[Federal Register Volume 64, Number 170 (Thursday, September 2, 1999)]
[Notices]
[Pages 48217-48221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22942]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-23980; File No. 812-11676]
Integrity Life Insurance Company, et al.
August 27, 1999.
AGENCY: Securities and Exchange Commission (the ``Commission'' or
``SEC'').
ACTION: Notice of application for an order pursuant to Section 26(b) of
the Investment Company Act of 1940 (the ``1940 Act'') approving certain
substitutions of securities.
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SUMMARY OF APPLICATION: Applicants request an order to permit certain
registered unit investment trusts to substitute shares of EQ Advisors
Trust, a registered open-end investment company, for shares of The
Hudson River Trust, another registered open-end investment company,
currently held by those unit investment trusts.
Applicants: Integrity Life Insurance Company, National Integrity
Life Insurance Company, Separate Account VUL of Integrity Life
Insurance Company, and Separate Account VUL of National Integrity Life
Insurance Company (collectively, the ``Applicants'').
[[Page 48218]]
Filing Date: The application was filed on July 1, 1999, and amended
and restated on August 17, 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 by 5:30 p.m. on September 21, 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: c/o Integrity Life
Insurance Company, 515 West Market Street, 8th Floor, Louisville,
Kentucky 40202, Attn: Kevin L. Howard, Esq.
FOR FURTHER INFORMATION CONTACT: Kevin P. McEnery, Senior Counsel, or
Susan M. Olson, 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
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. Integrity Life Insurance Company (``Integrity'') is an Ohio
stock life insurance company. Integrity sells flexible premium variable
annuity contracts, fixed single premium annuity contracts, and flexible
premium annuity contracts offering both traditional fixed guaranteed
interest rates along with equity indexed options. Integrity serves as
depositor for Separate Account VUL of Integrity Life Insurance Company
(``Integrity Account'').
2. Integrity is an indirect wholly owned subsidiary of ARM
Financial Group, Inc., a publicly traded corporation specializing in
providing retail and institutional customers with products and services
designed for long-term savings and retirement planning.
3. National Integrity Life Insurance Company (``National
Integrity,'' and together with Integrity, the ``Insurance Companies'')
is a New York stock life insurance company. National Integrity sells
flexible premium variable annuity contracts, fixed single premium
annuity contracts, and flexible premium annuity contracts offering
traditional fixed guaranteed interest rates. National Integrity serves
as depositor for Separate Account VUL of National Integrity Life
Insurance Company (``National Integrity Account,'' and together with
the Integrity Account, the ``Insurance Company Accounts''). National
Integrity is a wholly owned subsidiary of Integrity.
4. Each of the Insurance Company Accounts is a segregated asset
account of its Insurance Company sponsor and is registered with the
Commission under the 1940 Act as a unit investment trust. The Insurance
Company Accounts fund the variable benefits available under certain
variable life insurance policies issued by their respective Insurance
Company sponsors (collectively, the ``Policies''). The Policies are
flexible premium individual variable life insurance policies. Integrity
and National Integrity have not offered the Policies since 1990, but
the Policies that they issued are still outstanding.\1\
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\1\ Applicants represent that, in reliance on the relief in
Great-West Life Insurance Company (pub. avail. Oct. 23, 1990)
(``Great-West''), they provide certain information to Policy owners
about the policies, the relevant Insurance Company, and the
underlying fund in lieu of filing post-effective amendments to the
registration statements relating to those Policies or delivering
updated prospectuses to those Policies owners.
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5. The Hudson River Trust (``HRT'') is organized as a Massachusetts
business trust. It is registered as an open-end management investment
company under the 1940 Act, and its shares are registered under the
Securities Act of 1933 (the ``1933 Act'') on Form N-1A. HRT is a series
investment company, as defined by Rule 18f-2 under the 1940 Act, and
currently offers shares of 14 separate portfolios, six of which
(``Current Funds'') would be involved in the proposed substitutions.
