[Federal Register Volume 64, Number 71 (Wednesday, April 14, 1999)]
[Notices]
[Pages 18461-18464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9316]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23776, 812-11126]
Merrill Lynch Life Insurance Company, et al.
April 8, 1999.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of application for an order of approval pursuant to
section 26(b) of the Investment Company Act of 1940, as amended (the
``1940 Act'' or the ``Act''), and an order of exemption pursuant to
section 17(b) of the 1940 Act from section 17(a) thereof.
-----------------------------------------------------------------------
APPLICANTS: Merrill Lynch Life Insurance Company (``Merrill Lynch
Life''), Merrill Lynch Life Variable Annuity Separate Account A
(``Annuity Account A''), ML Life Insurance Company of New York (``ML of
New York''), and ML of New York Variable Annuity Separate Account A
(``New York Annuity Account A'') (collectively, the ``Applicants'').
SUMMARY OF APPLICATION: Applicants request an order pursuant to section
26(b) of the 1940 Act approving the substitution of units of beneficial
interest (``Units'') issued by the Select Ten Portfolios (as defined
below) of the Equity Investor Fund, Defined Asset Funds (the ``Trust'')
and held by Annuity Account A and New York Annuity Account A (each an
``Account''; collectively, the ``Accounts''), to support, as
applicable, certain variable annuity contracts (collectively, the
``Contracts'') issued by Merrill Lynch Life or ML of New York
(collectively, the ``Companies''). Applicants also request an order
pursuant to section 17(b) of the Act exempting them from section 17(a)
of the 1940 Act to the extent necessary to permit the substitution of
Units of the 1999 ML Select Ten V.I. Trust (the ``1999 Portfolio'') for
Units of the 1998 ML Select Ten V.I. Trust (the ``1998 Portfolio'')
initially held by the Accounts by redeeming Units of the terminating
1998 Portfolio for portfolio securities and cash (``redemption
proceeds'') and using the redemption proceeds, after adjustment by the
distribution agent (The Bank of New York or ``BONY'') acting on behalf
of the Accounts, to purchase Units of the 1999 Portfolio.
FILING DATES: The application was filed on April 30, 1998. It was
amended and restated on March 25, 1999 and April 7, 1999.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on April 29, 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 issues contested. Persons who wish to be notified
of a hearing may request notification by writing the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, c/o Edward W. Diffin, Jr. Esq., Vice President and
Senior Counsel, Merrill Lynch Insurance Group, Inc., 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
FOR FURTHER INFORMATION CONTACT: Lorna J. MacLeod, Attorney, at (202)
942-0684, or Susan M. Olson, Branch Chief, at (202) 942-0680, Office of
Insurance Products, (Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
29549 ((202) 942-8090).
Applicant's Representations
1. Merrill Lynch Life, a stock life insurance company organized
under the laws of the State of Arkansas, is the depositor and sponsor
of Annuity Account A. Annuity Account A is registered with the
Commission under the Act as a unit investment trust (File No. 811-
6459).
2. ML of New York, a stock life insurance company organized under
the laws of the State of New York, is the depositor and sponsor of New
York Annuity Account A. New York Annuity Account A is registered with
the Commission under the Act as a unit investment trust (File No. 811-
6466).
3. The Trust is registered with the Commission under the 1940 Act
as a unit investment trust (File No. 811-3044). The Trust consists of a
number of portfolios (each a ``Portfolio''), which includes the 1998
Portfolio, and will include the 1999 Portfolio (each, a ``Select Ten
Portfolio''; collectively, the ``Select Ten Portfolios''). Each Select
Ten Portfolio is or will be a series of the Trust created under New
York law by a Trust Indenture between Merrill Lynch, Pierce, Fenner &
Smith Incorporated (``MLPF&S''), the Sponsor and depositor, and BONY
acting as the Trustee. Each Select Ten Portfolio will pursue the
strategy of buying approximately equal amounts of the ten highest
dividend yielding common stocks of the 30 stocks on the Dow Jones
Industrial Average (``DJIA'') as of a specified date each year
(``Strategy Stocks'') and hold them for about one year until the Select
Ten Portfolio is terminated.
