[Federal Register Volume 61, Number 77 (Friday, April 19, 1996)]
[Notices]
[Pages 17330-17333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9695]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21894; File No. 812-9970]
Equitable Life Insurance Company of Iowa, et al.
April 15, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Equitable Life Insurance Company of Iowa (``Equitable'')
and Equitable Life Insurance Company of Iowa Separate Account A (the
``Account'').
RELEVANT 1940 ACT SECTIONS: Order requested pursuant to Section 26(b)
of the 1940 Act approving the proposed substitution of securities and
pursuant to Section 17(b) of the 1940 Act exempting the proposed
transaction from the provisions of Section 17(a) of the 1940 Act.
[[Page 17331]]
SUMMARY OF THE APPLICATION: Applicants seek an order approving the
proposed substitution of shares of the Advantage Portfolio of the Equi-
Select Series Trust (the ``Trust'') for shares of the Government
Securities Portfolio (the ``GS Portfolio'') and the Short-Term Bond
Portfolio (the ``STB Portfolio'') (collectively, with the Advantage
Portfolio and the GS Portfolio, the ``Portfolios'') of the Trust.
Applicants also seek an order exempting them from Section 17(a) of the
1940 Act to the extent necessary to permit Applicants to carry out the
above-referenced substitution by redeeming shares of the GS Portfolio
and of the STB Portfolio in kind or partly in kind and using the
redemption proceeds to purchase shares of the Advantage Portfolio.
FILING DATE: The application was filed on January 31, 1996. Applicants
represent that an amendment to the application will be filed during the
notice period and that such amendment will include the representations
as contained herein.
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 May 10, 1996, 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 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, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, John A. Merriman, General Counsel, Equitable Life Insurance
Company of Iowa, 604 Locust Street, Des Moines, Iowa 50309.
FOR FURTHER INFORMATION CONTACT:
Barbara J. Whisler, Senior Counsel, Wendy Finck Friedlander, Deputy
Chief, Office of Insurance Products, Division of Investment Management,
at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application is available for a fee from the Public
Reference Branch of the Commission.
1. Applicants' Representations
Equitable, a stock life insurance company organized under Iowa law
in 1867, serves as the sponsor and the depositor of the Account.
Equitable is a wholly-owned subsidiary of Equitable of Iowa Companies,
a publicly held company.
2. The Account, established by Equitable under Iowa law on January
24, 1994, is registered with the Commission as a unit investment trust.
The Account funds certain individual flexible purchase payment deferred
variable annuity contracts issued by Equitable (the ``Contracts''). The
Account currently has fourteen subaccounts, each of which invests in
and reflects the performance of a corresponding series of the Trust or
of another underlying mutual fund. The Trust is registered with the
Commission as an open-end management investment company.
3. The GS Portfolio seeks total return by investing for a high
level of current income with a moderate degree of share-price
fluctuation. During normal market conditions, the GS Portfolio invests
at least 80% of its total assets in U.S. government securities. The STB
Portfolio seeks total return by investing for a high level of current
income with a low degree of share-price fluctuation. The STB Portfolio
invests primarily in short and intermediate term investment grade debt
obligations. The Advantage Portfolio seeks current income with a very
low degree of share-price fluctuation. The Advantage Portfolio invests
primarily in short-term investment grade obligations. Shares of the GS
Portfolio and the STB Portfolio are purchased without sales charge by
separate subaccounts of the Account at the net asset value next
determined following receipt of a purchase payment by the respective
subaccount. Applicants state that any dividend or capital gain
distributions received from the Portfolios are reinvested in additional
shares of the Portfolios and retained as assets of the applicable
subaccounts. Shares of the Portfolios are redeemed without charge to
the extent necessary for Equitable to make annuity or other payments
under the Contracts.
4. Equitable Investment Services, Inc. (``EISI''), the investment
adviser to the Trust, is a registered investment adviser, a wholly
owned subsidiary of Equitable of Iowa Companies and an affiliate of
Equitable. As investment adviser to the Trust, EISI provides overall
management of the investment strategies and policies of the Portfolios.
EISI entered into a subadvisory agreement with Strong Capital
Management, Inc. (``Strong'') pursuant to which Strong served as
subadvisor to the Portfolios. Strong is not affiliated with Equitable.
Applicants state that, effective April 1, 1996, the subadvisroy
agreement terminated and EISI assumed the portfolio management
functions for the Portfolios. Upon termination of the subadvisory
agreement, Applicants state that the fees payable to EISI from the
Portfolios did not change.
