[Federal Register Volume 68, Number 126 (Tuesday, July 1, 2003)]
[Notices]
[Pages 39163-39168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16517]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26080; File No. 812-12938]


Western-Southern Life Assurance Company, et al.; Notice of 
Application

June 25, 2003.
AGENCY: The 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.

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Applicants: Western-Southern Life Assurance Company (``Western-
Southern''), Separate Account 1 of Western-Southern (``Western-Southern 
Separate Account 1''), Separate Account 2 of Western-Southern 
(``Western-Southern Separate Account 2,'' together with Western-
Southern Separate Account 1, the ``Western-Southern Separate 
Accounts''), Integrity Life Insurance Company (``Integrity''), Separate 
Account I of Integrity (``Integrity Separate Account I''), Separate 
Account II of Integrity (``Integrity Separate Account II,'' together 
with Integrity Separate Account I, the ``Integrity Separate 
Accounts''), National Integrity Life Insurance Company (``National 
Integrity''), Separate Account I of National Integrity (``National 
Integrity Separate Account I''), Separate Account II of National 
Integrity (``National Integrity Separate Account II,'' together with 
National Integrity Separate Account I, the ``National Integrity 
Separate Accounts), Columbus Life Insurance Company (Columbus Life'' 
and together with Western-Southern, Integrity and National Integrity, 
the ``Insurance Companies'' and each individually, an ``Insurance 
Company'') and Separate Account 1 of Columbus Life (``Columbus Life 
Separate Account 1,'' and together with the Western-Southern Separate 
Accounts, the Integrity Separate Accounts and the National Integrity 
Separate Accounts, the ``Separate Accounts'') (collectively, the 
``Applicants'').

Summary of Application: Applicants request an order approving the 
substitution of shares of (i) the Touchstone Money Market Fund for 
shares of the Fidelity VIP Money Market Portfolio and (ii) the Putnam 
VT International Equity Fund (formerly the Putnam VT International 
Growth Fund) for the Touchstone International Equity Fund (each a 
``Substitution'' collectively the ``Substitutions'').

Filing Date: The application was filed on March 4, 2003 and was amended 
and restated on June 19, 2003.

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 July 18, 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: G. Stephen Wastek, 
Esq., Integrity Life Insurance Company, 515 West Market Street, 
Louisville, Kentucky 40202, Elisabeth A. Dahl, Esq., Western-Southern 
Life Assurance Company, 400 Broadway, Cincinnati, Ohio 45202 and Robert 
N. Hickey, Esq., Sullivan & Worcester LLP, 1666 K Street, NW., 
Washington, DC 20006.

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 Fifth Street, NW., 
Washington, DC 20549 (tel. (202) 942-8090).

Applicant's Representations

    1. Western-Southern is a stock life insurance company organized 
under the laws of the State of Ohio. It is a wholly-owned subsidiary of 
The Western and Southern Life Insurance Company (``WSLIC''). WSLIC is a 
wholly-owned subsidiary of Western-Southern Mutual Holding Company, a 
mutual holding company organized under the laws of the State of Ohio in 
2000.
    2. Integrity is a stock life insurance company organized under the 
laws of Ohio. Integrity is an indirect wholly-owned subsidiary of 
WSLIC.
    3. National Integrity is a stock life insurance company organized 
under the laws of New York. National Integrity is a direct wholly-owned 
subsidiary of Integrity and an indirect wholly-owned subsidiary of 
WSLIC.
    4. Columbus Life is a stock life insurance company organized under 
the laws of the State of Ohio. It is a wholly-owned subsidiary of 
WSLIC.
    5. Western-Southern Separate Account 1 was established under Ohio 
law in 1992. Western-Southern Separate Account 1 is registered under 
the Act as a unit investment trust and is used to fund variable annuity 
contracts issued by Western-Southern. Two variable annuity contracts 
funded by Western-Southern Separate Account 1 are affected by this 
application.
    6. Western-Southern Separate Account 2 was established under Ohio 
law in 1994. Western-Southern Separate Account 2 is registered under 
the Act as a unit investment trust and is used to fund variable annuity 
contracts issued by Western-Southern. One variable annuity contract 
funded by Western-Southern Separate Account 2 is affected by this 
application.
    7. Integrity Separate Account I was established under Ohio law in 
1986. Integrity Separate Account I is registered under the Act as a 
unit investment trust and is used to fund variable annuity contracts 
issued by Integrity. Three variable annuity contracts funded by 
Integrity Separate Account I are affected by this application.
    8. Integrity Separate Account II was established under Ohio law in 
1992. Integrity Separate Account II is registered under the Act as a 
unit investment trust and is used to fund variable annuity contracts 
issued by Integrity. One variable annuity contract funded by Integrity 
Separate Account II is affected by this application.
    9. National Integrity Separate Account I was established under New 
York law in 1992. National Integrity Separate Account I is registered 
under the Act as a unit investment trust and is used to fund variable 
annuity contracts issued by National Integrity. Three variable annuity 
contracts funded by National Integrity Separate Account I are affected 
by this application.
    10. National Integrity Separate Account II was established under 
New York law in 1992. National Integrity Separate Account II is 
registered under the Act as a unit investment trust and is used to fund 
variable annuity

