[Federal Register Volume 63, Number 175 (Thursday, September 10, 1998)]
[Notices]
[Pages 48537-48540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24206]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23424; File No. 812-11200]
Integrity Life Insurance Company, et al.; Notice of Application
September 2, 1998.
AGENCY: Securities and Exchange Commission (``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 other
separate accounts of the Companies or affiliated insurance companies
that support materially similar investment divisions, from the
provisions of Section 12(d)(3) of the 1940 Act, to the extent necessary
to permit the divisions of Separate Account Ten and the Select Ten Plus
Division 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.
APPLICANTS: Integrity Life Insurance Company (``Integrity''), Separate
Account Ten of Integrity Life Insurance Company (``Separate Account
Ten''), National Integrity Life Insurance Company (``National
Integrity,'' together with Integrity, the ``Companies''), and Select
Ten Plus Division of Separate Account II of National Integrity Life
Insurance Company (Select Ten Plus Division'') (collectively, the
``Applicants'').
FILING DATE: The application was filed on June 26, 1998.
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 servicing
Applicants with a copy of the request, in person or by mail. Hearing
requests must be received by the SEC by 5:30 p.m. on September 28,
1998, and should be 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, NW., Washington, DC 20459.
Applicants, c/o ARM Financial Group, Inc., 515 West Market Street,
Louisville, Kentucky 40202-3319.
FOR FURTHER INFORMATION CONTACT:
Megan L. Dunphy, Attorney, or Mark C. Amorosi, 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, NW., Washington,
DC 20549 (tel. (202) 942-8090).
Applicants' Representations
1. Integrity is a stock life insurance company and is authorized to
sell life insurance and annuities. Integrity is an indirect, wholly-
owned subsidiary of ARM Financial Group, Inc., (``ARM'').
2. Separate Account Ten is a separate account of Integrity and is a
funding vehicle for variable annuity contracts. The account is
registered with the SEC as an open-end management investment company
and is divided into four non-diversified investment divisions, Select
Ten Plus Division--March, Select Ten Plus Division--June, Select Ten
Plus Division--September, and Select Ten
[[Page 48538]]
Plus Division--December (each a ``Division'' and collectively, with the
Select Ten plus Division of National Integrity, the ``Divisions'').
3. National Integrity is a stock life insurance company and is
authorized to sell life insurance and annuities. National Integrity is
a wholly-owned subsidiary of Integrity and an indirect, wholly-owned
subsidiary of ARM.
4. Separate Account II is a separate account of National Integrity
and is a funding vehicle for variable annuity contracts. The account is
registered with the SEC as a unit investment trust. The Select Ten Plus
Division is a non-diversified investment division of Separate Account
II that is registered with the Commission as an open-end management
investment company. Additional similar investment divisions may be
established in the future at the discretion of National Integrity.
5. The business and affairs of Separate Account Ten and the Select
Ten Plus Division, respectively, are under the direction of a Board of
Managers, currently consisting of five members. Integrity Capital
Advisors, Inc. serves as the investment adviser (the ``Adviser'') and
National Asset Management Corporation serves as the sub-adviser (the
``Sub-Adviser'') to both Separate Account Ten and the Select Ten Plus
Division.
6. Applicants state that each of the Divisions will invest
approximately 10% of its 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 calculated as of the day preceding
the applicable specified Investment Date (the last business day of each
calendar year for the Select Ten Plus Division and the last business
day of the appropriate calendar quarter for the Divisions of Separate
Account Ten).
7. The DJIA is composed of thirty stocks chosen by the editors of
The Wall Street Journal as representative of the New York Stock
Exchange and of American industry. The DJIA is the property of the Dow
Jones & Company, Inc., which is not affiliated with the Applicants and
has not participated in any way in the creation of Separate Account Ten
or the Select Ten Plus Division or in the selection of their stocks.
8. Applicants state that the Divisions seek total return by
acquiring the ten highest dividend yielding common stocks in the DJIA
in equal weights and holding them for approximately twelve months. At
the end of each Division's twelve-month period, the Division's
portfolio is restructured to again hold the ten highest yielding stocks
in the DJIA in equal weights for the next twelve months. The term
``highest yielding stocks'' means the yield for each stock calculated
by annualizing the last quarterly or semi-annual ordinary dividend
distributed on that stock and dividing the result by the market value
of that stock as of the close of the New York Stock Exchange on the
business day prior to the applicable specified Investment Date.
9. Applicants state that the weights of the individual stock
positions will not be rebalanced during the year, nor will new or
additional contributions or transfers be accepted during any Division's
twelve-month holding period. Rather, new or additional contributions or
transfers will be invested on the next available Investment Date.
Dividends from stocks in each Division's portfolio will be reinvested
on the day the dividend is received in additional shares of the stock
that paid the dividend. Upon the receipt of a withdrawal request,
approximately equal dollar amounts of shares of each of the ten stocks
will be sold, such that the total dollar amount sold equals the amount
of the withdrawal.
10. 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) (Tres. Reg.
Sec. 1.817-5) apply a diversification requirement to each of the
Divisions (``Section 817(h) diversification requirements''). To qualify
as ``adequately diversified,'' each Division 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 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.
