[Federal Register Volume 60, Number 240 (Thursday, December 14, 1995)]
[Notices]
[Pages 64185-64190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30493]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21587; No. 812-9156]
Safeco Life Insurance Company, et al.
December 7, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Safeco Life Insurance Company (``SAFECO'') and Separate
Account SL (``Separate Account'').
RELEVANT 1940 ACT SECTION: Order requested under Section 26(b) of the
1940 Act.\1\
\1\Applicants represent that they will amend the application
during the notice period to make this representation.
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SUMMARY OF APPLICATION: Applicants seek an order authorizing the
substitution of shares of certain portfolios of the Variable Insurance
Products Fund and the Variable Insurance Products Fund II (``VIP
Trusts'') for shares of certain portfolios of The Hudson River Trust
(``Hudson Trust'') currently held by the Separate Account.
FILING DATE: The application was filed on August 10, 1994, and amended
on September 6, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the Application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on December 27, 1995, 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 the request, and the
issues contested. Persons may request notification of a hearing by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549. Applicants, c/o Leslie Harrison,
Counsel, SAFECO Life Insurance Company, P.O. Box 34690, Seattle,
Washington 98124-1690.
FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special
Counsel, or Brenda Sneed, Assistant Director, Division of Investment
Management (Office of Insurance Products), at (202) 942-0670.
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.
Applicants' Representations
1. SAFECO is a stock life insurance company licensed to sell
insurance and
[[Page 64186]]
annuities in the District of Columbia and all states except New York.
SAFECO is a wholly-owned subsidiary of SAFECO Corporation, a holding
company.
2. Separate Account. The Separate Account was established by SAFECO
and registered under the 1940 Act as a unit investment trust for the
purpose of funding certain flexible premium variable life insurance
contracts (``Contracts''). The Contracts have been registered under the
Securities Act of 1933.\2\ The Separate Account currently has fourteen
Investment Divisions (``Investment Divisions''), each investing
exclusively in the shares of a corresponding portfolio of the Hudson
Trust or the VIP Trusts.
\2\Applicants incorporate by reference the registration
statement for the Contracts (File No. 33-10248).
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3. The Hudson Trust. The Hudson Trust is registered under the 1940
Act as an open-end management investment company. The Hudson Trust
currently issues twelve series of shares of beneficial interest, each
representing a separate investment portfolio. Each Hudson Trust
portfolio is a separate open-end diversified management investment
company. Shares of six of the twelve Hudson Trust portfolios\3\
currently are held by the Separate Account. Alliance Capital Management
L.P. (``Alliance'') is the manager and investment adviser to the Hudson
Trust portfolios. Alliance is an investment adviser registered under
the Investment Advisers Act of 1940. Alliance, a publicly-traded
Delaware limited partnership, is indirectly owned by Equitable Life
Assurance Society of the United States (``Equitable''). Equico
Securities, Inc. (``Equico''), a wholly-owned subsidiary of Equitable,
is the principal underwriter of the Hudson Trust.
\3\The Hudson Trust Portfolios in which the Separate Account
invests include: the Common Stock, Money Market, Balanced,
Aggressive Stock, High Yield, and Global Portfolios.
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4. The VIP Trusts. The VIP Trusts are registered under the 1940 Act
as open-end management investment companies. The VIP Trusts currently
are issuing ten series of shares of beneficial interest, each
representing a separate investment portfolio (``VIP Trust
Portfolios''). Each VIP Portfolio is an open-end, diversified
management investment company. Fidelity Management & Research Company
(``FMR''), the manager of the VIP Trusts, is an investment adviser
registered under the Investment Advisers Act of 1940. FMR is indirectly
owned by FMR Corporation, a holding company for the Fidelity companies.
