[Federal Register Volume 64, Number 177 (Tuesday, September 14, 1999)]
[Notices]
[Pages 49827-49829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23888]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23998; No. 812-11512]
Ohio National Life Insurance Company, et al.; Notice of
Application
September 8, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to Section 26(b) of
the Investment Company Act of 1940 (the ``Act'').
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SUMMARY OF APPLICATION: Applicants seek an order approving the
substitution of: (a) Shares of Small Cap Growth Portfolio of Ohio
National Fund, Inc. (``ON Small Cap Growth Portfolio'') for shares of
Montgomery Variable Series: Small Cap Opportunities Fund (``Montgomery
Small Cap Fund''); and (b) shares of Lazard Retirement Emerging Markets
Portfolio (``Lazard Emerging Markets Portfolio'') for shares of
Montgomery Variable Series: Emerging Markets Fund (``Montgomery
Emerging Markets Fund'').
APPLICANTS: The Ohio National Life Insurance Company (``Ohio
National''), Ohio National Variable Account A (``Variable Account A''),
Ohio National Life Assurance Corporation (``ONLAC''), and Ohio National
Variable Account R (``Variable Account R'').
FILING DATES: The application was filed on February 17, 1999, and
amended and restated on July 26, 1999, and August 27, 1999.
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 no later then 5:30 p.m. on September 29, 1999, 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 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
Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549-0609. Applicants, Ohio National Life
Insurance Company, One Financial Way, Cincinnati, Ohio 45242.
FOR FURTHER INFORMATION CONTACT: Paul G. Cellupica, 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 Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0102 (tel (202) 942-8090).
Applicants' Representations
1. Ohio National was organized as a stock company under the laws of
Ohio in 1909. It issues annuities in 47 states, the District of
Columbia and Puerto Rico. ONLAC, a wholly-owned subsidiary of Ohio
National, is a stock life insurance company organized under the laws of
Ohio in 1979.
2. Variable Account A was established in 1969 by Ohio National as a
separate account under Ohio law for the purpose of funding variable
annuity contracts issued by Ohio National. Five of the variable annuity
contracts are affected by the application (``VA Contracts''). Variable
Account R was established in 1985 for the purpose of funding variable
life insurance contracts issued by ONLAC. One of the variable life
insurance contracts is affected by this application (``VLI Contract,''
collectively with the VA Contracts, the ``Contracts''). Variable
Account A and Variable Account R are registered as unit investment
trusts under the Act.
3. Purchase payments for the Contracts are allocated to one or more
subaccounts of Variable Account A or Variable Account R
(``Subaccounts''). The Contracts permit allocations of accumulation
value to up to 10 of the available Subaccounts that invest in specific
investment portfolios (``Portfolios'') of Underlying mutual funds
(``Underlying Funds'').
4. The Contracts permit transfers of accumulation value from one
Subaccount to another at any time prior to annuitization. No sales
charge applies to a transfer of accumulation value among the
Subaccounts. For three of the VA Contracts, the first transfer in any
calendar month is free; each additional transfer in a calendar month is
subject to a $10 charge. For the two remaining VA Contracts and the VLI
Contract, the first four transfers during each contract year are free;
each additional transfer is subject to a $3 charge. Although there
currently is no limit on the number of transfers that may be made, the
Contracts permit Ohio National or ONLAC, as applicable, to limit the
number, frequency, method or amount of transfers. Transfers from any
Subaccount on any one day may be
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limited to 1% of the previous day's total net assets of the Portfolio
if Ohio National, ONLAC or the Underlying Fund believe that the
Portfolio might otherwise be damaged.
5. Applicants propose the following substitutions: (a) The
substitution of shares of ON Small Cap Growth Portfolio for shares of
Montgomery Small Cap Fund and (b) the substitution of shares of Lazard
Emerging Markets Portfolio for shares of Montgomery Emerging Markets
Fund.
6. Montgomery Small Cap Fund is a separate investment portfolio of
The Montgomery Funds III (``Montgomery Funds''), an open-end management
investment company registered under the Act, and is currently an
investment option under three of the VA Contracts. Montgomery Small Cap
Fund is managed by Montgomery Asset Management, LLC (``Montgomery''), a
subsidiary of Commerzbank AG.
7. Montgomery Small Cap Fund's investment objective is to seek
capital appreciation by investing primarily in equity securities,
usually common stock, of domestic companies having market
capitalizations of less than $1 billion. The expense ratio of
Montgomery Small Cap Fund for 1998 was 1.50%. Absent voluntary fee
waivers by Montgomery, that expense ratio would have been 3.71%. Absent
voluntary fee waivers by Montgomery, that expense ratio would have been
3.71%. The total return of Montgomery Small Cap Fund (exclusive of
Contract or Subaccount charges) was -7.20% for the period since its
inception on May 1, 1998, through December 31, 1998.
