[Federal Register Volume 69, Number 70 (Monday, April 12, 2004)]
[Notices]
[Pages 19244-19251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8176]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26411; File No. 812-13024]


Integrity Life Insurance Company, et al.

April 6, 2004.
AGENCY: Securities and Exchange Commission (the ``Commission'').

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

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

Applicants: Integrity Life Insurance Company (``Integrity''), Separate 
Account I of Integrity Life Insurance Company (``Integrity Separate 
Account I''), Separate Account II of Integrity Life Insurance Company 
(``Integrity Separate Account II''), National Integrity Life Insurance 
Company (``National Integrity;'' together with Integrity, the 
``Integrity Companies''), Separate Account I of National Integrity Life 
Insurance Company (``National Integrity Separate Account I''), and 
Separate Account II of National Integrity Life Insurance Company 
(National Integrity Separate Account II'') (collectively, the 
``Applicants'').

Summary of Application: Applicants seek an order approving the proposed 
substitution of shares of Fidelity VIP Asset Manager: Growth Portfolio 
with Fidelity VIP Asset Manager Portfolio, Fidelity VIP Aggressive 
Growth Portfolio and Janus Growth Portfolio with Fidelity VIP Growth 
Portfolio, Janus Mid Cap Growth Portfolio with Fidelity VIP Mid Cap 
Growth Portfolio, Janus International Growth Portfolio and Janus 
Worldwide Growth Portfolio with Scudder EAFE Equity Index Fund, MFS 
Investors Trust Portfolio with MFS Capital Opportunities Portfolio, MFS 
Research Portfolio with MFS Investors Growth Stock Portfolio, and 
Putnam New Opportunities Fund with Putnam Voyager Fund (the 
``Substitution'').

Filing Date: The application was filed on September 30, 2003, and 
amended on April 1, 2004.

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 must be received by the 
Commission by 5:30 p.m. on May 6, 2004, 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 requester's interest, the reason for

[[Page 19245]]

the request, and the issues contested. Persons who wish to be notified 
of a hearing may request notification by writing to the Secretary of 
the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, P.O. Box 740074, 
Louisville, Kentucky, 40202-3319.

FOR FURTHER INFORMATION CONTACT: Alison White, Senior Counsel, or Lorna 
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 is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (202-942-8090).

Applicants' Representations

    1. Integrity is a stock life insurance company organized under the 
laws of Ohio. Integrity is a subsidiary of Western and Southern Life 
Insurance Company, a mutual life insurance company originally organized 
under the laws of Ohio in 1888.
    2. 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.
    3. 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 
Life Separate Account II is affected by this application.
    4. National Integrity is a stock life insurance company organized 
under the laws of New York. National Integrity is a direct subsidiary 
of Integrity and an indirect subsidiary of Western and Southern Life 
Insurance Company.
    5. National Integrity Separate Account I was established under New 
York law in 1986. 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.
    6. 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 contracts issued by National Integrity. One variable annuity 
contract funded by National Integrity Separate Account II is affected 
by this application (all eight variable annuities contracts affected by 
this application are hereinafter collectively referred to as the 
``Contracts'').
    7. Purchase payments under the Contracts are allocated to one or 
more subaccounts of the Separate Accounts. 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 
Integrity or National Integrity, as applicable. The assets maintained 
in the Separate Accounts will not be charged with any liabilities 
arising out of any other business conducted by Integrity or National 
Integrity, as applicable. Nevertheless, all obligations arising under 
the Contracts, including the commitment to make annuity payments or 
death benefit payments, are general corporate obligations of Integrity 
or National Integrity, as applicable. Accordingly, all of the assets of 
each of Integrity and National Integrity are available to meet its 
obligations under its Contracts.
    8. 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 53 and 60 
portfolios.
    9. Each of the Contracts permits transfers of accumulation value 
from one subaccount to another subaccount at any time prior to 
annuitization, subject to certain restrictions and charges described 
below. No sales charge applies to such a transfer of accumulation value 
among subaccounts.
    10. The Contracts permit up to twelve free transfers during any 
contract year. A fee of $20 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 automatically scheduled transfers are 
permitted without charge and are not counted against the twelve free 
transfers in a contract year.
    11. 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, and this reserved right is disclosed in 
each Contract's prospectus.
    12. On an ongoing basis, the Integrity Companies review the 
performance of the portfolios underlying the Contracts. During the past 
several years, the Replaced Portfolios have not maintained the level of 
performance that was the basis for their inclusion in the Contracts. 
These unfavorable performance records have occurred on an absolute 
basis, as well as relative to comparable portfolios with other 
investment advisers. This performance record may be attributable to 
certain changes that were occurring at the investment adviser to the 
Replaced Portfolios.
    13. Due to poor performance of the Replaced Portfolios in recent 
years, Applicants propose the following substitutions of shares:

