[Federal Register Volume 59, Number 200 (Tuesday, October 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25728]
[[Page Unknown]]
[Federal Register: October 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20613; File No. 812-8382]
Pacific Select Fund, et al.
October 12, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Pacific Select Fund (``Select Fund`') and Pacific
Corinthian Variable Fund (``Variable Fund''), referred to collectively
as the ``Applicants.''
RELEVANT 1940 ACT SECTIONS: Order requested under Section 17(b) of the
1940 Act for exemption from Section 17(a) thereof.
SUMMARY OF APPLICATION: Applicants seek an order that would permit the
assets of Variable Fund to be transferred to and combined with the
assets of Select Fund in exchange for shares of Select Fund. (The
transfer and combination of assets in exchange for such shares is
referred to herein as the ``Reorganization.'')
FILING DATES: The original application was filed on May 4, 1993. An
amended and restated application was filed on July 8, 1994.
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 the
Applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on November 6,
1994, and should be accompanied by proof of service on the 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 SEC.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants, c/o Sharon A Cheever, Esq., Pacific Mutual Life
Insurance Company, 700 Newport Center Drive, Newport Beach, CA 92660.
FOR FURTHER INFORMATION CONTACT:
Patrice M. Pitts, Attorney, Division of Investment Management, Office
of Insurance Products, at (202) 942-0679.
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 SEC.
Applicants' Representations
1. Select Fund is a diversified, open-end management investment
company, organized under the laws of the Commonwealth of Massachusetts.
2. Select Fund consists of ten investment series: (i) The Money
Market Series; (ii) The Managed Bond Series; (iii) The Government
Securities Series; (iv) The High Yield Bond Series; (v) The Growth
Series; (vi) The Growth LT Series; (vii) The Equity Income Series;
(viii) The Multi-Strategy Series; (ix) The Equity Index Series; and (x)
The International Series. It is presently contemplated that two new
series of Select Fund--the Equity Series and the Bond and Income
Series--will be organized. Shares of each series of Select Fund are
currently offered only for purchase by separate accounts of Pacific
Mutual Life Insurance Company (``Pacific Mutual'') to serve as an
investment medium for annuity contracts and for variable life insurance
policies issued by Pacific Mutual. Pacific Mutual serves as investment
adviser to each series of Select Fund. Pacific Mutual and three of its
separate accounts (the ``Pacific Select Separate Accounts'') currently
own all of the outstanding shares of Select Fund.
3. Pacific Mutual and the Insurance Commissioner of the State of
California, as conservator of First Capital Life Insurance Company--In
Conservation (``First Capital''), entered into an agreement regarding
the rehabilitation of First Capital (the ``Rehabilitation Plan''). In
connection with the Rehabilitation Plan, Pacific Mutual established a
wholly-owned subsidiary, Pacific Corinthian Life Insurance Company
(``Pacific Corinthian''), as a stock life insurance company
incorporated under the laws of the State of California.
4. As part of the Rehabilitation Plan, Pacific Corinthian assumed,
among other things, the life insurance policies and annuity contracts
issued by First Capital, including certain flexible premium deferred
annuity and variable accumulation contracts (the ``Variable
Contracts'') for which the Variable Fund serves as investment medium.
Also pursuant to the Rehabilitation Plan, the assets of a separate
account of First Capital that had funded the variable accumulation
option under the Variable Contracts were transferred intact to a
separate account designated as the Pacific Corinthian Variable Separate
Account.
5. The Pacific Corinthian Variable Separate Account funds
individual flexible premium deferred annuity and variable accumulation
contracts, formerly offered by First Capital, which were assumed by
Pacific Corinthian pursuant to the Rehabilitation Plan. The Pacific
Corinthian Variable Separate Account invests exclusively in Variable
Fund; each of the eight subaccounts of the Pacific Corinthian Variable
Separate Account invests in a distinct series of Variable Fund. Pacific
Corinthian Variable Separate Account owns all of the outstanding shares
of Variable Fund.
6. Variable Fund--formerly, Shearson VIP Fund--is incorporated
under the laws of the State of California. Variable Fund consists of
eight series: (i) The Money Market Series: (ii) The Equity Series;
(iii) The Bond and Income Series; (iv) The Government Securities
Series; (v) The Directions Value Series; (vi) The Equity Income Series;
(vii) The Diversified Low P/E Series; and (viii) The Balanced Series.
Pacific Mutual currently serves as investment adviser to each series of
Variable Fund.
