[Federal Register Volume 61, Number 187 (Wednesday, September 25, 1996)]
[Notices]
[Pages 50355-50357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24490]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22232; 812-9624]
Diversified Investors Strategic Variable Funds, et al.
September 19, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Diversified Investors Strategic Variable Funds (``Strategic
Variable Funds''); Diversified Investors Variable Funds (``Diversified
Variable Funds''); Diversified Investors Portfolios (``Diversified
Portfolios''); AUSA Life Insurance Company, Inc. (``AUSA''), on behalf
of itself and each future separate account (or subaccount thereof)
established by AUSA and registered under the 1940 Act as a unit
investment trust in connection with the offering by AUSA of group
variable annuity contracts (``Future Separate Accounts''); Diversified
Investment Advisors, Inc. (``Investment Advisors''), on behalf of
itself and each open-end management investment company or series
thereof organized in the future which becomes a member of the same
``group of investment companies'' (as defined in Rule 11a-3 of the 1940
Act) as, and which is the underlying investment vehicle for, a Future
Separate Account (``Future Funds''); and Diversified Investors
Securities Corp. (``Securities'').
Relevant Act Sections: Order requested under Section 6(c) of the 1940
Act granting exemption from Section 12(d) of the 1940 Act, and under
Sections 6(c) and 17(b) of the 1940 Act, granting exemption from
Section 17(a) of the 1940 Act.
Summary of Application: The requested order would permit Applicants to
create a ``fund of funds'' that initially would have three subaccounts.
Each subaccount would allocate its assets to the purchase of units of
Diversified Variable Funds or of the Future Separate Accounts
(hereinafter the ``Underlying Spokes'') without regard to the
percentage limitations of Section 12(d)(1) of the 1940 Act. The
Underlying Spokes, in turn, would invest in a corresponding series of
Diversified Portfolios or of a Future Fund (hereinafter the
``Underlying Hubs'').
Filing Dates: The application was filed on June 12, 1995, and was
amended and restated on September 25, 1995, January 29, 1996, July 15,
1996, August 22, 1996, and September 9, 1996.
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 SEC's Secretary and
serving Applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on October
15, 1996, 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 requestor's interest,
the reason for the request, and the issues contested. Persons may
request notification of a hearing by writing to the Secretary of the
SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. Applicants, 4 Manhattanville Road,
Purchase, New York 10577.
FOR FURTHER INFORMATION CONTACT:
Pamela K. Ellis, Senior Counsel, at (202) 942-0670, Office of Insurance
Products (Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. AUSA is a New York stock life insurance company, and a wholly
owned indirect subsidiary of AEGON nv, a Netherlands corporation which
is a publicly traded international insurance group.
2. Strategic Variable Funds is a separate account of AUSA, and is
registered under the 1940 Act as an open-end management investment
company.
3. Diversified Variable Funds is a separate account of AUSA and a
unit investment trust registered under the 1940 Act. Diversified
Variable Funds consists of fourteen separate subaccounts. Of these
subaccounts, twelve invest in Diversified Portfolios, and eleven may
serve as Underlying Spokes. Applicants state that each of the Future
Separate Accounts (which will become Underlying Spokes) will be
separate accounts (or subaccounts thereof) of AUSA, and will be
registered under the 1940 Act as unit investment trusts.
4. Diversified Portfolios is organized as a trust under the laws of
the State of New York, and is registered as an open-end management
investment company under the 1940 Act. Diversified Portfolios consists
of twelve separate series, eleven of which constitute the existing
Underlying Hubs. Applicants state that each of the Future Funds (which
will become Underlying Hubs) will be registered under the 1940 Act as
open-end management investment companies (or will be a series of such a
company).
5. Investment Advisors is a registered investment adviser under the
Investment Advisers Act of 1940, and
[[Page 50356]]
also is an indirect wholly owned subsidiary of AEGON nv. Investment
Advisors is the investment manager for Diversified Portfolios.
