97-33713. The Sierra Variable Trust, et al.; Notice of Application

[Federal Register Volume 62, Number 248 (Monday, December 29, 1997)]
[Notices]
[Pages 67669-67671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33713]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22948; File No. 812-10886]


The Sierra Variable Trust, et al.; Notice of Application

December 19, 1997.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under Section 17(b) of the 
Investment Company Act of 1940 (``1940 Act''), exempting Applicants 
from the provisions of Section 17(a) of the 1940 Act to the extent 
necessary to permit the merger of two series of a registered management 
investment company and the combination of corresponding sub-accounts of 
a separate account investing therein.

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SUMMARY OF APPLICATION: Applicants seek an order exempting them from 
the provisions of Section 17(a) of the 1940 Act to the extent necessary 
to permit the merger of the Trust's Short Term Global Government Fund 
(the ``Global Government Fund'') into the Trust's Short Term High 
Quality Bond Fund (the ``High Quality Bond Fund'') (the ``Merger'') and 
the combination of corresponding sub-accounts of the Separate Account 
investing therein.

APPLICANTS: The Sierra Variable Trust (``Trust''), American General 
Life Insurance Company (``Insurance Company'') and American General 
Life Insurance Company Separate Account D (``Separate Account'').

FILING DATES: The application was filed on December 5, 1997.

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 Secretary of the SEC and serving 
Applicants with a copy of the request, in person or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on January 13, 
1997, and should be accompanied by proof of service on Applicants, in 
the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request notification of a hearing by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, c/o J.B. Kittredge, Esq., Ropes & Gray, One 
International Place, Boston, Massachusetts 02110.

FOR FURTHER INFORMATION CONTACT: Michael Koffler, Attorney, or Mark 
Amorosi, Branch Chief, Office of Insurance Products (Division of 
Investment Management), at [phone].

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, 450 Fifth St., N.W., Washington, 
D.C. 20549 (tel. [phone]).

Applicants' Representations

    1. The Trust, an open-end, management investment company, is a 
Massachusetts business trust. It is a series investment company 
currently comprised of fourteen separate investment portfolios, two of 
which are the High Quality Bond Fund and the Global Government Fund. 
Five portfolios are asset allocation portfolios (the ``Asset Allocation 
Portfolios'') investing in six to eight of the other funds (the 
``Funds'') (the Asset Allocation Portfolios and the Funds are hereafter 
referred to collectively as the ``Portfolios''). The Trust issues a 
separate series of shares of beneficial interest in connection with 
each Portfolio and has registered these shares under the Securities Act 
of 1933 (the ``1933 Act'') on Form N1-A (File No. 33-57732).
    2. The Trust has sold shares of the Portfolios to the Separate 
Account, which is a separate account established by the Insurance 
Company to receive and invest net purchase payments paid under variable 
annuity contracts issued by the Insurance Company (the ``Contracts''). 
The Separate Account is registered as a unit investment trust under the 
1940 Act (File No. 811-2441). The Funds are investment options 
available under one form of the Contract (the ``Primary Contracts''). 
The Asset Allocation Portfolios are investment options currently 
available under a second form of the Contract (the ``Secondary 
Contracts''). Owners of the Contracts (``Owners'') may choose to have 
their net purchase payments allocated among investment divisions 
(``Divisions'') of the Separate Account, which Divisions correspond to 
the fourteen series of the Trust.
    3. The Insurance Company, a stock life insurance company, is leased 
to sell life, accident and health insurance and annuities in the 
District of Columbia and 49 states. The Insurance Company is the 
depositor and sponsor of the Separate Account.
    4. Sierra Investment Advisors Corporation (``SIAC''), an indirect, 
wholly owned subsidiary of Washington Mutual, Inc. (``WMI''), is the 
investment manager the High Quality Bond Fund and the Global Government 
Fund. Under an investment sub-advisory agreement with SIAC, Scudder, 
Stevens & Clark, Inc. (``Scudder''), an unaffiliated corporation, 
manages the High Quality Bond Fund and the Global Government Fund. SIAC 
receives a fee for its investment advisory services at an annual 
percentage of the average daily net assets of each Find,. Neither of 
these two Funds pays Scudder directly for its services, which are paid 
for by SIAC. Sierra Fund Administration Corporation (``SFAC'') serves 
as the administrator for both Funds and receives from each Fund an 
administrative fee equal to 0.18% of average daily net assets.
    5. Applicants state that the Trustees of the Trust, including a 
majority of those trustees who are not interested persons of the Trust, 
SIAC, WMI and their affiliates or the Insurance Company, have 
unanimously approved a Plan of Reorganization (the ``Plan'') pursuant 
to which the High Quality Bond Fund and the Global Government Fund 
would be merged. Applicants state that the principal purposes of the 
Merger are (1) to eliminate a Fund for which there is limited demand in 
a way that provides current shareholders of the Global Government Fund 
with the opportunity to pursue compatible investment goals,