7. Pacific Mutual and the Pacific Select Separate Accounts
currently own 100 percent of the outstanding shares of Select Fund.
Pacific Mutual also owns 100 Percent of the outstanding shares of
Pacific Corinthian. Pacific Corinthian is the depositor of the Pacific
Corinthian Variable Separate Account, the sole shareholder of Variable
Fund. As a result of these relationships, Select Fund and Variable Fund
may be deemed to be under the common control of Pacific Mutual. In
addition, the Applicants may be deemed to be affiliates of an
affiliated person (i.e., Pacific Mutual).
8. Under the Reorganization, Variable Fund will convey, transfer,
and deliver to Select Fund all of the existing assets of each series of
Variable Fund. In consideration thereof, Select Fund will agree: (i) To
assume and pay certain liabilities of Variable Funds; and (ii) to
deliver to Variable Fund full and fractional share of beneficial
interest of Select Fund having an aggregate net asset value equal to
the aggregate value of the net assets of the Variable Fund series
exchanged therefor.
9. The Reorganization will be performed in such a manner that the
assets and certain liabilities of The Money Market Series of Variable
Fund become the assets and liabilities of The Money Market Series of
Select Fund; the assets and certain liabilities of The Equity Series of
Variable Fund become those of the proposed Equity Series of Select
Fund; the assets and certain liabilities of The Bond and Income Series
of Variable Fund become the assets and liabilities of the proposed Bond
and Income Series of Select Fund; the assets and certain liabilities of
The Government Securities Series of Variable Fund become the assets and
liabilities of The Government Securities Series of Select Fund; the
assets and certain liabilities of The Directions Value Series, The
Diversified Low P/E Series, and The Equity Income Series of Variable
Fund become the assets and liabilities of The Equity Income Series of
Select Fund; and the assets and certain liabilities of The Balanced
Series of Variable Fund become the assets and liabilities of The Multi-
Strategy Series of Select Fund.
10. The rate of exchange will be determined based on the relative
net asset value per share of each Variable Fund series compared to the
net asset value of the corresponding Select Fund series as of the close
of business on the day immediately proceeding the effective date of the
proposed Reorganization. For the recently created Select Fund series
(i.e., the Bond and Income Series and the Equity Series), the net asset
value per share will be established as an amount equal to the net asset
value per share for the Variable Fund Bond and Income Series and Equity
Series as of the close of business on the business day immediately
preceding the effective date of the Reorganization. Thus, the rate of
exchange will be on a one-to-one basis. However, it is possible that
the proposed Equity Series and Bond and Income Series of the Select
Fund may offer their shares to the public prior to the effective date
of the Reorganization, in which case the rate of exchange for these
series will be determined in the manner described above for the
currently operational series of Select Fund.
11. Immediately after the Reorganization, the value of each
Variable Contract will be equal to the value of each such Contract
immediately before the Reorganization. Applicants represent that, apart
from the fact that the future each value of Variable Contracts issued
through the Pacific Corinthian Variable Separate Account will reflect
the investment performance of a series of the Select Fund instead of a
series of the Variable Fund, the Reorganization will have no material
economic impact on Variable Contract values.
12. On the effective date of the Reorganization, Variable Fund will
close its stock transfer books permanently and distribute pro rata to
its shareholders the Select Fund shares it received pursuant to the
Reorganization. Thereafter, the Variable Fund will be completely
liquidated. Such liquidation and distribution will be accompanied by
the establishment of an open account on the share records of Select
Fund in the name of each shareholder of Variable Fund representing the
respective pro rata number of Select Fund shares due that shareholder,
designated by series. Select Fund will register the shares of each of
its series issued pursuant to the Reorganization under the Securities
Act of 1933, using the Form N-14.
13. Pacific Mutual, Select Fund, and Variable Fund will pay all of
the costs of the Reorganization. Variable Fund and Select Fund shall
bear any such expenses only to the extent that the board of director/
trustees of each fund, including a majority of the independent
directors/trustees, determines that for the Fund to bear such expenses
is in the best interests of its respective shareholders.\1\ Applicants
represent that in no event will Select Fund and Variable Fund, in the
aggregate, bear more than two-thirds of the total expenses of the
Reorganization. The Applicants do not expect that the Reorganization
will entail any significant liquidation expenses because the
corresponding series of Variable Fund and Select Fund will have
substantially identical investment policies.
