[Federal Register Volume 63, Number 113 (Friday, June 12, 1998)]
[Notices]
[Pages 32268-32271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15632]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23241; File No. 812-10948]
PFL Endeavor Target Account, et al.; Notice of Application
June 5, 1998.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for an order pursuant to Section 6(c) of
the Investment Company Act of 1940 (the ``1940 Act'').
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SUMMARY OF APPLICATION: The Applicants seek an order pursuant to
Section 6(c) of the 1940 Act exempting the Applicants and future
separate
[[Page 32269]]
accounts of PFL or its affiliated insurance companies that support
materially similar subaccounts from Section 12(d)(3) of the 1940 Act to
the extent necessary to permit the Target 10 Subaccount to invest up to
10% and the Target 5 Subaccount to invest up to 20% of their (or, if
there is more than one Portfolio thereunder, of the applicable
Portfolio's) respective total assets in securities of issuers that
derive more than 15% of their gross revenues in their most recent
fiscal year from securities related activities.
APPLICANTS: PFL Endeavor Target Account (the ``Target Account'') and
PFL Life Insurance Company (``PFL'') (together, the ``Applicants'').
FILING DATE: The application was filed on January 2, 1998, and amended
and restated on April 1, 1998, and June 5, 1998.
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 on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
in person or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on June 30, 1998, and accompanied by proof of
service on the Applicants in the form of an affidavit or, for lawyers,
a certificate of service. Hearing requests should state the nature of
the requester's interest, the reason for the request and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicant, c/o PFL Life Insurance Company, 4333 Edgewood Road,
N.E., Cedar Rapids, Iowa 53499.
FOR FURTHER INFORMATION CONTACT:
Megan L. Dunphy, Attorney, or Mark Amorosi, Branch 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 SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 (tel. (202) 942-8090).
Applicant's Representations
1. The Target Account is a separate account of PFL and is
registered with the Commission as an open-end management investment
company. The Target Account is currently divided into two non-
diversified subaccounts, the DJIA Target 10 Subaccount and the DJIA
Target 5 Subaccount (each a ``Subaccount'' and together, the
``Subaccounts''). Additional subaccounts may be established in the
future at the discretion of PFL.
2. PFL, a stock life insurance company, is incorporated under the
name NN Investors Life Insurance Company, Inc., pursuant to Iowa law.
PFL is principally engaged in the sale of life insurance and annuity
policies, and is licensed in the District of Columbia, Guam, and in all
states except New York. PFL is a wholly-owned indirect subsidiary of
AEGON, USA, Inc., which is indirectly owned by AEGON n.v. of the
Netherlands.
3. The investments and administration of each Subaccount are under
the direction of the Target Account's Board of Managers. Endeavor
Investment Advisers (the ``Manager'') performs administerial and
managerial functions for the Target Account. First Trust Advisers L.P.
(the ``Adviser''), the Target Account's investment adviser, is
responsible for selecting the investments of each Subaccount consistent
with the investment objectives and policies of that Subaccount, and
will conduct securities trading for the Subaccounts.
4. The DJIA Target 10 Subaccount will invest approximately 10% of
its (or, if there is more than one Portfolio thereunder, of the
applicable Portfolio's) total assets in the common stock of each of the
ten companies in the Dow Jones Industrial Average (the ``DJIA'') that
have the highest dividend yield as of each specified Stock Selection
Date.
5. The DJIA Target 5 Subaccount will invest approximately 20% of
its (or, if there is more than one Portfolio thereunder, of the
applicable Portfolio's) total assets in the common stock of each of the
five companies with the lowest per share stock price of the ten
companies in the DJIA that have the highest dividend yield as of each
specified Stock Selection Date.
6. The DJIA comprises thirty stocks chosen by the editors of The
Wall Street Journal. The DJIA is the property of the Dow Jones &
Company, Inc., which is not affiliated with any Subaccount or PFL and
does not participate in any way in the creation of any Subaccount or
the selection of its stocks.
