[Federal Register Volume 68, Number 53 (Wednesday, March 19, 2003)]
[Notices]
[Pages 13343-13347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6549]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25959; File No. 812-12828]


Allianz Life Insurance Company of North America, et al.

March 14, 2003.
AGENCY: The Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order of approval pursuant to 
section 26(c) of the Investment Company Act of 1940 (the ``1940 Act'').

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APPLICANTS: Allianz Life Insurance Company of North America (``Allianz 
Life''), Allianz Life Variable Account A (``Allianz Account A''), 
Allianz Life Variable Account B (``Allianz Account B''), Allianz Life 
Insurance Company of New York (``Allianz Life of NY'') and Allianz Life 
of NY Variable Account C (``Allianz Account C''). Allianz Life and 
Allianz Life of NY are collectively referred to as the ``Insurance 
Company Applicants.'' Allianz Account A, Allianz Account B and Allianz 
Account C are collectively referred to as the ``Separate Account 
Applicants.''

FILING DATE: The application was filed on May 20, 2002, and amended and 
restated on August 6, 2002, December 16, 2002, March 7, 2003 and March 
13, 2003.

SUMMARY OF APPLICATION: Applicants request an order of approval to 
permit the substitution of shares of The Dreyfus Stock Index Fund 
(``Dreyfus Fund'') for shares of Franklin Templeton Variable Insurance 
Products Trust's (the ``Trust's'') Franklin S&P 500 Index Fund 
(``Franklin Fund'') (the ``Substitution'').

[[Page 13344]]


HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on April 3, 2003, and should be accompanied by 
proof of service on Applicants, in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the writer's interest, the reason for the request, and the 
issues contested. Persons may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Allianz Life 
Insurance Company of North America, 5701 Golden Hills Drive, 
Minneapolis, Minnesota 55416, Attention: Stewart D. Gregg, Esq.

FOR FURTHER INFORMATION CONTACT: Leland B. Erickson, Staff Attorney, or 
Zandra Y. Bailes, Branch Chief, Division of Investment Management, 
Office of Insurance Products, at (202) 942-0670.