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\1\Applicants represent that no series of the Variable Fund or
the Select Fund will bear any expenses of the Reorganization to the
extent that the impact of such expense on the net asset value per
share of a series equals of exceeds $0.01 per share.
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14. A plan that sets forth the terms and conditions necessary to
implement the Reorganization (the ``Reorganization Plan'') will be
submitted to the board of directors of Variable Fund and the board of
trustees of Select Fund. In deciding to approve the terms of the
Reorganization and recommend approval of such Reorganization to
shareholders of each Fund, the directors of Variable Fund and the
trustees of Select Fund (including the disinterested directors and
trustees) have made an inquiry into a number of matters and consider
the following factors, among others: (i) The reasonableness of advisory
fees paid to Pacific Mutual following the Reorganization; (ii) expense
rations and published information regarding Variable Fund and Select
Fund; (iii) the comparative investment performance of each series of
Variable Fund and each series of Select Fund; (iv) the terms and
conditions of the Reorganization, and whether the Reorganization will
result in dilution of shareholder or Variable Contract owner interests;
(v) the advantages of obtaining economies of scale, increased
investment flexibility, and expanded allocation options resulting from
acceptance of new premiums through the Reorganization; (vi) the
compatibility of the investment objectives, policies and restrictions,
and service features available to shareholders of each series of
Variable Fund compared to the corresponding series of Select Fund;
(vii) the costs to be incurred by Variable Fund and Select Fund as a
result of the Reorganization; (viii) tax consequences of the
Reorganization; and (ix) the potential for overreaching on the part of
either Applicant or any affiliate thereof.
15. The Reorganization Plan will be submitted to shareholders of
both the Variable Fund and the Select Fund for approval at a special
meeting called for that purpose. A majority of all votes of each
operating series of Variable Fund and Select Fund entitled to be cast
will be required to approve the Reorganization Plan and the
Reorganization; the Reorganization Plan may be effected with respect to
any Variable Fund or Select Fund series whose shareholders approve it.
Variable Fund and Select Fund each will furnish to its respective
shareholders a proxy statement/prospectus containing information
relating to the Reorganization Plan and the Reorganization.
16. Pacific Corinthian will vote shares of each series of the
Variable Fund, and Pacific Mutual will vote shares of each series held
by it and each Pacific Separate Account, in accordance with
instructions received from Variable Contract owners and owners of
annuity contracts and variable life insurance policies issued by
Pacific Mutual, respectively. Shares for which no voting instructions
are received will be voted by Pacific Corinthian or Pacific Mutual, as
appropriate, in the same proportion as it votes shares for which voting
instructions were received.
17. In addition to shareholder approval, Applicants further
condition the consummation of the Reorganization upon receipt from the
Commission of the exemptive order requested herein, receipt of any
necessary approval from the applicable state insurance commissions, and
receipt by Select Fund and/or Variable Fund of a private letter ruling
from the Internal Revenue Service or an opinion of tax counsel to the
effect that the Reorganization will qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended, and
will not result in the recognition of any taxable gain or loss to any
series of Select Fund or Variable Fund, or to any shareholders thereof.
Applicants' Legal Analysis
1. Under Section 2(a)(3) of the 1940 Act, one person is an
``affiliated person'' of another person if, among other things: The
person directly or indirectly owns, controls, or holds with power to
vote 5% or more of the other person's outstanding voting securities; 5%
or more of the person's outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote by the other
person; or the person directly or indirectly controls, is controlled
by, or is under common control with the other person.
2. Applicants may be deemed ``affiliated persons'' of one another
within the meaning of Section 2(a)(3) of the 1940 Act as a result of
their relationships to Pacific Mutual. Because of these relationships,
the Reorganization may be deemed to violate Section 17(a) of the 1940
Act, which, in relevant part, prohibits any affiliated person of a
registered investment company, or any affiliated person of such a
person, from knowingly selling to or purchasing from such investment
company any security or other property.
3. Section 17(b) of the 1940 Act authorizes the SEC to exempt any
transaction from the provisions of Section 17(a) if: the terms of the
transaction, including the consideration to be paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned; the transaction is consistent with the policy of each
registered investment company concerned; and the transaction is
consistent with the general purposes of the 1940 Act.