[[Page 39164]]

contracts issued by National Integrity. One variable annuity contract 
funded by National Integrity Separate Account II is affected by this 
application.
    11. Columbus Life Separate Account 1 was established under Ohio law 
in 1998. Columbus Life Separate Account 1 is registered under the Act 
as a unit investment trust and is used to fund variable universal life 
insurance policies issued by Columbus Life. One variable universal life 
insurance policy funded by the Columbus Life Separate Account 1 is 
affected by this application. The eleven variable annuity contracts and 
one variable universal life insurance policy affected by this 
application are hereinafter collectively referred to as the 
``Contracts.''
    12. Purchase payments under the Contracts are allocated to one or 
more subaccounts of the Separate Accounts (the ``subaccounts''). 
Income, gains and losses, whether or not realized, from assets 
allocated to the Separate Accounts are, as provided in the Contracts, 
credited to or charged against the Separate Accounts without regard to 
other income, gains or losses of the applicable Insurance Company. The 
assets maintained in the Separate Accounts will not be charged with any 
liabilities arising out of any other business conducted by the 
applicable Insurance Company. Nevertheless, all obligations arising 
under the Contracts, including the commitment to make annuity payments 
or death benefit payments, are general corporate obligations of the 
applicable Insurance Company. Accordingly, all of the assets of each of 
the Insurance Companies are available to meet its obligations under its 
Contracts.
    13. Each of the Contracts permits allocations of accumulation value 
to available subaccounts that invest in specific investment portfolios 
of underlying mutual funds. Each Contract offers between 17 and 33 
portfolios with respect to the Contracts funded by the Western-Southern 
Separate Accounts and Columbus Life Separate Account 1 and between 56 
and 61 portfolios with respect to the Contracts funded by the Integrity 
Separate Accounts and the National Integrity Separate Accounts. Each of 
the Contracts offers the Fidelity VIP Money Market Portfolio and/or the 
Touchstone International Equity Fund, the portfolios that are the 
subject of the Substitutions (the ``Replaced Funds''). Before the date 
of the Substitutions, the Touchstone Money Market Fund, which is 
proposed as the replacement for the Fidelity VIP Money Market 
Portfolio, and the Putnam VT International Equity Fund, which is 
proposed as the replacement for the Touchstone International Equity 
Fund, (each a ``Replacement Fund'' and together, the ``Replacement 
Funds''), if not already offered under the Contracts, will be added to 
the Contracts, as applicable. In addition, included in the Contracts 
are several alternative fixed interest rate options that are available 
to contract owners.
    14. Each of the Contracts permit transfers of accumulation value 
from one subaccount to another subaccount at any time prior to the 
extended coverage period that begins at the insured's age 100 (in the 
case of Contracts relating to the variable insurance policy) or prior 
to annuitization (in the case of Contracts relating to variable 
annuities), subject to certain restrictions and charges described 
below. No sales charge applies to such a transfer of accumulation value 
among subaccounts.
    15. The Contracts permit up to twelve free transfers during any 
contract year. A fee may be imposed on transfers in excess of twelve 
transfers in a contract year. Transfers must be at least $250, or, if 
less, the entire amount in the subaccount from which value is to be 
transferred. A variety of types of automatic scheduled transfers are 
permitted without charge and are not counted against the twelve free 
transfers in a contract year.
    16. Each of the Contracts reserves the right, upon notice to 
contract owners and compliance with applicable law, to add, combine or 
remove subaccounts, or to withdraw assets from one subaccount and put 
them into another subaccount. This reserved right is disclosed in each 
Contract's prospectus.
    17. Each Insurance Company, on its behalf and on behalf of the 
Separate Accounts set forth below, propose the following Substitutions:

