[Federal Register Volume 64, Number 55 (Tuesday, March 23, 1999)]
[Notices]
[Pages 14028-14032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6971]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23740; File No. 812-11378]
Protective Life Insurance Co., et al.
March 16, 1999.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under Section 26(b) of the
Investment Company Act of 1940 (``Act'') approving the proposed
substitution of securities.
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SUMMARY OF APPLICATION: Applicants seek an order approving the
substitution of shares of Oppenheimer Variable Account Funds
(``Oppenheimer Variable Funds'') representing interests in its
Oppenheimer Money Fund for shares of Protective Investment Company
(``PIC'') representing interests in its Money Market Fund and held by
the Life Account, Annuity Account, and Account A (together, the
``Accounts'') to support variable life insurance contracts or variable
annuity contracts (collectively, the ``Contracts'') issued by
Protective Life or American Foundation.
APPLICANTS: Protective Life Insurance Company (``Protective Life''),
American Foundation Life Insurance Company (``American Foundation''),
Protective Variable Life Separate Account (``Life Account''),
Protective Variable Annuity Separate Account (``Annuity Account''), and
Variable Annuity Account A of American Foundation (``Account A'').
FILING DATE: The application was filed October 28, 1998 and amended and
restated on February 9, 1999.
[[Page 14029]]
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 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 April 12, 1999,
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, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549-0609. Applicants, c/o Steve M.
Callaway, Esq., Protective Life Insurance Company, 2801 Highway 280
South, Birmingham, AL 35223. Copies to Stephen E. Roth, Esq. and David
S. Goldstein, Esq. Sutherland Asbill & Brennan LLP, 1275 Pennsylvania
Avenue, NW., Washington, DC 20004-2415.
FOR FURTHER INFORMATION CONTACT: Elisa D. Metzger, Senior Counsel, and/
or Susan M. Olson, Branch Chief, on (202) 942-0670, Office of Insurance
Products, Division of Investment Management.
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, NW., Washington, DC
20549 or call (202) 942-8090.
Applicants' Representations
1. Protective Life is a stock life insurance company organized
under Alabama law in 1907 and redomesticated under Tennessee law in
1992. Protective Life provides individual life and health insurance,
annuities, group life and health insurance, and guaranteed investment
contracts, and is licensed to transact insurance business in 49 states
and the District of Columbia. As of December 31, 1997, Protective Life
had total assets of approximately $10.4 billion. Protective Life is the
principal operating subsidiary of Protective Life Corporation
(``PLC''), a Delaware insurance holding company whose stock is traded
on the New York Stock Exchange. For the purposes of the Act, Applicants
state that Protective Life is the depositor and sponsor of the Life
Account and Annuity Account.
2. American Foundation, an Alabama insurance company, is a wholly
owned subsidiary of Protective Life. American Foundation provides
individual life, annuity, and group dental insurance products, and is
licensed to transact insurance business in 30 states, including New
York. As of December 31, 1997, the company had assets in excess of $100
million. For the purposes of the Act, Applicants state that American
Foundation is the depositor and sponsor of Account A.
3. Protective Life established the Life Account on February 22,
1995, and the Annuity Account on October 23, 1993, as separate
investment accounts under Tennessee law. American Foundation
established the Account A on December 1, 1997, as a separate investment
account under Alabama law. Under both Tennessee and Alabama laws, the
assets of each Account attributable to the Contracts through which
interests in that Account are issued are owned by either Protective
Life or American Foundation as appropriate, but are held separately
from all other assets of Protective Life or American Foundation Life,
for the benefit of the owners of, and the persons entitled to payment
under, those contracts. Consequently, such assets in each Account are
not chargeable with liabilities arising out of any other business that
Protective Life or American Foundation may conduct. Income, gains and
losses, realized or unrealized, from each of these Account's assets are
credited to or charged against the amounts allocated to that Account in
accordance with the Contracts without regard to other income, gains or
losses of Protective Life or American Foundation. Each Account is a
``separate account'' as defined by Rule 0-1(e) under the Act, and is
registered with the Commission as an unit investment trust.
4. The Life Account, Annuity Account, and Account A each are
divided into seventeen sub-accounts. Each sub-account invests
exclusively in shares representing an interest in a separate
corresponding investment portfolio (each, a ``Fund'') of one of four
series type management investment companies. The assets of the Life
Account support variable life insurance contracts and the assets of the
Annuity Account and the Account A support variable annuity contracts.
Interests in these Accounts offered through such Contracts have been
registered under the Securities Act of 1933 (the ``1933 Act'') on Form
S-6 (Life Account) and on Form N-4 (Annuity Account and Account A). The
Life Account, Annuity Account, and Account A each invest in the
Protective Money Market Fund of PIC that is involved in the
substitution discussed in this application.