------------------------------------------------------------------------
           Replaced Portfolio                 Replacement Portfolio
------------------------------------------------------------------------
Fidelity VIP Asset Manager: Growth       Fidelity VIP Asset Manager
 Portfolio.                               Portfolio.
Fidelity VIP Aggressive Growth           Fidelity VIP Growth Portfolio.
 Portfolio.
Janus Growth Portfolio.................  Fidelity VIP Growth Portfolio.
Janus Mid Cap Growth Portfolio.........  Fidelity VIP Mid Cap Growth
                                          Portfolio.
Janus International Growth Portfolio...  Scudder EAFE Equity Index Fund.
Janus Worldwide Growth Portfolio.......  Scudder EAFE Equity Index Fund.
MFS Investors Trust Portfolio..........  MFS Capital Opportunities
                                          Portfolio.
MFS Research Portfolio.................  MFS Investors Growth Stock
                                          Portfolio.
Putnam New Opportunities Fund..........  Putnam Voyager Fund.
------------------------------------------------------------------------


[[Page 19246]]

    14. Janus Capital Corporation serves as the investment adviser for 
each of the Janus Portfolios. Fidelity Management and Research 
Corporation (``FMR'') serves as the investment advisor for each of the 
Fidelity Portfolios. Massachusetts Financial Services Company 
(``MFSC'') is the investment advisor to the MFS Funds. Deutsche Asset 
Management, Inc. (``DeAM'') serves as the investment advisor for the 
Scudder Portfolios. None of the Applicants are affiliated with any of 
the Replaced or Replacement Portfolios or their respective investment 
advisers.
    15. The 2003 expenses for each of the Replaced and Replacement 
Portfolios are shown in Chart A. Historical performance as of December 
31, 2003 is shown in Chart B.

Substitution 1

16. Replaced Portfolio: Fidelity VIP Asset Manager: Growth Portfolio
    Fidelity VIP Asset Manager: Growth Portfolio is an asset allocation 
fund that seeks to maximize total return over the long term through 
investments in stocks, bonds, and short-term money market instruments. 
The Portfolio has a neutral mix, which represents the way the 
Portfolio's investments will generally be allocated over the long term. 
The range and approximate neutral mix for each asset class are shown 
below:

------------------------------------------------------------------------
                                                   Range     Neutral mix
                                                 (percent)     (percent)
------------------------------------------------------------------------
Stock Class...................................       50-100           70
Bond Class....................................         0-50           25
Short-Term/Money Market Class.................         0-50            5
------------------------------------------------------------------------

    Since first being offered as an investment option more than two 
years ago, the Portfolio had only attracted about $875,000 in net new 
sales and transfers at December 31, 2003.
17. Replacement Portfolio: Fidelity VIP Asset Manager Portfolio
    Fidelity VIP Asset Manager Portfolio seeks high total return with 
reduced risk over the long-term by allocating its assets among stocks, 
bonds and short-term money market instruments. The Portfolio has a 
neutral mix, which represents the way the Portfolio's investments will 
generally be allocated over the long term. The range and approximate 
neutral mix for each asset class are shown below:

------------------------------------------------------------------------
                                                   Range     Neutral mix
                                                 (percent)     (percent)
------------------------------------------------------------------------
Stock Class...................................        30-70           50
Bond Class....................................        20-60           40
Short-Term/Money Market Class.................         0-50           10
------------------------------------------------------------------------

