[Federal Register Volume 68, Number 67 (Tuesday, April 8, 2003)]
[Notices]
[Pages 17115-17120]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8439]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25989; File No. 812-12905]


CUNA Mutual Life Insurance Company, et al.; Notice of Application

April 2, 2003.
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.

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

Applicants: CUNA Mutual Life Insurance Company (the ``Company''), CUNA 
Mutual Life Variable Annuity Account (the ``Annuity Account''), and 
CUNA Mutual Variable Life Account (the ``Life Account'').

Summary of Application: Applicants request an order to permit the 
substitutions by the Company of Z Class shares of the Multi-Cap Growth 
Stock Fund (the ``Replacing Fund'') of the Ultra Series Fund (``Ultra 
Series'') for Initial Class shares of the MFS Emerging Growth Series 
(the ``Replaced Fund'') of the MFS Variable Insurance Trust (``MFS 
Trust'').

Filing Date: The application was filed on November 22, 2002 and was 
amended and restated on March 28, 2003.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
person may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on April 25, 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 Margaret 
Gallardo-Cortez, Esq., Assistant Vice President and Associate General 
Counsel, CUNA Mutual Life Insurance Company, 5910 Mineral Point Road, 
Madison, WI 53701-0391. Copy to David S. Goldstein, Esq., Sutherland 
Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW., Washington, DC 
20004-2415.

FOR FURTHER INFORMATION CONTACT: H. Yuna Peng, Attorney, at (202) 942-
0676, or Lorna J. MacLeod, Branch Chief, at (202) 942-0670, Office of 
Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the Public Reference Branch of the Commission, 450 5th Street, NW., 
Washington, DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. The Company is a mutual life insurance company organized under 
Iowa law in 1879 and incorporated on June 21, 1882. The Company, first 
organized as a fraternal benefit society with the name ``Mutual Aid 
Society of the Evangelical Lutheran Synod of Iowa and Other States,'' 
changed its name to ``Lutheran Mutual Aid Society'' in 1911, and 
reorganized as a mutual life insurance company called ``Lutheran Mutual 
Life Insurance Company'' on January 1, 1938. On December 28, 1984, the 
Company changed its name to ``Century Life of America.'' On January 1, 
1997, the Company changed its name to ``CUNA Mutual Life Insurance 
Company.'' As of December 31, 2002, the Company had assets in excess of 
$5 billion.
    2. The Company conducts a conventional life insurance business 
within the context of the credit union system and is authorized to 
transact the business of life insurance, including annuities, in all 
states other than New York and in Puerto Rico. For purposes of the Act, 
the Company is the depositor and sponsor of each of the Accounts as 
those terms have been interpreted by the Commission with respect to 
variable life insurance and variable annuity separate accounts.
    3. Each Account is a ``separate account'' as defined by Rule 0-1(e) 
under the Act. Each Account 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 one of the insurance 
dedicated mutual fund portfolios made available as investment vehicles 
underlying the Contracts.
    4. The Annuity Account is divided into 11 subaccounts. The assets 
of the Annuity Account support variable annuity contracts and interests 
in the Account offered through such contracts have been registered 
under the Securities Act of 1933.
    5. The Life Account is divided into 11 subaccounts. The assets of 
the Life

[[Page 17116]]

