[Federal Register Volume 63, Number 238 (Friday, December 11, 1998)]
[Notices]
[Pages 68480-68483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32933]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23589; File No. 812-10996]
Cova Financial Services Life Insurance Company, et al.; Notice of
Application
December 4, 1998.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for an order pursuant to Sections 17(b)
and 26(b) of the Investment Company Act of 1940 (the ``1940 Act'').
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SUMMARY OF APPLICATION: Applicants request an order pursuant to 26(b)
of the 1940 Act, approving the proposed substitution of securities, and
pursuant to Section 17(b) of the 1940 Act exempting related
transactions from Section 17(a) of the 1940 Act.
APPLICANTS: Cova Financial Services Life Insurance Company (``Cova
Life''), First Cova Life Insurance Company (``First Cova Life''), Cova
Financial Life Insurance Company (``Cova Financial Life) (collectively,
the ``Life Companies''), Cova Variable Annuity Account One (``Cova
Account One''), Cova Variable Life Account One (``Cova Life Account
One''), First Cova Variable Annuity Account One (``First Cova Account
One''), Cova Variable Annuity Account Five (``Cova Account Five'')
(collectively, the ``Accounts''), Cova Series Trust (``Cova Trust''),
Lord Abbett Series Fund, Inc. (``Lord Abbett Fund''), and General
American Capital Company (``General American Fund'') (collectively, the
``Management Companies'').
FILING DATE: The application was filed on February 5, 1998, and amended
and restated on November 4, 1998.
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 on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
in person or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on December 29, 1998, and 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 requester's interest, the reason for the request and the
issues contested. Persons who wish to be notified of a hearing may
request notification by writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, c/o Blazzard, Grodd & Hasenauer, P.C., 943 Post Road
East, Westport, CT 06880, Attn: Raymond A. O'Hara III, Esq.
FOR FURTHER INFORMATION CONTACT:
Megan L Dunphy, Attorney, or Mark Amorosi, Special Counsel, Office of
Insurance Products, Division of Investment Management, at (202) 942-
0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 (tel. (202) 942-8090).
Applicants' Representations
1. The Life Companies are affiliated stock life insurance
companies, whose parent is General American Life Insurance Company
(``General American''). Cova Life is incorporated in Missouri and does
business in the District of Columbia and in all states except
California, Maine, New Hampshire, New York and Vermont. First Cova is
incorporated in and licensed to do business only in the state of New
York. Cova Financial Life is incorporated in and licensed to do
business only in the state of California.
2. Each of the Accounts is registered with the Commission as a unit
investment trust. The assets of each Account support variable annuity
contracts and, with respect to Cova Life Account One, variable life
insurance policies (the ``Contracts''). Interests under the Contracts
have been registered under the Securities Act of 1933 (File Nos. 33-
39100; 33-14979; and 333-34741).
3. The Accounts are divided into subaccounts, each of which
reflects the investment performance of corresponding portfolios of Cova
Trust, Lord Abbett Fund, and the General American Fund.
4. Cova Trust is registered under the 1940 Act as an open-end
management investment company and is currently comprised of twenty
portfolios, nine of which are involved in the proposed substitution;
Stock Index Portfolio, Large Cap Stock Portfolio, Quality Income
Portfolio, Quality Bond Portfolio, High Yield Portfolio, Bond Debenture
Portfolio, Money Market Portfolio, VKAC Growth and Income Portfolio and
the Lord Abbett Growth and Income Portfolio.
5. Cova Investment Advisory Corporation (``Cova Advisory''), an
indirect wholly owned subsidiary of General American, is the investment
adviser for Cova Trust. Cova Advisory has engaged sub-advisers for each
of the portfolios of Cova Trust. The sub-adviser for the Large Cap
Stock and Quality Bond Portfolios is J.P. Morgan Investment Management,
Inc. (``JPM''). The sub-adviser for the Stock Index, Quality Income,
High Yield, Money Market and VKAC Growth and Income Portfolios is Van
Kampen American Capital Investment Advisory Corp. (``VKAC''). Lord
Abbett is the sub-adviser for the Lord Abbett Growth and Income
Portfolio and the Bond Debenture Portfolio of Cova Trust.