7. Applicants state that the objective of each Subaccount is to
provide an above-average total return through a combination of dividend
income and capital appreciation. On a Stock Selection Date specified in
the prospectus, each Subaccount will invest, in substantially equal
amounts, in the common stock of the companies meeting each Subaccount's
investment criteria (as held in a Subaccount, such common stock is
referred to as the ``Common Shares''). Each Subaccount may have
different investment portfolios (each a ``Portfolio'') running
simultaneously for different 12-month periods. For example, within the
DJIA Target 10 Subaccount there may be more than one Portfolio, each
with a different Stock Selection Date. A percentage relationship among
the number of Common Shares in a Portfolio will be established as of
that Stock Selection Date. When funds are deposited into or withdrawn
from the Portfolio during the year, Common Shares will be purchased or
sold, as appropriate, to duplicate, as nearly as practicable, the
percentage relationship of the number of Common Shares established at
the initial purchase. Applicants state that the percentage relationship
among the number of Common Shares in the Portfolio therefore should
remain stable (until the next Stock Selection Date).
8. Applicants state that, as of each Annual Stock Selection Date
(i.e., the last Business Day of the 12-month period following each
Stock Selection Date), a new percentage relationship will be
established among the number of Common Shares for each Portfolio on
such date. Common Shares may be sold or new equity securities bought so
that the Portfolio is equally invested in the common stock of each
company meeting the Subaccount's investment criteria. Thus, the
Portfolio may or may not hold equity securities of the same companies
as the previous year. Purchases or sales of Common Shares during the
year will duplicate, as nearly as practicable, the percentage
relationship among the number of Common Shares in the Portfolios as of
the Annual Stock Selection Date.
9. Section 817(h) of the Internal Revenue Code of 1986, as amended
(the ``Code''), provides that in order for a variable contract which is
based on a segregated asset account to qualify as an annuity contract
under the Code, the investments made by such account must be
``adequately diversified'' in accordance with Treasury regulations. The
Treasury regulations issued under Section 817(h) (Treas. Reg.
Sec. 1.817-5) apply a diversification requirement to each of the
Subaccounts and any Portfolios thereunder (``Section 817(h)
diversification requirements''). To qualify as ``adequately
diversified,'' each Subaccount and any Portfolio thereunder must have:
(i) No more than 55% of the value of its total assets represented by
any one investment; (ii) no more than 70% of the value of its total
assets represented by any two
[[Page 32270]]
investments; (iii) no more than 80% of the value of its total assets
represented by any three investments; and (iv) no more than 90% of the
value of its total assets represented by any four investments.
10. Applicants state that the Target Account, through the
Subaccounts and any Portfolios thereunder, intends to comply with the
Section 817(h) diversification requirements. PFL has entered into an
agreement with the Manager, who in turn, has entered into a contract
with the Adviser that requires the Subaccounts and any Portfolios
thereunder to be operated in compliance with the Treasury regulations.
Therefore, the Adviser may depart from a Subaccount's or Portfolio's
investment strategy, if necessary, in order to meet these Section
817(h) diversification requirements.
11. Applicants represent that, except in order to meet Section
817(h) diversification requirements, the Common Shares purchased for
each Subaccount and any Portfolios thereunder will be chosen solely
according to the formula described in the application and summarized in
this notice, and will not be based on the research opinions or buy or
sell recommendations of the Adviser. During each year, the Adviser will
invest premiums received in additional Common Shares or arrange sales
of Common Shares (e.g., to meet redemption or transfer requests) so
that the original proportionate relationship among the number of shares
of each stock in the Portfolio established at the beginning of the
relevant 12-month period is maintained, to the extent practicable. The
Adviser has no discretion as to which Common Shares are purchased.
Securities purchased for each of the Subaccounts and any Portfolios
thereunder may include securities of issuers in the DJIA that derived
more than fifteen percent of their gross revenues in their most recent
fiscal year from securities related activities.
Applicants' Legal Analysis
1. Section 12(d)(3) of the 1940 Act, with limited exceptions,
prohibits an investment company from acquiring any security issued by
any person who is a broker, dealer, underwriter or investment adviser.
Rule 12d3-1 under the 1940 Act exempts purchases by an investment
company of securities of an issuer (except its own investment adviser,
promoter or principal underwriter or their affiliates) that derived
more than fifteen percent of its gross revenues in its most recent
fiscal year from securities related activities, provided that, among
other things, immediately after such acquisition, the acquiring company
has invested not more than five percent of the value of its total
assets in securities of the issuer.
2. Section 6(c) of the 1940 Act provides that the Commission may
exempt any person, transaction, or class of transactions from any
provisions of the 1940 Act or any rule thereunder, if and to the extent
that 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.