Account support variable life insurance contracts and interests in the 
Account offered through such contracts have been registered under the 
1933 Act.
    6. The MFS Trust is registered as an open-end management investment 
company under the Act and currently offers 15 separate investment 
portfolios (each, a ``Fund''), one of which would be involved in the 
proposed substitution. The MFS Trust issues a separate series of shares 
of beneficial interest in connection with each Fund and has registered 
such shares under the 1933 Act on Form N-1A. Massachusetts Financial 
Services Company (``MFS'') serves as the investment adviser to each 
Fund, including the Replaced Fund. MFS' principal offices are located 
at 500 Boylston Street, Boston, Massachusetts 02116.
    7. Ultra Series is registered as an open-end management investment 
company under the Act and currently offers 10 separate investment 
portfolios, one of which would be involved in the proposed 
substitution. Ultra Series issues a separate series of shares of 
beneficial interest in connection with each portfolio (also a 
``Fund''), and has registered such shares under the 1933 Act on Form N-
1A. MEMBERS Capital Advisors, Inc. (``MCA'') is the investment adviser 
of each Fund, including the Replacing Fund. Under a unitary fee 
arrangement, MCA, at its own expense, also provides or arranges for the 
provision of substantially all other services required by Ultra Series 
through service agreements with affiliated and unaffiliated service 
providers. Such services include all administrative, accounting and 
legal services as well as the services of custodians, transfer agents 
and dividend disbursing agents. The Funds of Ultra Series do, however, 
pay their own auditor's fees, compensation to (and expenses of) 
trustees who are not interested persons, independent counsel fees, and 
extraordinary expenses.
    8. The Company and CUNA Mutual Investment Corporation (``CMIC'') 
each own a one-half interest in MCA. MCA's principal offices are 
located at 5910 Mineral Point Road, Madison, Wisconsin 53701.
    9. MCA manages the assets of various Funds of Ultra Series, 
including the Replacing Fund, using a ``manager of managers'' approach 
under which MCA may allocate some or all of a Fund's assets among one 
or more ``specialist'' subadvisers. MCA monitors the performance of 
each subadviser to the extent that it deems appropriate to achieve a 
Fund's investment objective, reallocates portfolio assets among its own 
portfolio management team and individual subadvisers, or recommends to 
the Ultra Series' board of trustees that particular subadvisers be 
employed or terminated for a Fund.
    10. MCA and the Replacing Fund have entered into a subadvisory 
agreement with Wellington Management Company, LLP (``Wellington 
Management'') to provide portfolio management services pursuant to 
which Wellington Management selects the Replacing Fund's investments 
and places orders to buy and sell the Replacing Fund's investments. 
Wellington Management's principal offices are located at 75 State 
Street, Boston, Massachusetts, 02109.
    11. 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 insured's life, 
and for a substantial death benefit upon the death of the insured. 
Under each of the Contracts, the Company reserves the right to 
substitute shares of one Fund for shares of another, or of another 
investment portfolio, including a portfolio of a different management 
investment company.
    12. For as long as a variable life insurance Contract remains in 
force or a variable annuity Contract has not yet been annuitized, a 
Contract owner may transfer all or any part of the Contract value from 
one subaccount to any other subaccount or to a fixed account. The 
Contracts do not limit the number of transfers of Contract value for 
any period of time or reserve to the Company the right to limit the 
number of transfers. The Company currently waives applicable fees for 
Contract value transfers; however, certain of the variable life 
insurance Contracts reserve to it the right to assess a charge of $20 
for transfers in excess of four per Contract year and certain of the 
annuity Contracts reserve the right to it to assess a charge of $10 for 
transfers in excess of twelve per Contract year.
    13. The proposed substitution is part of efforts by the Company to 
provide a portfolio selection within the Contracts that: (1) Better 
represents the designated asset class, (2) provides more stability in 
portfolio management, and (3) exhibits more consistency of periodic 
returns relative to representative markets.
    14. In 1995, when the Company first selected the Replaced Fund as 
an investment option under inclusion in the Contracts, the Fund met its 
desire for a multi-capitalization investment option. In recent years, 
however, the Replaced Fund has, in the Company's view, become more 
oriented towards stocks of large-cap growth companies. Although this 
has been the result of a strategy of successfully identifying and 
holding as portfolio investments the securities of fast-growing 
companies and by focusing new purchases in larger companies, the 
portfolio composition and general orientation of the Replaced Fund has 
shifted and no longer fits the position in the investment option lineup 
for the Contracts desired by the Company. In contrast, MCA has recently 
retained Wellington Management as the Replacing Fund's subadviser in 
order to manage the Fund to fit this position in the lineup. In recent 
years, other accounts managed by Wellington Management in this style 
have generally invested between 20% and 35% of their total assets in 
small-cap and mid-cap growth stocks, thereby providing more consistent 
multi-cap exposure. In the Company's judgment, this portfolio 
orientation better represents the asset class mix of a portfolio 
originally intended for inclusion in the Contracts.
    15. Over time, the Replaced Fund has experienced a series of 
portfolio manager changes followed by the assignment of several 
portfolio managers, each with management responsibility over a portion 
of the Replaced Fund's assets. In the Company's view, this led to a 
significant increase in the number of portfolio holdings and has 
correspondingly raised the portfolio turnover rate to over 231% for 
2001. It also has resulted, at times, in concentrations of the Fund's 
investments in one or a few industries or sectors while other 
industries or sectors have been underrepresented.
    16. The Company believes that it is important that Contract 
investment options perform generally in line with representative 
markets, particularly given the limited selection of subaccounts 
available under the Contracts. In the Company's judgment, the changes 
in portfolio management and investment style experienced by the 
Replaced Fund have resulted in erratic portfolio performance for the 
Replaced Fund and the Company has determined that the Fund has not 
performed in line with those representative markets considered by MCA 
as providing more diversified multi-cap exposure. In contrast, the 
Replacing Fund's subadviser's style of management appears to have a 
much more consistent record in this regard. Based on Wellington 
Management's three-year