5. PIC was organized as a Maryland corporation on September 2,
1993, to serve as an investment vehicle for Protective Life's and
American Foundation Life's variable life and variable annuity separate
accounts. PIC is registered under the Act as an open-end management
investment company, and is a series investment company as defined by
Rule 18f-2 under the Act. PIC issues a separate series of shares of
stock in connection with each Fund, and has registered such shares
under the 1933 Act on Form N-1A. Protective Investment Advisors, Inc.
(``Protective Investment Advisor''), formerly Investment Distributors
Advisory Services, Inc., a wholly owned subsidiary of PLC, serves as
the investment manager to PIC. PIC currently comprises seven Funds, one
of which is the Protective Money Market Fund and is the subject of the
proposed substitution.
6. Oppenheimer Variable Funds was organized in 1984 as a
Massachusetts business trust, and is registered under the Act as a
diversified, open-end management investment company. Oppenheimer
Variable Funds is a series investment company as defined by Rule 18f-2
under the Act, and issues a separate series of shares of beneficial
interest in connection with each Fund. Oppenheimer Variable Funds has
registered shares of such Funds under the 1933 Act on Form N-1A.
Oppenheimer Funds, Inc., serves as the investment manager to
Oppenheimer Variable Funds. Oppenheimer Variable Funds currently
comprises ten Funds, one of which, the Oppenheimer Money Fund, is the
subject of the proposed substitution.
7. The Contracts are individual flexible premium variable and fixed
life insurance contracts, individual modified single premium variable
and fixed life insurance contracts, and individual flexible premium
deferred variable and fixed annuity contracts. Protective Life issues
three variable life insurance contracts and one variable annuity
contract. American Foundation issues one variable annuity contract. The
Contracts provide for the accumulation of values on a variable basis,
fixed basis or both, and provide settlement or annuity payment options
on a fixed basis. Protective Life's variable annuity contract also
provides for variable annuity payment options. Protective Life or
American Foundation, under each of the Contracts, reserves the right to
substitute shares of one Fund for shares of another, including a Fund
of
[[Page 14030]]
a different management investment company.
8. Under all of the Contracts, subject to certain conditions,
Contract owners may make unlimited free transfers (in minimum amounts
of $100 or the entire value of the subaccount or fixed account being
transferred) between and among the subaccounts of the appropriate
Account and a fixed account that is part of Protective Life's or
American Foundation's general account. Protective Life and American
Foundation, however, under each of the Contracts, reserve the right to
limit transfers to 12 per contract year and to charge a transfer fee of
$25 for each transfer after the twelfth in a contract year. Applicants
also serve the right to restrict the maximum amount which may be
transferred from the fixed account in any contract year to the greater
of (i) $2500, or (ii) 25% of the fixed account value.
9. Protective Investment Advisors has recommended to Protective
Life and American Foundation that it cease operating Protective Money
Market Fund. Since its inception, Protective Money Market Fund has been
relatively small for several reasons, including the fact that it is
only offered in Protective Life or American Foundation products and
that Contracts owners generally do not allocate contract value to the
Fund on a long-term basis. As a result, Protective Money Market Fund
has been unable to generate a sufficient level of assets to achieve any
significant economics of scale, and has not been able to achieve above-
average performance results or otherwise distinguish itself from other
money market funds. Likewise, the small size of the Fund results in
little income being generated from management fees. Conversely, due to
the requirements of Rule 2a-7 under the Act, management of the Fund is
time consuming and difficult for either Protective Investment Advisors
or the subadviser retained by Protective Investment Advisors to manage
the day-to-day operations of the Fund. In light of the fact that a
number of unaffiliated mutual fund organizations have large and
successful insurance product money market funds in which the Accounts
could invest, the foregoing factors have led Protective Life and
American Foundation to conclude that there is little reason for
Protective Investment Advisors to maintain an affiliated money market
fund for them. Consequently, after consulting with the PIC's board of
directors, Protective Investment Advisors, Protective Life and American
Foundation have determined to liquidate Protective Money Market Fund
via a substitution.
10. Protective Money Market Fund and Oppenheimer Money Fund have
identical investment objectives and achieve these objectives by
investing in ``money market'' securities. Both Funds seek to maintain a
constant net asset value per share of $1.00. Applicants believe that by
making the proposed substitution, they can better serve the interests
of Contract owners by offering them a Fund which in recent years has
had lower expenses and better performance than Protective Money Market
Fund.