5. The Contracts. The Contracts provide for minimum initial premium
payments and additional subsequent payments. Net premium payments are
allocated to the Investment Divisions and to the Guaranteed Interest
Division, a part of SAFECO's General Account. Twelve transfers of
Contract account value are permitted in a Contract year, without
charge; thereafter, a maximum charge of $25 may be imposed for each
additional transfer. The current transfer fee of $25 will be allocated
equally among the Investment Divisions from which the requested amounts
were transferred.
a. Sales Loads. The Contracts provide for the deduction of: (1) a
3% sales charge from each premium payment, and (2) a deferred sales
charge (``Surrender Charge'') from Contract account value if the
Contract is partially or fully surrendered in the first ten Contract
years. The Surrender Charge is equal to the lesser of: (1) a percentage
of the maximum premium for the Contract as follows:
------------------------------------------------------------------------
Percentage
Contract year of maximum
premium
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1 through 6................................................. 47.0
7........................................................... 37.0
8........................................................... 29.2
9........................................................... 18.8
10.......................................................... 9.4
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or (2) an amount equal to (A) minus (B) where (A) is 27% of the premium
payments received during the first Contract year up to the maximum
premium for the Contract, plus 6% of all other premium payments
received to the time of surrender, and (B) is the amount of any pro
rata Surrender Charge previously made under the Contract. A request for
a decrease in face amount of insurance is considered to be a partial
surrender subject during the first ten contract years to the pro rata
deduction of the Surrender Charge from contract account value. An
increase in face amount followed by a decrease in face amount will be
subject to the deduction of a Surrender Charge only on the amount of
decrease below the original face amount of insurance.
b. Right of Substitution. Under the Contracts, SAFECO has reserved
the right to substitute shares of another mutual or portfolio within
the Hudson Trust or the VIP Trusts if share of the Hudson Trust or the
VIP Trusts (or any portfolio thereof) become unavailable for investment
by the Separate Account, or if in SAFECO's judgment further investment
in such shares becomes inappropriate in view of the purposes of the
Contracts, subject to applicable state and federal securities laws.
c. Administration. SAFECO has primary responsibility for all
administration of the Contracts and the Separate Account. Currently,
Financial Administrative Services, Inc. (``FAS'') (formerly, Fleet
Administrative Services, Inc.) has been retained by SAFECO to provide
administrative services to SAFECO and its contract owners. FAS is
indirectly owned by Phoenix Home Life Mutual Insurance Company
(``Phoenix Home Life'').\4\ Prior to September, 1994, SAFECO had
retained Integrity Life Insurance Company (``Integrity''),\5\ the
principal underwriter for the Hudson Trust, to provide such
administrative services, including use of the Hudson Trust as the
underlying funding vehicle for the Contracts.\6\ On September 30, 1991,
the Distribution Agreement between the Hudson Trust and Integrity was
terminated.\7\ Accordingly, investment in Hudson Trust Portfolios has
been restricted to Contracts sold prior to September 30, 1991 (``Pre-
September 30 Contracts''). The Hudson Trust no longer is available as
an investment option under Contracts sold after September 30, 1991
(``Post-September 30 Contracts''). Consequently, the VIP Trusts were
selected as investment alternatives for the variable life programs
administered by Integrity.
\4\On December 31, 1993, FAS was acquired from Fleet Financial
Group by P.M. Holdings, Inc., a holding company owned by Phoenix
Home Life.
\5\On November 26, 1993, Integrity was acquired by ARM Financial
Group, Inc., a financial services holding company, from The National
Mutual Life Association of Australasia, Ltd. (``Australasia''), an
Australian life insurance company. Prior to its acquisition in 1988
by Australasia, Integrity had been a wholly-owned subsidiary of
Equitable.
\6\At that time, the Hudson Trust was managed by a SAFECO
affiliate, which SAFECO believed would assure good service between
the administrator and the fund manager.
\7\Under its terms, the Distribution Agreement would continue in
effect until September 30, 1991, and thereafter only if reapproved
by a majority of independent Trustees of the Hudson Trust. The
Trustees did not continue the Distribution Agreement after September
30, 1991.