[[Page 17117]]

history managing other accounts (mutual funds and other subadvisory 
clients) using this style and disciplines, the Company believes that 
the Fund, under Wellington Management's direction, will provide much 
more consistent performance than the Replaced Fund has provided. 
Applicants believe that replacing the Replaced Fund with the Replacing 
Fund will benefit Contract owners and improve the array of investment 
options available under the Contracts.
    17. Replacing the Replaced Fund with the Replacing Fund is 
appropriate and in the best interests of Contract owners because the 
stated investment objectives and principal investment strategies of the 
Replacing Fund are substantially identical to those of the Replaced 
Fund so that Contract owners will have continuity in investment and 
risk expectations. In addition, the types of investment advisory and 
administrative services provided to the Replacing Fund are 
substantially the same as those provided to the Replaced Fund. Finally, 
Applicants note that the net expenses for the Replacing Fund were the 
same as those for the Replaced Fund for the year ended December 31, 
2002.
    18. The following chart sets out the investment objective and 
principal investment strategies of the Replaced Fund and the Replacing 
Fund, as stated in their respective prospectuses.

------------------------------------------------------------------------
           Replaced Fund                        Replacing Fund
------------------------------------------------------------------------
     MFS Emerging Growth Series       Multi-Cap Growth Stock Fund
Investment Objective: Long term      Investment Objective: Long term
 growth of capital.                   capital appreciation.
Principal Investment Strategies:     Principal Investment Strategies:
The Fund invests, under normal       The Fund invests generally in
 market conditions, at least 80% of   common stocks, securities
 its net assets in common stocks      convertible into common stocks and
 and related securities, such as      related equity securities. Under
 preferred stocks, coinvertible       normal market conditions, the Fund
 securities and depositary receipts   will maintain at least 80% of its
 for those securities, of emerging    assets in these securities.
 growth companies. Emerging growth   The Fund seeks securities of growth
 companies may be of any size, and    companies across a broad range of
 the Fund's investments may include   market capitalization focusing on
 securities listed on a securities    those with proprietary
 exchange or traded in over-the-      technologies, management, or
 counter (OTC) markets.               market opportunities that are
MFS, the Fund's adviser, uses a       likely to support earnings growth
 bottom-up, as opposed to a top-      over extended time periods in
 down, investment style in managing   excess of the growth rate of the
 the Fund. This means that            economy and/or the rate of
 securities are selected based upon   inflation.
 fundamental analysis (such as an    The Fund may also invest in
 analysis of earnings, cash flows,    warrants, preferred stocks and
 competitive position and             debt securities (including non-
 management's abilities) performed    investment grade debt securities).
 by the Fund's manager and MFS'       The Fund may invest up to 25% of
 large group of equity research       its assets in foreign securities,
 analysts.                            including emerging market
While the Fund is a diversified       securities.
 fund and therefore spreads its
 investments across a number of
 issuers, it may invest a
 relatively large percentage of its
 assets in a single issuer as
 compared to other funds managed by
 MFS. The Fund may invest in
 foreign securities (including
 emerging market securities)
The Fund has engaged and may engage
 in active and frequent trading to
 achieve its principal investment
 strategies.
------------------------------------------------------------------------

    19. The following chart compares advisory fees, other expenses, 
total operating expenses (before and after any waivers and 
reimbursements), and portfolio turnover rates for the year ended 
December 31, 2002, expressed as an annual percentage of average daily 
net assets, of the Replaced Fund and the Replacing Fund. Neither the 
Initial Class shares of the Replaced Fund nor Z Class shares of the 
Replacing Fund are subject to a distribution plan or shareholder 
service plan adopted under Rule 12b-1 of the Act.