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

Applicants' Representations

    1. Allianz Life is organized under the laws of the state of 
Minnesota. Allianz Life offers fixed and variable life insurance and 
annuities and group life, accident and health insurance. Allianz Life 
is licensed to do direct business in 49 states and the District of 
Columbia. Allianz Life is a wholly-owned subsidiary of Allianz 
Versicherungs AG Holding.
    2. Allianz Life of NY is organized under the laws of the state of 
New York. (Until January 1, 2003, Allianz Life of NY was known as 
Preferred Life Insurance Company of New York). Allianz Life of NY 
offers variable annuities, group life, and group accident and health 
insurance. Allianz Life of NY is licensed to do business in six states, 
including New York and the District of Columbia. Allianz Life of NY is 
a wholly-owned subsidiary of Allianz Life, which is a wholly-owned 
subsidiary of Allianz Versicherungs AG Holding.
    3. Allianz Account A is a segregated asset account of Allianz Life. 
Allianz Account A was established by Allianz Life on May 31,1985, under 
Minnesota insurance laws. Allianz Account A is used to fund certain 
variable life insurance policies issued by Allianz Life. Allianz 
Account A is divided into several subaccounts, each of which invests in 
and reflects the investment performance of a specific underlying 
registered investment company or portfolio thereof. Allianz Account A 
is registered as a unit investment trust under the 1940 Act.
    4. Allianz Account B is a segregated asset account of Allianz Life. 
Allianz Account B was established by Allianz Life on May 31, 1985, 
under Minnesota insurance laws. Allianz Account B is used to fund 
certain variable annuity contracts issued by Allianz Life. Allianz 
Account B is divided into several subaccounts, each of which invests in 
and reflects the investment performance of a specific underlying 
registered investment company or portfolio thereof. Allianz Account B 
is registered as a unit investment trust under the 1940 Act.
    5. Allianz Account C is a segregated asset account of Allianz Life 
of NY. Allianz Account C was established by Allianz Life of NY on 
February 26, 1988 under New York insurance laws. (Until January 1, 
2003, Allianz Account C was known as Preferred Life Account C). Allianz 
Account C is used to fund certain variable annuity contracts issued by 
Allianz Life of NY. Allianz Account C is divided into several 
subaccounts, each of which invests in and reflects the investment 
performance of a specific underlying registered investment company or 
portfolio thereof. Allianz Account C is registered as a unit investment 
trust under the 1940 Act.
    6. The Separate Account Applicants support certain variable annuity 
contracts and variable life policies (collectively, the ``Contracts'') 
issued by the Insurance Company Applicants. The Contracts offer a large 
number of widely diverse variable investment options. For purposes of 
clarity, the Contracts can be divided into four general categories. 
There are currently offered contracts and three categories of closed 
contracts no longer available for sale.
    [sbull] First, there are six currently offered Contracts that 
historically have offered the Franklin Fund. Each of these Contracts 
currently offers a total of 50 variable investment options, including a 
money market investment option. (The Franklin Fund is not included as 
one of the 50 available options, as it is closed to allocations of new 
premium payments and transfers of Contract value.) Each Contract in 
this Category offers the same 50 investment options.
    [sbull] Second, there are two ``Category 1 Closed Contracts.'' 
These are Contracts that are no longer available for sale. Each of 
these Contracts makes available the same investment options that are 
available through currently offered Contracts, and, as such, each of 
these Contracts permits owners of existing Contracts to allocate new 
premium payments and transfers among 50 investment options.
    [sbull] Third, there is one ``Category 2 Closed Contract.'' This 
Contract is no longer available for sale. This Contract permits owners 
of existing Contracts to allocate new premium payments and transfers 
among forty-two variable investment options, including a money market 
option.
    [sbull] Fourth, there are three ``Category 3 Closed Contracts.'' 
These Contracts are no longer available for sale. These contracts 
permit owners of existing Contracts to allocate new premiums (if 
permitted by the terms of the Contract) and transfers among thirty-six 
variable investment options, including one money market option. Each 
Contract in this Category offers the same thirty-six investment 
options.
    7. As of March 13, 2003, 42 of the 50 investment options offered 
through currently offered Contracts and Category 1 Closed Contracts 
have been offered through each of these Contracts for a year or more. 
All of the investment options available in the Category 2 Closed 
Contract other than the Dreyfus Fund have been available for over a 
year. Lastly, all of the investment options available in the Category 3 
Closed Contracts other than the Dreyfus Fund have been available 
through each of these Contracts for over a year. In addition, 
Applicants will not add or close any investment options prior to the 
effective date of the proposed Substitution.
    8. Under the Contracts, the Insurance Company Applicants reserve 
the right to substitute one of the variable investment options with 
another variable investment option subject to prior approval of the 
Commission. Moreover, the Insurance Company Applicants are entitled to 
limit further investment in a variable investment option.
    9. Each Contract permits transfers of Contract values. In most 
instances, up to twelve transfers may be made during each year free of 
charge.\1\ There is currently no limitation on the aggregate number of 
transfers that may be made,

[[Page 13345]]