Substitution 2

18.a. Replaced Portfolio: Janus Growth Portfolio
    Janus Growth Portfolio seeks long-term growth of capital in a 
manner consistent with the preservation of capital. It is a diversified 
portfolio that pursues its objective by investing primarily in common 
stocks selected for their growth potential. Although the Portfolio can 
invest in companies of any size, it generally invests in larger, more 
established companies. When the Janus market timing scandal surfaced in 
early September 2003 more than $1.4 million was redeemed from this 
Portfolio in less than one month, leaving it with assets at December 
31, 2003 of only approximately $3.6 million.
18.b. Replaced Portfolio: Fidelity VIP Aggressive Growth Portfolio
    Fidelity VIP Aggressive Growth Portfolio seeks capital 
appreciation. FMR invests the Portfolio's assets in companies FMR 
believes offer potential for accelerated earnings or revenue growth. 
FMR focuses investments in medium-sized companies but may also invest 
substantially in larger or smaller companies.
    Fidelity VIP Aggressive Growth Portfolio was opened as a portfolio 
option on May 1, 2001 and closed exactly one year later because it was 
frequently being used by market timers. At December 3, 2003, it had 
approximately $56,000 invested in it via the Integrity Companies.
19. Replacement Portfolio: Fidelity VIP Growth Portfolio
    Fidelity VIP Growth Portfolio seeks capital appreciation. FMR 
invests the Portfolio's assets in companies FMR believes have above-
average growth potential. Growth may be measured by factors such as 
earnings or revenue. Companies with high growth potential tend to be 
companies with higher than average price/earnings (P/E) ratios. 
Companies with strong growth potential often have new products, 
technologies, distribution channels or other opportunities or have a 
strong industry or market position. The stocks of these companies are 
often called ``growth'' stocks.

Substitution 3

20.a. Replaced Portfolio: Janus International Growth Portfolio
    Janus International Growth Portfolio seeks long-term growth of 
capital. It invests, under normal circumstances, at least 80% of its 
net assets in securities of issuers from at least five different 
countries, excluding the United States. Although the Portfolio intends 
to invest substantially all of its assets in issuers located outside 
the United States, it may invest in U.S. issuers and it may at times 
invest all of its assets in fewer than five countries, or even a single 
country. When the Janus market timing scandal surfaced in early 
September 2003 more than $1.3 million was redeemed from this Portfolio 
in less than one month, leaving it with assets of only approximately 
$3.3 million at December 31, 2003.
20.b. Replaced Portfolio: Janus Worldwide Growth Portfolio
    Janus Worldwide Growth Portfolio seeks long-term growth of capital 
in a manner consistent with the preservation of capital. It is a 
diversified portfolio that pursues its objective by investing primarily 
in common stocks of companies of any size throughout the world. The 
Portfolio normally invests in issuers from at least five different 
countries, including the United States. The Portfolio may at times 
invest in fewer than five countries or even a single country. Following 
redemptions of more than $1.4 million in less than one month after the 
Janus market timing scandal surfaced in September 2003, and net 
transfers and redemptions for the year ended December 31, 2003 of $7.3 
million, approximately $25 million was invested in this Portfolio's two 
service classes as of December 31, 2003.
21. Replacement Portfolio: Scudder EAFE Equity Index Fund
    The EAFE Equity Index Fund seeks to match, as closely as possible 
(before expenses are deducted), the performance of the EAFE Index, 
which measures international stock market performance. The Fund 
attempts to invest in stocks and other securities that are 
representative of the EAFE Index as a whole.

Substitution 4

22. Replaced Portfolio: Janus Mid Cap Growth Portfolio
    Janus Mid Cap Growth Portfolio seeks long-term growth of capital. 
It is a non-diversified portfolio that pursues its objective by 
normally investing at least 80% of its equity assets in securities 
issued by medium-sized companies.