4. Applicants request an order of the Commission pursuant to
Section 17(b) of the 1940 Act exempting the Reorganization from the
provisions of Section 17(a) of the 1940 Act to the extent necessary to
permit the various series of Select Fund to acquire the assets of the
corresponding series of Variable Fund in exchange for shares of the
Select Fund series.\2\
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\2\Applicants posit that Congress did not intend Section 26(b)
of the 1940 Act to apply to transactions such as the Reorganization
and, therefore, have requested neither a Commission order pursuant
to Section 26(b) before proceeding with the Reorganziation, nor
Commission approval of their decision to proceed with the
Reorganization without a Commission order pursuant to Section 26(b).
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A. Reasonableness, Fairness, and the Absence of Overreaching
1. Applicants assert that the terms of the proposed Reorganization
are fair and reasonable and do not involve overreaching on the part of
any person concerned.
2. Applicants represent that the Reorganization will not be
effected unless: (i) the board of directors of Variable Fund and the
board of trustees of Select Fund--including a majority of the
disinterested directors/trustees--separately have reviewed and approved
the terms of the Reorganization set forth in the Reauthorization Plan,
including consideration to be paid or received by all parties to the
Reauthorization; and (ii) the board of directors of Variable Fund and
the board of trustees of Select Fund independently have determined that
the Reorganization will be in the best interests of the shareholders of
each Fund's series, and that consummation of the Reorganization will
not result in the dilution of the current interests of any shareholder
or contract owner of Variable Fund or Select Fund.
3. Applicants note that the number of shares to be issued to
Variable Fund by Select Fund will be determined on the basis of the
relative net asset value per share of each series proposed to be
combined.
4. Applicants represent that neither the board of directors of
Variable Fund nor the board of trustees of Select Fund will make a
recommendation to shareholders concerning the Reorganization Plan
unless it has considered the expense ratios and published information
regarding the fees and expenses of corresponding series of the Variable
Fund and the Select Fund and those of similar funds, the terms and
conditions of the Reorganization Plan, and whether the Reorganization
Plan will result in the dilution of any shareholder interests.
Applicants assert that no recommendation will be made unless the
directors/trustees have considered: (i) The potential benefits of the
Reorganization to shareholders of the series of the Variable Fund or
the Select Fund, as appropriate, and the contract owners with contract
values allocated to the Pacific Corinthian Variable Separate Account or
the Pacific Select Separate Accounts, as appropriate; (ii) the
compatibility of investment objectives, policies, restrictions, and
investment holdings of the corresponding series of Variable Fund and
Select Fund; (iii) the terms and conditions of the Reorganization Plan
which might affect the price of outstanding shares of each series of
Variable Fund or Select Fund, as appropriate, or interests of contract
owners indirectly invested therein; and (iv) direct or indirect costs
to be incurred by the series of Variable Fund or Select Fund, as
appropriate, or shareholders thereof or contract owners who have
allocated their variable contracts to separate accounts that invest in
Variable Fund or Select Fund series.
5. If effected according to the Reorganization Plan, the
Reorganization should result in an increase in the asset size of the
Select Fund. Applicants represent that the larger aggregate net assets
of Select Fund and certain of its series should enable the combined
entity to realize significant benefits associated with economies of
scale.
6. Applicants represent that, because Pacific Corinthian no longer
accepts new premiums from existing owners of the Variable Contracts and
no longer solicits new applications for new Variable Contracts, the
Variable Fund faces the potential of limited (or no) growth and
continued diminution of asset size. Consequently, the expense ratios of
certain Variable Fund series may increase, Variable Fund series may
experience difficulty in achieving their investment objectives, service
providers may find it less profitable to render services to Variable
Fund series, and it may become difficult for the Variable Fund series
to retain qualified service providers. Applicants assert that the
Reorganization will provide an opportunity for the owners of the
Variable Contracts to invest in an underlying fund with greater assets
that has the potential for growth in assets.
7. Applicants represent that, under the advisory agreement with
Select Fund, Pacific Mutual renders the types of advisory and non-
advisory services that are substantially similar to the types of
advisory services currently rendered to Variable Fund by Pacific Mutual
and the management services rendered to Variable Fund by Pacific
Corinthian. Applicants anticipate that, after completion of the
Reorganization, the investment advisory fees paid by the series of
Select Fund involved in the Reorganization will be comparable to the
advisory fees and management fees paid by the corresponding series of
Variable Fund.
8. Applicants represent that, generally, the expense ratios for
Select Fund are lower than those of the corresponding series of
Variable Fund, and the Reorganization should result in a benefit to
contract owners in that the investment-related expenses that bear
indirectly are likely to decrease.