6. Lord Abbett Fund is registered under the 1940 Act as an open end
management investment company and is currently comprised of two
portfolios, one of which--the Growth and Income Portfolio--is relevant
to the proposed substitution. Lord Abbett & Co. (``Lord Abbett'') is
the investment manager of the Lord Abbett Fund.
7. General American Fund is registered under the 1940 Act as an
open-end management investment company and is comprised of eight
series, one of which--the Money Market Fund--is relevant to the
proposed substitution. Conning Asset Management Company, an affiliate
of General American, is the investment adviser to the Money Market
Fund.
8. Applicants propose to substitute shares of certain portfolios of
Cova Trust and the General American Fund (``Substitute Funds'') for
shares of certain other portfolios of Cova Trust, the General American
Fund, and the Lord Abbett Fund (the ``Replaced Funds'') as follows:
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Substitute fund Replaced fund
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Cova Trust Cova Trust
1. Large Cap Stock Portfolio............... 1. Stock Index Portfolio.
2. Quality Bond Portfolio.................. 2. Quality Income Portfolio.
3. Bond Debenture Portfolio................ 3. High Yield Portfolio.
4. Lord Abbett Growth and Income Portfolio. 4. VKAC Growth and Income Portfolio.
Cova Trust Lord Abbett Fund
5. Lord Abbett Growth and Income Portfolio. 5. Growth and Income Portfolio.
General American Fund Cova Trust
6. Money Market Portfolio.................. 6. Money Market Portfolio.
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9. Applicants represent that the Substitute Funds have investment
objectives that are the same as, similar to, or consistent with those
of the Replaced Funds. For each of the substitutions numbered 1-4 in
Table 1, above, Applicants state that the Replaced Fund and Substitute
Fund are not the same, but are substantially similar. For the
substitution numbered 5 above, Applicants state that the Replaced Fund
and Substitute Fund are ``clone'' funds with identical investment
objectives and policies, and the investment adviser of the Replaced
Fund will continue to provide investment advice to the Substitute Fund
as a sub-adviser to the fund. Applicants state that the substitution
numbered 6 involves two money market funds with substantially identical
investment objectives.
10. Applicants state that five of the six proposed substitutions
involve Replaced Funds that are sub-advised by VKAC which is no longer
an affiliated entity of the Life Companies. These five Portfolios are:
the Stock Index Portfolio, the Quality Income Portfolio, the High Yield
Portfolio, the VKAC Growth and Income Portfolio and the Money Market
Portfolio. The Life Companies examined the historical investment
performance records of the proposed sub-advisers/advisers for the
Substitute Funds and determined that such records compared favorably,
or were better than, those of VKAC, the sub-adviser for five Replaced
Funds. Applicants also maintain that the expense ratios of these
Replaced Funds is likely to increase over time as assets decline and
therefore, the performance of these funds will be hurt. Applicants
state that, given the desire of the Life Companies to improve
performance, the Life Companies have determined that it is in their
best interest and in the best interest of the Contract owners to pursue
the proposed substitutions.
11. The Lord Abbett Growth and Income Portfolio of Cova Trust is a
newly created investment portfolio that will not begin operations until
the proposed substitution takes place and therefore does not have an
operating history. Applicants state that the Substitute Fund's
investment objectives and policies are a ``clone'' of the Replaced
fund, and therefore, the Applicants expect the Substitute Fund to have
portfolio characteristics that are substantially the same as the
Replaced Fund.
12. Applicants state that certain of the Substitute Funds are
substantially larger than the Replaced Funds. Applicants maintain that
other Substitute Funds, although smaller than the Replaced Funds, are
growing at a much faster rate than the Replaced Funds. Applicants
assert that the increased asset size of the Substitute Funds is more
likely to result in economies of scale and in lower operating expenses
which inure to the benefit of Contract owners.
13. Applicants state that certain of the Replaced Funds of Cova
Trust have experienced more favorable expense ratios than the
Substitute Funds. Applicants state, however, that the Cova Trust
Replaced Funds are no longer offered for sale and therefore their
assets are likely to decrease over time given normal levels of
transfers and redemptions. Accordingly, Applicants maintain that the
expense ratios of these Replaced Funds will rise given the declining
assets and the resulting loss of economies of scale.