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6. Proposed Transactions. Applicants now propose to substitute
shares of five VIP Trusts Portfolios for shares of six Hudson Trust
Portfolios (``Substitution''). The Portfolios and their investment
objectives as stated in their respective prospectuses are as follows:
a. Shares of the VIP Trusts Money Market Portfolio will be
substituted for shares of the Hudson Trust Money Market Portfolio. The
VIP Trusts Money Market Portfolio's investment objective is to seek as
high a level of current income as is consistent with preserving
[[Page 64187]]
capital and providing liquidity by investing only in high quality U.S.
dollar denominated money market securities of domestic and foreign
issuers. The Hudson Trust Money Market Portfolio's investment objective
is to obtain a high level of current income, preserve its assets and
maintain liquidity by investing primarily in high quality U.S. dollar
denominated money market instruments.
b. Shares of the VIP Trusts Growth Portfolio will be substituted
for shares of: (1) The Hudson Trust Common Stock Portfolio; and (2) the
Hudson Trust Aggressive Stock Portfolio. The VIP Trusts Growth
Portfolio's investment objective is to achieve capital appreciation by
investing in common stocks, as well as bonds, preferred stocks, and
high-yielding, lower-rated debt securities and foreign securities. The
Hudson Trust Common Stock Portfolio's investment objective is to
achieve long-term growth of its capital and increased income by
investing primarily in common stocks and other equity-type instruments.
The Hudson Trust Aggressive Stock Portfolio's investment objective is
to achieve long-term growth of capital by investing primarily in common
stocks and other equity-type securities issued by quality small and
intermediate sized companies with strong growth prospects and in
covered options on those securities.
c. Shares of the VIP Trusts Asset Manager Portfolio will be
substituted for shares of the Hudson Trust Balanced Portfolio. The VIP
Trusts Asset Manager Portfolio's investment objective is to seek high
total return with reduced risk over the long-term by allocating its
assets among domestic and foreign stocks, bonds and short-term, fixed-
income instruments. The Hudson Trust Balanced Portfolio's investment
objective is to achieve a high return through both appreciation of
capital and current income by investing in a diversified portfolio of
publicly traded equity and debt securities and short-term money market
instruments.
d. Shares of the VIP Trusts High Yield Portfolio will be
substituted for shares of the Hudson Trust High Yield Portfolio. The
VIP Trusts High Yield Portfolio's investment objective is to seek a
high level of current income by investing primarily in high-yielding,
lower-rated, fixed income securities, while also considering growth of
capital. The Hudson Trust High Yield Portfolio's investment objective
is to achieve high return by maximizing current income and, to the
extent consistent with that objective, capital appreciation by
investing primarily in a diversified mix of high yield, fixed income
securities involving greater volatility of price and risk of principal
and income than high quality fixed income securities. The medium and
lower quality debt securities in which the High Yield Portfolio may
invest are known as ``junk bonds.''
e. Shares of the VIP Trusts Overseas Portfolio will be substituted
for shares of the Hudson Trust Global Portfolio. The VIP Trusts
Overseas Portfolio's investment objective is to seek long-term growth
of capital primarily through investments in foreign securities. The
Hudson Trust Global Portfolio's investment objective is to achieve
long-term growth of capital by investing primarily in equity securities
of non-United States companies as well as United States issuers.
Applicants assert that the investment objectives and policies of
each of the VIP Trusts Portfolios which are to be substituted and the
Hudson Trust Portfolios to be substituted are similar, except for the
Hudson Trust Aggressive Stock Portfolio and the VIP Trusts Growth
Portfolio. Applicants represent that the VIP Trusts Growth Portfolio's
investments are all permissible investments of the Hudson Trust
Aggressive Stock Portfolio. However, the Aggressive Stock Portfolio
permits certain additional investments\8\ that are not allowed under
the investment policy of the Growth Portfolio. Nevertheless, Applicants
submit that Contract owners are seeking long-term growth when they
invest in either the Growth Portfolio or the Aggressive Stock
Portfolio, that this goal can be achieved by investment in either
Portfolio, and that the differences between investment policies are
non-material to achievement of these investment goals.
\8\The Aggressive Stock Portfolio may invest in foreign
securities, write covered call options, purchase call and put
options on individual equity securities, security indexes and
foreign currencies, and purchase and sell stock index and foreign
currency future investments and options thereon.