8. Montgomery and Montgomery Funds intend to cease offering shares
of Montgomery Small Cap Fund due to the small amount of assets and the
corresponding absence of economies of scale. Montgomery has indicated
that the small size of Montgomery Small Cap Fund makes it difficult to
manage successfully and makes it difficult to comply with
diversification requirements applicable to variable insurance products
under the Internal Revenue Code of 1986, as amended, and to mutual
funds under the Act. On May 1, 1999, Ohio National and ONLAC ceased
permitting allocations by new contractowners of accumulation value to
the Subaccounts that invest in Montgomery Small Cap Fund.
9. ON Small Cap Growth Portfolio is another investment option
currently available under the VA Contracts which also offer Montgomery
Small Cap Fund. The investment adviser of ON Small Cap Growth Portfolio
is Ohio National Investments, Inc. The sub-adviser that manages the
investments of ON Small Cap Growth Portfolio is Robertson Stephens
Investment Management, L.P.
10. The investment objective of ON Small Cap Growth Portfolio is
capital appreciation. ON Small Cap Growth Portfolio invests in an
actively managed portfolio of equity securities, principally common
stocks, of companies that in the opinion of its sub-adviser have the
potential, based on superior products or services, operating
characteristics, and financing capabilities, for more rapid growth than
the over-all economy. Up to 30% of its assets may be invested in
foreign securities. The expense ratio of ON Small Cap Growth Portfolio
for 1998 was 1.30%. The total return of ON Small Cap Growth Portfolio
(exclusive of Contract or Subaccount charges) was 4.62% for the period
since its inception on May 1, 1998, through December 31, 1998.
11. Montgomery Emerging Markets Fund (collectively with Montgomery
Small Cap Fund, the ``Eliminated Portfolios'') is a separate investment
portfolio of Montgomery Funds and is currently an investment option
under the Contracts. Montgomery Emerging Markets Fund is managed by
Montgomery.
12. Montgomery Emerging Markets Fund's investment objective is to
seek capital appreciation by investing primarily in equity securities
of companies in countries having economies and markets generally
considered by the World Bank or the United Nations to be emerging or
developing. The expense ratio of Montgomery Emerging Markets Fund for
1998 was 1.75%. Absent voluntary deferral of fees and absorption of
expenses by Montgomery, that expense ratio would have been 1.80%. The
total return of Montgomery Emerging Markets Fund (exclusive of Contract
or Subaccount charges) was -37.53% for the year ended December 31,
1998, and the average annual total return since its inception on
February 2, 1996, through December 31, 1998, was -13.15%.
13. On May 1, 1999, Ohio National and ONLAC ceased permitting
allocations by new contractowners of accumulation value to the
Subaccounts that invest in Montgomery Emerging Markets Fund.
14. Lazard Emerging Markets Portfolio (collectively with ON Small
Cap Growth Portfolio, the ``Substitute Portfolios'') is a separate
investment portfolio of Lazard Retirement Series, Inc., an open-end
management investment company registered under the Act. The Lazard
Emerging Markets Portfolio has been available under the Contracts since
May 1, 1999. Lazard Emerging Markets Portfolio is managed by Lazard
Asset Management (``Lazard''), a division of Lazard Freres & Co. LLC.
15. Lazard Emerging Market Portfolio's investment objective is to
seek capital appreciation. It invests primarily in equity securities of
non-United States issuers located, or doing significant business, in
emerging market countries that Lazard considers inexpensively priced
relative to the return on total capital or equity. The expense ratio of
Lazard Emerging Markets Portfolio for 1998 was 1.80%. Absent voluntary
expense reductions, that expense ratio would have been 14.37%. The
total return of Lazard Emerging Markets Portfolio for the year ended
December 31, 1998 was -22.85%. Its average annual total return since
its inception on November 4, 1997, through December 31, 1998, was
-26.48%.
16. Applicants represent that each substitution will take place at
the relative asset values determined on the date of the substitution in
accordance with Section 22 of the Act and Rule 22c-1 thereunder. There
will be no financial impact to any contractowner. Each substitution
will be effected by having each Subaccount that invests in the
Eliminated Portfolio redeem its shares of the Eliminated Portfolio at
the net asset value calculated on the date of the substitutions and
purchase shares of the substitute Portfolio at net asset value on the
same date.
17. Immediately following the substitutions, Ohio National and
ONLAC will combine: (a) The Montgomery Small Cap and ON Small Cap
Growth Subaccounts that each hold shares of the ON Small Cap Growth
Portfolio after the substitution; and (b) the Montgomery Emerging
Markets and Lazard Emerging Markets Subaccounts that each hold shares
of the Lazard Emerging Markets Portfolios after the substitution. Ohio
National and ONLAC will reflect this treatment in disclosure documents
for Variable Account A and Variable Account R, respectively, and in the
financial statements and Form N-SAR annual report filed by Variable
Account A and Variable Account R.
18. Applicants represent that the proposed substitutions were
described in supplements to the prospectus for the Contracts
(``Stickers'') filed with the Commission and mailed to contractowners.