14. Furthermore, Applicants state that Life Companies have been
voluntarily subsidizing the Cova Trust Replaced Funds for all operating
expenses exclusive of investment advisory fees. Applicants maintain
that the Life Companies have already expended considerable amounts of
money voluntarily subsidizing these portfolios, and it is likely that
the Life Companies will cease any future expense reimbursements.
Without expense reimbursements, Applicants maintain that the expense
ratios of the Cova Trust Replaced Funds will likely exceed their
Substitute Fund counterparts over time.
15. Applicants state that the proposed substitution will take place
at relative net asset value with no change in the amount of any
Contract owner's Contract value or in the dollar value of their
investment in the Accounts. The substitutions will be effected by
redeeming shares of the Replaced Funds on the date of substitution at
net asset value and using the proceeds to purchase shares of the
Substitute Funds at net asset value on the same date. At all times, the
Contract values will remain unchanged and fully invested. Contract
owners will not incur any fees or charges as a result of the proposed
substitutions nor will their rights under the Contracts be altered in
any way. All expenses incurred in connection with the proposed
substitutions, including legal, accounting and other fees and expenses,
will be paid by the Life Companies. In addition, the proposed
substitutions will not impose any tax liability on Contract owners. The
proposed substitutions will not cause the Contract fees and charges
currently being paid by existing Contract owners to be greater after
the proposed substitutions than before the proposed substitutions.
16. Applicants state that it is expected that certain of the
substitutions will be effected by redeeming the shares of the Replaced
Fund partly in cash and partly in-kind. Those assets will then be
contributed to the Substitute Fund to purchase shares of that fund.
Redemptions and contributions in-kind will reduce the brokerage costs
that would otherwise be incurred in connection with the redemption. The
use of in-kind redemptions and contributions will be done in a manner
consistent with the investment objectives and policies and
diversification requirements of the applicable Substitute Fund, and the
adviser and each Substitute Fund's sub-adviser will review the in-kind
redemptions to assure that the assets proposed for the fund are
suitable for the Substitute Fund. The assets subject to in-kind
redemption and purchase will be valued based on the normal valuation
procedures of the redeeming and purchasing funds. Applicants state that
any inconsistencies in valuation
[[Page 68482]]
procedures between the Replaced Fund and the Substitute Fund will be
reconciled so that the redeeming and purchasing values are the same.
17. Applicants state that after the substitutions have been
completed there will be one instance where more than one sub-account of
an Account will hold shares of a single Substitute Fund. The Life
Companies intend to consolidate those sub-accounts. Specifically,
Applicants state the subaccounts currently investing in the VKAC Growth
and Income Portfolio and the Growth and Income Portfolio of the Lord
Abbet Fund will be merged in to new sub-accounts which will invest in
the Lord Abbett Growth and Income Portfolio of Cova Trust. Shares held
by the existing sub-accounts will be transferred to the new sub-
accounts at net asset value so there will be no financial impact to the
Contract owner.
18. Applicants state that the Life Companies have supplemented the
Contract prospectuses to reflect the proposed substitutions. The
supplements identify which funds are being replaced and advise Contract
owners that they may transfer assets from any subaccount involved in
the proposed substitution to any other subaccount available under a
Contract without any limitation or charge prior to the date of the
substitution and for a period of 30 days after the substitution.
Contract owners who are affected by the substitution will be sent
notice of the substitutions within five days following the substitution
date confirming that the substitutions have been completed and
reiterating their right to make transfers to any other subaccount for a
period of 30 days from the date of the notice without any limitation or
charge being imposed.
19. Applicants state that following the substitutions, Contract
owners will be afforded the same contract rights, including surrender
and other transfer rights with regard to amounts invested under the
Contracts, as they currently have.
Applicant's Legal Analysis
1. Section 26(b) of the 1940 Act provides, in pertinent part, that
`[i]t shall be 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 a security unless the Commission
shall have approved such substitution.'' Section 26(b) of the 1940 Act
also provides that the Commission shall issue an order approving such
substitution if the evidence establishes that the substitution is
consistent with the protection of investors and the purpose fairly
intended by the policies and provisions of the 1940 Act.