11. The assets of Oppenheimer Money Fund have been significantly
greater than the assets of Protective Money Market Fund for each of the
past three years. For the years 1997, 1996, and 1995, the net assets of
the Oppenheimer Money Fund \1\ were $126,782,000; $129,719,000; and
$65,386,000, respectively. For the years 1997, 1996, and 1995, the net
assets of the Protective Money Market Fund \2\ were $3,622,000;
$6,121,000; and $5,070,000, respectively. As a result of its size.
Oppenheimer Money Fund has been able to achieve economies of scale that
Protective Money Market could not attain. These economies of scale are
reflected in Oppenheimer Money Fund's ratio of total operating expenses
to net asset value. Oppenheimer Money Fund's expenses have ranged from
one half to one third of those of the Protective Money Market Fund over
the past three years.
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\1\ Oppenheimer Money Fund pays a monthly investment management
fee based upon the average daily net assets of the Fund at an annual
rate of .450% of the first $500 million, .425% of the next $500
million, .400% of the next $500 million, and .375% of the average
net assets over $1.5 billion.
\2\ Protective Money Market Fund pays a monthly investment
management fee based upon the average daily net assets of the Fund
at an annual rate of .60%. Protective Life or Protective Investment
Advisors has voluntarily reimbursed the Fund for expenses in excess
of its management fee over each of the last three fiscal years.
Ratio of Operating Expenses to Average Net Assets
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1197 1996 1995
(percent) (percent) (percent)
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Protective Money Market Fund (before reimbursement)............. 1.42 1.27 1.17
Protective Money Market Fund (after reimbursement).............. .60 .60 .60
Oppenheimer Money Fund.......................................... .48 .49 .51
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12. Applicants believe that Oppenheimer Money Fund will continues
to have significantly greater assets than Protective Money Market Fund,
and have no reason to believe, given the limited distribution of
Protective Money Market Fund's shares and the relatively short-term
nature of contract owners' investment in the Fund, that Protective
Money Market Fund will match the low expense ratios of Oppenheimer
Money Fund in the near future. Likewise, for each of the past three
years, Oppenheimer Money Fund has had somewhat higher total returns
than Protective Money Market Fund.
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Annual total return
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1997 1996 1995
(percent) (percent) (percent)
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Protective Money Market Fund.................................... 4.96 4.82 5.32
Oppenheimer Money Fund.......................................... 5.31 5.13 5.62
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[[Page 14031]]
Applicants have no reason to believe that, in the near term, the
performance of Protective Money Market Fund will match or exceed that
of Oppenheimer Money Fund.
13. For the foregoing reasons, Applicants submit that the proposed
substitution of Oppenheimer Money Fund for shares of Protective Money
Market Fund is in the best interests of Contract owners.
14. Protective Life and American Foundation will redeem Protective
Money Market Fund shares for cash and apply the redemption proceeds to
the purchase of Oppenheimer Money Fund shares. The proposed
substitution will take place at relative net asset value with no change
in the amount of any Contract owner's contract or policy value, death
benefit, or in the dollar value of his or her investment in any of the
Accounts. As a result, Contract owners will remain fully invested.
Contract owners will not incur any fees or charges as a result of the
proposed substitution, nor will their rights nor Protective Life's or
American Foundation's obligations under the Contracts be altered in any
way. All expenses incurred in connection with the proposed
substitution, including legal, accounting, and other fees and expenses,
will be paid by Protective Life or American Foundation. In addition,
the proposed substitution will not impose any tax liability on Contract
owners. The proposed substitution will not cause the Contract fees and
charges currently being paid by existing Contract owners to be greater
after the proposed substitution than before the proposed substitution.
The proposed substitution will not, of course, be treated as a transfer
for the purpose of assessing transfer charges or for determining the
number of remaining permissible transfers in a Contract year.
Protective Life and American Foundation will not exercise their rights
under the Contracts to impose additional restrictions on transfers from
the affected subaccount to another subaccount or a fixed account for a
period of at least 30 days following the substitution.
15. Applicants state that by supplements to the various
prospectuses for the Contracts and the Accounts, all owners of the
Contracts have been notified of Protective Life's and American
Foundation's intention to take the necessary actions, including seeking
the order requested by this application, to substitute shares of
Protective Money Market Fund as described herein. The supplements for
the Accounts advise Contract owners that from the date of the
supplement until the date of the proposed substitution, owners are
permitted to make one transfer of all amounts under a Contract invested
in the affected subaccount on the date of the supplement to another
subaccount or a fixed account available under a Contract without that
transfer counting as a ``free'' transfer permitted under a Contract.
The supplements also inform Contract owners that Protective Life and
American Foundation will not exercise their rights reserved under the
Contracts to impose additional restrictions on transfers from the
affected subaccount to another subaccount or a fixed account until at
least 30 days after the proposed substitution.