[[Page 18462]]
4. The estimated expenses for the 1998 Portfolio consist of a
deferral sales charge (the ``Transaction Fee'') ($4.70 per 1000 Units),
a Trustee's fee ($0.82 per 1000 Units), Portfolio Supervision,
Bookkeeping, and Administrative Expenses ($0.45 per 1000 Units),
Organizational Expenses ($0.46 per 1000 Units); and Other Operating
Expenses ($0.06 per 1000 Units). The Transaction Fee and the fee for
Portfolio Supervision, Bookkeeping, and Administrative Expenses are
paid to the Sponsor. The Transaction Fee is a sales charge that
compensates the Sponsor for creating and maintaining the Trust, and
includes a profit element. It is accrued daily and collected by the
Sponsor, MLPF&S, on a deferred basis quarterly and any remainder at the
time Units are redeemed. The Transaction Fee is not a liability of the
Trust, but a liability of Unit purchasers. No unaccrued (contingent)
fee amounts will be owed if Units are redeemed before the Trust
terminates. Applicants represent that the fee for Portfolio
Supervision, Bookkeeping and Administrative Expenses is paid at cost,
consistent with Section 26(a)(2)(C) of the 1940 Act and Rule 26a-1
thereunder. Other expenses are paid to independent third parties and
depend on the amounts charged by the third parties.
5. The estimated expenses for the 1999 Portfolio will be similar to
those of the 1998 Portfolio. The Transaction Fee for the 1999 Portfolio
will be equal to 0.47% of the initial offer price of the 1999
Portfolio. The fee for Portfolio Supervision, Bookkeeping and
Administrative Expenses will be at cost. The fee for Organizational
Expenses, the Trustee's fee and Other Operating Expenses may vary from
those of the 1998 Portfolio depending on the amounts charged by
independent third parties. These fees, however, will be without profit
to the sponsor consistent with Rule 26a-1 under the Act.
6. Applicants specifically represent, as a basis for receiving the
relief requested in this application, that: (a) the Transaction Fee for
the 1999 Portfolio, including the nature and purpose of the fee, the
manner of the imposition of the fee, the amount of the fee, and its
imposition in the proposed substitution described in this application,
is covered by the exemptive relief received in Inv. Co. Act Rel. No.
11494 (Dec. 26, 1980) (Order) (the ``1980 Order''), Inv. Co. Act Rel.
No. 13848 (Mar. 27, 1984) (Order) (the ``1984 Order), and Inv. Co. Act
Rel. No. 14717 (Sept. 12, 1985) (Order) (the ``1985 Order''); and (b)
as a result, the Transaction Fee for the 1999 Portfolio is exempted by
the 1980, 1984, and 1985 Orders from Sections 2(a)(32), 2(a)(35),
11(c), 22(c) and 22(d) of the Act and Rule 22c-1 thereunder, and no
relief is being requested from those Sections or that Rule by this
application.
7. The Contracts are variable annuity contracts issued by Merrill
Lynch Life and ML of New York. Premiums under the Contracts may be
allocated to one or more subaccounts of the Accounts. The Contracts
generally permit six transfers per contract year between subaccounts
without imposition of a transfer charge. Each Contract reserves to
Merrill Lynch Life or ML of New York, as appropriate, the right,
subject to Commission approval, to substitute Units of the 1999
Portfolio for Units of the 1998 Portfolio held by a subaccount of the
relevant Account.
8. Merrill Lynch Life on its own behalf and on behalf of Annuity
Account A, and ML of New York on its own behalf and on behalf of New
York Annuity Account A, made the 1998 Portfolio available as an
investment option under the Contracts through a subaccount of each
Account (each a ``Select Ten Subaccount''). As described above, each
Select Ten Portfolio will hold approximately equal values of the ten
stocks in the DJIA having the highest dividend yield as of a specified
date each year. In light of the fluctuation in dividend rates and share
prices of stocks generally, all of the Strategy Stocks are unlikely to
be the same from 1998 to 1999. Consequently, Applicants anticipate that
a number of the portfolio securities held by the Select Ten Portfolios
will change each year. The organizational structure of the Portfolios
dictates that a new Select Ten Portfolio be created that will invest in
the Strategy Stocks for that year. Each Select Ten Portfolio terminates
after one year, on a contemplated date. As a result, a substitution
must occur in order for the Select Ten Subaccount to remain
continuously invested in a Select Ten Portfolio.