------------------------------------------------------------------------
         Proposed substitution                  Separate accounts
------------------------------------------------------------------------
(i) the Touchstone Money Market Fund     Integrity Separate Account I,
 for shares of the Fidelity VIP Money     Integrity Separate Account II,
 Market Portfolio.                        National Integrity Separate
                                          Account I, National Integrity
                                          Separate Account II.
(ii) the Putnam VT International Equity  Western-Southern Separate
 Fund for shares of the Touchstone        Account 1, Western-Southern
 International Equity Fund.               Separate Account 2, Integrity
                                          Separate Account I, Integrity
                                          Separate Account II, National
                                          Integrity Separate Account I,
                                          National Integrity Separate
                                          Account II, Columbus Life
                                          Separate Account 1.
------------------------------------------------------------------------

    18. In the case of the Substitution relating to the Touchstone 
Money Market Fund, shares of each class of the Replaced Fund will be 
liquidated and the proceeds will be used to purchase shares of the 
equivalent corresponding class of the Replacement Fund. Class I shares 
of the Touchstone Money Market Fund (which have no Rule 12b-1 fee) will 
be substituted for Initial class shares of the Fidelity VIP Money 
Market Portfolio (which have no Rule 12b-1 fee) and Class SC shares of 
Touchstone Money Market Fund (which have a Rule 12b-1 fee of 0.25%) 
will be substituted for Service Class 2 shares of the Fidelity VIP 
Money Market Portfolio (which have a Rule 12b-1 fee of 0.25%). In the 
case of the Substitution relating to the Putnam VT International Equity 
Fund, Class IB shares of the Putnam VT International Equity Fund (which 
have a Rule 12b-1 fee of 0.25%) will be substituted for Class I shares 
of the Touchstone International Equity Fund (which have no Rule 12b-1 
fee).
    19. Touchstone Advisors, Inc. (``Touchstone''), a wholly-owned 
subsidiary of WSLIC, serves as the investment adviser to the Touchstone 
International Equity Fund and to the Touchstone Money Market Fund. 
Fidelity Management and Research Company serves as the investment 
adviser to the Fidelity VIP Money Market Portfolio. Putnam Investment 
Management, LLC serves as investment adviser to the Putnam VT 
International Equity Fund. Fidelity Management and Research Company and 
Putnam Investment Management, LLC are unaffiliated with Touchstone and 
the Insurance Companies.
    20. The investment objectives, policies and restrictions of the 
Replacement Funds are in each case substantially similar to the 
investment objectives, policies and restrictions of the respective 
Existing Funds. Set forth below is a description of the investment 
objectives and principal investment policies of each Existing Fund and 
its corresponding Replacement Fund.
    21. The Fidelity VIP Money Market Portfolio is a separate series of 
the Variable Products Insurance Fund. The Fidelity VIP Money Market 
Portfolio

[[Page 39165]]