[[Page 67670]]

(2) to reduce management and transaction costs, and (3) to improve 
investment performance.
    6. Applicants state that, pursuant to the Plan, on the closing date 
(``Closing Date''), the High Quality Bond Fund would acquire all of the 
assets and liabilities of the Global Government Fund. The net asset 
value of the shares of the High Quality Bond Fund issued in exchange 
shall equal the net asset value of the shares of the Global Government 
Fund then outstanding. Each Global Government Fund shareholder (which 
term includes both the Global Government Fund Division as well as the 
Asset Allocation Portfolios investing in the Global Government Fund) 
will receive the number of full and fractional shares of the High 
Quality Bond Fund equal in value at the date of the exchange to the 
value of such shareholder's shares of the Global Government Fund. 
Thereafter, the expenses borne by such shareholders will be those 
applicable to the High Quality Bond Fund. The shares of the High 
Quality Bond Fund issued pursuant to the Merger have been registered 
under the 1933 Act on Form N-14 (File No. 333-37637).
    7. Applicants state that the Trust intends to submit the proposed 
Merger to shareholders for approval. Owners of a Primary Contract may 
provide voting instructions to the Insurance Company for the number of 
full or fractional shares of a Fund equal to the cash value of the 
Primary Contract held in the Division of the Separate Account investing 
in the Global Government Fund, divided by the net asset value per 
share. Fund shares attributable to the Secondary Contracts or to 
Primary Contracts for which no voting instructions are received will be 
voted by the Insurance Company in the same proportion as the 
instructions by Owners of Primary Contracts. The affirmative vote of a 
majority of the outstanding shares of the Global Government Fund will 
be required to approve the transaction.
    8. Applicants also state that, contemporaneously with the Merger 
and subject to shareholder approval, Composite Research & Management 
Corporation (``Composite''), another indirect, wholly-owned subsidiary 
of WMI, will become the investment manager of the High Quality Bond 
Fund, with Composite providing the same services as are currently 
provided by SIAC and Scudder for a fee equal to the fee currently 
charged by SIAC. Murphey Favre Shareholders Services, Inc. (``MFSS''), 
an affiliate of Composite, would provide at the same rate the same 
administrative services that are currently provided by SFAC.
    9. Applicants state that if Composite is approved as the investment 
manager for the High Quality Bond Fund and the Merger is effected, 
Composite and MFSS have undertaken from the date of the Merger and at 
least through December 31, 1998, to waive their fees and/or to bear 
certain expenses to the extent necessary to limit total operating 
expenses of the High Quality Bond Fund to the annual rate of 1.00% 
(which equals the annualized rate of the High Quality Bond Fund for the 
first six months of 1997, taking into account the waiver of certain 
advisory fees during this time). Neither SIAC, SFAC, Composite nor MFSS 
has indicated their intentions with respect to the Global Government 
Fund should the merger not be approved. However, assuming the SIAC/SFAC 
waivers remain in effect, Applicants assert that the Merger would lower 
the expenses for Global Government Fund shareholders from the annual 
rate of 1.26% (1.28% during the last complete fiscal year) to the 
annual rate of 0.92%, with a guarantee through December 31, 1998, that 
the expense ration could not exceed 1.00%.
    10. Applicants assert that the High Quality Bond Fund and the 
Global Government Fund have substantially similar investment 
objectives: the High Quality Bond Fund's objective is to provide ``as 
high a level of current income as is consistent with prudent investment 
management and stability of principal.'' The Global Government Fund's 
objective is ``to provide high current income consistent with 
protection of principal.'' Applicants state that the Global Government 
Fund generally has a substantially higher percentage of its assets in 
securities of foreign issuers, has greater flexibility to invest in 
lower-rated securities, and is non-diversified within the meaning of 
the 1940 Act. The High Quality Bond Fund is diversified and may invest 
only in investment grade securities. Applicants maintain, however, that 
there is a substantial overlap in the securities eligible for purchase 
by both Funds and each seeks to maintain a targeted average weighted 
maturity of less than 3 years.
    11. Applicants state that the Trustees have determined that the 
interests of Owners of Contract indirectly invested in the Global 
Government Fund and the High Quality Bond Fund will not be diluted as a 
result of the proposed transactions and that the Merger is in the best 
interests of each affected Fund and the shareholders thereof. 
Applicants represent that the Merger is expected to result in economies 
of the scale and cost savings which will be reflected in improved 
performance prospects. Certain expenses of the affected Funds that are 
incurred by each Fund, such as fees for independent auditors and 
custodial fees, will be reduced on a percentage basis as the Funds are 
combined. The larger fund also will allow the adviser the opportunity 
to better able to choose new investments, reinvest funds from maturing 
investments and manage cash flows.
    12. Applicants represent that apart from the fact that the future 
cash value of Contracts indirectly invested in the Global Government 
Fund will reflect the investment performance and expenses of the High 
Quality Bond Fund, the Merger will have no economic impact on Contract 
values, fees or charges under the Contracts. Applicants also represent 
that the Merger will have no effect on the rights or interests of 
Owners, other than reducing from 9 to 8 the number of investment 
options available to Owners of Primary Contract and reducing by 1 the 
number of asset classes available to the Asset Allocation Portfolios. 
Applicants state that the proposed transaction will not have adverse 
tax consequences for the Owners.