[[Page 19247]]

Medium-sized companies are those whose market capitalization falls 
within the range of companies in the S&P MidCap 400 Index. Market 
capitalization is a commonly used measure of the size and value of a 
company. The market capitalizations within the Index will vary, but as 
of December 31, 2003, they ranged from approximately $695 million to 
$17 billion. The Portfolio had only approximately $3.1 million invested 
in it via the Integrity Companies at December 31, 2003.
23. Replacement Portfolio: Fidelity VIP Mid Cap Portfolio
    FMR normally invests the Portfolio's assets primarily in common 
stocks. FMR normally invests at least 80% of the Portfolio's total 
assets in securities of companies with medium market capitalizations. 
Medium market capitalization companies are those whose market 
capitalization is similar to the capitalization of companies in the S&P 
Mid Cap 400 at the time of the investment. Companies whose 
capitalization no longer meets this definition after purchase continue 
to be considered to have a medium market capitalization for purposes of 
the 80% policy.

Substitution 5

24. Replaced Portfolio: MFS Investors Trust Portfolio
    MFS Investors Trust Portfolio seeks mainly to provide long-term 
growth of capital, with a secondary objective of current income, by 
normally investing at least 65% of its net assets in common stocks and 
related securities. While the Portfolio may invest in companies of any 
size, it generally focuses on companies with larger market 
capitalizations that MFS believes have sustainable growth prospects and 
attractive valuations based on current and expected earnings or cash 
flow. The Portfolio will also seek to generate gross income equal to 
approximately 90% of the dividend yield on the Standard & Poor's 500 
Composite Index. The Portfolio had only approximately $3.5 million 
invested in it via the Integrity Companies at December 31, 2003.
25. Replacement Portfolio: MFS Capital Opportunities Portfolio
    MFS Capital Opportunities Portfolio seeks capital appreciation by 
normally investing at least 65% of its net assets in common stocks and 
related securities. The Portfolio focuses on companies that MFS 
believes have favorable growth prospects and attractive valuations 
based on current and expected earnings or cash flow.

Substitution 6

26. Replaced Portfolio: MFS Research Portfolio
    The MFS Research Portfolio seeks to provide long-term growth of 
capital and future income. The Portfolio invests, under normal market 
conditions, at least 80% of its net assets in common stocks and related 
securities, such as preferred stocks, convertible securities and 
depository receipts. The Portfolio focuses on companies that MFS 
believes have favorable prospects for long-term growth, attractive 
valuations based on current and expected earnings or cash flow, 
dominant or growing market share, and superior management. The 
Portfolio may invest in companies of any size. The investments may 
include securities traded on securities exchanges or in the over-the-
counter markets. The Portfolio may invest in foreign securities 
(including emerging market securities), through which it may have 
exposure to foreign currencies. MFS Research Portfolio was first 
offered as a portfolio option by the Integrity Companies on May 1, 
2001, but had garnered only approximately $858,000 in assets in the 
Contracts at December 31, 2003.
27. Replacement Portfolio: MFS Investors Growth Stock Portfolio
    MFS Investors Growth Stock Portfolio seeks to provide long-term 
growth of capital and future income rather than current income by 
investing, under normal market conditions, at least 80% of its net 
assets in common stocks and related securities, such as preferred 
stocks, convertible securities and depositary receipts for those 
securities, of companies which MFS believes offer better than average 
prospects for long-term growth. MFS looks particularly for companies 
which demonstrate: (a) A strong franchise, strong cash flows and a 
recurring revenue stream; (b) a strong industry position where there is 
potential for high profit margins or substantial barriers to new entry 
in the industry; (c) a strong management with a clearly defined 
strategy; and (d) new products or services.

Substitution 7

28. Replaced Portfolio: Putnam New Opportunities Fund
    Putnam New Opportunities Fund seeks long-term capital appreciation 
by investing mainly in common stocks of U.S. companies, with a focus on 
growth stocks in sectors of the economy that Putnam Management believes 
have high growth potential. Growth stocks are issued by companies that 
Putnam Management believes are fast-growing and whose earnings it 
believes are likely to increase over time. At December 31, 2003, Putnam 
New Opportunities Fund had attracted only about $7.2 million in 
investments through the Integrity Companies since it was offered in all 
Contracts in January 2003.
29. Replacement Portfolio: Putnam Voyager Fund
    Putnam Voyager Fund seeks capital appreciation by investing mainly 
in common stocks of U.S. companies, with a focus on growth stocks. 
Growth stocks are issued by companies that Putnam Management believes 
are fast-growing and whose earnings it believes are likely to increase 
over time.