3. Applicants request that the Commission exempt the Target Account
from the provisions of Section 12(d)(3) in order to permit the DJIA
Target 10 Subaccount (and any Portfolio thereunder) to acquire
securities of an issuer that derives more than 15% of its gross
revenues from securities related activities, provided that (i) those
securities are included in the DJIA as of the applicable specified
Stock Selection Date, (ii) they represent one of the ten companies in
the DJIA that have the highest dividend yield as of the applicable
specified Stock Selection Date, and (iii) as of the first business day
after the applicable specified Stock Selection Date, the value of the
Common Shares of each securities related issuer represents
approximately 10%, but in no event more than 10.5%, of the value of the
DJIA Target 10 Subaccount's (or, if there is more than one Portfolio
thereunder, of the applicable Portfolio's) total. Applicants state that
the use of the term ``approximately'' is intended to allow for such
deviation from a precise 10% as to permit the purchase of round lots of
50 to 100 shares of stock. The 10.5% standard will be based on the
prices of the Common Shares as of the close of business on the Stock
Selection Date.
4. The Applicants further request that the Commission exempt the
Target Account from the provisions of Section 12(d)(3) in order to
permit the DJIA Target 5 Subaccount (and any Portfolio thereunder) to
acquire securities of an issuer that derives more than 15% of its gross
revenues from securities related activities, provided that (i) those
securities are included in the DJIA as of the applicable specified
Stock Selection Date, (ii) they represent one of the five companies
with the lowest dollar per share stock price of the ten companies in
the DJIA that have the highest dividend yield as of the applicable
specified Stock Selection Date, and (iii) as of the first business day
after the applicable specified Stock Selection Date, the value of the
Common Shares of each securities related issuer represents
approximately 20%, but in no event more than 20.5%, of the value of the
DJIA Target 5 Subaccount's (of, if there is more than one Portfolio
thereunder, of the applicable Portfolio's) total assets. Applicants
state that the use of the term ``approximately'' is intended to allow
for such deviation from a precise 20% as to permit the purchase of
round lots of 50 or 100 shares of stock. The 20.5% standard will be
based on the prices of the Common Shares as of the close of business on
the Stock Selection Date.
5. The Target Account and each Subaccount and any Portfolio
thereunder undertake to comply with all of the requirements of Rule
12d3-1, except the condition prohibiting an investment company from
investing more than 5% of the value of its total assets in securities
of a securities related issuer.
6. Applicants represent that Section 12(d)(3) was intended: (i) to
prevent investment companies from exposing their assets to the
entrepreneurial risks of securities related businesses; (ii) to prevent
potential conflicts of interest; (iii) to eliminate certain reciprocal
practices between investment companies and securities related
businesses; and (iv) to ensure that investment companies maintain
adequate liquidity in their portfolios.
7. A potential conflict could occur if an investment company
purchased securities or other interests in a broker-dealer to reward
that broker-dealer for selling fund shares, rather than solely on
investment merit. Applicants maintain that this concern does not arise
in this situation since neither the Adviser nor any Subaccount has
discretion in choosing the Common Shares or amount purchased. The stock
must first be included in the DJIA (which is unaffiliated with the
Applicants, and Subaccount, the Adviser, the Manager or PFL). In
addition, the security must also qualify as one of the ten companies in
the DJIA that has the highest dividend yield as of the applicable
specified Stock Selection Date, and with respect to the DJIA Target 5
Subaccount, the security must also qualify as one of the five companies
with the lowest per share stock price of the ten companies in the DJIA
that have the highest dividend yield as of the applicable specified
Stock Selection Date.
8. Applicants state that prior Section 12(d)(3) relief has been
granted to applicants which were unit investment trusts with no
discretion to choose the portfolio securities or the amount purchased,
but when discretion to sell
[[Page 32271]]
portfolio securities to the extent necessary to meet redemptions. The
Target Account, however, is a managed investment company issuing
variable annuities and, as such, will continually accept new premiums
which it must continue to invest; it is not a unit investment trust
with a fixed number of units outstanding. The Adviser is obligated to
follow the investment formula described in the application and
summarized in this notice as nearly as practicable, and therefore, for
new investments during a year the 10% ratio for the DJIA Target 10
Subaccount and any Portfolios thereunder and the 20% ratio for the DJIA
Target 5 Subaccount and any Portfolios thereunder will be based on the
ratios of the number of shares established at the beginning of each
year rather than the value of the stocks. Securities for each
Subaccount and any Portfolio thereunder will be chosen with respect to
specified formulas for each Subaccount or Portfolio and not in the
Adviser's discretion.