11. Applicants state that the Divisions intend to comply with the
Section 817(h) diversification requirements. Separate Account Ten and
the Select Ten Plus Division have each entered into an agreement with
the Adviser, who in turn has entered into an agreement with the Sub-
Adviser, that requires the Divisions be operated in compliance with the
Treasury regulations. Therefore, the Adviser and the Sub-Adviser may
depart from the Divisions' investment strategy, if necessary, in order
to meet these Section 817(h) diversification requirements.
12. Applicants represent that under all circumstances, except in
order to meet Section 817(h) diversification requirements, the common
stocks purchased for each Division 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 or Sub-Adviser. The Adviser and Sub-
Adviser have no discretion as to which common stocks are purchased.
13. Applicants state that securities purchased for each of the
Divisions may include securities of issuers in the DJIA that derived
more than 15% of their gross revenues in their most recent fiscal year
from securities related activities. To the extent any of the ten
highest yielding stocks qualifying for a Division are reasonably
believed to receive 15% or more of their revenues from securities
related activities, the Division will allocate a maximum of 5% of its
assets to each of those stocks, and will allocate the remainder of its
assets among the remaining stocks not so limited unless and until the
exemptive relief from this limitation has been granted by the SEC.
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 from Section 12(d)(3) 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 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.
2. Section 6(c) of the 1940 Act provides that the Commission may
exempt any person, transaction, or class of persons or transaction from
any provision 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 provision of the 1940 Act.
3. Applicants request that the Commission exempt Separate Account
[[Page 48539]]
Ten and the Select Ten Plus Division from the provisions of Section
12(d)(3) in order to permit the Divisions 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 day preceding the applicable specified Investment
Date, (ii) those securities represent one of the ten companies in the
DJIA that have the highest dividend yield as of the day preceding the
applicable specified Investment Date, and (iii) as of the day preceding
the applicable specified Investment Date, the value of the common stock
of each securities related issuer represents approximately 10% of the
value of any Division's total assets, but in no event more than 10.5%
of the value of the Division's total assets. 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 or 100 shares of stock. The 10.5% standard will be used on the
prices of the common stock as of the close of business on the day
preceding the applicable specified Investment Date.
4. Each of the Divisions 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.
5. 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.
6. 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. Applicants maintain that this concern does not
arise in this situation since neither the Adviser, Sub-Adviser, nor any
Division has discretion in choosing the common stock or amount
purchased. The stock must first be included in the DJIA (which is
unaffiliated with the Applicants, Adviser, Sub-Adviser or the Boards of
Managers). In addition, the securities must also qualify as one of the
ten companies in the DJIA that has the highest dividend yield as of the
day preceding the applicable specified Investment Date.
7. 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 with discretion to sell portfolio securities to the extent
necessary to meet redemptions. The Adviser and Sub-Adviser are
obligated to follow the investment formula described in the application
and summarized in this notice as nearly as practicable. Securities
purchased for each Division will be chosen with respect to the
specified formulas and not at the Adviser's or Sub-Adviser's
discretion.
8. The Adviser or Sub-Adviser would be permitted to deviate from
the formula only where circumstances are such that the investment of a
particular Division 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 an annuity contract under
the Code. In such a situation, the Adviser and Sub-Adviser must be
permitted to deviate from the investment strategy 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.
9. Applicants represent that the liquidity of a Division's
portfolio is not a concern here since each common stock selected is a
component of the DJIA, listed on the New York Stock Exchange, and among
the most actively traded securities in the United States.
10. Applicants also represent that the effect of a Division's
purchase of 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. Potential purchases by a
Division would represent an insignificant amount of the outstanding
common stock and trading volume of any of these issuers.
11. Applicants state that a possible 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 Division, however,
Applicants maintain 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 a Division
would be invested in the broker-dealer or parent thereof.
12. Finally, Applicants state that another potential conflict of
interest could occur if an investment company directed brokerage to an
affiliated broker-dealer which the company has invested to enhance the
broker-dealer's profitability or to assist it during financial
difficulty, even through the broker-dealer may not offer the best price
and execution. To preclude this type of conflict, the Applicants agree,
as a condition of the application, that no company whose stock is held
in any Division, nor any affiliate of such company, will act as broker
or dealer for any Division in the purchase or sale of any security for
its portfolio.
13. Applicants seek relief not only with respect to Separate
Account Ten and the Select Ten Plus Division, but also with respect to
(i) other separate accounts of the Companies or affiliated insurance
companies that support materially similar investment divisions, and
(ii) other materially similar investment divisions of Separate Account
II of National Integrity Life Insurance Company as may be created in
the future. Applicants represent that the terms of relief requested are
consistent with the standards set forth in Section 6(c) of the 1940
Act.
Applicants' Conditions
Applicants agree to the following conditions:
1. The common stock is included in the DJIA as of the day preceding
the applicable specified Investment Date;
2. The common stock represents one of the ten companies in the DJIA
that have the highest dividend yield as of the day preceding the
applicable specified Investment Date;
3. As of the day preceding the Investment Date, the value of the
common stock of each securities related issuer represents approximately
10% of the value of any Division's total assets, but in no event more
than 10.5% of the value of the Division's total assets; and
4. No company whose stock is held in any Division, nor any
affiliate thereof, will act as broker or dealer for any Division in the
purchase or sale of any security for the Division.
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
[[Page 48540]]
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. 98-24206 Filed 9-9-98; 8:45 am]
BILLING CODE 8010-01-M
