[Federal Register Volume 68, Number 70 (Friday, April 11, 2003)]
[Notices]
[Pages 17845-17848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8922]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25995; File No. 812-12840]


Principal Life Insurance Company, et al., Notice of Application

April 7, 2003.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to section 26(b) of 
the Investment Company Act of 1940 (the ``Act'') approving the 
substitution of securities and an order of exemption pursuant to 
section 17(b) of the Act.

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APPLICANTS: Principal Life Insurance Company (``Principal Life''), 
Principal Life Insurance Company Variable Life VL Separate Account (the 
``VL Separate Account''), and Principal Life Insurance Company Separate 
Account B (``Separate Account B'').

SUMMARY: Applicants seek an order to permit, under the specific 
circumstances identified in the application, the substitution of shares 
of the SmallCap Account of Principal Variable Contracts Fund, Inc, 
(``SmallCap Account'') for shares of the MicroCap Account of Principal 
Variable Contracts Fund, Inc. (``MicroCap Account''). Applicants also 
request an order exempting the proposed substitution from the 
provisions of section 17(a) of the Act.

DATES: The Application was filed on May 8, 2002, and amended on 
December 19, 2002, and March 24, 2003.

HEARING OR NOTIFICATION OF HEARING: An order granting the Application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
Applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 on April 29, 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 who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549. 
Applicants, c/o John W. Blouch, Esq., Jones & Blouch L.L.P., 1025 
Thomas Jefferson Street, NW., Washington, DC 20007-0805; copy to 
Michael D. Roughton, Esq., Principal Financial Group, Inc., 711 High 
Street, Des Moines, Iowa 50392-0200.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Zandra Bailes, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: Following is a summary of the Application; 
the complete Application is available for a fee from the SEC's Public 
Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 
(telephone (202) 942-8090).

Applicants' Representations

    1. Principal Life is a stock life insurance company organized under 
the laws of Iowa in 1879. It is authorized to transact life insurance 
and annuity business in all of the United States and the District of 
Columbia.
    2. The VL Separate Account was established in 1987 by Principal 
Life as a separate account under Iowa law for the purpose of funding 
variable life contracts issued by Principal Life (File No. 811-05118). 
Separate Account B was established in 1970 by Principal Life as a 
separate account under Iowa law for the purpose of funding variable 
annuity contracts issued by Principal Life (File No. 811-02091). The 
only contracts affected by this application are: (a) Four flexible 
premium variable life insurance policies called ``Flex Variable Life'' 
(File No. 033-13481) (``FVL Contract''), ``Prinflex Life'' (File No. 
333-00101) (``Prinflex Contract''), ``Survivorship Variable Universal 
Life'' (File No. 333-71521) (``Survivorship Contract''), and 
``Principal Variable Universal Life Accumulator'' (File No. 333-65690) 
(``Accumulator Contract''); (b) an individual deferred annuity contract 
called ``Flexible Variable Annuity'' (File No. 33-74232) (``FVA 
Contract''); and (c) a group variable annuity contract called ``Premier 
Variable Annuity Contract'' (File No. 333-63401) (``Premier Contract,'' 
collectively with FVL Contract, Prinflex Contract, Survivorship 
Contract, Accumulator Contract and FVA Contract, the ``Contracts'').
    3. Purchase payments for FVL, Prinflex, Survivorship and 
Accumulator Contracts are allocated to one or more subaccounts 
(``Divisions'') of VL Separate Account. Purchase payments for FVA and 
Premier Contracts are allocated to one or more Divisions of Separate 
Account B. The Contracts permit allocations of accumulation value to 
the available Divisions. Each Division invests in shares of an 
underlying mutual fund (``Underlying Fund''). There currently are 40 
Divisions available under the FVL

[[Page 17846]]

