[Federal Register Volume 64, Number 157 (Monday, August 16, 1999)]
[Notices]
[Pages 44563-44565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21091]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23938; File No. 812-11594]
Dow Target Variable Fund LLC; Notice of Application
August 10, 1999.
agency: Securities and Exchange Commission (``SEC'').
action: Notice of application for an amended order under Section 6(c)
of the Investment Company Act of 1940 (the ``Act'').
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summary of application: Applicant seeks an order under Section 6(c) of
the Act amending an existing order (Investment Company Act Release No.
23628, Dec. 20, 1998). The amended order would exempt Applicant and any
other existing or future open-end management investment company or
portfolio thereof that is advised by its investment adviser, Ohio
National Investments, Inc. (the ``Adviser''), or any entity controlled
by or under common control with the Adviser that follows an investment
strategy that is the same as one of the two investment strategies
described in the application (``Future Funds'') from the provisions of
Section 12(d)(3) of the Act to the extent necessary to permit their
portfolios: (a) to invest up to 10.5% of their total assets in
securities of issuers that derive more than 15% of their gross revenues
from securities related activities; or (b) to invest up to 20.5% of
their total assets in securities of issuers that derive more than 15%
of their gross revenues from securities related activities.
applicant: Dow Target Variable Fund LLC.
filing date: The application was filed on March 18, 1999, and amended
on July 23, 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 Secretary of the SEC and serving
Applicant with a copy of the request, personally or by mail. Hearing
requests must be received by the SEC by 5:30 p.m. on August 31, 1999,
and must be accompanied by proof of service on Applicant 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 by writing to the
Secretary of the SEC.
addresses: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549-0609. Applicant, Dow Target Variable Fund LLC, One Financial Way,
Cincinnati, Ohio 45242.
for further information contact: Joyce M. Pickholz, Senior Counsel, or
Kevin M. Kirchoff, Branch Chief, Office of Insurance Products, Division
of Investment Management, at (202) 942-0670.
supplementary information: The 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. 20549-0102 [tel. (202) 942-8090].
Applicant's Representations
1. Applicant is a registered, open-end management investment
company (File No. 811-09019). It currently consists of twelve non-
diversified portfolios, each named after a calendar month (January
Portfolio, February Portfolio, etc.) (collectively, the ``Dow Target 10
Portfolios''). Applicant proposes to add another twelve non-diversified
portfolios, also named after the calendar months (collectively, the
``Dow Target 5 Portfolios'').
2. Applicant was organized under the laws of Ohio as a limited
liability company on September 21, 1998. Under Ohio law, a limited
liability company does not issue shares of stock. Instead, ownership
rights are contained in membership interests. Each membership interest
of Applicant (``Interest'') represents an undivided interest in the
stocks held in one of Applicant's portfolios.
3. The Interests are not offered directly to the public. The only
direct owner of the Ohio National Life Insurance Company (``Ohio
National Life'') through its variable annuity separate accounts. Those
of Ohio National Life's variable annuity owners who have contract
values allocated to any of Applicant's portfolios have indirect
beneficial rights in the Interests and have the right to instruct Ohio
National with regard to how it votes the Interests that it holds in its
variable annuity separate accounts.
4. Applicant's investment adviser is Ohio National Investment, Inc.
(the ``Adviser''), a wholly owned subsidiary of Ohio National Life.
First Trust Advisors L.P. (``First Trust'') is the sub-adviser to each
of Applicant's portfolios.
5. Each of Applicant's Dow Target 10 Portfolios invests
approximately 10% of its total assets in the common stock of the ten
companies in the Dow Jones Industrial Average (the ``Dow'') having the
highest dividend yield as of the close of business on the next to last
business day of the month preceding the month for which the portfolio
is named (the ``Stock Selection Date''). These ten companies are
popularly known as the ``Dogs of the Dow.'' On or about the first
business day of the month for which a portfolio is named, First Trust
sets the proportionate relationship among the ten stocks to be held in
that portfolio for the next twelve months. At the end of a portfolio's
twelfth month, the portfolio will be rebalanced with a new mix of Dogs
of the Dow stocks.
6. Each of Applicant's Dow Target 5 Portfolios will invest
approximately 20% of its total assets in the common stock of the five
companies of the Dogs of the Dow having the lowest per share stock
price as of the close of business on the Stock Selection Date. On or
about the first business day of the month for which a portfolio is
named, First Trust will set the proportionate relationship among the
five stocks to be held in that portfolio for the next twelve months. At
the end of a portfolio's twelfth month, the portfolio will be
rebalanced with a new mix of five Dogs of the Dow stocks.
7. Stocks held in any portfolio are not expected to reflect the
entire index, and the prices of Interests are not intended to parallel
or correlate with movements in the Dow. Generally, it will not be
possible for all of a portfolio's funds to be invested in the
prescribed mix of applicable stocks at any given time. However, the
Adviser and First Trust will try, to the extent practicable, to
maintain a minimum cash position at all times. Applicant represents
that normally the only cash items held will represent amounts expected
to be deducted as charges and amounts too small to purchase additional
proportionate round lots of the stocks.
