[Federal Register Volume 59, Number 94 (Tuesday, May 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11926]
[[Page Unknown]]
[Federal Register: May 17, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20290; File No. 812-8626]
The Mutual Life Insurance Company of New York, et al.
May 11, 1994.
AGENCY: Securities and Exchange Commission (the ``SEC'' or
``Commission'').
ACTION: Notice of Application for Exemptions under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: The Mutual Life Insurance Company of New York (``Mutual of
New York'') and Keynote Series Account (the ``Variable Account'').
RELEVANT 1940 ACT SECTIONS: Exemption requested under Section 17(b) and
Section 6(c) from Section 17(a) and approval requested under Section
26(b).
SUMMARY OF APPLICATION: Applicants seek an order approving the
substitution (the ``Substitution'') of beneficial interests in the
portfolios of the Diversified Investors Portfolios (the ``Trust'') for
shares of the portfolios of MONY Series Fund, Inc. (the ``Fund''), the
Trust portfolios thereafter to continue serving as an eligible funding
vehicle for the group variable annuity contracts offered by the
Variable Account.
FILING DATES: The application was filed on October 15, 1993, and was
amended on January 31, 1994, April 5, 1994, and April 27, 1994.
HEARING OR NOTIFICATION OF HEARINGS: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving the Applicants with a copy of the request, personally or by
mail. Hearing requests must be received by the SEC by 5:30 p.m. on June
6, 1994, and must 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 may request
notification of a hearing by writing to the Secretary of the
Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. Applicants, c/o Edward P. Bank,
Esq., The Mutual Life Insurance Company of New York, 1740 Broadway, New
York, New York 10019.
FOR FURTHER INFORMATION CONTACT:
C. Christopher Sprague, Senior Staff Attorney, at (202) 942-0670, or
Michael V. Wible, Special Counsel, at (202) 942-0670, Office of
Insurance Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
Commission's Public Reference Branch.
Applicants' Representations
1. Mutual of New York is a mutual life insurance company organized
under the laws of the State of New York in 1842. Mutual of New York
offers a wide range of insurance and pension investment products
including group variable annuity contracts. Mutual of New York is
licensed to do business in all states as well as in the District of
Columbia and the Virgin Islands.
2. The Variable Account is a segregated investment account
registered under the 1940 Act as a unit investment trust, and funds
certain group variable annuity contracts (the ``Contracts'') co-issued
by Mutual of New York. The Variable Account is divided into seven sub-
accounts (the ``Subaccounts''), including six Subaccounts that invest
in shares of a corresponding series of the Fund (i.e., the Money
Market, Long Term Bond, Intermediate Government Bond, Diversified,
Equity Income, and Equity Growth Portfolios of the Fund). The seventh
Subaccount, which corresponds to the Calvert Socially Responsible
Series (a portfolio of Acacia Capital Corporation) (the ``Calvert
Series''), will not be affected by the Substitution, and will remain
available for allocation of purchase payments by holders of the
Contracts (``Contractholders''). MONY Securities Corp. serves as
principal underwriter for the Contracts.
3. The Fund is a diversified, open-end management investment
company that was organized as a Maryland corporation in 1984. The Fund
is comprised of seven series, six of which are available to holders of
the Contracts through the Subaccounts.
4. The Trust is a diversified, open-end management investment
company that was organized as a trust under the laws of the State of
New York. The Trust will be the ``hub'' in a ``hub and spoke''
structure in which the Variable Account will be one of the ``spokes.''
Hub and spoke is a registered service mark of Signature Financial
Group, Inc. The Trust is authorized to issue shares of up to nine
series (each such series, a ``Trust Portfolio''), six of which will be
available to holders of the Contracts through the Subaccounts. The
Trust was created to provide the underlying investment funds for the
Variable Account as well as for other insurance company separate
accounts, mutual funds, and collective trusts which restrict the
offering of interests in such accounts, funds, and trusts to (a)
certain employee retirement plans of for-profit and not-for-profit
entities, including those having cash or deferred arrangements and
those covering self-employed individuals and owner-employees (such as
401(k) plans, money purchase plans, profit sharing plans, simplified
employee pension plans, and Keogh Plans), and (b) qualified personal
retirement plans such as IRAs and rollover IRAs. Each Trust Portfolio
will be managed in compliance with the diversification requirements set
forth under Section 817(h) of the Internal Revenue Code. Mutual of New
York believes, based upon review of existing federal income tax laws
and regulations and the advice of counsel, that the Substitution will
not have a material adverse impact on the ability of the Variable
Account to meet the diversification requirements. The Trust will offer
and sell interests only to entities which qualify under the look-
through rule under U.S. Treasury Regulation 1.817-5(f)(2)(i).