Contract, 23 of which invest in Principal Variable Contracts Fund, Inc. 
(``Principal Fund''), an open-end management investment company 
registered under the Act (File Nos. 811-01944 and 002-35570). There 
currently are 47 Divisions available under the Accumulator and Prinflex 
Contracts, 25 of which invest in Principal Fund. There currently are 39 
Divisions available under the Survivorship Contract, 25 of which invest 
in Principal Fund. There currently are 41 Divisions available under the 
FBA Contract, 26 of which invest in Principal Fund. There currently are 
25 Divisions available under the Premier Contract, all of which invest 
in Principal Fund. The only Divisions affected by this application are 
the MicroCap Divisions of VL Separate Account and Separate Account B 
which invest solely in the MicroCap Account and the SmallCap Division 
of those two Separate Accounts which invest solely in the SmallCap 
Account. MicroCap Account and SmallCap Account are referred to 
collectively as the ``Funds.''
    4. The Contracts permit transfers of accumulated value from one 
Division to another. The total amount transferred each time must be at 
least $250 under the FVL Contract or $100 under the FVA, Survivorship, 
Accumulator, or Prinflex Contracts, unless a lesser amount constitutes 
the Contract's entire accumulated value in a Division. Transfers 
between Divisions under the Premier Contract are not subject to a 
minimum amount or any charge. A transaction charge of $25 is imposed on 
each transfer of accumulated value among Divisions under the FVL 
Contract exceeding four per policy year. A transaction charge of $30 is 
imposed on each transfer of accumulated value among Divisions under the 
FVA Contract exceeding twelve per policy year. No transaction charge 
applies to transfers under the Prinflex, Accumulator or Survivorship 
Contracts.
    5. Applicants propose a substitution of shares of the SmallCap 
Account for shares of the MicroCap Account held by the MicroCap 
Divisions of VL Separate Account and Separate Account B.
    6. Principal Management Corporation (``PMC''), a registered 
investment adviser under the Investment Advisers Act of 1940, as 
amended (``Advisers Act''), and an indirect, wholly-owned subsidiary of 
Principal Financial Group, Inc., serves as the investment adviser for 
the Funds. Pursuant to sub-advisory agreements, the MicroCap Account is 
managed by Goldman Sachs Asset Management (``GSAM''), a registered 
investment adviser under the Advisers Act, and the SmallCap Account is 
managed by Invista Capital Management, LLC (``Invista''), a registered 
investment adviser under the Advisers Act. Invista is an indirect, 
wholly-owned subsidiary of Principal Life.
    7. The MicroCap Account's investment objective is to seek long term 
growth of capital primarily by investing in value and growth oriented 
companies with small market capitalizations. Under normal market 
conditions, the MicroCap Account invests at least 80% of its net assets 
plus any borrowings for investment purposes (measured at the time of 
purchase) in a broadly diversified portfolio of equity securities in 
microcap U.S. issuers (including foreign issuers that are traded in the 
United States). These microcap issuers will generally have market 
capitalizations of less than $1 billion at the time of investment. The 
expense ratio of the MicroCap Account for 2002 was 1.25%. The MicroCap 
Account has no 12b-1 plan. The total return of the MicroCap Account was 
-16.89% for the year ended December 31, 2002, and the average annual 
total return for the life of the Account through December 31, 2002, was 
-5.54%.
    8. The SmallCap Account's investment objective is to seek long term 
growth of capital by investing primarily in equity securities of both 