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7. Additional Investments Options. In addition to the five VIP
Trusts Portfolios which are to be substituted for the six Hudson Trust
Portfolios, Contract owners will be able to invest in the five
additional VIP Trusts Portfolios:
a. Investment Grade Bond Portfolio, which seeks high current income
by investing primarily in fixed-income obligations of all types by
investing at least 65% of its total assets in investment-grade, fixed
income securities, such as bonds, notes and debentures.
b. Asset Manager Growth Portfolio, which seeks to maximize total
return over the long term by allocating its assets among three classes,
or types of investments: (1) stock class, consisting of equity
securities of all types; (2) bond class, including all varieties of
fixed-income instruments with maturities of more than three years; (3)
short-term class, including all types of short-term instruments with
remaining maturities of three years of less. Applicants state that the
difference between this Portfolio and the VIP Trusts Asset Manager
Portfolio is the percentage allocation to these three classes of
investment.
c. Equity Income Portfolio, which seeks reasonable income by
investing primarily in income producing equity securities. The
Portfolio normally invests at least 65% of its total assets in these
securities.
d. Index 500 Portfolio, which seeks to match the total return of
the S&P 500 while keeping expenses low. The Portfolio normally invests
at least 80% (65% if Portfolio assets are below $20 million) of its
assets in equity securities of companies that comprise the S&P 500.
e. Contrafund Portfolio, which seeks capital appreciation by
investing in companies that are believed to be undervalued due to an
overly pessimistic appraisal by the public.
8. Advisory Fees--Hudson Trust Portfolios. Advisory fees are
payable by the Hudson Trust Portfolios at the following annual
percentages of values of each Portfolio's average daily net assets:
------------------------------------------------------------------------
Daily average net assets
--------------------------------
First
Portfolio $350 Next $400 Over $750
million million million
(percent) (percent) (percent)
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a. Money market........................
b. Balanced............................ .400 .375 .350
c. Common Stock........................
d. Aggressive Stock.................... .500 .475 .450
e. High Yield..........................
f. Global.............................. .550 .525 .500
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9. Management Fees--VIP Trust Portfolios. The management fee for
each VIP Trusts Portfolio (excluding the Money Market Portfolio) is
calculated by adding a group fee rate to an individual fund fee rate,
and multiplying the result by each Portfolio's average net assets. The
group fee rate is based on the average net assets of all the mutual
funds advised by FMR and can not exceed certain maximum rates. The
Management fee for the Money market Portfolio is calculated by
multiplying the sum of
[[Page 64188]]
three components (group fee rate, which drops as total assets under
management increase, individual fee rate and an income component)\9\ by
the fund's average net assets.
\9\The income component is 6% of gross income in excess of 5%
yield and can not rise above 0.24% of the average net assets.
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For 12/
Maximum 31/94 Individual
Portfolio group fee group fee fee rate
rate rate (percent)
(percent) (percent)
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Money Market.......................... 0.37 0.1563 0.03
Growth\10\............................ 0.52 0.3191 0.30
Asset Manger\11\...................... 0.52 0.3191 0.40
High Income........................... 0.37 0.1563 0.45
Overseas.............................. 0.52 0.3191 0.45
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\10\FMR has directed certain portfolio trades of the Growth Portfolio to
brokers who paid a portion of the Portfolio's expenses. For the period
ending December 31, 1994, the Portfolio's expenses were reduced by
$204,452.
\11\FMR directed certain portfolio trades to brokers who paid a portion
of the Asset Manager Portfolio's expenses. For the period ended
December 31, 1994, the expenses of the Asset Manager Portfolio were
reduced by $131,585 under this arrangement.
10. Sub-Advisory Agreements--VIP Trusts Portfolios. FMR, the
manager of the VIP Trusts, has entered into various sub-advisory
agreements for research, investment advice and portfolio management
services. FMR has entered into sub-advisory agreements with Fidelity
Management & Research (UK), Inc. (``FMR UK'') and Fidelity Management &
Research (Far East), Inc. (``FMR Far East'') on behalf of the VIP
Trusts High Income and Asset Manager Portfolios. FMR also has entered
into sub-advisory agreements with FMR U.K., FMR Far East and Fidelity
International Investment Advisers (``FIIA'') on behalf of the VIP
Trusts Overseas Portfolio; FIIA, in turn, has entered into a sub-
advisory agreement with its wholly-owned subsidiary Fidelity
International Investment Advisors (U.K.) Limited (``FIIAL UK''). FMR
has entered into a sub-advisory agreement with FMR Texas, Inc. (``FMR
Texas'') on behalf of the VIP Trusts Money Market Portfolio. Under
these sub-advisory agreements, FMR pays the fees of FMR UK, FMR Far
East, FMR Texas and FIIA. FIIA, in turn, pays the fees of FIIAL UK.