seeks to earn a high level of current income while preserving capital 
and providing liquidity. It invests only in high-quality, U.S. dollar 
denominated money market securities of domestic and foreign issuers, 
such as certificates of deposit, obligations of governments and their 
agencies, and commercial paper and notes.
    22. The Touchstone Money Market Fund is a separate series of the 
Touchstone Variable Series Trust, an open-end management investment 
company registered under the Act. The Touchstone Money Market Fund 
seeks high current income, consistent with liquidity and stability of 
principal. The Fund invests in high-quality money market instruments. 
The Fund's investments may include domestic bank obligations, including 
certificates of deposit, bankers' acceptances and time deposits; U.S. 
Government obligations issued directly by the U.S. Treasury or by 
agencies of the U.S. Government; short-term corporate debt obligations 
and taxable and tax-exempt municipal securities.
    23. The Touchstone International Equity Fund is a separate series 
of the Touchstone Variable Series Trust. The investment objective of 
the Touchstone International Equity Fund is to seek long-term growth of 
capital through investment in equity securities of foreign issuers. The 
Fund seeks growth of capital. This means that the Fund looks for 
investments that it thinks will increase in value over a period of 3 to 
5 years. Under normal circumstances, the Fund will invest at least 80% 
of net assets in the common stock and preferred stock of foreign 
companies in at least 3 countries outside of the United States. The 
Fund focuses on mid- and large-capitalization located in Europe, 
Australia and the Far East. The Fund may invest up to 15% of its assets 
in securities issued by companies located in emerging market countries.
    24. The Putnam VT International Equity Fund is a separate series of 
Putnam Variable Trust, an open-end management investment company 
registered under the Act. The Putnam VT International Equity Fund seeks 
capital appreciation. It invests mainly in common stocks of companies 
outside the United States. The Fund's investment adviser looks for 
companies it believes to have favorable investment potential. For 
example, it may purchase stocks of companies with stock prices that 
reflect a value lower than that which the investment adviser places on 
the company. The Fund invests mainly in mid-sized and large companies, 
although it can invest in companies of any size. Although the Fund 
emphasizes investments in developed countries, it may also invest in 
companies located in emerging markets.
    25. The Substitutions are a part of a restructuring designed to 
eliminate the offering of overlapping funds in the Western-Southern 
enterprise and those available from unaffiliated funds which also are 
available as investment options, with similar investment objectives and 
strategies and to eliminate uncompetitive products based on performance 
history or lack of ability to gather assets to be operationally 
efficient that serve as funding vehicles for insurance contracts issued 
by Western-Southern and its affiliates, including the Insurance 
Companies.
    26. The Substitution of Touchstone Money Market Fund for Fidelity 
VIP Money Market Portfolio, which replaces an outside fund with a fund 
for which Touchstone acts as investment adviser also will permit 
Touchstone, under the Multi-Manager Order, to hire, monitor and replace 
sub-advisers as necessary to seek optimal performance. Before 
Touchstone Money Market Fund can rely on the Multi-Manager Order, the 
operation of the Touchstone Money Market Fund as a multi-manager fund, 
as described in the application for the Multi-Manager Order, will be 
approved, following the proposed Substitution, by a majority of the 
outstanding voting securities of the Touchstone Money Market Fund.
    27. In addition, contract owners with sub-account balances invested 
in shares of the Replacement Funds will have a lower management fee and 
the same (or lower in the case of Class I shares) total expense ratio 
taking into account fund expenses and fee waivers, in the case of the 
Touchstone Money Market Fund, and a lower management fee and a lower 
total expense ratio taking into account fund expenses (including Rule 
12b-1 fees) in the case of the Putnam VT International Equity Fund. 
With respect to the Substitution of the Class IB shares of the Putnam 
VT International Equity Fund for the Class I shares of the Touchstone 
International Equity Fund, the Insurance Companies considered the fact 
that the Class IB shares were already an investment option under 
certain contracts issued by Integrity and National Integrity. Moreover, 
there will be no increase in Contract fees and expenses, including 
mortality and expense risk fees and administration and distribution 
fees charged to the Separate Accounts as a result of the Substitutions. 
The Applicants believe that the Replacement Funds have investment 
objectives, policies and risk profiles that are substantially similar 
to the corresponding Replaced Funds to make those Replacement Funds 
appropriate candidates as substitutes. The Insurance Companies 
considered the performance history of the Replaced Funds and the 
Replacement Funds and determined that no contract owners would be 
materially adversely affected as a result of the Substitutions.
    28. With respect to the Substitution relating to the Touchstone 
International Equity Fund, the Applicants represent that (i) the 
Insurance Companies will not receive, for three years from the date of 
the Substitution, any direct or indirect benefits from the Replacement 
Fund, its adviser or underwriter (or their affiliates), in connection 
with assets representing contract values of Contracts affected by the 
Substitution, at a higher rate than they had received from the Replaced 
Fund, its adviser or underwriter (or their affiliates), including 
without limitation: Rule 12b-1, shareholder service, administration or 
other service fees, revenue sharing or other arrangements in connection 
with such assets; and (ii) the Substitution and the selection of the 
Replacement Fund was not motivated by any financial consideration paid 
or to be paid to the Insurance Companies by the Replacement Fund, its 
adviser or underwriter or their respective affiliates.
    29. The following describes the proposed Substitutions with respect 
to each Fund's comparative performance history and comparative fund 
expenses.