9. Applicants represent that the Reorganization will not be
effected until the board of directors of Variable Fund: (i) Has
considered and compared the relative investment performance of each
series of Variable Fund and all series of Select Fund and, in the case
of pertinent series of Select Fund for which new portfolios managers
are proposed, investment performance for comparable portfolios managed
by such proposed portfolio managers; and (ii) determines whether
performance and investment flexibility may be enhanced if assets of
Variable Fund series are combined with assets of Select Fund series in
accordance with the Reorganization Plan.
10. Applicants further represent that the Reorganization will not
have adverse tax consequences for any Variable Fund or Select Fund
shareholder.
B. Consistency With Applicant's Policies and the General Purposes of
the 1940 Act
1. Applicants represent that the Reorganization will not be
approved unless the boards of each Fund have determined that the
investment objectives and policies of the corresponding series of
Variable and Select Fund are compatible. Applicants assert that no
significant differences exist between Variable Fund and Select Fund
regarding investment policies, borrowing and lending limitations,
permitted transactions, or quality of investments.\3\
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\3\Applicants note that there are differences between the stated
objectives of each Fund's Equity Income series. However, Applicants
represent that, while the two series have investment objectives that
are stated somewhat differently, there is a great deal of
commonality in their stated investment policies.
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2. Rule 17a-8 under the 1940 Act exempts from the prohibitions of
Section 17(a) mergers, consolidations, or purchases or sales of
substantially all of the assets involving registered investment
companies which may be affiliated persons, or affiliated persons of an
affiliated person, solely by reason of having a common investment
adviser, common directors/trustees, and/or common officers. Because the
Applicants may be affiliated with one another for reasons for reasons
other than sharing an investment adviser, directors/trustees, and
officers, Applicants may not be able to rely on Rule 17a-8.
3. Applicants have agreed, nevertheless, to comply with the
substantive requirements of the Rule 17a-8. Applicants represent that:
(i) The directors of Variable Fund have determined that the
Reorganization will be in the best interests of the shareholders of
each Variable Fund series, and will not result in the dilution of the
current interests of any such shareholder or Variable Contract owner;
and (ii) the trustees of Select Fund have determined that the
Reorganization will be in the best interests of the shareholders of
each Select Fund series, and will not result in the dilution of the
current interests of any such shareholder or contract owner having
contract value allocated through the Pacific Select Separate Accounts.
4. Moreover, Applicants assert that, although the nature of the
affiliations may preclude them from relying on the exemption afforded
by Rule 17a-8 under the 1940 Act, the directors/trustees of each fund,
including the disinterested directors/trustees, have made the findings
required by Rule 17a-8.
5. Applicants also represent that the Reorganization is consistent
with the general purposes of the 1940 Act, and does not present any of
the conditions or abuses that the 1940 Act was designed to mitigate or
eliminate. In particular, Section 1(b)(6) of the 1940 Act provides that
the national public interest and the interest of investors are
adversely affected when investment companies are recognized without the
consent of their security holders. Applicants submit that the
Reorganization Plan must receive the approval of shareholders of each
series of Variable Fund and the pertinent series of Select Fund (the
shares of both Funds being voted in proportion to the instructions
received from contract owners having a voting interest in each series
of each Fund). Variable Contract owners will receive a proxy statement/
prospectus containing all material disclosures, including a description
of all material aspects of any proposed Reorganization Plan, and a copy
thereof. Likewise, contract owners with contract value allocated to the
variable accounts of the Pacific Select Separate Accounts that invest
in the pertinent series of Select Fund will receive a proxy statement
containing, among other things, information relating to the
Reorganization Plan and the transactions contemplated therein, and will
have an opportunity to vote on the Reorganization.
Conclusion
Applicants request an order of the Commission pursuant to Section
17(b) of the 1940 Act exempting the Reorganization from the provisions
of Section 17(a) of the 1940 Act. Applicants submit that, for the
reasons set forth above, the terms of the Reorganization, as set forth
in the Reorganization Plan, including the consideration paid and
received, are reasonable and fair to shareholders of each series of
Variable Fund and Select Fund, and to contract owners invested therein,
and do not involve overreaching on the part of any person concerned.
Applicants further submit that the proposed Reorganization will be
consistent with the policies of Variable Fund and Select Fund and each
series thereof, as well as with the general purposes of the 1940 Act.
For the Commission by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25728 Filed 10-17-94; 8:45 am]
BILLING CODE 8010-01-M
