
Federated Trust, provided that: (i) the shares are sold at their net 
asset value; and (ii) the investment securities are of the type and 
quality that the Federated Fund could have acquired with the proceeds 
from the sale of its shares had the shares been sold for cash. The 
second of these conditions is met for the proposed In-Kind Transaction 
because the Federated Fund is compatible with or similar to the 
Phoenix-Federated Fund.
    13. Applicants assert that the In-Kind Transaction is consistent 
with the general purposes of the 1940 Act and that the In-Kind 
Transaction does not present any of the conditions or abuses that the 
1940 Act was designed to prevent.

Conclusion

    Applicants assert that, for the reasons stated above, the requested 
order approving the Substitution and exempting the In-Kind Transaction 
should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-21953 Filed 8-27-02; 8:45 am]
BILLING CODE 8010-01-P