5. The Fund Portfolios expected to be eliminated in the
Substitution, and the Trust Portfolios expected to be substituted as
choices for investment of purchase payments in the Variable Account are
as follows:
------------------------------------------------------------------------
Fund portfolio Trust portfolio
------------------------------------------------------------------------
Money Market....................... Money Market.
Long Term Bond..................... Government/Corporate Bond.
Intermediate Government Bond....... Intermediate Government Bond.
Diversified........................ Balanced.
Equity Income...................... Equity Income.
Equity Growth...................... Equity Growth.
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6. Mutual Of New York on its own behalf and on behalf of the
Variable Account proposes to effect a substitution of shares of the
Trust Portfolios for all shares of the corresponding Fund Portfolios as
indicated above. Mutual of New York will schedule the Substitution to
occur as soon as practicable following the issuance of the requested
order so as to maximize the benefits to be realized from the
Substitution. On November 15, 1993, a supplement to the prospectus for
the Contracts was sent to Contractholders, and was attached to
prospectuses delivered to new Contractholders. That supplement provided
notice to Contractholders that an application seeking approval of the
Substitution had been filed with the Commission. The supplement briefly
described the Substitution, and identified the Portfolios of the Fund
and the respective Portfolios of the Trust that will be substituted
therefor. The supplement also described a transaction entered into my
Mutual of New York and AUSA Life Insurance Company, Inc. (``AUSA''),
pursuant to which AUSA will assume the obligations of Mutual of New
York under the Contracts. The assumption by AUSA is the subject of a
separate application that is pending with the Commission, and is not
the subject of this application.
7. Within five days after the Substitution, Mutual Of New York will
send to Contractholders written notice of the Substitution that
identifies the shares that have been eliminated and the shares that
have been substituted. Mutual of New York will include in such mailing
an updated prospectus of the Variable Account that discloses the
completion of the Substitution and the availability of the Trust
Portfolios. Contractholders will be advised that for a period of sixty
days from the mailing of the notice, they may transfer all assets as
substituted to any other available Subaccount (including the Calvert
Series, which will not be affected by the Substitution). No transfer
charge is currently in effect, and none will be imposed prior to the
expiration of sixty days from the date of the mailing of the notice.
Following the Substitution, Contractholders will be afforded the same
contract rights, including surrender and other transfer rights with
regard to amounts invested under the Contracts, as they have currently.
Mutual Of New York will pay all expenses and transaction costs of the
Substitution, including any applicable brokerage commissions.
8. Mutual Of New York will redeem for cash and securities all
shares of the Fund Portfolios it currently holds on behalf of the
Variable Account at the close of business on the date selected for the
Substitution. Mutual Of New York's redemption of shares of the Fund
Portfolios will be partly for cash but principally for securities as a
partial redemption in kind. The Fund will effect the redemptions in
kind to the extent consistent with the investment objectives and
diversification requirements applicable to the Fund Portfolios. Mutual
Of New York will review the securities selected by the Fund for
redemption in kind to assure that such securities are suitable
investments for the respective Trust Portfolios. Mutual Of New York
will also review securities selected for transfer under the redemption
in kind to assure that such securities will not cause either the Fund
Portfolios or the Trust Portfolios to fail to meet the diversification
requirements of the Internal Revenue Code. Prior to effecting the
Substitution, Mutual Of New York will take all actions necessary to
comply with the requirements of Section 18(f) of the 1940 Act and Rule
18f-1 thereunder. The securities redeemed in kind will be used together
with the cash proceeds to purchase interests in the Trust Portfolios.