5. Prior to October 6, 1995, EISI and Strong waived the advisory
fees for each of the Portfolios. EISI also undertook to bear all
operating expenses of each of the Portfolios in excess of .75% of each
Portfolio's average daily net assets, excluding the advisory fees
payable to EISI. Beginning October 6, 1995, EISI and Strong began to
accrue advisory fees from the Portfolios. EISI did undertake, however,
to reimburse the Advantage Portfolio, the STB Portfolio and the GS
Portfolio for all operating expenses, excluding advisory fees, in
excess of .30%, .30% and .50% respectively, of each Portfolio's average
daily net assets. This undertaking may terminate at any time, without
notice to the Portfolios' shareholders. For the year ended December 31,
1995, Applicants state that the advisory fee waivers attributed to the
Portfolios amounted to $33,430 and EISI had reimbursed the Trust
$175,284 for the Portfolios' expenses in excess of the then current
expense limitations.
6. Applicants propose to substitute shares of the Advantage
Portfolio for all shares of the GS Portfolio and the STB Portfolio
attributable to the Contracts (the ``Removed Funds''). The application
states that, soon after its filing, Equitable will supplement the
prospectus for the Account to reflect the proposed substitution. The
application further states that the substitution will occur as soon as
practicable after receipt of the order requested in the application.
The Proposed Substitution
1. Applicants state that, upon receipt of the order requested in
the application, Equitable will redeem shares of each of the Removed
Funds. Simultaneously, Equitable will use the proceeds of the
redemption to purchase the applicable number of shares of the Advantage
Portfolio. Applicants state that the substitution will occur at
relative net asset values of the Portfolios with no change in the
amount of any Contract owner's Contract value. Further, there will be
no imposition of a transfer or similar charge.
2. Applicants note that, in connection with the proposed redemption
by Equitable of the Removed Funds, certain brokerage fees and expenses
will be incurred. The expenses will be charged to the appropriate
Portfolio but borne by Equitable as described in the application. To
alleviate the impact of the brokerage fees and expenses upon the
Removed Funds and ultimately
[[Page 17332]]
upon Equitable, the Trust and EISI propose that the redemption of the
Removed Funds be accomplished, in part, by in kind payments.
3. Applicants state that, on the date of the substitution, the
Trust will transfer to Equitable cash and/or securities held by the
Removed Funds. Equitable will then use such cash and/or securities to
purchase shares of the Advantage Portfolio. Applicants state that the
valuation of any in kind transfers will be on a basis consistent with
the valuation procedures for the assets of the Removed Funds and for
the Advantage Portfolio.
4. Applicants state that all expenses and transaction costs
incurred in connection with the proposed substitution, including legal
and accounting fees and brokerage commissions, will be paid by
Equitable. Applicants also state that the proposed substitution will
not alter the tax or insurance benefits available to owners under the
Contracts. Furthermore, the proposed substitution will not alter the
contractual obligations of Equitable.
5. In addition to the prospectus supplements distributed to
Contract owners, Applicants represent that, within 5 days after the
proposed substitution, Equitable will send to the Contract owners a
written notice (the ``Notice'') informing them that shares of the
Removed Funds have been eliminated and that shares of the Advantage
Portfolio have been substituted. With the Notice, Equitable will
include the prospectus supplement of the Account which describes the
substitution. The Notice will advise owners of the Contracts that, for
a period of thirty days from the mailing date of the Notice, they may
transfer all assets, as substituted, to any other available subaccount
of the Account. This transfer may be made without limitation and
without charge. Applicants represent that after the substitution,
Contract owners will be afforded the same Contract rights, including
those of surrender and transfer, that the owners currently have. At
present, there are no surrender fees or redemption charges imposed
under the Contracts; however, applicable deferred sales charges are
imposed. These charges will remain after the substitution.
Applicants' Legal Analysis
Request for an Order Under Section 26(b)
1. Section 26(b) of the 1940 Act provides in pertinent part that
``[i]t shall be unlawful for any depositor or trustee of a registered
unit investment trust holding the security of a single issuer to
substitute another security for such security unless the Commission
shall have approved such substitution.'' The purpose of Section 26(b)
is to protect the expectation of investors in a unit investment trust
that the unit investment trust will accumulate the shares of a
particular issuer and to prevent nonscrutinized substitutions which
might, in effect, force shareholders dissatisfied with the substituted
security to redeem their shares, thereby incurring either a loss of the
sales load deducted from initial proceeds, an additional sales load
upon reinvestment of the redemption proceeds, or both. Section 26(b)
affords protection to investors by preventing a depositor or trustee of
a unit investment trust holding shares of one issuer from substituting
for those shares the shares of another issuer, unless the Commission
approves that substitution.
2. Applicants represent that the proposed substitution is
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act. Applicants
assert that the purposes, terms and conditions of the proposed
substitution are consistent with the principles and purposes of Section
26(b) and do not entail any of the abuses that the Section is designed
to prevent. Applicants assert that the substitution is an appropriate
solution to the limited Contract owner interest and investment in the
Removed Funds. Applicants state that this interest is, and in the
future can be expected to be, of insufficient size to promote
consistent investment performance or to reduce operating expenses.