9. The 1998 Portfolio will terminate on April 30, 1999, and holders
of units of that Portfolio will receive Units of the 1999 Portfolio,
which will acquire approximately equal values of the ten stocks in the
DJIA having the highest dividend yields as of a specified date prior to
April 30, 1999, and will hold those stocks for approximately one year.
As holders of Units of the 1998 Portfolio, the Accounts will, absent
unusual circumstances and subject to obtaining the relief requested in
the application, receive units of the 1999 Portfolio on behalf of
owners of the Contracts (``Owners'') on April 30, 1999. The purpose of
this substitution is to provide Owners with a Select Ten Subaccount
that utilizes the described investment strategy on a continuous basis
under the Contracts.
10. Applicants represent that by prominent disclosure within the
prospectuses for the Contracts and the Accounts, they have notified all
Owners and prospective Owners of a Contract in advance of the intention
of Merrill Lynch Life and ML of New York to substitute Units of the
1999 Portfolio for Units of the 1998 Portfolio. The prospectuses
advised Owners and prospective Owners that the 1998 Portfolio will be
replaced by the 1999 Portfolio on a specified date (the ``Rollover
Date''), subject to obtaining the relief requested in the application.
The prospectuses inform Owners and prospective Owners that they may
continue to allocate premium payments and transfer cash value to the
Select Ten Subaccount investing in the 1998 Portfolio after the
Rollover Date; however, as of the Rollover Date, the Select Ten
Subaccount will invest in the 1999 Portfolio (rather than in the 1998
Portfolio). The prospectuses further inform Owners and prospective
Owners that from the Rollover Date to thirty days after the Rollover
Date, Owners will be permitted to make one transfer from the Select Ten
Subaccount of all of the cash value under a Contract invested in the
Select Ten Subaccount to other available subaccounts of the relevant
Account, without that transfer counting as one of the limited number of
transfers among subaccounts of an Account permitted in a Contract year
free of charge. The prospectuses also explain that neither Company will
exercise any right reserved by it under the Contracts to impose
additional restrictions on transfers until at least thirty days after
the proposed substitution.
11. Applicants propose to substitute Units of the 1999 Portfolio
for Units of the 1998 Portfolio initially held by the Select Ten
Subaccounts by redeeming Units of the terminating 1998 Portfolio and
using the redemption proceeds to purchase Units of the 1999 Portfolio.
12. The proposed substitution will be accomplished by the in-kind
redemption of Units of the terminating 1998 Portfolio. The Trust's
distribution agent, acting on behalf of the relevant Account, will
adjust the in-kind proceeds (Strategy Stocks and cash) so that their
overall composition matches the investment profile--the Strategy
Stocks--of the 1999 Portfolio. The distribution agent contributes the
adjusted proceeds to the 1999 Portfolio. Following this contribution,
the trustee of the 1999 Portfolio will issue the appropriate number of
units in the 1999 Portfolio to the relevant Account. The
[[Page 18463]]
adjustment of the redemption proceeds involves brokerage expenses that
will be reflected in the amount contributed to the 1999 Portfolio and,
thus, will be borne by Owners remaining in the Select Ten Subaccount
through the rollover. Applicants state that these brokerage expenses
are customary expenses and are analogous to brokerage expenses incurred
by management investment companies which sell and buy portfolio
securities throughout the course of any given year.