Applicants' Legal Analysis

    1. Applicants request that the Commission issue an order pursuant 
to Section 17(b) of the 1940 Act exempting the Merger from the 
provisions of Section 17(a) of the 1940 Act, to the extent necessary to 
permit the High Quality Bond Fund to acquire substantially all of the 
assets of the Global Government Fund in exchange for shares of the High 
Quality Bond Fund.
    2. Section 17(a)(1) of the 1940 Act, in relevant part, prohibits 
any affiliated person of a registered investment company, or any 
affiliated person of such a person, acting as principal, from knowingly 
selling any security or other property to the registered investment 
company. Section 17(a)(2) of the 1940 Act, generally, prohibits the 
persons described above, acting as principal, from knowingly purchasing 
any security of other property from the registered investment company.
    3. Section 2(a)(3) of the 1940 Act defines the term ``affiliated 
person,'' in relevant part, as (a) any person directly or indirectly 
owning, controlling, or holding with power to vote, 5 per centum of 
more of the outstanding voting securities of such other person; (b) any 
person 5 per centum of more of whose outstanding voting securities are 
directly or indirectly owned, controlled

[[Page 67671]]

or held with power to vote, by such person; and (c) any person directly 
or indirectly controlling, controlled by, or under common control with, 
such other persons.
    4. Applicants state that because the Insurance Company, through the 
Separate Account, technically owns 100% of the outstanding shares of 
each Fund, it is arguably an affiliate of each Portfolio. In this case, 
each Fund may be an affiliated person of an affiliated person (i.e., 
the Insurance Company) and transactions between the Funds may be 
subject to the prohibition of Section 17(a) of the 1940 Act. Applicants 
also state that an affiliation between the Funds also may arise if they 
are deemed to be under common control. Since the Funds are part of the 
same investment company, they each have common directors and officers 
as well as a common investment adviser. If the Funds are considered to 
be under common control, they could be affiliated persons of one 
another.
    5. Section 17(b) of the 1940 Act provides that the Commission may, 
upon application, grant an order exempting any transaction from the 
prohibitions of Section 17(a) if the evidence establishes that (a) 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; (b) the proposed 
transaction is consistent with the policy of each registered investment 
company concerned, as recited in the registration statement and reports 
filed under the Act; and (c) the proposed transaction is consistent 
with the general purposes of the 1940 Act.
    6. Applicants represent that the terms of the proposed Merger as 
set forth in the Plan, including the consideration to be paid and 
received, are reasonable and fair and do not involve overreaching on 
the part of any person concerned. Applicants also represent that the 
proposed Merger is consistent with the policies of the High quality 
Bond Fund and the Global Government Fund as recited in the Trust's 
current registration statement and reports filed under the 1940 Act, 
and with the general purposes of the 1940 Act. Applicants state that 
the Merger does not present any of the conditions or abuses that the 
1940 Act was designed to mitigate or eliminate.
    7. Applicants state that the Board of Trustees of the Trust, 
including a majority of the disinterested Trustees, has reviewed and 
approved the terms of the Merger as set forth in the Plan, including 
the consideration to be paid or received by all parties. Applicants 
also state that they have independently determined that the proposed 
Merger will be in the best interests of the shareholders of each 
affected Fund and of the Owners indirectly invested in each affected 
Fund and that the consummation of the Merger will not result in the 