                                        Chart A.--2003 Portfolio Expenses
----------------------------------------------------------------------------------------------------------------
                                                                              Total
                                                                 Other        Annual        Fee       Net Total
             Portfolio               Mgmt. Fee    12b-1 Fee     Expenses    Operating    Reduction      Annual
                                     (Percent)    (Percent)    (Percent)     Expenses    (Percent)     Expenses
                                                                            (Percent)                 (Percent)
----------------------------------------------------------------------------------------------------------------
Service Class Shares or Class B
 Shares to Service Class 2 Shares:
    Fidelity Asset Manager: Growth         0.58         0.25         0.22         1.05          N/A         1.05
    Fidelity Asset Manager........         0.53         0.25         0.13         0.91          N/A         0.91
    Janus Growth..................         0.65         0.25         0.02         0.92          N/A         0.92
    Fidelity Aggressive Growth....         0.63         0.25         2.26         3.14         1.89         1.25
    Fidelity Growth...............         0.58         0.25         0.09         0.92          N/A         0.92
    Janus Worldwide Growth........         0.65         0.25         0.06         0.96          N/A         0.96

[[Page 19248]]

 
    Janus International Growth....         0.65         0.25         0.11         1.01          N/A         1.01
    Scudder EAFE Equity Index.....         0.45         0.25         0.67         1.37         0.47     \1\ 0.90
    Janus Mid Cap Growth..........         0.65         0.25         0.02         0.92          N/A         0.92
    Fidelity Mid Cap..............         0.58         0.25         0.12         0.95          N/A         0.95
    MFS Investors Trust...........         0.75         0.25         0.12         1.12          N/A         1.12
    MFS Capital Opportunities.....         0.75         0.25         0.19         1.19         0.04         1.15
    MFS Research..................         0.75         0.25         0.13         1.13          N/A         1.13
    MFS Investors Growth Stock....         0.75         0.25         0.13         1.13          N/A         1.13
    Putnam New Opportunities......         0.59         0.25         0.08         0.92          N/A         0.92
    Putnam Voyager Fund...........         0.55         0.25         0.07         0.87          N/A         0.87
Service Class to Service Class
 Shares:
    Fidelity Asset Manager: Growth         0.58         0.10         0.17         0.85          N/A         0.85
    Fidelity Asset Manager........         0.53         0.10         0.11         0.74          N/A         0.74
Institutional Class or Class A to
 Initial Class Shares:
    Fidelity Asset Manager: Growth         0.58         0.00         0.15         0.73          N/A         0.73
    Fidelity Asset Manager........         0.53         0.00         0.10         0.63          N/A         0.63
    Janus Growth..................         0.65         0.00         0.02         0.67          N/A         0.67
    Fidelity Growth...............         0.58         0.00         0.09         0.67          N/A         0.67
    Janus Worldwide Growth........         0.65         0.00         0.06         0.71          N/A         0.71
    Janus International Growth....         0.65         0.00         0.11         0.76          N/A         0.76
    Scudder EAFE Equity Index.....         0.45         0.00         0.64         1.09         0.44     \2\ 0.65
    Janus Mid Cap Growth..........         0.65         0.00         0.02         0.67          N/A         0.67
    Fidelity Mid Cap..............         0.58         0.00         0.12         0.70          N/A        0.70
----------------------------------------------------------------------------------------------------------------
\1\ The Advisor has contractually agreed to waive its fees and/or reimburse expenses of the Fund, to the extent
  necessary, to limit all expenses to .90% of the average daily net assets of the Fund until April 30, 2005.
\2\ The Advisor has contractually agreed to waive its fees and/or reimburse expenses of the Fund, to the extent
  necessary, to limit all expenses to .65% of the average daily net assets of the Fund until April 30, 2005.