6. Securities, a Delaware corporation, is registered as a broker-
dealer under the Securities Exchange Act of 1934, and is a member of
the National Association of Securities Dealers, Inc. Securities acts as
distributor for group variable contracts issued by AUSA.
7. Applicants organized Strategic Variable Funds to operate as a
``fund of funds.'' Strategic Variable Funds will be one of the
available investment vehicles underlying group variable annuity
contracts offered by AUSA (``Variable Contracts''). Strategic Variable
Funds initially will have three subaccounts (``Subaccounts''). Each
Subaccount will invest all of its assets in units of the Underlying
Spokes, and will allocate and reallocate its assets among the
Underlying Spokes.
8. The Underlying Spokes are, or will be, ``feeder'' (or ``spoke'')
funds in a ``master-feeder'' (or ``Hub and Spoke'') \1\
structure in which there are other feeders investing in the master
funds. Each of the existing Underlying Spokes invests, and each future
Underlying Spoke will invest, all of its assets in an Underlying Hub
having the same investment objective and policies as the Underlying
Spoke. Each existing Underlying Hub is advised by Investment Advisors
and has one or more sub-advisers who are responsible for its day-to-day
investment selections. In addition to the Underlying Spokes, each of
the existing Underlying Hubs has, and each future Underlying Hub is
expected to have, a number of additional ``spokes,'' including a mutual
fund, a bank sponsored collective trust, and non-registered insurance
company separate accounts. In the future, each Underlying Hub may sell
interests to other eligible entities to the extent permitted by
applicable law.
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\1\ Hub and Spoke is a registered service mark of
Signature Financial Group, Inc.
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9. Allocations of a Subaccount's assets among units of the
Underlying Spokes will be made consistent with its investment
objective. For example, it is anticipated that an ``aggressive''
Subaccount would, under normal circumstances, invest substantially all
of its assets in Underlying Spokes that in turn invest in Underlying
Hubs investing in equity securities. The Underlying Spokes/Underlying
Hubs in which each Subaccount will invest will be described in the
Subaccount's prospectus. In addition, the prospectus will disclose the
general ranges for investment by the Subaccount in each type of
Underlying Spoke (i.e., equity, fixed-income, and money market), and in
each specific Underlying Spoke. Contractholders will receive disclosure
of any changes in the identity of the Underlying Spokes in which the
Subaccount may invest (e.g., if a new Underlying Spoke is included) or
any changes in the investment ranges. Allocations of a Subaccount's
assets among Underlying Spokes initially will be made, and subsequently
adjusted, by Investment Advisors in its role as investment manager to
Strategic Variable Funds.
10. Applicants anticipate that Strategic Variable Funds, the
Underlying Spokes, and the Underlying Hubs will be sold without a
front-end sales charge, and will not be subject to any redemption
charge, contingent deferred sales charge, or Rule 12b-1 fees.
Applicants reserve the right, however, to charge sales charges and
service fees in the future subject to Condition 5 below. The only
direct expense payable by Strategic Variable Funds will be an asset
allocation and administrative fee, in return for which investors in
Strategic Variable Funds will receive allocation and other services
provided by Investment Advisors and AUSA. Applicants anticipate that
the asset allocation and administrative fee will be at a rate of .20%
per annum of average daily net assets for each Subaccount.\2\
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\2\ AUSA permits unlimited transfers without charge among the
subaccounts of Diversified Variable Funds. AUSA, however, reserves
the right to impose limitations upon the number and timing of such
transfers and to impose transfer charges. AUSA also reserves the
right to deduct an annual contract charge not to exceed $50.
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11. Each Subaccount will pay indirectly its proportional share of
the expenses of the respective Underlying Spokes in which it invests.
These expenses include daily charges for mortality and administrative
expense risks which currently are charged against the net assets of the
Underlying Spokes at an annual rate of .90%, but may be charged at a
maximum annual rate of 1.25%. In addition, these expenses include the
Underlying Spokes' proportional shares of the expenses of the
Underlying Hubs in which they invest, which include advisory fees and
other customary expenses of registered investment companies, primarily
consisting of compensation to independent trustees, insurance premiums,
fees and expenses of independent auditors and legal counsel, custodial
fees and expenses, and accounting expenses.