dilution of the current interests of any shareholder or Owner.
    8. Applicants state that in determining whether to recommend 
approval of the Plan to shareholders and Owners, the Board of Trustees 
of the Trust, including a majority of disinterested Trustees, inquired 
into a number of matters and considered various factors, as described 
in the application. The Trustees noted, in particular, the potential 
benefits to shareholders and Owners, the substantially similar 
investment objectives of the affected Funds, the terms and conditions 
of the Plan which might affect the price of shares (or Owner interests) 
to be exchanged, and the direct or indirect costs to be incurred by the 
affected Funds or shareholders or Owners invested in such Funds. The 
Board of Trustees also considered the recent trend of declining annuity 
contract purchase payments and increased redemptions, as well as 
expectations of future payments under the variable annuity contracts 
which permit allocation to the global Government Fund. Applicants state 
that the Board of Trustees believes action is necessary to provide 
Owners certain benefits and to avoid certain adverse consequences to 
the Owners. Applicants also state that, in addition to anticipated 
lower expenses, a merger of the Global Government Fund and the High 
Quality Bond Fund should result in a larger portfolio which can be 
managed more effectively.
    9. Applicants state that the proposed Merger will not in any way 
affect the price of outstanding shares of the High Quality Fund, nor 
will it in any way affect the Contract values or interests of Owners 
indirectly invested therein. Under the Plan, the transfer of assets of 
the Global Government Fund to the High Quality Bond Fund, and the 
issuance of shares of the High Quality Bond Fund in exchange therefor, 
will be made on the basis of the relative net asset values of the 
affected Funds on the Closing Date.
    10. Applicants represent that the aggregate value of shares to be 
issued to the Global Government Fund Division under the Plan will 
exactly equal the aggregate value of shares held by that Division 
immediately prior to the proposed Merger. The aggregate value of all 
Owner's outstanding units of interest of the Global Government Fund 
Division will not change on the Closing Date as a result of the Merger 
and the aggregate value of such units supporting the cash value of each 
Owner indirectly invested in that Division immediately prior to the 
Merger will remain unchanged immediately after the Merger. The same is 
true for Divisions owning Global Government Fund shares through the 
Asset Allocation Portfolios. Applicants state that Composite, WMI or 
one of its affiliates will pay all of the Trust's direct and indirect 
expenses of the Merger.
    11. Rule 17a-8 under the 1940 Act exempts from 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 affiliated persons, solely 
by reason of having a common investment adviser, common directors and/
or common officers. Because of the potential affiliations noted above, 
the Funds may not be able to rely on rule 17a-8. Applicants state, 
however, that the Trustees have evaluated the relevant considerations 
and have determined that the Plan will comply with the conditions that 
rule 17a-8 requires.

Conclusion

    Applicants submit that, for all of the reasons summarized above, 
the terms of the proposed Merger as set forth in the Plan, including 
the consideration to be paid and received, are reasonable and fair to 
the Trust, to the affected Funds and to shareholders and Owners 
invested therein and do not involve overreaching on the part of any 
person concerned. Furthermore, the proposed Merger will be consistent 
with the policies of each of the affected Funds as recited in the 
Trust's registration statement and reports filed under the 1940 Act and 
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. 97-33713 Filed 12-24-97; 8:45 am]
BILLING CODE 8010-01-M