other than the twelve free transfers per year limit referred to above. 
A charge may be assessed for transfers made after the accumulation 
period ends. For deferred variable annuity contracts, after the 
accumulation period, no transfers are permitted from the fixed annuity 
option to the variable annuity option.
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    \1\ 1 For the Allianz Life variable immediate annuity contract, 
currently an unlimited number of transfers is permitted each year 
without charge, however, Allianz Life has reserved the right to 
limit the number of free transfers each year (File Number 33-76190).
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    10. The Contracts provide for a free withdrawal privilege equal to 
at least 10% of Contract value annually; this right is not subject to 
reduction or withdrawal. No tax liability or consequences are 
associated with the transfer of Contract values within the Contract.
    11. The Franklin Fund is part of the Trust, which was organized as 
a Massachusetts business trust on April 26, 1988. Shares of the 
Franklin Fund are sold to the Separate Account Applicants for the 
purpose of funding the Contracts. The Franklin Fund is managed by 
Franklin Advisers, Inc. (``Franklin Advisers''). The Franklin Fund's 
investment objective is to match the performance of the Standard & 
Poor's 500 Composite Stock Price Index (``S&P 500 Index'') before the 
deduction of fund expenses. The Franklin Fund seeks to invest at least 
80% of its total assets in the common stocks of companies included in 
the S&P 500 Index. The Trust offers two classes of shares of the 
Franklin Fund to insurance company separate accounts. The terms of the 
Class 1 and Class 2 shares are identical except that the Class 2 shares 
bear the expenses of the Class 2 distribution plan. The Trust is 
registered as an open-end management company under the 1940 Act, and 
its shares are registered as securities under the Securities Act of 
1933 (``1933 Act''). Under an agreement with Franklin Advisers, SSgA 
Funds Management, Inc. (``SSgA'') is the Franklin Fund's sub-adviser. 
Neither Franklin Advisers nor SSgA is affiliated with the Applicants.
    12. The Dreyfus Fund is a Maryland Corporation formed on January 
24, 1989. It is registered as an open-end management company under the 
1940 Act, and its shares are registered as securities under the 1933 
Act. The investment adviser for the Dreyfus Fund is The Dreyfus 
Corporation (``Dreyfus''). Shares of the Dreyfus Fund are currently 
sold exclusively to insurance company separate accounts for the purpose 
of funding variable annuity contracts and variable life insurance 
policies. Like the Franklin Fund, the Dreyfus Fund's investment 
objective is to match the total return of the S&P 500 Index. The 
Dreyfus Fund attempts to have a correlation with the S&P 500 Index of 
at least .95 before expenses. A correlation of 1.00 would mean that the 
Dreyfus Fund and the S&P 500 Index were perfectly correlated. The 
Dreyfus Fund offers two classes of shares, Initial Class and Service 
Class. The terms of the Initial Class and Service Class are identical 
except that the Service Class shares bear the expenses of the Service 
Class distribution plan. Mellon Equity Associates, an affiliate of 
Dreyfus, serves as the Dreyfus Fund's index fund manager. Neither 
Dreyfus nor Mellon Equity Associates is affiliated with the Applicants.
    13. In December of 2001, the Insurance Company Applicants were 
informed by Franklin Advisers that the Board of Trustees of the 
Franklin Fund had determined that the Franklin Fund would be dissolved 
and liquidated. Franklin Advisers stated that the closing of the 
Franklin Fund was proposed primarily because the Franklin Fund had not 
attracted and/or retained sufficient assets to be a sufficiently 
economically viable fund.
    14. Effective May 1, 2002, in anticipation of the closing of the 
Franklin Fund, the Insurance Company Applicants closed the Franklin 
Fund to new premiums and transfers. Also on May 1, the Insurance 
Company Applicants added the Dreyfus Fund as a variable investment 
option offered through the Contracts.
    15. Applicants request the Commission's approval to effect the 
substitution of shares of the Franklin Fund with shares of the 
corresponding class of shares of the Dreyfus Fund. Dreyfus Initial 
Class shares would be substituted for Franklin Class 1 shares, and 
Dreyfus Service Class shares would be substituted for Franklin Class 2 
shares.
    16. Applicants believe that the Dreyfus Fund is an appropriate 
replacement for the Franklin Fund, and an appropriate investment 
vehicle for the Contract owners, because the two Funds share a 
virtually identical investment objective. The Franklin Fund and the 
Dreyfus Fund both seek to match the performance of the S&P 500 Index. 
Both funds use similar policies and strategies to attempt to match the 
performance of the S&P 500 Index.
    17. The expenses of the Franklin Fund and the Dreyfus Fund as of 
December 31, 2002, and currently, as a percentage of average daily net 
assets, are as follows:

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                                                   Franklin Fund   Dreyfus Fund    Franklin Fund   Dreyfus Fund
                                                      Class 1      Initial Class      Class 2      Service Class
----------------------------------------------------------------------------------------------------------------
Management Fees.................................           0.15%           0.25%           0.15%           0.25%
Rule 12b-1 Fee..................................             N/A             N/A       \2\ 0.25%           0.25%
Other Expenses..................................           0.14%           0.02%           0.14%           0.02%
                                                 -----------------
      Total Expenses Before Reimbursement or Fee           0.29%           0.27%           0.54%           0.51%
       Waiver...................................
Management Fee Reduction........................     \3\ (0.01%)             N/A     \3\ (0.01%)             N/A
                                                 -----------------
      Total Expenses After Reimbursement or Fee            0.28%           0.27%           0.53%          0.51%
       Waiver...................................
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\2\ While the maximum amount payable under the Franklin Fund's Class 2 Rule 12b-1 plan is 0.35% per year of the
  fund's average daily net assets, the Board of Trustees of the Trust has set the current rate at 0.25% per
  year.
\3\ The manager has agreed in advance to reduce its fee to reflect reduced services resulting from the Fund's
  investment in a Franklin Templeton money fund. This reduction is required by the Fund's Board of Trustees and
  an order of the Commission.

    18. As the foregoing chart indicates, for each Class, as of 
December 31, 2002, the Dreyfus Fund had lower expense ratios than the 
corresponding class of the Franklin Fund. In addition, the Applicants 
believe that the addition of assets resulting from the Substitution may 
result in even lower expense ratios for the Contract owners that have 
currently allocated their Contract values to the Franklin Fund.
    19. Contract owners were first notified of the proposed 
Substitution in May of 2002. This notice informed Contract owners of 
the proposed Substitution and the reason for the Substitution, and also 
provided Contract owners a toll free number for obtaining a current 
prospectus for the Dreyfus Fund. In addition, on or before February 4, 
2003, approximately 60 days prior to the projected effective date of 
the Substitution, Contract owners were sent a second notice of the 
Substitution. The

[[Page 13346]]