HRT sells shares to the Insurance Company Accounts to serve as an
investment medium for the Policies.\2\ Sales of HRT shares to the
Insurance Company Accounts currently account for less than 1% of HRT's
total assets. HRT currently offers two classes of shares, Class IA and
Class IB shares, which differ only in that Class IB shares are subject
to a distribution plan adopted and administered pursuant to Rule 12b-1
under the 1940 Act. The Insurance Company Accounts hold only Class IA
shares. Each Current Fund is advised by Alliance Capital Management
L.P. (``Alliance''), an investment adviser registered under the
Investment Advisers Act of 1940, as amended (``Advisers Act'').
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\2\ An exemptive order was issued by the Commission granting
exemptions from the 1940 Act to permit shares of HRT to be offered
to separate accounts of affiliated and unaffiliated insurance
companies that offer either variable life insurance policies or
variable annuity contracts. See Equitable Variable Life Insurance
Company, Investment Company Act Rel. Nos. 14899 (Jan. 14, 1986)
(order) and 14860 (Dec. 18, 1985) (notice). An exemptive order also
was issued by the Commission granting exemptions from the 1940 Act
to permit shares of EQ Advisors Trust to be offered to separate
accounts of affiliated and unaffiliated insurance companies that
offer either variable life insurance policies or annuity contracts
(``EQAT Shared Funding Order''). See EQ Advisors Trust, Investment
Company Act Rel. Nos. 22651 (April 30, 1997) (order) and 22602
(April 4, 1997) (notice).
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6. EQ Advisors Trust (``EQAT'') is organized as a Delaware business
trust. It is registered as an open-end management investment company
under the 1940 Act, and its shares are registered under the 1933 Act on
Form N-1A. EQAT is a series investment company, as defined by Rule 18f-
2 under the 1940 Act, and currently offers 25 separate portfolios of
shares EQAT currently sells shares to certain registered and
unregistered separate accounts (``Equitable Separate Accounts'') used
as the underlying investment options for certain variable annuity
contracts and/or variable life insurance policies issued by The
Equitable Life Assurance Society of the United States (``Equitable'').
EQAT currently offers two classes of shares, Class IA and IB shares,
which differ only in that Class IB shares are subject to a distribution
plan adopted and administered pursuant to Rule 12b-1 under the 1940
Act. EQ Financial Consultants, Inc. (``EQ Financial''), an indirect
wholly-owned subsidiary of Equitable, serves as investment manager of
each of the current 25 portfolios of EQAT under an investment
management agreement with EQAT.\3\ EQ Financial is an investment
adviser registered under the Advisers Act and a broker-dealer
registered under the Securities Exchange Act of 1934, as amended.
Pursuant to the investment management agreement, the investment manager
(``Manager'') is responsible for the general management and
administration of EQAT, including selecting the investment advisers for
each of EQAT's portfolios (``Advisers''), monitoring their investment
programs and results, reviewing brokerage matters, overseeing
compliance issues, and carrying out the directives of the
[[Page 48219]]
Board of Trustees. EQAT has received an exemptive order from the
Commission (``Multi-Manager Order'') that permits EQ Financial, or any
entity controlling, controlled by, or under common control (within the
meaning of Section 2(a)(9) of the 1940 Act) with EQ Financial, subject
to certain conditions, including approval of the Board of Trustees of
EQAT, and without the approval of shareholders, to (a) Employ a new
Adviser or Advisers for any portfolio pursuant to the terms of a new
Investment Advisory Agreement, in each case either as a replacement for
an existing Adviser or as an additional Adviser; (b) change the terms
of any Investment Advisory Agreement; and (c) continue the employment
of an existing Adviser on the same contract terms where a contract has
been assigned because of a change of control of the Adviser.\4\ In such
circumstances, owners would receive notice of any such action,
including information concerning any new Adviser, that normally is
provided in proxy materials.