  Chart B.--Portfolio Performance Average Annual Returns As of December
                                31, 2003
------------------------------------------------------------------------
                                      1 year       3 year       5 year
            Portfolio               (Percent)    (Percent)    (Percent)
------------------------------------------------------------------------
Service Class Shares, Service
 Class 2 or Class B Shares:
    Fidelity Asset Manager Growth        23.03       (1.48)       (0.78)
    Fidelity Asset Manager.......        17.66         0.78         1.71
    Janus Growth.................        31.49      (10.22)       (2.47)
    Fidelity Aggressive Growth...        30.28       (7.86)          N/A
    Fidelity Growth..............        32.54       (8.79)       (1.55)
    Janus Worldwide Growth.......        23.68      (10.74)       (0.47)
    Janus International Growth...        34.53       (8.55)         2.86
    Scudder EAFE Equity Index....        32.97       (7.94)       (3.76)
    Janus Mid Cap Growth.........        34.76      (16.36)       (2.28)
    Fidelity Mid Cap.............        38.25         6.27        18.97
    MFS Investors Trust..........        21.84       (6.94)       (3.03)
    MFS Capital Opportunities....        27.11      (12.03)       (0.69)
    MFS Research.................        24.37       (9.71)       (2.80)
    MFS Investors Growth Stock...        22.60      (12.03)          N/A
    Putnam New Opportunities.....        32.43      (13.69)       (0.06)
    Putnam Voyager Fund..........        24.91      (10.70)       (1.25)
Service Class Shares:
    Fidelity Asset Manager Growth        23.15       (1.19)       (0.54)
    Fidelity Asset Manager.......        17.91         1.06         1.97
Institutional Class Shares,
 Initial Class or Class A Shares:
    Fidelity Asset Manager Growth        23.34       (1.19)       (0.54)
    Fidelity Asset Manager.......        17.97         1.06         1.85
    Janus Growth.................        31.73      (10.01)       (2.16)
    Fidelity Growth..............        32.85       (8.56)       (1.32)
    Janus Worldwide Growth.......        23.99      (10.52)       (0.13)
    Janus International Growth...        34.91       (8.31)         3.38
    Scudder EAFE Equity Index....        33.35       (7.66)       (3.49)
    Janus Mid Cap Growth.........        35.10      (16.15)       (1.95)
    Fidelity Mid Cap.............        38.64         6.54        19.25
------------------------------------------------------------------------


[[Page 19249]]

    30. The Substitution will take place at the portfolios' relative 
net asset values determined on the date of the Substitution 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 Substitution will be effected by having each of the 
subaccounts that invests in the Replaced Portfolios redeem its shares 
at the net asset value calculated on the date of the Substitution and 
purchase shares of the respective Replacement Portfolios at the net 
asset value calculated on the same date.
    31. The Substitution 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 Substitution and will describe the reasons for engaging 
in the Substitution. The Stickers will also inform contract owners with 
assets allocated to a subaccount investing in the Replaced Portfolios 
that no additional amount may be allocated to those subaccounts on or 
after the date of the Substitution. In addition, the Stickers will 
inform affected contract owners that they will have the opportunity to 
reallocate accumulation value:
     Prior to the Substitution from the subaccounts 
investing in the Replaced Portfolios, and
     For 30 days after the Substitution from the 
subaccounts investing in the Replacement Portfolios 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 Substitution. Each contract owner will be 
provided with a prospectus for the Replacement Portfolios before the 
Substitution. Within five days after the Substitution, the Integrity 
Companies will each send affected contract owners written confirmation 
that the Substitution has occurred.
    33. The Integrity Companies will pay all expenses and transaction 
costs of the Substitution, including all legal, accounting and 
brokerage expenses relating to the Substitution. No costs will be borne 
by contract owners. Affected contract owners will not incur any fees or 
charges as a result of the Substitution, nor will their rights or the 
obligations of the Applicants under the Contracts be altered in any 
way. 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. The Substitution 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 pursuant to section 26(c) of the Act, as set forth below, 
because the affected contract owners will have:
    (a) contract values allocated to a subaccount invested in a 
Replacement Portfolio with an investment objective and policies 
substantially similar to the investment objective and policies of the 
Replaced Portfolio;
    (b) for the three years ended December 31, 2003 all but three of 
the Replacement Portfolios have superior three year performance to that 
of the Replaced Portfolio. In the three exceptions, the performance 
difference is small or the five year performance is superior; and
    (c) current total annual expenses are lower than those of the 
substituted portfolio, except in two cases where total annual expenses 
of the Replacement Portfolio are higher than those of the Replaced 
Portfolio, but by only 3 basis points in each case (in these two cases, 
as discussed below, the Integrity Companies propose to eliminate this 
difference through an expense reduction at the Separate Account level).