In all cases, Mutual of New York will simultaneously place the
redemption requests with the Fund and the purchase orders with the
Trust, so that the purchases will be for the exact amounts of the
redemption proceeds. As a result, at all times, monies attributable to
Contractholders currently invested in all Subaccounts will be fully
invested.
9. Applicants have established certain procedures to ensure that
the in kind redemptions will be effected in a fair and equitable manner
from the perspectives of the Variable Account, the Fund, and the other
separate accounts which presently invest in Fund Portfolios. These
procedures, which provide that securities be distributed on a pro rata
basis (with cash distributed in lieu of fractional interests), will
ensure that securities held by the Fund Portfolios which are selected
for in kind redemption will be comparable with respect to quality,
duration, industry, and other relevant investment criteria to those
securities which are not selected for in kind redemption. These
procedures will be approved by the Board of Directors of the Fund,
including the disinterested directors of the Fund voting separately as
a group. In addition, subsequent to the in kind redemption, Applicants
will provide a report to the Board of Directors of the Fund which
demonstrates full compliance with such procedures. Applicants have
determined that it is appropriate to effect the Substitution, based on
the current similarity of the portfolio investments of the Fund
Portfolios and the corresponding Trust Portfolios.
Applicants' Legal Analysis
1. Section 26(b) of the 1940 Act provides in pertinent part that
``[i]t shall be unlawful for any depositor or trustee or 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 unscrutinized 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 this protection to investors by preventing a depositor or
trustee of a unit investment trust holding the shares of one issuer
from substituting for those shares the shares of another issuer, unless
the Commission approves that substitution.
2. The purposes, terms, and conditions of the Substitution will not
entail any of the abuses that Section 26(b) is designed to prevent. The
Substitution is appropriate and consistent with Mutual of New York's
alternative funding plans for the Contracts through the Trust
Portfolios. The Substitution is proposed to provide a consolidation of
assets of vehicles that currently and in the future may be expected to
be used for pension funding to promote consistent investment
performance and to reduce operating expenses.
3. Applicants represent that the Substitution will not result in
the type of costly forced redemptions that Section 26(b) was intended
to guard against, and is consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
1940 Act for the following reasons: (a) the Substitution is for shares
of the Trust Portfolios, whose objectives, policies, and restrictions
are sufficiently similar to those of the substituted Fund Portfolios so
as to continue fulfilling the Contractholders' present objectives and
expectations: (b) a Contractholder may transfer amounts credited to the
Contract either in advance of the Substitution or following the receipt
of notice that the Substitution has been effected, including a transfer
to the Calvert Series; (c) the Substitution will, in all cases, be at
net asset value of the respective shares, without the imposition of any
transfer or similar charge; (d) Mutual of New York has undertaken to
assume the expenses and transaction costs, including among others,
legal and accounting fees and any brokerage commissions, relating to
the Substitution (the partial redemptions in kind contemplated for
appropriate securities of the Fund Portfolios are expected to reduce
such costs); (e) the Substitution will not restrict future transfers
under the Contracts as the Contracts neither limit allowable transfers
nor do they currently impose a charge for transfers; (f) the
Substitution in no way will alter the insurance benefits to
Contractholders or the contractual obligations of Mutual Of New York;
(g) the Substitution in no way will alter the tax benefits to Holders;
(h) Contractholders may choose to withdraw amounts credited to them
following the Substitution under the conditions that currently exist
(the Contracts impose no deferred sales load, although a participant
may be subject to restrictions under the terms of the plan through
which such participant acquired interests in the Contract); and (i) the
Substitution is expected to confer certain economic benefits to
Contractholders by virtue of the enhanced asset size of the continuing
Trust Portfolios.
4. Applicants respectfully submit that it is in the best interests
of Contractholders to substitute interests in the Trust Portfolios for
corresponding shares of the Fund. The overall investment objectives of
the Trust Portfolios are sufficiently similar to those of the
corresponding Fund Portfolios for the substitution to be appropriate.