a. For providing investment advice and research services, the sub-
advisors are compensated as follows: (1) FMR pays FMR U.K. and FMR Far
East fees equal to 110% and 105%, respectively, of their costs; (2) FMR
pays FIIA 30% of its monthly management fee with respect to the average
market value of investments held by the fund for which FIIA has
provided FMR with investment advice; and (3) FIIA pays FIIAL UK a fee
equal to 100% of its costs.
b. For providing investment management services, the sub-advisors
are compensated as follows: (1) FMR pays FMR UK, FMR Far East and FIIA
50% of FMR's monthly management fee with respect to the fund's average
net assets managed by the sub-advisor on a discretionary basis; (2)
FIIA pays FIIAL UK 100% of its costs; and (3) FMR pays FMR Texas a fee
equal to 50% of the management fee payable to FMR under its management
contract with the Money Market Portfolio.
11. The following table indicates the amount of assets that were
invested in Hudson River Trust Portfolios at the year ended December
31:
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As of 12/ As of 12/ As of 12/ As of 12/ As of 12/
31/94 31/93 31/92 31/91 31/90
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Total Contracts................................ 2,785 1,655 765 357 237
Invested in Hudson Trust....................... 308
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Assets 12/31/ Assets 12/31/ Assets 12/31/ Assets 12/ Assets 12/
Portfolio 94 93 92 31/91 31/90
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Common Stock.......................... $1,011,187 $1,114,766 $1,053,292 $992,549 $437,830
Money Market.......................... 376,959 427,557 69,058 145,332 34,025
Balanced.............................. 60,865 97,035 108,132 59,470 13,598
Aggressive............................ 68,285 108,403 176,348 141,097 13,361
High Yield............................ 21,162 293,199 275,997 11,819 10,003
Global................................ 154,454 113,683 32,276 25,518 7,377
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Proposed Transactions
1. Transactions to implement the proposed Substitution of shares of
five VIP Trusts Portfolios for shares of six Hudson Trust Portfolios
will take place both at the Separate Account level and at the
underlying Fund level.
a. Separate Account Level. At the Separate Account level, the
Substitution will result in a transfer of Contract account values from
one Separate Account Division to another. On the day of the
Substitution, SAFECO will determine the Contract account values held in
the Investment Divisions which invest in the Hudson Trust Portfolios,
redeem those units of interest, purchase units of the Investment
Division which invests in the corresponding VIP Trusts Portfolio and
credit those units to the Contract. Contract account value will be
identical immediately before and after the Substitution. The number of
units held in the Contract, however, may vary to reflect the difference
in unit values of the various Investment Divisions. All unit values
will be valued at the next computed value in a manner consistent with
Rule 22c-1 under the 1940 Act.
b. Fund Level. On the day of the Substitution, all shares held by
the Separate Account in the Hudson Trust will be redeemed and,
contemporaneously, an amount equal to the cash proceeds of the
redemption will be used to purchase shares of the corresponding VIP
Trusts Portfolios.\12\ All shares will be purchased and redeemed at
prices based on the current net asset values per share next computed
after receipt of the redemption request and in a manner consistent with
Rule 22c-1 under the 1940 Act.
\12\SAFECO, on behalf of the Separate Account, will make a
request for redemption of all Hudson Trust shares. Due to the time
needed to process the redemption request, a delay in payment of the
cash redemption proceeds is anticipated. Thus, SAFECO will advance
an amount in cash equivalent to the redemption proceeds amount,
which will be used to purchase VIP Trusts Portfolio shares. Contract
account values which were held in Hudson Trust Portfolios will
remain fully vested. Subsequently, the Hudson Trust will pay the
cash redemption proceeds to SAFECO. No cash will be distributed to
Contract owners unless, incidently, a Contract owner requests a
surrender.