8. The Dow consists of 30 stocks selected by Dow Jones & Company,
Inc. as representative of the broader domestic stock market and of
American industry. Dow Jones and Company, Inc. is not affiliated with
the Applicant and has not participated, and will not participate, in
any way in the creation of the portfolios or the selection of the
stocks purchased by the portfolios.
9. Until the end of the initial month of a portfolio, Interests may
be purchased by variable annuity separate accounts of Ohio National
Life. After the initial month of a portfolio, no further Interests in
that portfolio may be purchased until eleven months later. Interests
may be redeemed at any time.
10. Any purchase of Interests made after the initial business day
of the month for which the portfolio is named will duplicate, as nearly
as is practicable, the original proportionate relationships of the
applicable stocks
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held by that portfolio. Because the prices of each of the stocks will
change nearly every day, the ratio of the price of each to the total
price of the entire group of applicable stocks will also change daily.
However, the proportion of stocks held by that portfolio will not
change materially as a result of the sales of additional Interests
after the first business day of the month for which the portfolio is
named.
11. Applicant is not a ``regulated investment company'' under
Subchapter M of the Internal Revenue Code of 1986, as amended (the
``Code''). Nonetheless, it does not pay federal income tax on its
interest, dividend income or capital gains. As a limited liability
company whose interests are sold only to Ohio National Life, it is
disregarded as an entity for purposes of federal income taxation. Ohio
National Life, through its variable annuity separate accounts, is
treated as owning the assets of the portfolios directly and its tax
obligations thereon are computed pursuant to Subchapter L of the Code
(which governs the taxation of insurance companies). Under current tax
law, interest, dividend income and capital gains of Applicant are not
taxable to Applicant, and are not currently taxable to Ohio National
Life or to contract owners, when left to accumulate within a variable
annuity contract.
12. Section 817(h) of the Code provides that in order for a
variable contract that is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by
that account must be ``adequately diversified in accordance with
Treasury regulations.
13. Each portfolio must comply with the Section 817(h)
diversification requirements. Therefore, the Adviser and First Trust
may depart from the portfolio investment strategy, if necessary, in
order to satisfy the Section 817(h) diversification requirements. Under
all circumstances, except in order to meet Section 817(h)
diversification requirements, the common stocks purchased for each
portfolio are chosen solely according to the formula described above
and are not based on the research opinions or buy or sell
recommendations of the Adviser or First Trust. Neither the Adviser nor
First Trust has any discretion as to which common stocks are purchased.
Securities purchased for each portfolio may include securities of
issuers in the Dow that derived more than 15% of their gross revenues
in their most recent fiscal year from securities related activities.
14. The existing order permits Applicant's Dow Target 10 Portfolios
to invest up to 10% of their total assets in securities of issuers that
derive more than 15% of their gross revenues from securities related
activities. Applicant now proposes to extend the relief to permit
Applicant's portfolios and Future Funds: (a) to invest up to 10.5% of
their total assets in securities of issuers that derive more than 15%
of their gross revenues from securities related activities; or (b) to
invest up to 20.5% of their total assets in securities of issuers that
derive more than 15% of their gross revenues from securities related
activities.
Applicant's Legal Analysis
1. Section 12(d)(3) of the 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 Act exempts from Section 12(d)(3) purchases by an investment
company of securities of an issuer, except its own investment adviser,
promoter or principal underwriter of the affiliates, that derived more
than 15% of its gross revenues in its most recent fiscal year from
securities related activities, provided that, among other things,
immediately after any such acquisition the acquiring company has
invested not more than 5% of the value of its total assets in the
securities of the issuer. Each of Applicant's portfolios undertakes to
comply with all of the requirements of Rule 12d3-1, except the
condition in subparagraph (b)(3) prohibiting an investment company from
investing more than 5% of the value of its total assets in securities
of a securities related issuer.
2. Section 6(c) of the Act provides that the SEC, by order upon
application, may conditionally or unconditionally exempt any person,
security, or transaction, or any class or classes thereof, from any
provision of the Act or any rule or regulation 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 Act.
3. Applicant states that Section 12(d)(3) was intended: (a) to
prevent investment companies from exposing their assets to the
entrepreneurial risks of securities related businesses; (b) to prevent
potential conflicts of interest; (c) to eliminate certain reciprocal
practices between investment companies and securities related
businesses; and (d) to ensure that investment companies maintain
adequate liquidity in their portfolios.