Applicants' Legal Analysis
Section 12(d)(1)
1. Section 12(d)(1)(A) provides that no registered investment
company may acquire securities of another investment company if such
securities represent more than 3% of the acquired company's outstanding
voting stock, more than 5% of the acquiring company's total assets, or
if such securities, together with the securities of any other acquired
investment companies, represent more than 10% of the acquiring
company's total assets. Section 12(d)(1)(B) provides that no registered
open-end investment company may sell its securities to another
investment company if the sale will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies.
2. Section 6(c) provides that the Commission may exempt persons or
transactions if, and to the extent that, such 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. Applicants request an order under Section
6(c) exempting them from Section 12(d)(1) to permit Strategic Variable
Funds to invest in the Underlying Spokes in excess of the percentage
limitations of Section 12(d)(1).
3. Section 12(d)(1) is intended to prevent unregulated pyramiding
of investment companies, and the abuses that are perceived to arise
from such pyramiding. These abuses include the acquiring fund imposing
undue influence over the acquired fund through the threat of large-
scale redemptions and the layering of sales charges and advisory fees.
4. Applicants believe that Strategic Variable Funds is structured
in a manner consistent with the intent of Section 12(d)(1) of the 1940
Act and which avoids the abuses intended to be prevented by that
Section. Applicants state that the proposed structure of Strategic
Variable Funds is very different from the structure of the investment
companies whose practices led to the adoption of Section 12(d)(1) and
its amendment in 1970. As required by Condition 1 below, Strategic
Variable Funds and the Underlying Hubs must be part of the same ``group
of investment companies,'' as defined in Rule 11a-3 under the 1940 Act.
Underlying Spokes must be registered separate accounts (or subaccounts
thereof) established by
[[Page 50357]]
AUSA in connection with the offering by AUSA of Variable Contracts. In
addition, Investment Advisors will be the investment adviser to
Strategic Variable Funds and each of the Underlying Hubs. Applicants
assert that Investment Advisors and AUSA are governed by their
obligations to the various funds at different levels, and that any
allocation or reallocation by Investment Advisors of a Subaccount's
assets among Underlying Spokes/Underlying Hubs will be made in
accordance with these obligations. Finally, Applicants argue that
AUSA's and Investment Advisors' self-interest will prompt them to
maximize benefits to all shareholders, and not disrupt the operations
of Strategic Variable Funds or any of the Underlying Spokes or
Underlying Hubs.
5. Applicants believe that Strategic Variable Funds' asset and
administrative fee will be justified by the incremental benefits, not
otherwise available, of the professional assets allocation service that
Investment Advisors would provide for investors choosing Strategic
Variable Funds. In addition, Applicants note that, as required by
Condition 4 below, before a Subaccount may adopt an asset allocation
and administrative fee, the directors of Strategic Variable Funds,
including the independent directors, must find that the fee is based on
services that are in addition to, rather than duplicative of, services
provided under any Underlying Hub's advisory contract. Moreover,
Applicants assert that no fees for duplicative services can exist at
the Underlying Spoke level, because no advisory fees are or will be
charged at the Underlying Spoke level.
6. Applicants also state that no layering of sales charges will
exist. Condition 5 below requires that Strategic Variable Funds'
acquisition, disposition, or holding of interests directly in the
Underlying Spokes and indirectly in the Underlying Hubs shall not be
subject, directly or indirectly, to any sales charges or service fees
as defined in Rule 2830 of the Conduct Rules of the National
Association of Securities Dealers, Inc.
7. Accordingly, Applicants believe that the requested exemption
from Section 12(d)(1) is appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policies of the 1940 Act.
Section 17(a)
8. Section 17(a) of the 1940 Act makes it unlawful for an
affiliated person of a registered investment company to sell securities
to, or purchase securities from, the company. Section 17(b) provides
that the Commission shall exempt a proposed transaction from Section
17(a) if evidence establishes that: (a) the terms of the proposed
transaction are reasonable and fair and do not involve overreaching;
(b) the proposed transaction is consistent with the policies of the
registered investment company involved; and (c) the proposed
transaction is consistent with the general provisions of the 1940 Act.