Applicants filed this notice with the Commission on January 27, 2003, 
as a supplement to Contract owners' prospectuses. This notice
    [sbull] Informed Contract owners of the proposed Substitution and 
the projected effective date of the Substitution (approximately April 
4, 2003);
    [sbull] Informed Contract owners that a substitution of Dreyfus 
Fund shares for Franklin Fund shares would occur if contrary transfer 
instructions were not received from the owner;
    [sbull] Informed owners that they were entitled to a ``free 
transfer right'' prior to the Substitution commencing on the date of 
the notice. This free transfer right permits Contract owners to make 
one transfer from the Franklin Fund, without that transfer incurring 
any transfer charge or counting toward any limitation on free 
transfers. If the Contract owners choose to transfer Contract value 
from the Franklin Fund to multiple transferee funds, it will still 
count as only one (free) transfer;
    [sbull] Informed owners that there would be no charge associated 
with a default allocation of Franklin Fund assets to the Dreyfus Fund, 
and that any such default allocation will not count toward any limit on 
free transfers;
    [sbull] Informed owners that from the date of the Substitution 
owners would have an additional thirty-day free transfer right out of 
the Dreyfus Fund, if they had not already exercised their free transfer 
right, without that transfer incurring any transfer charge or counting 
toward any limitation on free transfers;
    [sbull] Included a transfer form that can be filled out and mailed 
by the customer;
    [sbull] Included information regarding all investment options 
currently available under their Contract; and
    [sbull] Included instructions for obtaining a current prospectus 
for the Dreyfus Fund or any other currently available investment 
option.
    20. The Insurance Company Applicants will confirm all transfers 
made at the request of Contract owners during the free transfer period, 
as well as any transfer of Contract value made in connection with the 
Substitution, in accordance with Rule 10b-10 under the Securities 
Exchange Act of 1934.
    21. Within five days following the Substitution, the Insurance 
Company Applicants will send Contract owners a third notice. The third 
notice will inform the Contract owners that the Substitution has taken 
place and notify them that they are entitled to one free transfer from 
the Dreyfus Fund for a period of thirty days from the date of the 
Substitution, if they have not already exercised this right prior to 
the Substitution. Specifically, the third notice will inform Contract 
owners that the free transfer right permits Contract owners to make one 
transfer of Contract value attributable to the Franklin Fund out of the 
Dreyfus Fund and into any other investment option without that transfer 
incurring any transfer charge or counting toward any limitation on free 
transfers. If Contract owners choose to transfer Contract value to 
multiple transferee funds, it will still count as only one (free) 
transfer. The third notice will include a transfer form that can be 
filled out and mailed by the customer. The notice will include 
information regarding all investment options currently available under 
their Contract. Lastly, the notice will include directions for 
obtaining prospectuses for any of the investment options available 
under the Contract. In addition, a current prospectus for the Dreyfus 
Fund will be included with the third notice to Contract owners affected 
by the Substitution, if not previously provided. The Insurance Company 
Applicants will file this notice with the Commission pursuant to Rule 
497 under the 1933 Act as a supplement to their current prospectuses.
    22. At the close of business on the date selected for the 
Substitution, the Insurance Company Applicants will redeem shares of 
the Franklin Fund held on behalf of their respective Separate Account 
Applicants in kind. Simultaneously, the Insurance Company Applicants, 
on behalf of each of its Separate Account Applicants, will place a 
purchase order for shares of the corresponding class of the Dreyfus 
Fund so that each purchase will be for the exact amount of the assets 
received as redemption proceeds. Accordingly, at all times monies 
attributable to Contract owners then invested in the Franklin Fund will 
remain fully invested and will result in no change in the amount of any 
owner's contract value, death benefit or investment in the applicable 
Separate Account Applicant.
    23. The redemption and purchase will be made at prices based on the 
current net asset values next computed after receipt of the redemption 
request and purchase order and, therefore, in a manner consistent with 
Rule 22c-1 under the 1940 Act. The full net asset value of the redeemed 
shares held by the Separate Account Applicants will be reflected in 
Contract owner's contract values following the Substitution without 
reduction for brokerage or other such fees or charges. The Insurance 
Company Applicants, or the adviser to the Dreyfus Fund or the Franklin 
Fund, will pay all expenses incurred in connection with the 
Substitution, including legal, accounting, brokerage, and other fees 
and expenses.
    24. Neither the rights nor the obligations of the Insurance Company 
Applicants under the Contracts will be altered in any way. The proposed 
Substitution will in no way alter insurance benefits to Contract 
owners. The Substitution will not have any adverse tax consequences to 
Contract owners. The proposed Substitution will not cause Contract fees 
and charges currently being paid by existing Contract owners to be 
greater after the proposed Substitution than before the proposed 
Substitutions. The proposed Substitution will not be treated as a 
transfer for the purpose of assessing transfer charges.
    25. The Insurance Company Applicants represent that the proposed 
Substitution and the selection of the Dreyfus Fund were not motivated 
by any financial consideration paid or to be paid to the Insurance 
Company Applicants or their affiliates by the Dreyfus Fund, its adviser 
or underwriter or their affiliates. The Insurance Company Applicants 
represent that, immediately after the Substitution, they will not 
receive any direct or indirect benefits from the Dreyfus Fund, its 
adviser or underwriter (or their affiliates), in connection with assets 
attributable to Contracts affected by the Substitution, at a higher 
rate than they had received from the Franklin Fund, its advisor or 
underwriter (or their affiliates), including without limitation, 12b-1, 
shareholder service, administration or other service fees, revenue 
sharing or other arrangements. As noted above, the Substitution is 
occurring because of the planned closing of the Franklin Fund.