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2. Applicants represent that Contract owners invested in the Hudson
Trust have been sent a Supplement to the Hudson Trust Prospectus which
[[Page 64189]]
explains the proposed Substitution, the anticipated change in SAFECO's
administrative support system, and the right to elect to transfer
Contract account value to the VIP Trusts. Applicants further represent
that a notice has been sent to Contract owners informing them of the
new administrator and the new administrative system. If the Commission
issues an order regarding the proposed Substitution, a second notice,
accompanied by a current prospectus for the VIP Trusts, will be sent to
Contract owners informing them of the Commission's order and the
proposed date of the Substitution. A third notice will be mailed to
each affected Contract owner within five days after the Substitution
has been effected confirming that the Substitution has been completed
and reflecting the transfer of Contract account values from the Hudson
Trust Investment Divisions to the VIP Trusts Investment Divisions.
Affected Contract owners will have a period of 30-days after the date
of the mailing of the third notice and confirmation of Substitution to
exercise the right to make a one-time transfer of Contract account
values to any other Division, including the Guaranteed Interest
Division, without charge and without the transfer counting as one of
the free transfers permitted in a Contract year.
3. All administrative or other transaction costs, except brokerage
costs, will be borne by SAFECO. The proposed Substitution will not
result in adverse tax consequences to Contract owners, the Separate
Account or SAFECO. The Substitution will not result in a change in
Contract provisions or alter SAFECO's contractual obligations under the
Contracts.
Applicants' Legal Analysis
1. The Applicants request that the Commission issue an order under
Section 26(b) of the 1940 Act to the extent necessary to permit the
substitution of shares of the VIP Trusts Portfolios for the shares of
the Hudson Trust Portfolios currently held by the Separate Account.\13\
Thereafter, the VIP Trusts Portfolios will be eligible funding vehicles
for the Contracts, including the Pre-September 30 Contracts.
\13\Applicants state that to the extent that any aspect of the
Substitution may be deemed to require approval under Section 11 of
the 1940 Act, they intend to rely on the exemptive provisions of
Rule 11a-2 under the 1940 Act.
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2. Section 26(b) of the 1940 Act prohibits a depositor or trustee
of a registered unit investment trust holding the securities of a
single issuer from substituting another security for such security
unless the Commission approves the substitution, finding that it is
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
3. SAFECO represents that the Substitution is in the best interests
of Contract owners. The Hudson Trust is the only permitted investment
option for SAFECO's approximately 308 Pre-September 30 Contracts, which
are expected to decrease in the ordinary course of events and,
therefore, become more costly and less efficient to administer.\14\
\14\Overhead expenses associated with maintaining investments in
the Hudson Trust include costs for determining and maintaining the
daily unit values, preparation and mailing to Contract owners of
annual and semi-annual reports, proxy statements and other mailings,
preparation of performance information, maintenance of bank
accounts, reconciliations and other accounting and banking costs
associated with the underlying fund.
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4. Applicants represent that the Contract provides for both
guaranteed rates of insurance and current rates of insurance. Under the
Contract, the current rates of insurance cannot exceed the guaranteed
rate and usually is less. Applicants represent that state insurance
laws require SAFECO to establish current rates of insurance that
reasonably anticipate future expenses. Accordingly, SAFECO periodically
restates its rates of insurance to take into account all expenses
incurred in its insurance business. To the extent that expenses
reasonable can be reduced, all Contract owners will benefit to the
extent to improve current insurance rates. Conversely, insurance rates
may increase if expenses increase.
5. Applicants further represent that the additional support
provided by the Manager of the VIP Trusts of life insurance companies
and their separate accounts (``Participating Companies'') by way of
fund information is helpful in the sales process and to existing
Contract owners as they periodically review their investment decisions.
Applicants submit that this support will benefit Contract owners by
helping SAFECO enhance Contract size in this product line and keep
costs down.