growth and value oriented companies with comparatively smaller market 
capitalizations. Under normal market conditions, the SmallCap Account 
invests at least 80% of its assets in common stocks of companies with 
small market capitalizations (those with market capitalizations similar 
to companies in the Russell 2000 Index) at the time of purchase. The 
expense ratio of the SmallCap Account for 2002 was 0.97%. The SmallCap 
Account has no 12b-1 plan. The total return of the SmallCap Account for 
the year ended December 31, 2002, was -27.33%, and the average annual 
total return for the life of the Account through December 31, 2002, was 
-5.95%. There are no fee waiver or expense reimbursement provisions 
with respect to either Fund.
    9. Applicants believe that the substitution will better serve the 
interests of contractowners because it will eliminate an investment 
option under the Contracts that has never been able to attract 
significant contractowner interest and will provide contractowners with 
an investment in an account that has similar, although not identical, 
investment objectives and policies as well as a lower expense ratio. 
Applicants also believe that the substitution should benefit 
contractowners by providing economies of scale that result from 
investing in a much larger account. Applicants represent that the 
substitution will take place at the relative net asset values 
determined on the date of the substitution in accordance with section 
22(c) of the Act and rule 22c-1 thereunder. Applicants represent that 
there will be no financial impact to any contractowner. The 
substitution will be effected by having the MicroCap Divisions redeem 
their shares of the MicroCap Account for cash at the net asset value 
calculated on the date of the substitution and purchase shares of the 
SmallCap Account for cash at net asset value on the same date. In the 
alternative, the substitution may be effected by having a partial ``in-
kind'' redemption with the MicroCap Divisions receiving from the 
MicroCap Account securities that are eligible investments for the 
SmallCap Account and that have a value equal to the net asset value of 
the shares of the MicroCap Account being redeemed and then contributing 
these securities to the SmallCap Account in exchange for shares of the 
SmallCap Account having a net asset value equal to the value of the 
securities contributed (the ``In-Kind Transaction''). In connection 
with the completion of the substitution, Principal Life will withdraw 
its seed money from the MicroCap Account and terminate the MicroCap 
Account. In addition, Principal Life will combine the MicroCap Division 
with the SmallCap Division.
    10. Applicants represent that the proposed substitution was 
described in supplements to the prospectuses for the Contracts 
(``Stickers'') which were filed with the Commission on August 16, 2002, 
and mailed to contractowners. The Stickers gave contractowners notice 
of the substitution, described the reasons for engaging in the 
substitution, and informed contractowners that no amounts may be 
transferred to the MicroCap Division on or after May 31, 2003. In 
addition, the Stickers informed affected contractowners that they will 
have an opportunity to reallocate accumulation value, prior to the 
substitution, from the MicroCap Division, or for 60 days after the 
substitution, from the SmallCap Division to another Division available 
under the Contracts, without the imposition of any transfer charge or 
limitation and without counting the transfer as one of the annual free 
transfers (the ``Free Transfer Right'').
    11. Each contractowner has been provided a prospectus for the 
SmallCap Account. Within five days after the substitution, Principal 
Life will send to contractowners written confirmation