------------------------------------------------------------------------
                                     Replaced Fund      Replacing Fund
                                 ---------------------------------------
                                     MFS Emerging      Multi-Cap Growth
                                     Growth Series      Stock Fund  (Z
                                    (Initial Class)         Class)
------------------------------------------------------------------------
Advisory Fees...................              0.75%               0.85%
Other Expenses..................              0.11                0.01
                                 ---------------------
    Total Operating Expenses....              0.86%               0.86%
Less Expense Waivers and                    N/A                 N/A
 Reimbursements.................
Net Operating Expenses..........              0.86%               0.86%
Portfolio Turnover..............            114.67%             156.51%
------------------------------------------------------------------------

    20. The Replaced Fund has an expense offset arrangement that 
reduces the Fund's custody fee based upon the amount of cash maintained 
by the Portfolio with its custodian and dividend disbursing agent. 
``Other Expenses'' do not take into account these expense reductions, 
and are therefore higher than the actual expenses of the series. Had 
these fee reductions been taken into account, ``Net Expenses'' for the 
Replaced Fund would equal 0.85%.
    21. The following chart compares the fees paid for advisory and 
subadvisory services for the fiscal year ending December 31, 2002, 
expressed as an annual percentage of average daily net assets, by the 
Replaced Fund and the Replacing Fund.

[[Page 17118]]



------------------------------------------------------------------------
            Replaced Fund                       Replacing Fund
------------------------------------------------------------------------
MFS Emerging Growth Series  (Initial    Multi-Cap Growth Stock Fund  (Z
               Class)                               Class)
------------------------------------------------------------------------
                         Annual                              Annual
 Annual Advisory    Subadvisory Fee    Annual Unitary    Subadvisory Fee
       Fee            (paid by the     Management Fee     (paid by the
                        Adviser)                            Adviser)
------------------------------------------------------------------------
                                                             Wellington
                                                             Management
0.75%                           NA              0.85%     First $100M--
                                                                  0.50%
                                                          Above $100M--
                                                                  0.40%
------------------------------------------------------------------------

    22. The following table compares the respective asset levels, 
expense ratios, and performance data of the two Funds for each of the 
past three fiscal years. Wellington Management has been the Replacing 
Fund's subadviser since May 1, 2002.

------------------------------------------------------------------------
                               Net assets at end    Expense      Total
   MFS Emerging Growth Fund        of period         ratio      return
------------------------------------------------------------------------
2000.........................     $2,312,406,000        .85%     -19.61%
2001.........................      1,462,000,000        .86      -33.49
2002.........................        774,775,000        .85      -33.76
------------------------------
                          Multi-Cap Growth Fund
------------------------------------------------------------------------
2000.........................         $9,897,000        .91%      -9.52%
2001.........................         13,923,000        .86      -30.89
2002.........................         75,326,000        .86      -25.21