16. In addition to the prospectus supplements distributed to owners
of Contracts, within five days after the proposed substitution, any
Contract owners who were affected by the substitution will be sent a
written notice informing them that the substitution was carried out and
that they may make one transfer of all amounts under a Contract
invested in the affected subaccount on the date of the notice to
another sub-account or a fixed account available under their Contract
without that transfer counting as one of any limited number of
transfers permitted in a Contract year or as one of a limited number of
transfers permitted in a Contract year free of charge. The notice will
also reiterate the fact that Protective Life and American Foundation
will not exercise any rights reserved by either under any of the
Contracts to impose additional restrictions on transfers from the
affected subaccount to another subaccount or a fixed account until at
least 30 days after the proposed substitution. The notice as delivered
in certain states also may explain that, under the insurance
regulations in those states, Contract owners who are affected by the
substitution may exchange their Contracts for fixed-benefit life
insurance contracts or annuity contracts, as applicable, issued by
Protective Life or American Foundation (or one of their affiliates)
during the 60 days following the proposed substitution. The notices
will be preceded or accompanied by a current prospectus for Oppenheimer
Variable Funds.
17. Protective Life and American Foundation also are seeking
approval of the proposed substitution from any state insurance
regulators whose approval may be necessary or appropriate.
Applicants' Legal Analysis
1. Applicants request an order from the Commission pursuant to
Section 26(b) approving the proposed substitution of securities issued
by Oppenheimer Variable Funds for those issued by PIC which are
currently held by the Accounts.
2. Section 26(b) of the Act requires the depositor of a registered
unit investment trust holding the securities of a single issuer to
receive Commission approval before substituting the securities held by
the trust.
3. The Contracts expressly reserve for Protective Life or American
Foundation the right, subject to compliance with applicable law, to
substitute shares of another investment management company for shares
of an investment management company held by an Account or a subaccount
of an Account. The prospectuses for the Contracts and the Accounts
contain appropriate disclosure of this right. Protective Life and
American Foundation each reserved this right of substitution both to
protect themselves and their Contract owners in situations where either
might be harmed or disadvantaged by circumstances surrounding the
issuer of the shares held by one or more of their separate accounts and
to afford the opportunity to replace such shares where to do so could
benefit itself and Contract owners.
4. Applicants state that in this case the proposed substitution of
shares is necessary because Protective Money Market Fund will no longer
be offered. Further, Applicants submit that the proposed substitution
of shares of Oppenheimer Money Fund for shares of Protective Money
Market Fund, will benefit Contract owners by replacing Protective Money
Market Fund with a Fund that not only has identical investment
objectives but which also has lower expenses and better performance.
5. Applicants anticipate that Contract owners will be at least as
well off with the proposed array of subaccounts offered after the
proposed substitution as they have been with the array of subaccounts
offered prior to the substitution. Applicants state that the proposed
substitution retains for Contract owners the investment flexibility
which is a central feature of the Contracts.
6. Applicants state that the proposed substitution is not the type
of substitution which Section 26(b) was designed to prevent. Unlike
traditional unit investment trusts where a depositor could only
substitute an investment security in a manner which permanently
affected all the investors in the trust, the Contracts provide each
Contract owner with the right to exercise his or her own judgment and
transfer account values into other sub-accounts. Moreover, Applicants
state that the Contracts will offer Contract owners the opportunity to
transfer
[[Page 14032]]
amounts out of the affected subaccount into any of the remaining sub-
accounts without cost or other disadvantage. Therefore, Applicants
submit that the proposed substitution will not result in the type of
costly forced redemption which Section 26(b) was designed to prevent
7. Applicants state that the proposed substitution also is unlike
the type of substitution which Section 26(b) was designed to prevent in
that by purchasing a Contract, Contract owners select much more than a
particular investment company in which to invest their contract or
policy values. They also select the specific type of insurance coverage
offered by Protective Life or American Foundation under their Contract
as well as numerous other rights and privileges set forth in the
Contract. Contract owners may also have considered Protective Life's or
American Foundation's size, financial condition, type and its
reputation for service in selecting their Contract. These factors will
not change as a result of the proposed substitution.
8. Applicants request an order of the Commission pursuant to
Section 26(b) of the Act approving the proposed substitution by
Protective Life and American Foundation.
Conclusion
Applicants submit that, for all the reasons and facts summarized
herein, the proposed substitution is consistent with the protection of
investors and the purposes fairly intended by the policy and provisions
of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6971 Filed 3-22-99; 8:45 am]
BILLING CODE 8010-01-M