6. Applicants represent that the Hudson Trust no longer is
available to new Participating Companies and to new Contract owners of
existing Participating Companies, including SAFECO. As a result, the
Hudson Trust is not an investment alternative for SAFECO's Contract
owners. SAFECO submits that a substitution of the VIP Trust Portfolios
for the corresponding Hudson Trust Portfolios would provide more
investment opportunities for its Contract owners because the VIP Trusts
continuously offer their shares to Participating Companies with an
expanding asset base and distribution outlets.
7. Applicants represent that currently, six Hudson Trust Portfolios
are available under the Contracts. Applicants further represent that
ten VIP Trusts Portfolios are available under the non-Hudson Trust
Contracts. The VIP Trusts are intended to fund variable life insurance
and variable annuity contracts offered by Participating Companies.
Currently, there are in excess of 40 Participating Companies that have
elected to use the VIP Trusts as funding vehicles for their variable
contracts. Applicants submit that this is a significant distribution
outlet for VIP Trusts shares which will result in an expanding asset
base for the VIP Trusts and a concomitant reduction in the per share
management fees and other expenses and, thus, greater economies of
scale.
8. Applicants represent that a comparison of the relative asset
sizes of the Hudson Trust and the comparable VIP Trusts Portfolios for
the year ended December 31, 1994, indicates that in all cases, except
for the Hudson Trust Common Stock Portfolio (which commenced operations
on June 16, 1975) compared with the VIP Trusts Growth Portfolio (which
commenced operations on October 9, 1986), the corresponding VIP Trusts
Portfolio has a larger asset base.
9. Applicants further represent that a comparison of expense ratios
for the period ended December 31, 1994, shows that there has been a
steady decline in expense ratios of all Portfolios. The VIP Trusts
Portfolios have shown a greater decrease; however, on average, the
Hudson Trust Portfolios have lower expense ratios.
10. Applicants assert that the performance of the VIP Trusts
Portfolios is comparable to or better than the comparable Hudson Trust
Portfolios. For example, a comparison of the five year average total
return shows that the VIP Trusts Portfolios exceed the total return for
the corresponding Hudson Trust Portfolios in four of the six
Portfolios: (a) VIP Trusts Money Market Portfolio (5.09%) compared to
Hudson Trust Money Market Portfolio (4.98%); (b) VIP Trusts Asset
Manager Portfolio (10.71%) compared to Hudson Trust Balanced Portfolio
(7.29%); (c) VIP Trusts Growth Portfolio (10.88%) compared to Hudson
Trust Common Stock Portfolio (9.82%); and (d) VIP Trusts High Income
Portfolio (14.01%) compared to Hudson Trust High Yield Portfolio
(10.60%). With respect to the
[[Page 64190]]
other two Portfolios, the Hudson Trust Aggressive Stock Portfolio had
an exceptional return of 86.87% in 1991, and in the other case the VIP
Trusts Overseas Portfolio experienced a significant loss in 1992
(10.72%) when compared to the Hudson Trust Global Portfolio's return
(0.50%). Applicants note further that, as of December 31, 1994, the
Hudson Trust Contract owners only had $68,285 in the Hudson Trust
Aggressive Stock Portfolio and $154,454 in the Hudson Trust Overseas
Portfolio. Applicants submit that this demonstrates that performance is
comparable or better in the VIP Trusts Portfolios as compared to the
Hudson Trust.
11. Applicants state that the Substitution would permit a Contract
owner to remain in the VIP Trusts Portfolios or transfer Contract
account values to any other available Investment Division or to the
Guaranteed Interest Division without cost and without such transfer
counting as a transfer for purposes of assessing a transfer fee.
Applicants represent that the notice of Substitution provided to
Contract owners will inform them of their rights. Accordingly,
Applicants submit that the terms of the proposed Substitution are
consistent with the purpose underlying Section 26(b) of preventing
investors from being forced to forfeit a sales load already deducted or
perhaps to incur additional sales loads upon redemption and purchase of
another investment company security.