9. Applicants request exemptive relief from the prohibitions of
Section 17(a) to allow the transactions described in the application.
Applicants assert that the relief is consistent with the standards of
Section 17(b), and that such relief should be granted for the same
reasons set forth above under the discussion of Section 12(d)(1) of the
1940 Act.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Strategic Variable Funds and each Underlying Hub will be part of
the same ``group of investment companies,'' as defined in Rule 11a-3
under the 1940 Act, and the Underlying Spokes will be registered
separate accounts (of subaccounts thereof) established by AUSA in
connection with its offering of the Variable Contracts.\3\
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\3\ Because the Underlying Spokes will be unit investment
trusts, they do not fall within the technical definition of ``group
of investment companies'' under Rule 11a-3(a)(5) of the 1940 Act,
which only applies to open-end investment companies. Applicants note
that although the Underlying Spokes do not technically comply with
the definition, the policy underlying a requirement that all funds
in a ``fund of funds'' be part of the same group of investment
companies is served by the proposed structure because AUSA is an
affiliated person of Investment Advisors.
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2. No Underlying Hub shall acquire securities of any other
investment company in excess of the limits contained in Section
12(d)(1)(A) of the 1940 Act, and no Underlying Spoke shall acquire
securities of any other investment company except in conformity with
Section 12(d)(1)(E) of the 1940 Act.
3. A majority of the directors \4\ of Strategic Variable Funds will
not be ``interested persons,'' as defined in Section 2(a)(19) of the
1940 Act (``Independent Directors'').
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\4\ Although Strategic Variable Funds will be a separate account
of an insurance company, and not a corporation, trust, or similar
entity, Applicants state that Strategic Variable Funds will create a
board of individuals who will function as `'directors'' of Strategic
Variable Funds within the meaning of Section 2(a))(12) of the 1940
Act for purposes of exercising the function of directors under the
1940 Act and the rules thereunder.
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4. Before approving any advisory contract under Section 15 of the
1940 Act, the directors of Strategic Variable Funds, including a
majority of the Independent Directors, shall find that advisory fees
charged under such contract are based on services provided that are in
addition to, rather than duplicative of, services provided pursuant to
any Underlying Hub's advisory contract. Such finding, and the basis
upon which the finding was made, will be recorded fully in the minute
books of Strategic Variable Funds.
5. Strategic Variable Funds' acquisition, disposition, or holding
of interests directly in the Underlying Spokes and indirectly in the
Underlying Hubs shall not be subject, directly or indirectly, to any
sales charges or service fees as such terms are defined in Rule 2830 of
the Conduct Rules of the National Association of Securities Dealers,
Inc.
6. Applicants will provide the following information, in electronic
format, to the Chief Financial Analyst of the Division of Investment
Management of the Commission: monthly average total assets for each
Subaccount and each of its Underlying Spokes and Underlying Hubs;
monthly purchases and redemptions (other than by exchange) for each
Subaccount and each of its Underlying Spokes and Underlying Hubs;
monthly exchanges into and out of each Subaccount and each of its
Underlying Spokes; month-end allocations of each Subaccount's assets
among its Underlying Spokes; annual expense ratios for each Subaccount
and each of its Underlying Spokes and Underlying Hubs; and a
description of any vote taken by the unit holders of any Underlying
Spoke, including a statement of the percentage of votes cast for and
against the proposal by Strategic Variable Funds and by the other unit
holders of the Underlying Spoke. Such information will be provided as
soon as reasonably practicable following each fiscal year-end of
Strategic Variable Funds (unless the Chief Financial Analyst shall
notify Strategic Variable Funds or Investment Advisors in writing that
such information need no longer be submitted).
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-24490 Filed 9-24-96; 8:45 am]
BILLING CODE 8010-01-M