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. 
Applicants have reserved the right to make such a substitution under 
the Contracts and this reserved right is disclosed in each Contract's 
prospectus.
    4. Substitutions have been common where the substituted 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 all cases the investment objectives and policies of the 
Replacement Portfolios are sufficiently similar to those of the 
corresponding Replaced Portfolios that contract owners will have 
reasonable continuity in investment expectations. Accordingly, the 
Replacement Portfolios are appropriate investment vehicles for those 
contract owners who have contract values allocated to the Replaced 
Portfolios.
    6. For the three years ended December 31, 2003 all but three of the 
Replacement Portfolios have superior performance to that of the 
Replaced Portfolios. The Replacement Portfolios have demonstrated 
superior performance over the last three years during a time of 
substantial market fluctuation and uncertainties. Applicants believe 
this superior performance shall continue to the benefit of 
shareholders. In addition, as noted previously, none of these three 
Replaced Portfolios has attracted significant assets, and two of the 
three are in the large cap asset class, where the Applicant has an 
overabundance of subaccount offerings.
    7. In the first of the three exceptions, the proposed substitution 
of MFS Capital Opportunities Portfolio to replace MFS Investors Trust 
Portfolio, the performance of MFS Capital Opportunities Portfolio for 
both the five- and one-year periods ended December 31, 2003 was 
superior to that of MFS

[[Page 19250]]