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\3\ During 1999, EQ Financial plans to change its name to AXA
Advisors, Inc. On July 12, 1999, the Board of trustees of EQAT
approved a transfer of the Investment Management Agreement to
Equitable. That transfer of the Investment Management Agreement is
expected to occur prior to October 1, 1999.
\4\ See EQ Advisors Trust and EQ Financial Consultants, Inc.,
Investment Company Act Rel. Nos. 23128 (April 24, 1998) (order) and
23093 (March 30, 1998) (notice). Before a New Fund may rely on the
Multi-Manager Order, the operation of that New Fund as a multi-
manager fund, as described in the application for the Multi-Manager
Order, will be approved, following the substitutions proposed in the
application, by a majority of that New Fund's outstanding voting
securities in a manner consistent with the EQAT Shared Funding
Order.
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7. EQAT has filed a post-effective amendment to its registration
statement on Form N-1A in order to register 14 new portfolios,
including the six portfolios (``New Funds'') that the Applicants
propose to substitute for the Current Funds. Alliance will serve as the
Adviser to each of the 14 new portfolios (the ``Alliance Portfolios''),
including the New Funds. EQAT intends to sell shares of the Alliance
Portfolios to the Equitable Separate Accounts, as well as to the
Insurance Company Accounts.
8. The Policies expressly reserve to the Applicants the right,
subject to compliance with applicable law, to substitute shares of
another portfolio for shares of the Current Funds held by the Insurance
Company Accounts. The prospectuses describing the Policies contain
appropriate disclosure of this right of substitution.
9. Applicants represent that they are not affiliates of HRT, EQAT
or Equitable.
10. The Applicants propose to substitute Class IA shares issued by
the six New Funds for the Class IA shares issued by six Current Funds.
Equitable and each Equitable Separate Account that is registered under
the 1940 Act and that currently invests in HRT (collectively, the
``Equitable Accounts'') have filed an application with the Commission
(``Equitable Application'') requesting, inter alia, an order pursuant
to Section 26(b) of the 1940 Act, approving the substitution of
securities issued by the Alliance Portfolios for the securities issued
by the 14 portfolios of HRT and currently used as the investment
options for the contracts issued by Equitable through the Equitable
Accounts.\5\ If approved, Equitable will redeem more than 99% of HRT's
assets in connection with those substitutions. Applicants state that it
is their belief that it is reasonable to conclude that, following the
proposed substitutions by Equitable: (i) The expense level of the
Current Funds will increase dramatically as a percentage of net assets
due to the smaller asset base, which is highly unlikely to increase;
(ii) the Current Funds will be difficult to manage in conformity with
the applicable diversification regulations under the Internal Revenue
Code of 186, as amended (``Code''); and (iii) the asset levels of the
Current Funds will be small enough to raise concern as to whether the
Current Funds will remain viable investment options. By contrast, none
of these concerns will be associated with investments in EQAT.
Applicants submit that, under these circumstances, the substitution of
the New Funds for the Current Funds is in the best interest of Policy
owners.
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\5\ File No. 812-11602 (filed Apr. 30, 1999).
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11. The Applicants represent that the Manager of the 25 current
portfolios of EQAT will also serve as Manager of the New Funds, that
Alliance will serve as the Adviser to each of the Alliance Portfolios,
and that each of the New Funds will have the same portfolio manager(s)
as those of the corresponding Current Fund. The Applicants also state
that each of the New Funds will have investment objectives, investment
strategies and anticipated risks that are identical in all material
respects to those of the corresponding Current Fund. The investment
objectives of each Current Fund and the corresponding New Fund are as
follows:
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Current fund Investment objective New fund Investment objective
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Alliance Aggressive Stock Portfolio.. Seeks to achieve long- Alliance Aggressive Seeks to achieve long-
term growth of capital. Stock Portfolio. term growth of
capital.
Alliance Balanced Portfolio.......... Seeks to achieve a high Alliance Balanced Seeks to achieve a high
return through both Portfolio. return through both
appreciation of appreciation of
capital and current capital and current
income. income.