Applicants' Legal Analysis

    1. Section 26(c) of the 1940 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. Specifically, section 26(c) of the 1940 
Act provides that ``[i]t 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.''
    2. Section 26(c) of the 1940 Act was enacted as part of the 
Investment Company Act Amendments of 1970. Prior to the enactment of 
these amendments, 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

[[Page 13347]]

the substitution within five (5) days after 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 security, recommended that section 26 be amended to 
require that a proposed substitution of the underlying investments of a 
unit investment trust receive prior Commission approval.
    3. Applicants assert that the purposes, terms, and conditions of 
the Substitution are consistent with the principles and purposes of 
section 26(c) and do not entail any of the abuses that section 26(c) is 
designed to prevent. The Applicants state that the Contracts are 
designed with a number of features that provide adequate protection to 
Contract owners in the event of a substitution. These features include 
free partial withdrawal rights, transferability between investment 
options including 12 free transfers per year, and a significant number 
of investment options. In addition, Contract owners are free to 
transfer to any other option available under the relevant Contract for 
approximately 60 days prior to the date of the Substitution and 30 days 
after the Substitution (``Free Transfer Period'') without any transfer 
fee and without that transfer counting as one of the twelve permitted 
each year free of charge. In addition, the Contracts provide reasonably 
diversified investment options. Contract owners will be assessed no 
charges whatsoever in connection with the Substitution, and their 
annual fund expense ratios are expected to decrease. Further, Contract 
owners will be substituted into the Dreyfus Fund, whose investment 
objectives and policies are substantially similar in all material 
respects to those of the Franklin Fund. In addition, expenses for the 
Dreyfus Fund are lower than those of the Franklin Fund.
    4. Applicants submit that the Substitutions do not present the type 
of costly forced redemption or other harms that section 26(c) was 
intended to guard against and is consistent with the protection of 
investors and the purposes fairly intended by the 1940 Act. The 
Substitution will be in accordance with Contract owners' objectives and 
risk expectations because the investment objective of the Franklin Fund 
is nearly identical to that of the Dreyfus Fund. In addition, the 
Contracts provide adequate protection in the event of a substitution. 
Moreover, the Substitution will be subject to the following terms and 
conditions:
    (a) After receipt of Notice informing a Contract owner of the 
Substitution, a Contract owner may request that his or her assets be 
reallocated to another subaccount at any time during the Free Transfer 
Period. The Free Transfer Period provides sufficient time for Contract 
owners to consider their reinvestment options;
    (b) The Substitution will be at net asset value of the respective 
shares, without the imposition of any transfer, brokerage, or similar 
charge;
    (c) Neither the Contract owners, the Franklin Fund, nor the Dreyfus 
Fund will bear any costs of the Substitution, and all legal costs and 
any brokerage or other costs incurred in the Substitution will be paid 
by the Insurance Company Applicants or Franklin Advisers, and 
accordingly, the Substitution will have no impact on the Contract 
owners' Contract values;
    (d) The Substitution will in no way alter the contractual 
obligations of the respective Insurance Company Applicants or the 
rights and privileges of Contract owners under the Contracts, or alter 
insurance benefits to Contract owners; and
    (e) The Substitution will in no way alter the tax benefits to 
Contract owners.
    5. Applicants represent that the fees and expenses of the Dreyfus 
Fund have historically been less than those of the Franklin Fund. 
Accordingly, the proposed Substitution poses no concerns in connection 
with the fees and expenses that will arise therefrom.

Applicants' Conclusions

    Applicants request an Order of the Commission pursuant to section 
26(c) of the 1940 Act to permit them to effect the Substitution on the 
terms set forth in the Application. Applicants believe, for all of the 
reasons stated in the Application, that their request for approval 
meets the standards set forth in section 26(c).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6549 Filed 3-18-03; 8:45 am]
BILLING CODE 8010-01-P