    23. Applicants believe that the Replacing Fund is an appropriate 
replacement for the Replaced Fund for each Contract. The Replacing Fund 
has a substantially identical investment objective as that of the 
Replaced Fund. Both pursue their investment objective by investing 
primarily in companies, of various sizes, which are expected to grow 
faster than the general economy. The investment adviser for the 
Replaced Fund and the subadviser for the Replacing Fund both rely on 
internal research and use a ``bottom-up'' stock selection approach to 
portfolio management (as opposed to a ``top-down,'' economic 
forecasting oriented approach). There are, however, some distinctions 
between the way in which the principal investment strategies are 
pursued by the Replaced Fund and the Replacing Fund.
    24. The primary differences in the implementation of investment 
strategies of the Replaced Fund and the Replacing Fund manifest in the 
degree of flexibility exercised by their adviser or subadviser in 
implementing the strategies. For example, whereas the Replaced Fund's 
investment adviser employs no firm guidelines limiting the size of its 
capitalization exposures, the Replacing Fund's subadviser typically 
limits large-cap exposure to a range of 60%-90% of total assets, mid-
cap exposure to 25% or less of total assets, and small-cap exposure to 
20% or less of total assets. Similarly, the Replaced Fund's adviser 
does not limit its exposure to any single industry; in contrast, the 
Replacing Fund's subadviser generally limits its industry exposure to 
no more than 15 percentage points in excess of that industry's weight 
in the Fund's benchmark index. Moreover, the Replaced Fund has often 
concentrated its portfolio in relatively few large holdings, with some 
exceeding 10% of total assets, while much of the rest of its portfolio 
is often scattered over a few hundred very small holdings. In contrast, 
the Replacing Fund's subadviser has generally managed other accounts 
with the same style as the Replacing Fund with few holdings 
representing more than 5% of the Fund's total assets and fewer than 110 
holdings overall. Finally, the annual portfolio turnover rate for the 
Replaced Fund has ranged from 114% to 231% over the last three years as 
it has tried to respond to current market conditions. In contrast, 
other accounts managed by the Replacing Fund's subadviser with the same 
style as the Replacing Fund have experienced annual turnover rates 
ranging from 90% to 140% during the past three years. The Company 
believes that this likely is a reflection of Wellington Management's 
longer-term perspective on the stocks it has purchased. In addition, 
the Replacing Fund has available to it transactional advantages 
attributable to achieved economies of scale comparable to that of the 
Replaced Fund's manager and has the same expense ratio as the Replaced 
Fund.
    25. To the extent that the annualized ratio of expenses to average 
net assets of the Replacing Fund exceeds, for each fiscal period (such 
period being less than 90 days) during the twenty-four months following 
the substitutions, 0.85%, the Company will, for each Contract 
outstanding on the date of the proposed substitutions, make a 
corresponding reduction in separate account expenses (or subaccount) 
expenses on the last day of such fiscal period, such that the ratio of 
the Replacing Fund's expenses to average net assets, together with the 
ratio of expenses to average net assets of the corresponding separate 
account (or subaccount) will, on an annualized basis, be no greater 
than the sum of 0.85% and the ratio of expenses to average net assets 
of the separate account (or subaccount) for the fiscal year ended 
December 31, 2002. In addition, for twenty-four months following the 
substitutions, the Company will not increase asset-based fees or 
charges for Contracts outstanding on the day of the proposed 
substitutions.
    26. By supplements to the May 1, 2002 prospectuses for the 
Contracts and the Accounts (substantially in the form attached as 
Exhibit C to the initial application), the Company will notify owners 
of the Contracts of their intention to take the necessary actions, 
including seeking the order requested

[[Page 17119]]