Fidelity VIP Money Market Portfolio--Touchstone Money Market Fund

    The Applicants represent that the historical performance of 
Touchstone Money Market Fund for the year ended December 31, 2002 is 
comparable to and for the three-month period ended April 30, 2003 and 
year-to-date through April 30, 2003 exceeds that of, Fidelity VIP Money 
Market Portfolio. Effective April 28, 2003, Touchstone Money Market 
Fund's management fee was reduced to 0.18%. In addition, the Fund 
entered into a Sponsor Agreement with Touchstone, effective April 28, 
2003, whereby total annual operating expenses for the Class I shares 
will not exceed 0.28% and total annual operating expenses for the Class 
SC shares will not exceed 0.55% through December 31, 2005. The Sponsor 
Agreement will be amended with respect to Class SC shares prior to the 
Substitution to provide that total annual operating expenses will not 
exceed 0.54% for at least two years from the date of the Substitution. 
As a result of the change in management fee and the expense cap 
contained in the amended Sponsor Agreement, as set forth below,

[[Page 39166]]

the management fee of Touchstone Money Market Fund is lower than that 
of Fidelity VIP Money Market Portfolio, and, including expense waivers, 
Touchstone Money Market Fund's total annual operating expenses are the 
same (or lower in the case of Class I shares) as those of Fidelity VIP 
Money Market Portfolio.

 
                                                   In percent
----------------------------------------------------------------------------------------------------------------
                                                                                   Fidelity VIP
                                                                    Touchstone     money market     Touchstone
                                   Fidelity VIP money market       money market      portfolio     money market
                                  portfolio (Initial Class)*      fund (Class I)  (Service Class    fund (Class
                                                                        \1\             2)*            SC) *
----------------------------------------------------------------------------------------------------------------
Management Fee..............                                0.20            0.18            0.20            0.18
12b-1 fee...................  ..................................  ..............              25              25
Other Expenses..............                                0.09            0.96            0.09            0.53
Total Annual Operating                                      0.29          **1.14            0.54            0.96
 Expenses...................
Waivers.....................  ..................................            0.86  ..............            0.42
Net Expenses................                                0.29            0.28            0.54            0.54
----------------------------------------------------------------------------------------------------------------
* Expenses for fiscal year ended December 31, 2002.
** Based on estimated amounts for the current fiscal year.
1 Pro forma expenses for fiscal year ended December 31, 2002 giving effect to amended Sponsor Agreement.

    Found Performance as of April 30, 2003

 
                                                   In percent
----------------------------------------------------------------------------------------------------------------
                                                                     One Year*      Three-Month         YTD
----------------------------------------------------------------------------------------------------------------
Fidelity VIP Money Market Portfolio (Initial Class).............            1.69            0.26            0.36
Touchstone Money Market Fund (Class I) 1 2*.....................            1.58            0.27            0.37
----------------------------------------------------------------------------------------------------------------
* For calendar year ended December 31, 2002.
1 The Class SC shares of Touchstone Money Market Fund was organized on April 28, 2003 and has not yet commenced
  operations. No performance information is available.
2 The Touchstone Money Market Fund's performance for the one year ended December 31, 2002 reflects total annual
  operating expenses of 0.60%. As indicated above, effective April 28, 2003, the total annual operating expenses
  of the Fund are limited to 0.28% for Class I shares. If this expense limitation were in effect for the one
  year ended December 31, 2002, the Touchstone Money Market Fund's performance would have been 1.90%.

Touchstone International Equity Fund--Putnam VT International Equity 
Fund

    The Applicants represent that the historical performance of Putnam 
VT International Equity Fund for the one-, three-, and five-year 
periods ended April 30, 2003 and year-to-date through April 30, 2003 
has exceeded that of the Touchstone International Equity Fund. In 
addition, as set forth below, the management fee and total annual 
operating expenses (including a Rule 12b-1 fee of 0.25%) of Putnam VT 
International Equity Fund, both before and after expense waivers, are 
lower than those of Touchstone International Equity Fund.

                               In percent
------------------------------------------------------------------------
                                            Touchstone       Putnam VT
                                           International   International
                                            Equity Fund     Equity Fund
                                            (Class I) *    (Class IB) *
------------------------------------------------------------------------
Management Fee..........................            0.95            0.76
12b-1 fee...............................  ..............          1 0.25
Other Expenses..........................            1.72            0.18
Total Annual Operating Expenses.........            2.67            1.19
Waivers.................................            1.42  ..............
Net Expenses............................            1.25            1.19
------------------------------------------------------------------------
* Expenses for fiscal year ended December 31, 2002.
1 The Fund has adopted a Distribution Plan with respect to its Class IB
  shares to compensate Putnam Retail Management (the Fund*s underwriter)
  for services provided and expenses incurred by it as principal
  underwriter of the Class IB shares, including payments to insurance
  companies and their affiliated dealers for providing services to their
  contract holders investing in the Fund. The plan provides for payments
  by the Fund to Putnam Retail Management at the annual rate (expressed
  as a percentage of average net assets) of up to 0.35% on Class IB
  shares. The Trustees of the Fund currently limit payments on Class IB
  shares to 0.25% of average net assets.