Investors Trust Portfolio. The MFS Capital Opportunities Portfolio 
portfolio management team was replaced in October 2002, resulting in a 
significant turnaround in the Portfolio's performance since then.
    8. In the second of the three exceptions, the proposed substitution 
of Fidelity Growth Portfolio to replace Fidelity Aggressive Growth 
Portfolio, the performance of Fidelity Growth Portfolio for the one-
year period ended December 31, 2003 was superior to that of Fidelity 
Aggressive Growth Portfolio by more than 200 basis points. Moreover, 
Fidelity Aggressive Growth Portfolio has not been offered by the 
Applicants since May 2002, and had only about $56,000 invested in it at 
December 31, 2003.
    9. In the last of the three exceptions, the proposed substitution 
of MFS Investors Growth Stock Portfolio to replace MFS Research 
Portfolio, the MFS Research Portfolio outperformed the MFS Investors 
Growth Stock Portfolio on an absolute basis for both the one- and 
three-year periods ended December 31, 2003. Importantly, however, the 
MFS Investors Growth Stock Portfolio provided better relative 
performance, according to Morningstar. MFS Investors Growth Stock 
Portfolio's three-year return places it in the 74th percentile among 
large cap growth funds, while MFS Research Portfolio's three-year 
return placed it in the 94th percentile among large cap blend funds.
    10. MFS Research Portfolio's poor relative performance against its 
peers is an important consideration in Applicant's decision to seek to 
substitute it. Another is that MFS Investors Growth Stock Portfolio is 
considered a ``flagship'' fund by MFS and receives significant 
investment and marketing support. MFS Investors Growth Stock Portfolio 
supplemented its existing portfolio manager with two additional 
managers in October 2003, and saw favorable performance results for the 
year. Its return during 2003 placed it in the 28th percentile among its 
large cap growth peers, as compared to MFS Research Portfolio's 2003 
return, which placed it in the 81st percentile among its large cap 
blend peers.
    11. Finally, MFS Investors Growth Stock Portfolio has simply been a 
more attractive fund to investors. Though the inception date for both 
funds was May 2000, MFS Investors Growth Stock Portfolio (Service 
Class) has about $209.2 million invested in it, while MFS Research 
(Service Class) has only about $6.7 million invested in it. Similarly, 
since first being offered in Applicants' products in May 2000, MFS 
Investors Growth Stock Portfolio has more than $8 million invested in 
it via the Applicants, while MFS Research Portfolio has only about 
$858,000 invested in it since first being offered by the Applicants in 
May 2002.
    12. In all cases but two, the Replacement Portfolios will have 
lower annual expenses than the Replaced Portfolios. In the two 
substitutions that do not provide for lower expenses, the differences 
are de minimis. In each of these cases, the Replacement Portfolio's net 
total annual operating expenses as of the fiscal year ended December 
31, 2003 were only 3 basis points higher than those of the 
corresponding Replaced Portfolio. To compensate for this small increase 
in expenses, Applicants propose the following. If, on the last day of 
each fiscal quarter (or, to the extent that Replacement Portfolio 
expense information is not available on a quarterly basis, on the last 
day of each fiscal semi-annual period) applicable to the 12 month 
period following the Substitution, the total operating expenses of 
either Replacement Portfolio (taking into account any expense waiver or 
reimbursement) exceed on an annualized basis the net expense level of 
the corresponding Replaced Portfolio for the fiscal year ended December 
31, 2003, the Integrity Companies will, for each Contract outstanding 
on the date of the Substitution, reimburse the Separate Account as of 
the last day of such fiscal quarter (or, as applicable, fiscal semi-
annual period), to the extent necessary so that the amount of the 
Replacement Portfolio's net expenses for such period, together with 
those of the corresponding Separate Account will, on an annualized 
basis, be no greater than the sum of the net expenses of the 
corresponding Replaced Portfolio and the expenses of the Separate 
Account for the 2003 fiscal year. In addition, for 12 months following 
the Substitution, the Integrity Companies will not increase asset-based 
fees or charges for Contracts outstanding on the day of the 
Substitution.
    13. Importantly, in connection with assets held under Contracts 
affected by the Substitutions, the Integrity Companies will not 
receive, for three years from the date of the Substitutions, any direct 
or indirect benefits from the Replacement Portfolios, their advisors or 
underwriters (or their affiliates) at a rate higher than that which 
they had received from the Replaced Portfolios, their advisors or 
underwriters (or their affiliates), including without limitation 12b-1, 
shareholder service, administration or other service fees, revenue 
sharing or other arrangements in connection with such assets. The 
Integrity Companies represent that the Substitutions and the selection 
of the Replacement Portfolios were not motivated by any financial 
consideration paid or to be paid by the Replacement Funds, their 
advisors or underwriters, or their respective affiliates.
    14. 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) Each of the Replacement Portfolios is an appropriate portfolio 
to which to move contract owners with values allocated to the Replaced 
Portfolios because the portfolios have substantially similar investment 
objectives and policies.
    (b) The costs of the Substitution, including any brokerage costs, 
will be borne by the Integrity Companies and will not be borne by 
contract owners. No charges will be assessed to effect the 
Substitution.
    (c) The Substitution 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.
    (d) 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 and will result in 
contract owners' contract values being moved to a Portfolios with the 
same or lower current total annual expenses, except in the case of two 
Replacement Portfolios where, as discussed above, the Integrity 
Companies propose to eliminate the difference in expenses through an 
expense reduction at the Separate Account level.
    (e) All contract owners will be given notice of the Substitution 
prior to the Substitution and will have an opportunity for 30 days 
after the Substitution 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.
    (f) Within five days after the Substitution, the Integrity 
Companies will send to its affected 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 the Integrity 
Companies.

[[Page 19251]]

    (h) The Substitution will have no adverse tax consequences to 
contract owners and will in no way alter the tax benefits to contract 
owners.

Conclusion

    Applicants request an order of the Commission pursuant to section 
26(c) of the Act approving the Substitution. 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, the requested order meets 
the standards set forth in section 26(c) and should, therefore, be 
granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8176 Filed 4-9-04; 8:45 am]
BILLING CODE 8010-01-P