13. As soon as reasonably practicable following the proposed
substitution (but in any event, within five days after April 30, 1999),
any Owners affected by the substitution will receive an updated
prospectus for the Contracts accompanied by a prospectus for the 1999
Portfolio. In addition, Applicants undertake to accompany the updated
prospectuses with a letter to affected Owners that highlights the
substitution and the investment by the Select Ten Sub-Account in the
1999 Portfolio. The prospectus for the 1999 Portfolio will specify the
Strategy Stocks of the 1999 Portfolio. The updated prospectus for the
Contracts will reflect information about the 1999 Portfolio and will
inform Owners that they may make one transfer of all contract value
under a contract invested in a select Ten Subaccount on the date of the
prospectus to another subaccount within thirty days of the substitution
without that transfer counting as one of a 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 Prospectus will also
state that the Companies will not exercise any rights reserved by them
under any of the Contracts to impose any additional restriction on
transfers until at least thirty days after the proposed substitution.
14. Applicants state that the proposed substitution will take place
at relative net asset values and, except for the brokerage expenses
described above that will be incurred in establishing the 1999
Portfolio, with no other change in the amount of any Owners contract
value or death benefit or in the dollar value of his or her investment
in any subaccount investing the Select Ten Trust, or in any of the
Accounts. No sales load deduction, other than the Transaction Fee, will
be made beyond those already provided for in the Contracts. Owners will
not incur addition fees or charges as a result of the proposed
substitution nor will their rights, or the obligations of Merrill Lynch
Life or ML of New York, as applicable, under the Contracts be altered
in any way. Applicants represent that all expenses incurred in
connection with the proposed substitution, including legal, accounting
and other fees and expenses (except for the brokerage expenses
described above), will be paid by Merrill Lynch Life or ML of New York.
The proposed substitution will not impose any tax liability on Owners,
and by itself, will not cause the fees and charges currently being paid
by existing Owners to be greater after the proposed substitution than
before the proposed substitution. Units of the 1999 Portfolio will be
subject to the Transaction Fee, which will be assessed at a rate of
0.4% of the initial offer price. Applicants also represent that the
proposed substitution will not 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. The Companies will
not exercise any right either may have under the Contracts to impose
additional restrictions on transfers or eliminate the transfer
privilege under any of the Contracts for a period of at least thirty
days following the proposed substitution.
Applicants' Legal Analysis
1. Applicants request that the Commission issue an order pursuant
to section 26(b) of the 1940 Act approving the substitution of Units of
the 1999 Portfolio for Units of the terminating 1998 Portfolio
currently held by the Select Ten Subaccounts by redeeming Units of the
1998 Portfolio and using the redemption proceeds to purchase Units of
the 1999 Portfolio.
2. Section 26(b) of the 1940 Act requires the depositor of a
registered unit investment trust holding the securities of a single
issuer to obtain Commission approval before substituting the securities
held by the trust. Specifically, section 26(b) states:
It 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 security unless the
Commission shall have approved such substitution. The Commission
shall issue an order approving such substitution if the evidence
establishes that it is consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of
this title.
3. Applicants assert that the proposed substitution is
substantially consistent with the standards that the Commission and its
staff have applied to substitutions that have been approved in the past
and are consistent with the protection of investors and the purposes
fairly intended by the 1940 Act.
4. Applicants assert that the 1999 Portfolio will be suitable and
appropriate investment vehicle for Owners. The 1999 Portfolio will have
identical investment objectives and policies to the 1998 Portfolio.
Furthermore, Applicants assert that an integral aspect of the long term
investment strategy of the Select Ten Portfolios is the annual
replacement of any portfolio securities that are no longer among the
ten highest dividend yielding stocks in the DJIA. Under the proposed
structure, this is accomplished by the creation of the 1999 Portfolio
that will hold (for a one year period) approximately equal values as of
the date of deposit of ten highest dividend yielding stocks in the
DJIA. Applicants assert that the proposed substitution is necessary to
permit Owners to pursue the long-term investment strategy for which the
Select Ten Portfolios are designed.
5. In addition, Applicants note that the proposed substitution may
be only temporary in character because Owners may always exercise their
own judgment as to the most appropriate investment vehicle. Owners may,
pursuant to the terms of their Contracts, and for 30 days after the
proposed substitution without charge, transfer contract value to
another subaccount.