Alliance Common Stock Portfolio...... Seeks long-term growth Alliance Common Stock Seeks long-term growth
of its capital and Portfolio. of its capital and
increase in income. increase in income.
Alliance Global Portfolio............ Seeks long-term growth Alliance Global Seeks long-term growth
of capital. Portfolio. of capital.
Alliance High Yield Portfolio........ Seeks to achieve a high Alliance High Yield Seeks to achieve a high
return by maximizing Portfolio. return by maximizing
current income and, to current income and, to
the extent consistent the extent consistent
with that objective, with that objective,
capital appreciation. capital appreciation.
Alliance Money Market Portfolio...... Seeks to obtain a high Alliance Money Market Seeks to obtain a high
level of current Portfolio. level of current
income, preserve its income, preserve its
assets and maintain assets and maintain
liquidity. liquidity.
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12. The Applicants state that it is expected that: (i) The
management fees (i.e., the total management fees paid to the Manager
and from which the Manager will compensate the Adviser) with respect to
each New Fund will be the same as the management fees currently
applicable to the corresponding Current Funds; and (ii) there may be a
slight increase in the total expense ratios of each of the New Funds as
compared to those of the corresponding Current Fund. The Applicants
also represent that the chart below shows: (i) The Management fees
[[Page 48220]]
and total expenses for Class IA shares of each of the Current Funds for
the year ending December 31, 1998; and (ii) the estimated management
fees and total expenses of Class IA shares of each of the New Funds
following the proposed substitutions. Estimated management fees and
total expenses of Class IA shares of each of the New Funds are based on
pro forma expenses of the New Funds following the proposed
substitutions and are based upon the audited financial statements of
HRT for the year ending December 31, 1998.
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Year ending December 31, 1998 Pro forma
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Managemet and
Advisory fees Total expenses advisory fees Total expenses
(as percentage (as percentage New fund class (as percentage (as percentage
Current fund class IA of average of average IA of average of average
daily net daily net daily net daily net
assets) assets) assets) assets)
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Alliance Aggressive Stock 0.54 0.56 Alliance 0.54 0.57
Portfolio. Aggressive
Stock Portfolio.
Alliance Balanced Portfolio.. 0.41 0.45 Alliance 0.41 0.46
Balanced
Portfolio.
Alliance Common Stock 0.36 0.39 Alliance Common 0.36 0.40
Portfolio. Stock Portfolio.
Alliance Global Stock 0.64 0.71 Alliance Global 0.64 0.72
Portfolio. Stock Portfolio.
Alliance High Yield Portfolio 0.60 0.63 Alliance High 0.60 0.64
Yield Portfolio.
Alliance Money Market 0.35 0.37 Alliance Money 0.35 0.38
Portfolio. Market
Portfolio.
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13. The Applicants state that they provided their respective Policy
owners with detailed notice disclosing the proposed substitutions
shortly after the application was initially filed. The Applicants state
that, upon effectiveness of the post-effective amendment to the
registration statement of EQAT with respect to the New Funds and
publication of notice by the Commission with respect to the
application, they will send the Policy owners further detailed notice
concerning the proposed substitutions, together with a prospectus for
the New Funds. The notices will describe each of the New Funds,
identify each Current Fund that is being replaced, and disclose the
impact of other substitutions on fees and expenses at the underlying
fund level. The Applicants state that copies of the prospectuses for
the New Funds will be sent to Policy owners with the notice. The notice
period will be at least thirty days after the notice is sent to
affected Policy owners. Confirmation of the substitutions will be sent
to affected Policy owners within five days after the substitutions are
effected.
14. The Applicants state that the substitutions will be effected by
redeeming shares of the Current Funds on the effective date of the
substitutions proposed in the application and proposed in the Equitable
Application (``Substitution Date'') at net asset value and using the
proceeds to purchase shares of the New Funds at net asset value on the
same date. No transfer or similar changes will be imposed by the
Applicants and, on the Substitution Date, all policy values will remain
unchanged and fully invested. The Applicants expect that the
substitutions will be effected by redeeming the shares of each Current
Fund in-kind. Those assets will then be contributed in-kind to the
corresponding New Fund to purchase shares of that New Fund. Redemptions
and contributions in-kind will reduce the brokerage costs that
otherwise would be incurred in connection with the proposed
substitutions and will ensure that Policy values remain fully invested.