    Fund Performance as of April 30, 2003

[[Page 39167]]



 
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                      1 Year          3 Year          5 Year            YTD
----------------------------------------------------------------------------------------------------------------
Touchstone International Equity (Class I).......          -23.50          -22.97          -10.05           -1.75
Putnam VT International Equity Fund (Class IB)..          -18.01          -15.40           -1.26            0.12
----------------------------------------------------------------------------------------------------------------

    30. The Substitutions will take place at the Funds' relative net 
asset values determined on the date of the Substitutions in accordance 
with Section 22 of the Act and Rule 22c-1 thereunder with no change in 
the amount of any contract owner's cash value or death benefit or in 
the dollar value of his or her investment in any of the subaccounts. 
Accordingly, there will be no financial impact on any contract owner. 
The Substitutions will be effected by having each of the subaccounts 
that invests in the Replaced Funds redeem its shares at the net asset 
value calculated on the date of the Substitution and purchase shares of 
the respective Replacement Fund at the net asset value calculated on 
the same date.
    31. The Substitutions will be described in supplements to the 
prospectuses for the Contracts (``Stickers'') filed with the Commission 
and mailed to contract owners. The Stickers will give contract owners 
notice of the Substitutions and will describe the reasons for engaging 
in the Substitutions. The Stickers will also inform contract owners 
with value allocated to a subaccount investing in the Replaced Funds 
that no additional amount may be allocated to those subaccounts on or 
after the date of the Substitutions. In addition, the Stickers will 
inform affected contract owners that they will have the opportunity to 
reallocate accumulation value prior to the Substitutions from the 
subaccounts investing in the Replaced Funds, and for 30 days after the 
Substitutions from the subaccounts investing in the Replacement Funds 
to subaccounts investing in other portfolios 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.
    32. The prospectuses for the Contracts, as supplemented by the 
Stickers, will reflect the Substitutions. Each contract owner will be 
provided with a prospectus for the Replacement Funds before the 
Substitutions, unless such contract owner has already received a copy 
of such prospectus in the ordinary course. Within five days after the 
Substitutions, the Insurance Companies will each send affected contract 
owners written notice that the Substitutions have occurred. This 
written notice will also reiterate to contract owners that they will 
have the opportunity to reallocate accumulation value for 30 days after 
the Substitutions from the subaccounts investing in the Replacement 
Funds to subaccounts investing in other portfolios available under the 
respective Contracts.
    33. The Insurance Companies, as applicable, will pay all expenses 
and transaction costs of the Substitutions, including all legal, 
accounting and brokerage expenses relating to the Substitutions. No 
costs will be borne by contract owners. Affected contract owners will 
not incur any fees or charges as a result of the Substitutions, nor 
will their rights or the obligations of the Applicants under the 
Contracts be altered in any way. The Substitutions will not cause the 
fees and charges under the Contracts currently being paid by contract 
owners to be greater after the Substitutions than before the 
Substitutions. The Substitutions will have no adverse tax consequences 
to contract owners and will in no way alter the tax benefits to 
contract owners.
    34. Applicants believe that their request satisfies the standards 
for relief of Section 26(c) of the Act, as set forth below, because the 
affected contract owners will have:
    (i) Contract values allocated to a subaccount invested in a 
Replacement Fund with an investment objective and investment policies 
substantially similar to the investment objective and policies of the 
Replaced Fund; (ii) Superior or comparable performance to that of the 
Replaced Funds; and (iii) Current total annual operating expenses that 
are the same or lower than those of the Replaced Fund.