[[Page 17847]]

that the substitution has occurred. The confirmation will be 
accompanied by a notice describing the Free Transfer Right.
    12. Applicants represent that Principal Life will pay all expenses 
and transaction costs of the substitution. Affected contractowners will 
not incur any fees or charges as a result of the substitution, nor will 
their rights or the obligations of Principal Life under the Contracts 
be altered in any way. The proposed substitution will not cause the 
fees and charges under the Contracts currently being paid by 
contractowners to be greater after the substitution than before the 
substitution. The proposed substitution will not have a tax impact on 
contractowners.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to section 26(c) of the Act 
approving the substitution. Section 26(c) of the Act makes it 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 approves the substitution. The 
Commission will approve such a 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 Act.
    2. 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. Substitution is an appropriate solution to the 
small size and higher relative expense of the MicroCap Account. 
Applicants believe that the SmallCap Account will better serve 
contractowner interests because of its larger size and lower expenses. 
Moreover, Principal Life has reserved the right to effect substitutions 
in the Contracts and disclosed this reserved right in the prospectus 
for the Contracts.
    3. Applicants represent that the substitution will not result in 
the type of costly, forced redemption that section 26(c) was intended 
to guard against and, for the following reasons, is consistent with the 
protection of investors and the purposes fairly intended by the Act:
    (a) The proposed substitution permits contractowners continuity of 
investment objectives and expectations. Both the SmallCap Account and 
the MicroCap Account seek long term growth of capital primarily by 
investing in value and growth oriented companies. Although the SmallCap 
Account and the MicroCap Account differ primarily in the market 
capitalization of the companies in which they invest, with the SmallCap 
Account investing primarily in companies with small market 
capitalizations ranging approximately from $150 million to $1.4 
billion, and the MicroCap Account investing primarily in companies with 
market capitalizations under $1 billion, there is substantial overlap 
in the securities in which each may invest. The SmallCap Account, with 
its emphasis on investing in companies with small market 
capitalizations, will afford shareholders of the MicroCap Account an 
opportunity for continued investment exposure to companies with smaller 
market capitalizations.
    (b) The contract owners will have ample opportunity to consider 
their investment options because they will be given notice prior to the 
substitution and will have an opportunity to reallocate accumulation 
value among other available Divisions without the imposition of any 
transfer charge or limitation as a result of the Free Transfer Right.
    (c) The costs of the substitution will be borne by Principal Life 
and will not be borne by the Funds or the contract owners.
    (d) The substitution will be at net asset values of the respective 
shares, without the imposition of any transfer or similar charge and 
with no change in the amount of any contract owner's accumulation value 
under the Contracts.
    (e) The substitution will not cause the fees and charges under the 
Contracts currently being paid by contract owners to be greater after 
the substitution than before the substitution.
    (f) Within five days after the substitution, Principal Life will 
send to contract owners written confirmation that the substitution has 
occurred.
    (g) The substitution will in no way alter the insurance benefits to 
contract owners or the contractual obligations of Principal Life.
    (h) The substitution will in no way alter the tax benefits to 
contract owners.
    (i) To the extent that the annualized expenses of the SmallCap 
Account exceed, for each fiscal quarter during the two-year period 
following the substitution, the 2002 net expense level of the MicroCap 
Account, Principal Life will, for each Contract outstanding on the date 
of the substitution, make a reduction in (or reimbursement of) the 
SmallCap Division expenses on the last day of each such fiscal period, 
such that the sum of the net expenses of the SmallCap Account and the 
net expenses of the SmallCap Division will, on an annualized basis, be 
no greater than the sum of the net expenses of the MicroCap Account and 
the net expenses of the MicroCap Division for the 2002 fiscal year. In 
addition, for the two-year period following the substitution, Principal 
Life will not increase asset-based fees or charges under the Contracts.
    4. Section 17(a) of the Act provides, in pertinent part, that it is 
unlawful for any affiliated person of a registered investment company, 
or any affiliated person of such an affiliated person, acting as 
principal, knowingly to sell any security or other property to such 
registered company or to purchase from such registered company any 
security or other property. Section 2(a)(3) of the Act defines the term 
``affiliated person'' of another person to include in pertinent part 
``(A) any person directly or indirectly owning, controlling, or holding 
with power to vote, 5 per centum or more of the outstanding voting 
securities of such other person; (B) any person 5 per centum or more of 
whose outstanding voting securities are directly or indirectly owned, 
controlled, or held with power to vote, by such other person; (C) any 
person directly or indirectly controlling, controlled by, or under 
common control with such other person; * * * (E) if such other person 
is an investment company, any investment adviser thereof or any member 
of an advisory board thereof.''
    5. Each of the Funds was sponsored by Principal Life. Principal 
Life may be deemed an affiliated person of an affiliated person of each 
of the Funds because it is under common control with Principal 
Management Corporation, which serves as the investment adviser to the 
Funds. Moreover, Principal Life is the owner of all the outstanding 
shares of the SmallCap Account and all of the outstanding shares of the 
MicroCap Account. As a result of these relationships, the Funds might 
be deemed to be under common control and, therefore, affiliated persons 
of each other for purposes of the prohibitions set forth in section 
17(a) of the Act. Thus, absent exemptive relief, consummation of the 
substitution using the In-Kind Transaction could result in a violation 
of section 17(a) because the transaction would involve the purchase 
from and sale of securities to an investment company by an affiliated 
person, or an affiliated person of an affiliated person, of that 
investment company.
    6. Section 17(b) of the Act provides that the Commission may exempt 
any transaction from the prohibitions of section 17(a) if the evidence 
establishes that:

[[Page 17848]]

    (a) The terms of the proposed transaction, including the 
consideration to be paid or received, are fair and reasonable 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 the registration 
statements and reports filed under the Act; and
    (c) The proposed transaction is consistent with the general 
purposes of the Act.
    7. Applicants represent that the terms of the proposed In-Kind 
Transaction are reasonable and fair and do not involve any overreaching 
on the part of any person concerned. The substitution will be 
accomplished on the basis of the relative net asset values of each of 
the Funds and, therefore, will have no economic impact on the interest 
of any contract owner.
    8. Applicants represent that the substitution is consistent with 
the investment objective of each of the Funds in that both Funds seek 
long term growth of capital by investing primarily in value and growth 
oriented companies. Although the SmallCap Account and the MicroCap 
Account differ primarily in the market capitalization of the companies 
they invest in, with the SmallCap Account investing primarily in 
companies with small market capitalizations, ranging approximately from 
$150 million to $1.4 billion, and the MicroCap Account investing 
primarily in companies with market capitalizations under $1 billion, 
there is substantial overlap in the securities in which each may 
invest, and the SmallCap Account, with its emphasis on investing in 
companies with small market capitalizations, will afford shareholders 
of the MicroCap Account an opportunity for continued investment 
exposure to companies with smaller market capitalizations. In addition, 
contract owners with an interest in the MicroCap Division will have the 
opportunity to transfer their interest, without charge, to any other 
Division.
    9. Applicants represent that the substitution is consistent with 
the general purposes of the Act. Section 1(b)(2) of the Act declares 
that the public interest and interest of investors are adversely 
affected when investment companies are organized and managed in the 
interest of affiliated persons, rather than in the interest of the 
company's security holders. The substitution does not result in any of 
the self-dealing abuses that the Act was designed to prevent. Principal 
Life will pay all expenses incurred in connection with the 
substitution. The substitution will be effected by Principal Life in 
accordance with the terms of the Contracts. The substitution will 
eliminate a small fund that has never been able to attract significant 
investor interest, will provide contract owners with an interest in 
that fund with an interest in a fund that has similar, although not 
identical, investment objectives and policies as well as a lower 
expense ratio, and should benefit the shareholders of both Funds by 
providing economies of scale that result from combining the assets and 
operations of the two Funds.
    10. Applicants request an order of the Commission pursuant to 
section 26(c) of the Act approving the substitution and an order of 
exemption pursuant to section 17(b) of the Act in connection with 
aspects of the substitution that may be deemed to be prohibited by 
section 17(a), as described above. Section 26(c), in pertinent part, 
provides that the Commission shall issue an order approving a 
substitution of securities 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 Act. For the reasons and 
upon the facts set forth above, Applicants believe that the requested 
order meets the standards set forth in section 26(c) and should, 
therefore, be granted. Section 17(b) of the Act provides that the 
Commission may grant an order exempting transactions prohibited by 
section 17(a) of the Act upon application subject to certain 
conditions. Applicants represent that the proposed In-Kind Transaction 
meets all of the requirements of section 17(b) of the Act and that an 
exemption should be granted, to the extent necessary, from the 
provisions of section 17(a).

Conclusion

    Section 6(c) of the Act, in pertinent part, provides that the 
Commission, by order upon application, may conditionally or 
unconditionally exempt any persons, security or transaction, or any 
class or classes of persons, securities or transactions, from any 
provision or provisions of the Act, or any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.
    Applicants submit that, for the reasons stated in the Application, 
their exemptive requests meet the standards set out in section 6(c) and 
that an order should, therefore, be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8922 Filed 4-10-03; 8:45 am]
BILLING CODE 8010-01-P