4. A potential conflict could occur, for example, 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. Applicant states that this concern does not arise
in this situation. Applicant states that generally, none of Applicant,
the Adviser or First Trust has discretion in choosing the common stock
or amount purchased. Applicant states that the stock must first be
included in the Dow, which is unaffiliated with Applicant, the Adviser
or First Trust. In addition, the stock must also qualify as one of the
ten companies in the Dow that has the highest dividend yield as of the
close of business on the Stock Selection Date. In the case of Dow
Target 5 Portfolios, the stock must then qualify as one of the five
companies of the Dogs of the Dow that have the lowest per share stock
price as of the close of business on the Stock Selection Date.
5. The Adviser and First Trust are obligated to follow the
investment formula described above as nearly as practicable. Applicant
represents that the only time any deviation from the formula would be
permitted would be where circumstances were such that the investments
of a particular portfolio would fail to be ``adequately diversified''
under the Section 817(h) diversification requirements, and would thus
cause the annuity contracts to fail to qualify as annuity contracts
under the Code. Applicant states that the likelihood of this exception
arising is extremely remote. In such a situation, Applicant submits
that it must be permitted to deviate from the investment strategy in
order to meet the Section 817(h) diversification requirements and then
only to the extent necessary to do so. Applicant asserts that this
limited discretion does not give rise to the potential conflicts of
interest or to the possible reciprocal practices between investment
companies and securities related businesses that Section 12(d)(3) is
designed to prevent.
6. Applicant states that the liquidity of a portfolio is not a
concern here since each common stock selected is a component of the
Dow, listed on the New York Stock Exchange, and among the most actively
traded securities in the United States.
7. In addition, Applicant submits that the effect of a portfolio's
purchase of the stock of parents of broker-dealers would be de
minimis. Applicant states that the common stocks of securities related
issuers represented in the Dow are widely held with active markets and
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that potential purchases by a portfolio represent an insignificant
amount of the outstanding common stock and trading volume of any of
these issuers. Therefore, Applicant argues that it is almost
inconceivable that these purchases would have any significant effect on
the market value of any of these securities related issuers.
8. Another possible conflict of interest is where a broker-dealer
may be influenced to recommend certain investment company funds which
invest in the stock of the broker-dealer or any of its affiliates.
Applicant states that because of the large market capitalization of the
Dow issuers and the small portion of these issuers' common stock and
trading volume that are purchased by a portfolio, 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 a portfolio is invested in the broker-dealer or a
parent thereof.
9. Finally, another potential conflict of interest could occur if
any 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
the broker-dealer may not offer the best price and execution. To
preclude this type of conflict, Applicant agrees, as a condition of
this application, that no company whose stock is held in any portfolio,
nor any affiliate of such a company, will act as broker or dealer for
any portfolio in the purchase or sale of any security.
10. Applicant seeks relief not only with respect to the Dow Target
10 Portfolios and the Dow Target 5 Portfolios, but also with respect to
Future Funds. Applicant states that without the requested class relief,
exemptive relief for any Future Fund would have to be requested and
obtained separately. Applicant asserts that these additional requests
for exemptive relief would present no issues under the Act not already
addressed in the application. Further, if Future Funds were to
repeatedly seek exemptive relief with respect to the same issues,
investors would receive no additional protection or benefit, and
investors could be disadvantaged by increased costs from preparing the
additional requests for relief. Applicant argues that class relief is
appropriate in the public interest because the relief will promote
competitiveness in the variable insurance products market by
eliminating the need for Future Funds to file redundant exemptive
applications, thereby reducing administrative expenses and maximizing
efficient use of resources. Also, eliminating the delay and the
expenses of repeatedly seeking exemptive relief would enhance the
ability of Future Funds to effectively take advantage of business
opportunities as such opportunities arise.
Applicant's Conditions
Applicant agrees that any order granting the requested relief from
Section 12(d)(3) of the Act shall be subject to the following
conditions:
1. The common stock is included in the Dow as of the Stock
Selection Date;
2. With respect to Dow Target 10 Portfolios, the common stock
represents one of the ten companies in the Dow that have the highest
dividend yield as of the close of business on the Stock Selection Date;
3. With respect to Dow Target 5 Portfolios, the common stock
represents one of the five companies with the lowest dollar per share
stock price out of the ten companies in the Dow that have the highest
dividend yield as of the close of business on the Stock Selection Date;
4. With respect to Dow Target 10 Portfolios, as of close of
business on the Stock Selection Date, the value of the common stock of
each securities related issuer represents approximately 10% of the
value of any portfolio's total assets, but in no event more than 10.5%
of the value of the portfolio's total assets;
5. With respect to Dow Target 5 Portfolios, as of close of business
on the Stock Selection Date, the value of the common stock of each
securities related issuer represents approximately 20% of the value of
any portfolio's total assets, but in no event more than 20.5% of the
value of the portfolio's total assets; and
6. No company whose stock is held in any portfolio, nor any
affiliate thereof, will act as broker or dealer for any portfolio in
the purchase or sale of any security for that portfolio.
Conclusion
For the reasons summarized above, Applicant asserts that the order
requested is appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21091 Filed 8-13-99; 8:45 am]
BILLING CODE 8010-01-M