9. The Adviser is permitted to deviate from the respective formula
for a Subaccount or Portfolio where circumstances are such that the
investment of a particular Subaccount or Portfolio would fail to meet
the 817(h) diversification requirements and would thus cause the
annuity contracts to fail to qualify as an annuity contract under the
Code. Applicants maintain that, in such a situation, the Adviser must
be permitted to deviate from a Subaccount's or Portfolio's investment
strategy, but only in order to meet the 817(h) diversification
requirements and then only to the extent necessary to do so. Applicants
state that this limited discretion does not raise the concerns that
Section 12(d)(3) is designed to prevent.
10. Applicants represent that the liquidity of a Subaccount's
portfolio is not a concern here since the shares of common stock
selected are each included in the DJIA, listed on the New York Stock
Exchange and are among the most actively traded securities in the
United States.
11. Applicants also represent that the effect of a Subaccount's
purchase on the stock of parents of broker-dealers would be de minimis.
The common stocks of securities related issuers represented in the DJIA
are widely held and have active markets, and potential purchases by a
Subaccount would represent an insignificant amount of the outstanding
common stock and the trading volume of any of those issuers.
12. Applicants state that a potential conflict of interest could
occur if broker-dealers are influenced to recommend certain investment
company funds which invest in the stock of the broker-dealer or any of
its affiliates. Because of the large market capitalization of the DJIA
issuers and the small portion of these issuers' common stock and
trading volume that would be purchased by a Subaccount, however,
Applicants find that it is extremely unlikely that any advice offered
by a broker-dealer to a customer as to which investment company to
invest in would be influenced by the possibility that the Target
Account would be invested in the broker-dealer or parent thereof.
13. Finally, Applicants state that another potential conflict of
interest could occur if an investment company directed brokerage to an
affiliated broker-dealer in which the company has invested to enhance
the broker-dealer's profitability or to assist it during financial
difficulty, even though that broker-dealer may not offer the best price
and execution. To preclude this type of conflict, Applicants and each
Subaccount agree, as a condition of the application, that no company
held in a Subaccount portfolio, nor any affiliate of such company, will
act as broker for any Subaccount in the purchase or sale of any
security for its portfolio.
14. Applicants seek relief not only with respect to the Target
Account and the Subaccounts described in the application, but also with
respect to other separate accounts of PFL or its affiliated insurance
companies hereinafter created that support materially similar
subaccounts (``Future Accounts''). Applicants represent that the terms
of relief requested with respect to Future Accounts are consistent with
the standards set forth in Section 6(c) of the 1940 Act.
Applicants' Conditions
The Applicants agree to the following conditions:
1. The Common Shares are included in the DJIA as of the applicable
specified Stock Selection Date;
2. The Common Shares represent one of the ten companies in the DJIA
that have the highest dividend yield as of the applicable specified
Stock Selection Date;
3. With respect to the DJIA Target 5 Subaccount, the Common Shares
represent one of the five companies with the lowest dollar per share
stock price of the ten companies in the DJIA that have the highest
dividend yield as of the applicable specified Stock Selection Date;
4. With respect to the DJIA Target 10 Subaccount and any Portfolios
thereunder, at the beginning of each year, the value of the Common
Shares of each securities related issuer represents approximately 10%
of the value of the DJIA Target 10 Subaccount's (or, if there is more
than one Portfolio thereunder, of the applicable Portfolio's) total
assets, but in no event more than 10.5% of the value of the DJIA Target
10 Subaccount's (or, if there is more than one Portfolio thereunder, of
the applicable Portfolio's) total assets on the first business day
after each Stock Selection Date;
5. With respect to the DJIA Target 5 Subaccount and any Portfolios
thereunder, at the beginning of each year, the value of the Common
Shares of each securities related issuer represents approximately 20%
of the value of the DJIA Target 5 Subaccount's (or, of there is more
than one Portfolio thereunder, of the applicable Portfolio's) total
assets, but in no event more than 20.5% of the value of the DJIA Target
5 Subaccount's (or, if there is more than one Portfolio thereunder, of
the applicable Portfolio's) total assets on the first business day
after each Stock Selection Date; and
6. No company whose stock is held in any Subaccount or Portfolio,
nor any affiliate thereof, will act as broker for any Subaccount or
Portfolio in the purchase or sale of any security for the Subaccount or
Portfolio.
Conclusion
For the reasons summarized above, Applicants assert that the
requested exemptions are 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. 98-15632 Filed 6-11-98; 8:45 am]
BILLING CODE 8010-01-M