by this application, to carry out the proposed substitution as 
described herein.
    27. The supplements about the proposed substitution will advise 
Contract owners that from the date of the supplement until the date of 
the proposed substitution, the Company will not (except as described in 
the next section) suspend its current waivers of transfer charges or 
exercise any rights reserved by it under any Contract to impose 
additional charges for transfers until at least 30 days after the 
proposed substitution. Similarly, the supplements will disclose that, 
from the date of the supplement until the date of the proposed 
substitution, the Company will permit Contract owners to make one 
transfer of Contract value out of the subaccount currently holding 
shares of the Replaced Fund to another subaccount without the transfer 
being treated as one of a limited number of transfers permitted without 
a transfer charge. The supplements also will advise Contract owners 
that if the proposed substitution is carried out, then each Contract 
owner affected by the substitution will be sent a written notice 
(described immediately below) informing them of the fact and details of 
the substitution.
    28. Within five days after the proposed substitution, any Contract 
owners who are affected by the substitution will be sent a written 
notice informing them that the substitution was carried out. Current 
prospectuses for the Replacing Fund will be sent to Contract owners on 
or before the time the notices are sent. The notice as delivered in 
certain jurisdictions also may explain that, under insurance 
regulations in those jurisdictions, Contract owners affected by the 
substitutions may exchange their Contract for a fixed-benefit life 
insurance contract or fixed-benefit annuity contract during the 60 days 
following the substitutions.
    29. The Company will carry out the proposed substitutions by 
redeeming Initial Class shares of the Replaced Fund held by the 
Accounts for cash and applying the proceeds to the purchase of Z Class 
shares of the Replacing Fund. The proposed substitutions will take 
place at relative net asset value with no change in the amount of any 
Contract owner's Contract 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 the Company's obligations under 
the Contracts be altered in any way. All applicable expenses incurred 
in connection with the proposed substitutions, including brokerage 
commissions and legal, accounting, and other fees and expenses, will be 
paid by the Company. 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.
    30. The proposed substitution will not be treated as a transfer of 
Contract value or an exchange of annuity units for the purpose of 
assessing transfer charges or for determining the number of remaining 
``free'' transfers or exchanges in a Contract year. The Company will 
not exercise any right it may have under the Contracts to impose 
charges for Contract value transfers or annuity unit exchanges under 
the Contracts for a period of at least 30 days following the proposed 
substitutions. Similarly, the Company will permit Contract owners to 
make one transfer of Contract value (or annuity unit exchange) out of 
the Replaced Fund subaccount to another subaccount without the transfer 
(or exchange) being treated as one of a limited number of transfers (or 
exchanges) permitted without a transfer charge. Likewise, for at least 
30 days following the proposed substitutions, the Company will permit 
Contract owners affected by the substitutions to make one transfer of 
Contract value (or annuity unit exchange) out of Replacing Fund 
subaccount to another subaccount without the transfer (or exchange) 
being treated as one of a limited number of transfers (or exchanges) 
permitted without a transfer charge.
    31. The Company is also seeking approval of the proposed 
substitutions from any state insurance regulators whose approval may be 
necessary or appropriate.
    32. The proposed substitution appears to involve the substitution 
of securities within the meaning of section 26(c) of the Act. 
Applicants therefore request orders from the Commission pursuant to 
section 26(c) approving the proposed substitution.
    33. All the Contracts expressly reserve for the Company the right, 
subject to compliance with applicable law, to substitute shares of one 
fund or portfolio held by a subaccount of an Account for another. The 
prospectuses for the Contracts and the Accounts contain appropriate 
disclosure of this right. The Company has reserved this right of 
substitution both to protect itself and its Contract owners in 
situations where it believes a fund is no longer appropriate for 
Contract owners or where either might be harmed or disadvantaged by 
circumstances surrounding the issuer of the shares held by one or more 
of its separate accounts and to afford the opportunity to replace such 
shares where to do so could benefit itself and Contract owners.
    34. Applicants maintain that Contract owners will be better served 
by the proposed substitution and that the proposed substitution is 
appropriate given the Funds and other investment options available 
under the various Contracts. Since its inception, the Replacing Fund 
has had investment performance superior to that of the Replaced Fund. 
More significantly, the Replacing Fund has had substantially similar 
levels of expenses over this same period (substantially identical for 
each of the past two years) as the Replaced Fund. Applicants believe 
that the Replacing Fund and Replaced Funds are substantially the same 
in their stated investment objectives and principal investment 
strategies as to afford investors continuity of investment experience, 
relative to management style. In addition, Applicants generally submit 
that the proposed substitution meets the standards that the Commission 
and its staff have applied to similar substitutions that have been 
approved in the past.
    35. Although the Replaced Fund has substantially more assets than 
the Replacing Fund, the Replaced Fund's assets have declined 
significantly in recent periods. Although the Replaced Fund benefits 
from an expense offset arrangement that reduces the Fund's custody fees 
and thus has the effect, along with other arrangements to reduce 
expenses, of reducing the Replaced Fund's expenses to slightly lower 
than those of the Replacing Fund, there is no assurance that this 
expense reduction will continue. Because of the expense limits on the 
Contracts discussed above, for two years following the proposed 
substitution, Contract owners affected by the proposed substitution 
will benefit from a subaccount and underlying Fund with aggregate 
expenses that are no higher than the aggregate annualized expenses of 
the subaccount and the Replaced Fund for the fiscal year ended December 
31, 2002.
    36. Applicants believe that Contract owners will be at least as 
well off with the Replacing Fund as with the Replaced Fund. The 
proposed substitution retains for Contract owners the investment 
flexibility that is a central feature of the Contracts. If the proposed 
substitution is carried out, all Contract owners will be permitted to

[[Page 17120]]

allocate purchase payments and transfer Contract values between and 
among the remaining subaccounts as they could before the proposed 
substitution.
    37. The proposed 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 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 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 disadvantage. The 
proposed substitutions, therefore, will not result in the type of 
costly forced redemption which section 26(c) was designed to prevent.
    38. The proposed substitution also is unlike the type of 
substitution that 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 Contract values. 
They also select the specific type of coverage offered by the Company 
under the Contract, as well as numerous other rights and privileges set 
forth in the Contract. Contract owners may also have considered the 
size, financial condition, type and reputation for service of the 
Company, from whom they purchased their Contract in the first place. 
These factors will not change because of the proposed substitution.
    39. Applicants submit that the proposed substitution is consistent 
with the protection of investors and the purposes fairly intended by 
the policy and provisions of the Act.
    Conclusion:
    Applicants assert that, for the reasons stated above, the requested 
order approving the Substitution should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8439 Filed 4-7-03; 8:45 am]
BILLING CODE 8010-01-P