The Stickers gave contractowners notice of the substitutions and
describe the reasons for engaging in the substitutions. The Stickers
also informed contractowners that no additional amounts may be
allocated to the Subaccounts that invest in the Eliminated Portfolios
on or after the date of substitution. In addition, the
[[Page 49829]]
Stickers informed affected contractowners that they will have one
opportunity to reallocate accumulation value:
(a) Prior to the substitutions, from the Subaccounts investing in
the Eliminated Portfolios; or
(b) For 30 days after the substitutions, from the Subaccounts
investing in the Substitute Funds, to Subaccounts investing in other
Portfolios available under the Contracts, without the imposition of any
transfer charge or limitation.
19. A transfer out of the Subaccounts investing in the Eliminated
Portfolios from the date of the notice through the date of the
substitutions will not: (a) Be assessed a transfer fee; (b) count as a
free transfer; or (c) be subject to any limitation relating to
transfers that result in more than a reduction of an Underlying Fund's
assets by 1% or more.
20. Similarly, for a period of 30 days after the substitutions, a
transfer out of a Subaccount that invests in a Substitute Portfolio of
accumulation value moved to that Subaccount as a result of the
substitutions will not: (a) Be assessed a transfer fee; (b) count as a
free transfer; or (c) be subject to any limitation relating to
transfers that result in more than a reduction of an Underlying Fund's
assets by 1% or more.
21. Applicants represent that the prospectuses for the Contracts
reflect the substitutions. Each contractowner will have been provided
prospectuses for the Substitute Portfolios before the substitutions.
Within five days after the substitutions, Ohio National and ONLAC will
send to contractowners written confirmation that the substitutions have
occurred.
22. Applicants represent that Ohio National and ONLAC will pay all
fees and expenses of the substitutions, including legal, accounting,
brokerage commissions and other fees and expenses; none will be borne
by contractowners. Affected contractowners will not incur any fees or
charges as a result of the substitutions, nor will their rights or the
obligations of Ohio National or ONLAC under the Contracts be altered in
any way. The proposed substitutions will not cause the fees and charges
under the Contracts currently being paid by contractowners to be
greater after the substitutions than before the substitutions.
23. Applicants state that their request satisfies the standards for
relief of Section 26(b) because:
(a) The substitutions involve Portfolios with substantially similar
investment objectives;
(b) After each substitution, affected contractowners will be
invested in a Portfolio whose performance has been better on a
historical basis; and
(c) After each substitution affected contractowners will be
invested in a Portfolio whose expenses have been less on a historical
basis.
Applicants' Legal Analysis
1. Applicants request an order pursuant to Section 26(b) of the Act
approving the substitutions. Section 26(b) of the Act makes it 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 approves the substitution. The
Commission will approve such a substitution if the evidence establishes
that it is consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the Act.
2. Applicants assert that the purposes, terms and conditions of the
substitutions are consistent with the principles and purposes of
section 26(b) and do not entail any of the abuses that section 26(b) is
designed to prevent. Applicants represent that substitution is an
appropriate solution to the unfavorable relative performance and higher
relative expenses of the Portfolios to be eliminated. Applicants
believe that each Substitute Portfolio will better serve contractowner
interests because its performance has been significantly better than
the performance of, and its expenses have been lower than the expenses
of, the corresponding Eliminated Portfolio. Moreover, Ohio National and
ONLAC have each reserved this right in the Contracts and disclosed this
reserved right in the prospectuses for the Contracts.
3. Applicants represent that the substitutions will not result in
the type of costly forced redemption that section 26(b) was intended to
guard against and, for the following reasons, are consistent with the
protection of investors and the purposes fairly intended by the Act:
(a) Each Substitute Portfolio has investment objectives, policies
and restrictions substantially similar to those of the corresponding
Eliminated Portfolio, and permits contractowners continuity of their
investment objectives and expectations.
(b) The costs of the substitutions will be borne by Ohio National
and ONLAC and will not be borne by contractowners. No charges will be
assessed to effect the substitutions.
(c) The substitutions will, in all cases, be at net asset values of
the respective shares, without the imposition of any transfer or
similar charge and with no change in the amount of any contractowner's
accumulation value.
(d) The substitutions will not cause the fees and charges under the
Contracts currently being paid by contractowners to be greater after
the substitutions than before the substitutions.
(e) The contractowners will be given notice prior to the
substitutions and will have an opportunity to reallocate accumulation
value among other available Subaccounts without the imposition of any
transfer charge or limitation. No transfer:
(i) From a Subaccount investing in an Eliminated Portfolio from the
date of the notice through the date of the substitutions, or
(ii) For 30 days after the substitutions, of accumulation value
that had been transferred to a Subaccount that invests in a Substitute
Portfolio as a result of the substitutions, will count as one of the
limited number of transfers permitted in a contract year free of
charge.
(f) Within five days after the substitutions, Ohio National and
ONLAC will send to contractowners written confirmation that the
substitutions have occurred.
(g) The substitutions will in no way alter the insurance benefits
to contractowners or the contractual obligations of Ohio National or
ONLAC.
(h) The substitutions will in no way alter the tax benefits to
contractowners.
Conclusion
Applicants assert that, for the reasons summarized above, the
requested order approving the substitutions should be granted.
For the Commission, by the Division of Investment Management
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23888 Filed 9-13-99; 8:45 am]
BILLING CODE 8010-01-M