Applicants' Legal Analysis

    1. 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. The purpose of Section 26(c) is to protect the expectation of 
investors in a unit investment trust that the unit investment trust 
will accumulate shares of a particular issuer by preventing 
unscrutinized substitutions that might, in effect, force shareholders 
dissatisfied with the substituted security to redeem their shares, 
thereby possibly incurring either a loss of the sales load deducted 
from initial premium payments, an additional sales load upon 
reinvestment of the redemption proceeds, or both. Moreover, in the 
insurance product context, a contract owner forced to redeem may suffer 
adverse tax consequences. Section 26(c) affords this protection to 
investors by preventing a depositor or trustee of a unit investment 
trust that holds shares of one issuer from substituting for those 
shares the shares of another issuer, unless the Commission approves 
that substitution.
    3. 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.
    4. Substitutions have been common where the substitute portfolio 
has investment objectives and policies that are similar to those of the 
eliminated portfolio, current expenses that are similar to or lower 
than those of the eliminated portfolio, and performance that is similar 
to or better than that of the eliminated portfolio.
    5. In both cases the investment objectives and policies of the 
Replacement Funds are sufficiently similar to those of the 
corresponding Replaced Funds that contract owners will have reasonable 
continuity in investment expectations. Accordingly, the Replacement 
Funds are appropriate investment vehicles for those contract owners who 
have contract values allocated to the Replaced Funds.
    6. The management fee and current total annual operating expenses 
(including Rule 12b-1 fees) are lower than those of the Replaced Fund, 
in the case of the Putnam VT International Equity Fund. In the case of 
the Touchstone Money Market Fund, the management fee is lower than that 
of the Replaced Fund and total annual

[[Page 39168]]

operating expenses, taking into effect expenses waivers, will be the 
same (or lower in the case of Class I shares). The Putnam VT 
International Equity Fund has had consistently better performance than 
the Touchstone International Equity Fund since its inception, and the 
Touchstone Money Market Fund has had comparable historical performance 
for the year ended December 31, 2002 to that of the Fidelity VIP Money 
Market Portfolio and its performance has exceeded that of the Fidelity 
VIP Money Market Portfolio for the three-month period ended April 30, 
2003 and year-to-date through April 30, 2003.
    7. The Substitutions will not result in the type of costly forced 
redemption that Section 26(c) was intended to guard against and, for 
the following reasons, are consistent with the protection of investors 
and the purposes fairly intended by the Act:
    (a) Each of the Replacement Funds is an appropriate portfolio to 
which to move contract owners with values allocated to the Replaced 
Funds because the portfolios have substantially similar investment 
objectives and policies.
    (b) The costs of the Substitutions, including any brokerage costs, 
will be borne by the Insurance Companies and will not be borne by 
contract owners. No charges will be assessed to effect the 
Substitutions.
    (c) The Substitutions will be at the 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 or death benefit.
    (d) The Substitutions will not cause the fees and charges under the 
Contracts currently being paid by contract owners to be greater after 
the Substitutions than before the Substitution and will result in 
contract owners' contract values being moved to portfolios with lower 
current total annual operating expenses (including a lower current 
management fee) than the Replaced Fund, in the case of the Putnam VT 
International Equity Fund, and the same (or lower) total annual 
operating expenses (including a lower current management fee) as the 
current total annual operating expenses of the Replaced Fund in the 
case of the Touchstone Money Market Fund.
    (e) Touchstone will cap total annual operating expenses of the 
Touchstone Money Market Fund Class I shares at 0.28% of average daily 
net assets through December 31, 2005 and Class SC shares at 0.54% of 
average daily net assets for at least two years from the date of the 
Substitution.
    (f) All contract owners will be given notice of the Substitutions 
prior to the Substitutions and will have an opportunity for 30 days 
after the Substitutions to reallocate accumulation value among other 
available subaccounts without the imposition of any transfer charge or 
limitation and without being counted as one of the contract owner's 
free transfers in a contract year.
    (g) Within five days after the Substitutions, the Insurance 
Companies will send to its affected contract owners written 
confirmation that the Substitutions have occurred.
    (h) For those contract owners who are contract owners on the date 
of the Substitutions, the Insurance Companies will not increase 
Separate Account or Contract fees and expenses for a two-year period 
beginning on the date of the Substitutions.
    (i) The Substitutions will in no way alter the insurance benefits 
to contract owners or the contractual obligations of the Insurance 
Companies.
    (j) The Substitutions will have no adverse tax consequences to 
contract owners and will in no way alter the tax benefits to contract 
owners.

Conclusion

    Applicants assert that for the reasons summarized 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. 03-16517 Filed 6-30-03; 8:45 am]
BILLING CODE 8010-01-P