12. Applicants represent that the Substitution will not alter or
affect the Contract. All the terms and conditions of the Contract are
the same after the Substitution as before, including surrender and
transfer rights. Applicants also represent that after the Substitution,
insurance benefits to Contract owners and the contractual obligations
of SAFECO are exactly the same as before the Substitution. Contract
owners will continue to look to SAFEC with regard to their rights under
the Contracts. Applicants further represent that no surrender, transfer
or other charge will be imposed at the time of the Substitution or for
the first transfer made during the 30 day period following mailing of
the confirmation and notice.
13. Applicants note that the Commission has approved a number of
substitutions where contract owners assets were reinvested in large
funds or investment portfolios in order to mitigate the adverse impact
of operating expenses on very small asset bases. Such substitutions
have been permitted even where the investment objectives, policies and
restrictions of the two portfolios involved were not nearly as similar
as in this application, including permitting the substitution of money
market portfolio shares for the shares of zero coupon bond, real estate
securities and bond portfolios. Further, the Commission also has
permitted a substitution which represented a negotiated settlement of a
dispute between the parties.
14. Applicants submit that Section 26(b) was designed to forestall
the ability of a depositor to present holders of interests in a unit
investment trust with situations in which a holder's only choice would
be to continue an investment in an unsuitable, unbargained for
underlying security, or to elect a costly, and, in effect, forced
redemption. Applicants submit that the proposed Substitution does not
present this type of situation. Moreover, under the Contracts, each
Contract owner now has the ability to make transfers among a range of
underlying investments, and Contract owners will have an ever greater
choice of investment options after the Substitution. Further, each
Contract owner can make the proposed Substitution temporary, without
cost or adverse tax consequences, by transferring the Contract account
value to any other Investment Division.
Conditions
Applicants consent to the following terms of and conditions to the
issuance of an order granting the requested exemptions:
1. All administrative or other costs of the transactions, except
brokerage fees, relating to the Substitution will be borne by SAFECO.
SAFECO will assume all expenses and transaction costs (including, among
others, legal and accounting fees) relating to the Substitution in a
manner that attributes all transaction costs to SAFECO.
2. SAFECO will mail a notice to the affected Contract owners which
will include a supplement to the Contract prospectus and a prospectus
for the VIP Trusts. The notice and the supplement will describe the
proposed Substitution.
3. Upon effecting the Substitution, SAFECO will mail a notice and
confirmation to each affected Contract owner informing the Contract
owner that the Substitution has been completed and the Contract account
value involved. Such confirmation and notice will be mailed to Contract
owners within five (5) days after the Substitution.
4. SAFECO will provide that, during a period of 30 days after the
date of the mailing of the notice and confirmation of Substitution to
affected Contract owners (the Free Transfer Period), the affected
Contract owners will have the right to make a one-time transfer of
Contract account values (at the value next computed after SAFECO
receives the request for transfer) to any other Investment Division and
to the Guaranteed Interest Division without charge and without the
transfer counting as one of the free transfers permitted in a Contract
year. Applicants represent that this 30-day period is sufficient time
for Contract owners to determine if they wish to be invested in another
Investment Division or the Guaranteed Interest Division.
5. The Substitution will, in all cases, be at net asset value of
the respective shares of the affected Portfolios. All transfers of
Contract account values will be affected without the imposition of any
transfer or other charge.
6. The Substitution in no way will alter the insurance benefits to
the Contract owners or the contractual obligations of SAFECO.
7. The Substitution in no way will alter the tax benefits to
Contract owners.
8. Contract owners may choose to withdraw amounts credited to them
following the Substitution under conditions that currently exist under
the Contracts, subject to any applicable deferred sales charge.
9. The Substitution is expected to confer certain economic benefits
on Contract owners by virtue of the increase in investment options, a
reduction in overall administrative costs thus helping to keep current
cost of insurance rates from increasing, and because of increased
support from the Manager of the VIP Trusts by way of consumer
information.
Conclusion
Applicants submit that, for the reasons and upon the facts set
forth above, the exemptive relief requested under Section 26(b) of the
1940 Act is consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act,
and satisfies the purposes underlying Section 26(b) of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30493 Filed 12-13-95; 8:45 am]
BILLING CODE 8010-01-M