The investment objectives of the Money Market, Balanced, Equity Income,
Equity Growth, and Intermediate Government Bond portfolios of the Fund
are substantially the same as the corresponding Portfolios of the
Trust. The Government/Corporate Bond Portfolio has investment
objectives that differ slightly from the Long Term Bond Portfolio of
the Fund. Both the Trust's Government/Corporate Bond Portfolio and the
Fund's Long Term Bond Portfolio seek to provide a high level of current
income with an overriding concern for preservation of capital. However,
the Trust's Portfolio will seek to accomplish this objective by
maintaining a remaining average maturity of one to four years. The
Fund's portfolio seeks to maintain a dollar weighted average life in
excess of eight years. Because of the longer average maturity, the
Fund's portfolio is more sensitive to changes in interest rates than
should be expected from the Trust's Portfolio, with a shorter average
maturity. However, at the present time, because of market conditions,
no significant difference would be expected in the return expected from
the two portfolios. Applicants believe that the investment objectives
are compatible and that, on balance, the Government/Corporate Bond
Portfolio, because of its shorter average maturity, presents less risk
to Contractholders, and therefore, Contractholders should benefit from
the substitution of that portfolio.
5. Total expenses as a percentage of average net assets for
investors in the Subaccounts are not expected to increase as a result
of the Substitution. The investment advisor to the Trust Portfolios has
agreed, through at least April 30, 1995, to waive its fees as
investment advisor to, and administrator of, the Trust Portfolios so
that total operating expenses of each Trust Portfolio are maintained at
their current level, which is less than or equal to the total operating
expenses of each corresponding portfolio of the Fund.
6. 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, 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 from purchasing any security
or other property from such registered investment company. The
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 interests in the Trust Portfolios with
proceeds from the sale of shares of the Fund portfolios. In addition,
the Substitution would not be exempt from Section 17 pursuant to Rule
17a-7 under the 1940 Act because the affiliations among the Variable
Account, the Fund, and the trust do not solely arise by reason of
having common investment advisers, common directors, and/or common
officers. Applicants state that the sale and purchase transactions
constituting the Substitution could come within the scope of Section
17(a)(1) and 17(a)(2) of the 1940 Act, respectively. Therefore, the
Substitution requires an exemption from Section 17(a) of the 1940 Act,
pursuant to Section 17(b) of the 1940 Act.
7. Section 17(b) of the 1940 Act provides that the Commission may
grant an order exempting the transactions 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 seek
an exemption from section 17(a) under both sections 17(b) and 6(c) of
the 1940 Act, because Section 17(b) refers to a single ``proposed
transaction,'' while under Section 6(c), the Commission may exempt a
series of transactions.
8. Applicants state that for all the reasons cited in connection
with their request for an order under Section 26(b), the Substitution
is reasonable and fair. The transactions effecting the substitution
including the redemption of Fund shares and the purchase of interests
in the Trust Portfolios will be effected in conformity with Section
22(c) of the 1940 Act and Rule 22c-1 thereunder. Moreover, the in-kind
redemptions of Fund shares will be effected in conformity with Section
18(f) and Rule 18f-1 thereunder, Rule 17a-7, and the Fund's established
procedures pursuant to Rule 17a-7. Contractholder interests following
the Substitution will not be diluted, and will not differ in any
measurable way from such interests immediately prior to the
Substitution in practical economic terms. Applicants state that in each
case, the consideration to be received and paid is reasonable and fair.
Applicants also assert that the Substitution is consistent with the
investment policy of the Fund and the Trust in that the investment
objectives of the substituted Trust Portfolios are substantially
similar to the objectives of the corresponding Fund portfolios.
9. Mutual of New York believes, based on its review of existing
federal income tax laws and regulations and the advice of counsel, that
the Substitution will not give rise to any taxable income for
Contractholders.
10. Applicants state that the Substitution is consistent with the
general purposes of the 1940 Act. Applicants state that the
Substitution does not present any of the investor protection concerns
and other issues that the 1940 Act is designed to address. Applicants
also note that Contractholders will be fully informed of the terms of
the Substitution through the prospectus of the Variable Account and the
notice, and will have an opportunity to reallocate investments prior to
and following the Substitution.
Applicants' Conclusion
For the reasons discussed above, Applicants submit that the
requested order under section 26(b) meets the standards of that
section, and that the requested exemption from section 17(a) meets the
standards of section 17(b) and section 6(c).
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11926 Filed 5-16-94; 8:45 am]
BILLING CODE 8010-01-M