3. Applicants state that the substitution will not result in the
type of costly forced redemption that Section 26(b) was intended to
guard against. Applicants note that the objectives, policies and
restrictions of the Removed Funds are substantially similar to the
objectives, policies and restrictions of the Advantage Portfolio,
thereby continuing to fulfill the Contract owners' objectives and risk
expectations. Additionally, Applicants note that the advisory fees
incurred by the Advantage Portfolio are 33% less than those incurred by
the GS Portfolio and 23% less than those incurred by the STB Portfolio
with respect to the first $100 million of assets under management and
remain lower through all breakpoints after $100 million. Finally,
Applicants represent that the substitution is expected to confer
certain modest economic benefits on Contract owners by virtue of
enhanced asset size.
4. Applicants note that the total expenses of each of the Removed
Funds as a percentage of the net assets of each Portfolio have remained
relatively high for these types of portfolios (4.92% for the GS
Portfolio and 6.18% for the STB Portfolio for the year ended December
31, 1995). Applicants state that a large portion of these expenses is
fixed. Because the size of each of the Removed Funds is relatively
small, and unlikely to grow significantly, Applicants note that the
current expenses represent and may continue to represent a relatively
large percentage of the Removed Funds' average net assets. The total
expense ratio for the year ended December 31, 1995 for the Advantage
Portfolio was 2.13% of average net assets. Applicants note that,
because the Advantage Portfolio's growth would be enhanced by the
substitution, greater economies of scale would be expected. Contract
owners should, therefore, benefit after the substitution from the lower
expense ratio of the Advantage Portfolio.
5. Applicants note that the relatively small size of the Removed
Funds hampers the ability to maintain optimal diversification.
Applicants maintain that the larger size of the Advantage Portfolio
lends itself to greater flexibility in purchasing attractive
securities. Accordingly, the Advantage Portfolio can achieve greater
diversification and more readily react to changes in market conditions.
Further, Contract owners will benefit through the more effective
management of a larger portfolio such as the Advantage Portfolio.
Request for an Order Under Section 17(b)
1. Section 17(a)(1) of the 1940 Act prohibits any affiliated person
of a registered investment company, or an affiliated person of an
affiliated person, acting as principal, from selling any security or
other property to such registered investment company. Section 17(a)(2)
of the 1940 Act prohibits any of such affiliated persons, acting as
principal, from purchasing any security or other property from such
registered investment company.
2. The proposed substitution may be deemed to entail one or more
purchases or sales of securities between and among affiliated persons
as a result of the purchase by the subaccounts of the Account of shares
of the Advantage Portfolio with proceeds from the redemption of shares
in kind of the Removed Funds. Applicants state that the proposed
substitution could come within the scope of Section 17(a) of the 1940
Act. Applicants therefore request an exemption from Section 17(a) of
the 1940 Act under Section 17(b).
[[Page 17333]]
3. Section 17(b) of the 1940 Act provides that the Commission may
grant an order exempting a transaction prohibited by Section 17(a) upon
application if 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
investment policy of each registered investment company concerned, as
recited in its registration statement and reports filed under the 1940
Act; and (c) the proposed transaction is consistent with the general
purposes of the 1940 Act. Applicants assert that the facts and
circumstances of the proposed substitution meet the standards set forth
in Section 17(b).
4. Applicants note that the Contracts reserve to Equitable the
right to replace shares of the Portfolios held by the Account with
shares of another portfolio if: (a) Shares of the Portfolios should no
longer be available for investment by the Account; or (b) in
Equitable's judgment, further investment in the Portfolios should
become inappropriate in view of the purpose of the Contracts, provided
any such substitution is approved by the Commission and is in
compliance with the applicable rules and regulations. Applicants state
that Equitable believes further investment in the Removed Funds is no
longer appropriate in light of the Contracts' purposes.
Applicants' Conclusions
1. Applicants assert that, for the reasons and upon the facts set
forth in the application, the requested order approving the proposed
substitution under Section 26(b) should be approved as consistent with
the protection of investors and the purposes fairly intended by the
policy and provisions of the 1940 Act.
2. Applicants assert that the requested order pursuant to Section
17(b) exempting Applicants from the provisions of Section 17(a) in
connection with the proposed substitution is appropriate because the
terms of the proposed substitution are reasonable and fair and do not
involve overreaching. Applicants also assert that the proposed
substitution is consistent with the investment policy of each
investment company concerned and with the purposes of the 1940 Act.
Furthermore, the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy 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. 96-9695 Filed 4-18-96; 8:45 am]
BILLING CODE 8010-01-M