In-kind redemptions and contributions will be done in a manner
consistent with the investment objectives, policies and diversification
requirements of each corresponding New Fund. The Manager of each New
Fund will review the in-kind transactions to assure that the assets are
suitable for the New Fund. All assets subject to in-kind redemption and
purchase will be valued based on the normal valuation procedures of the
redeeming and purchasing Funds, as set forth in the HRT and EQAT
registration statements.
15. The significant terms of the substitutions described above
include:
a. The New Funds have investment objectives, investment strategies,
and anticipated risks that are identical in all material respects to
those of the Current Funds. In this regard, the Applicants note that
the New Funds will continue to employ the same portfolio managers
currently employed by the Current Funds and are intended to mirror the
investment options provided by the Current Funds.
b. The fees and expenses of the New Funds will in all cases be
substantially similar to those of the Current Funds, assuming that the
asset levels of the New Funds do not decrease significantly from the
Current Funds' present asset levels. Again, the Applicants note in this
regard that given the substantial similarity of the Current Funds and
the New Funds, Applicants do not expect there to be a reduction in the
asset levels of the New Funds as a result of the substitutions.
c. Policy owners may transfer assets from the Current or New Funds
to another fund available under their Policy without the imposition of
any fee, charge, or other penalty that might otherwise be imposed from
the date of the initial notice through a date at least thirty days
following the Substitution Date.
d. The substitutions, in all cases, will be effected at the net
asset value of the respective shares of the Current Fund and the
corresponding New Fund in conformity with Section 22(c) of the 1940 Act
and Rule 22c-1 thereunder, without the imposition of any transfer or
similar charge by the Applicants, and with no change in the amount of
any Policy owner's Policy value or in the dollar value of his or her
investment in such Policy.
e. Policy owners will not incur any fees or charges as a result of
the proposed substitutions, nor will their rights or the obligations of
the relevant Insurance Company under the Policies be altered in any
way. Equitable will bear all expenses incurred in connection with the
proposed substitutions and related filings and notices, including
legal, accounting and other fees and expenses. The proposed
substitutions will not cause the Policy fees and charges currently
being paid by existing Policy owners to be greater after the proposed
substitutions than before the proposed substitutions.
f. Redemptions in-kind and contributions in-kind will be done in a
manner consistent with the investment objectives, policies and
diversification requirements of the applicable Current and New Funds,
and the Manager will review the in-kind transactions to assure that the
assets are suitable for the New
[[Page 48221]]
Fund. Consistent with Rule 17a-7(d) under the 1940 Act, no brokerage
commissions, fees (except customary transfer fees) or other
remuneration will be paid in connection with the in-kind transactions.
g. The substitutions will not be counted as new investment
selections in determining the limit, if any, on the total number of
funds that Policy owners can select during the life of a Policy.
h. The substitutions will not alter in any way the life benefits,
tax benefits, or any Policy obligations of the Applicants, under the
Policies.
i. Policy owners may withdraw amounts under the Policies or
terminate their interest in a Policy, under the conditions that
currently exist, including payment of any applicable withdrawal or
surrender charge.
j. Policy owners affected by the substitutions will be sent written
confirmation of the substitutions that identify each substitution made
on behalf of that Policy owner within five days following the
Substitution Date.
k. Before a New Fund may rely on the Multi-Manager Order, the
operation of that New Fund as a multi-manager fund as described in the
application for the Multi-Manager Order will be approved, following the
substitutions proposed in the application and the substitutions
proposed in the Equitable Application, by a majority of that New Fund's
outstanding voting securities in a manner consistent with the EQAT
Shared Funding Order.