6. Applicants request that the Commission issue an order pursuant
to Section 17(b) of the 1940 Act exempting them from the provisions of
Section 17(a) of the 1940 Act to the extent necessary to permit the
substitution of Units of the 1999 Portfolio for Units of the 1998
Portfolio initially held by the Select Ten Subaccounts by redeeming
Units of the terminating 1998 Portfolio and using the redemption
proceeds to purchase Units of the 1999 Portfolio.
7. The Commission has previously granted an exemption from Section
17(a) of the 1940 Act to the Trust permitting terminating series of the
Trust to sell portfolio securities to new series of the Trust. \1\ At
the time the exemption was obtained, the use of Portfolios of the Trust
as a funding vehicle for insurance company separate accounts was not
contemplated.
---------------------------------------------------------------------------
\1\ Defined Asset Funds--Equity Income Fund, Inv. Co. Act Rel.
No. 20517 (Aug. 31, 1994) (Order) (granting relief under Sections
6(c) and 17(b) of the 1940 Act for the Trust, on behalf of its
present and future series, to engage in rollover transactions such
as those that would occur as a result of the proposed substitution).
---------------------------------------------------------------------------
8. 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 person, acting as principal, from knowingly
selling any security or other
[[Page 18464]]
property to that company. Section 17(a)(2) of the 1940 Act generally
prohibits the persons described above, acting as principals, from
knowingly purchasing any security or other property from the registered
investment company.
9. Section 2(a)(3)(F) of the 1940 Act defines the term ``affiliated
person of another person'' as ``if such other person is an
unincorporated investment company not having a board of directors, the
depositor thereof.'' As the Trust is an unincorporated investment
company that does not have a board of directors, the depositor thereof,
MLPF&S, is an affiliated person of the Trust.
10. Pursuant to Section 2(a)(3)(C) of the 1940 Act, ``any person
directly or indirectly controlling, controlled by, or under common
control with'' another person is an ``affiliated person'' of such other
person. MLPF&S is a wholly owned subsidiary of Merrill Lynch & Co.,
Inc. As a wholly owned subsidiary of Merrill Lynch & Co., Inc.,
Applicants represent that MLPF&S is ``controlled by'' Merrill Lynch &
Co., Inc. within the meaning of Section 2(a)(9) of the 1940 Act.
11. Applicants further represent that each Company is an indirect
wholly owned subsidiary of Merrill Lynch & Co., Inc., and as such may
be deemed to be controlled by Merrill Lynch & Co., Inc. Consequently,
each of the Companies is an affiliated person of MLPF&S, and, as such,
is an affiliated person of an affiliated person of the Trust.
12. To the extent that Strategy Stocks formerly held by the 1998
Portfolio are sold by the Trust's distribution agent to the 1999
Portfolio, Applicants submit that the proposed substitution could
entail the indirect purchase of Units of the 1999 Portfolio with
portfolio securities of the 1998 Portfolio, and the indirect sale of
Units of the 1998 Portfolio for portfolios securities of the 1999
Portfolio by the Companies, acting as principal, from and to the Trust,
and therefore would be in contravention of Section 17(a).
13. 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:
(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.
14. Applicants assert 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. Applicants also assert that the proposed substitution is
consistent with the policies of the Trust and of the affected
Portfolios, as recited in the current registration statements and
reports filed by each under the 1940 Act. Finally, Applicants assert
that the proposed substitution is consistent with the general purposes
of the 1940 Act.
15. Rule 17a-7 under the 1940 Act exempts from the prohibitions of
Section 17(a), subject to certain enumerated conditions, a purchase or
sale transaction between a registered investment company or a separate
series of a registered investment company and a person which is an
affiliated person of such registered investment company (or affiliated
person of such person) solely by reason of having a common investment
adviser or investment advisers which are affiliated persons of each
other, common directors, and/or common officers. Applicants assert that
although they cannot rely on Rule
17a-7, they will comply with the substance of the rule.
Conclusion
Applicants submit that, for the reasons summarized above, the
request relief is appropriate in the public interest and consistent
with the protection of investors and the purposes fairly intended by
the policies and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-9316 Filed 4-13-99; 8:45 am]
BILLING CODE 8010-01-M