2. Applicants request an order pursuant to 26(b) of the 1940 Act
approving the proposed substitutions by the Life Companies. Applicants
assert that the purposes, terms, and conditions of the proposed
substitutions are consistent with the protection of investors and the
purposes fairly intended by the 1940 Act. Applicants further assert
that the proposed substitutions will not result in the type of costly
forced redemption that Section 26(b) of the 1940 Act was intended to
guard against.
3. Applicants state that the Contracts reserve the Life Companies'
right, subject to Commission approval, to substitute shares of one
management investment company for another in situations where it could
benefit the Life Companies and the Contract owners. Applicants also
state that the Contract prospectuses disclose this right. Applicants
maintain that each of the Substitute Funds is a suitable and
appropriate investment vehicle for Contract owners and each of the
Substitute Funds has either a substantially identical investment
objective or an investment objective that is similar to or comparable
with the Replaced Fund.
4. Applicants submit that the proposed substitutions meet the
following standards that have been applied to substitutions in the past
in that:
a. The investment objectives of the Substitute Funds are
substantially identical to, similar to, or comparable with those of the
Replaced Funds;
b. The substitutions, in all cases, will be effected at the net
asset value of the respective shares in conformity with Section 22(c)
of the 1940 Act and Rule 22c-1 thereunder, without the imposition of
any transfer or similar charge;
c. The Life Companies have undertaken to assume the expenses and
transaction costs, including among others, legal and accounting fees
and any brokerage commission, relating to the substitutions;
d. The substitutions in no way will alter the insurance benefits to
Contract owners or the contractual obligations of the Life Companies;
e. The substitutions in no way will alter tax benefits to Contract
owners; and
f. Contract owners may choose simply to withdraw amounts credited
to them following the substitutions under the conditions that currently
exist without incurring any charges (other than any applicable
withdrawal charges).
5. Section 17(a)(1) of the 1940 Act prohibits an affiliated person,
or an affiliate of an affiliated person, of a registered investment
company, from selling any security or other property to such registered
investment company. Section 17(a)(2) of the 1940 Act prohibits any
affiliated person from purchasing any security or other property from
such registered investment company.
6. Applicants state that certain portfolios of the Management
companies may be affiliated persons of each other or affiliated persons
of affiliated persons of each other. In addition, Applicants state that
the proposed substitutions by the Life Companies, which may entail the
indirect purchase of shares of the Substitute Funds with portfolio
securities of the Replaced Funds and the indirect sale of portfolio
securities of the Replaced Funds for shares of the Substitute Funds,
may also entail the purchase or sale of such securities by each of the
portfolios of the Management Companies involved, acting as principal,
to one of the other portfolios of the Management Companies and
therefore may be in contravention of Section 17(a) of the 1940 Act.
7. Applicants request an order pursuant to Section 17(b) of the
1940 Act exempting the in-kind redemptions and purchases from the
provisions of Section 17(a). Section 17(b) of the 1940 Act provides
that the Commission may grant an order exempting a proposed transaction
from Section 17(a) if evidence establishes that: (1) the terms of the
proposed 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; (2) the proposed transaction is
consistent with the policy of each registered investment company
concerned, as recited in its registration statement and reports filed
under the 1940 Act; and (3) the proposed transaction is consistent with
the general purposes of the 1940 Act.
8. Applicants represent that the terms of the proposed
substitution, including the consideration to be paid and received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned and that the interest of Contract owners will not be
diluted. The in-kind redemptions and purchases will take place at
relative net asset value with no change in the amount of any Contract
owner's Contract or accumulation value or death benefit or in the
dollar value of his or her investment in any of the Accounts. Both the
investment advisers/and or
[[Page 68483]]
sub-advisers will examine the portfolios securities being offered to
each Portfolio and accept only those securities as consideration that
they would have acquired directly in a cash transaction. The Applicants
represent that the transactions are consistent with the policies of
each investment company and the general purposes of the 1940 Act, and
comply with the requirements of Section 17(b).
Conclusion
Applicants assert that, for the reasons summarized above, the
requested order approving the substitution and related transactions
involving in-kind redemptions should be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32933 Filed 12-10-98; 8:45 am]
BILLING CODE 8010-01-M