16. The Applicants state that they will not complete the
substitutions as described in the application unless all of the
following conditions are met:
a. The Commission will have issued an order approving the
substitutions under Section 26(b) of the 1940 Act.
b. The Commission will have issued an order approving the Equitable
Application.
c. The amendments to the registration statement for EQAT adding the
New Funds shall have become effective.
d. Each Policy owner will have been mailed effective prospectuses
for the New Funds and relevant information about the proposed
substitutions for the applicable Policies at least 30 days prior to the
Substitution Date. In conjunction with this mailing, each Policy owner
will have been sent a notice that describes the terms of the proposed
substitutions and the Policy owners' rights in connection with them.
e. The Applicants will have satisfied themselves, based on advice
of counsel familiar with insurance laws, that the Policies allow the
substitution of portfolios as described in the application, and that
the transactions can be consummated as described herein under
applicable insurance laws and under the various Policies.
f. The Applicants will have complied with any regulatory
requirements they believe are necessary to complete the transactions in
each jurisdiction where the Policies have been qualified for sale.
Applicants' Legal Analysis
1. Section 26(b) of the 1940 Act provides that it shall be 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 shall have approved such
substitution. Section 26(b) further provides that the Commission shall
issue an order approving such substitution if the evidence establishes
that it is consistent with the protection of investors and the purposes
fairly intended by the policies and provisions of the 1940 Act.
2. The Applicants submit that the Policies expressly reserve to the
Applicants the right, subject to compliance with applicable law, to
substitute shares of another portfolio for shares of the Current Funds
held by the Insurance Company Accounts, and that appropriate disclosure
of this right of substitution is contained in the prospectuses
describing the Policies. The Applicants assert that they have reserved
this right of substitution both to protect themselves and their Policy
owners in situations where either might be harmed by events affecting
the issuer of the securities held by the Insurance Company Account and
to preserve the opportunity to replace such shares in situations where
a substitution could benefit itself and its Policy owners.
3. The Applicants maintain that the proposed substitutions protect
the Policy owners who have allocated Policy value to the Current Funds
by: (1) Providing an underlying investment option that is substantially
similar in all material aspects to the current investment option; and
(2) eliminating Current Funds that will not be viable due to the low
level of assets following the proposed substitutions by Equitable.
4. The Applicants further submit that the proposed substitutions
meet the standards that the Commission and its staff generally have
applied to other substitutions that have been approved. In addition,
the Applicants contend that none of the proposed substitutions is the
type of substitution that Section 26(b) was designed to prevent. Unlike
traditional unit investment trusts, the Policies provide each Policy
owner with the right to exercise his own judgment and transfer Policy
values into any other available variable and/or fixed investment
options. Additionally, Applicants state that the proposed substitutions
will not, in any manner, reduce the number, nature or quality of the
available investment options. The Applicants assert that the Policy
owners will be offered the opportunity to transfer amounts out of the
affected subaccounts without any cost or other penalty that may
otherwise have been imposed until thirty days after the Substitution
Date. For these reasons, the Applicants maintain that the proposed
substitutions will not result in the type of costly forced redemption
that Section 26(b) was designed to prevent.
5. The Applicants further submit that the proposed substitutions
also are unlike the type of substitution that Section 26(b) was
designed to prevent in that by purchasing a Policy, Policy owners
select much more than a particular underlying fund in which to invest
their Policy values. The Policy owners also select the specific type of
insurance coverage offered by the Applicants under the applicable
Policy, as well as numerous other rights and privileges set forth in
the Policy. The Applicants state that, in choosing to buy a Policy from
one of the Insurance Companies, it is likely that the Policy owner also
may have considered that Insurance Company's size, financial condition,
and reputation for service, and that none of those considerations and
factors will change as a result of the proposed substitutions.
6. The Applicants submit that, for all reasons stated above, the
proposed substitutions are consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
1940 Act.
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. 99-22942 Filed 9-1-99; 8:45 am]
BILLING CODE 8010-01-M
