[Federal Register Volume 59, Number 187 (Wednesday, September 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23992]
[Federal Register: September 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20567; No. 812-9082]
Jefferson-Pilot Life Insurance Company, et al.
September 21, 1994.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (``1940 Act'').
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APPLICANTS: Jefferson-Pilot Life Insurance Company (``Jefferson
Pilot'') and Jefferson-Pilot Separate Account A (``Separate Account'')
(collectively, ``Applicants'').
Relevant 1940 Act Section: Order requested under Section 26(b) of the
1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order authorizing the
substitution of shares of the Variable Insurance Products Fund's (``VIP
Fund'') Money Market Portfolio (``VIP Money Market Portfolio'') for
shares of the Jefferson-Pilot Money Market Fund, Inc. (``J-P Money
Market Fund''). The VIP Money Market Portfolio, together with other VIP
Fund portfolios and certain other registered mutual funds, will serve
as the eligible funding vehicles for certain individual variable
annuity contracts and other forms of variable annuity contracts that
may in the future be offered by Jefferson Pilot through the Separate
Account.
FILING DATE: The application was filed on June 30, 1994.
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 Commission's Secretary
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 October 17, 1994, 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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549. Applicants, c/o J. Gregory Poole,
Esq., Jefferson-Pilot Life Insurance Company, 100 North Greene Street,
Greensboro, North Carolina 27401.
FOR FURTHER INFORMATION CONTACT:
Yvonne M. Hunold, 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 is available for a fee from the
Commission's Public Reference Branch.
Applicants' Representations
1. Jefferson-Pilot, a stock life insurance company, is a wholly-
owned subsidiary of Jefferson-Pilot Corporation, a publicly held
corporation.\1\ Jefferson-Pilot is licensed to sell insurance and
annuities in 44 states, the District of Columbia, the Virgin Islands,
and Puerto Rico.
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\1\Delcor, Inc. (``Delcor''), a wholly-owned subsidiary of
Golden Eagle Industries, Inc. (``Golden Eagle''), Golden Eagle, C.D.
Spangler, Jr., a director of Golden Eagle, and W.D. Cornwell, Jr., a
director and officer of Delcor and Golden Eagle, together own
beneficially and of record 6.35% of Jefferson-Pilot Corporation's
outstanding stock.
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2. The Separate Account is a separate account organized by
Jefferson-Pilot and registered under the 1940 Act as a unit investment
trust for the purpose of funding certain individual variable annuity
contracts (``Contracts''). The Separate Account consists of nine sub-
accounts (``Subaccounts''), each investing in shares of a corresponding
fund or series of funds available under the Contracts, including shares
of the J-P Money Market Fund.
3. The J-P Money Market Fund is an open-end diversified management
investment company registered under the 1940 Act. Share of the J-P
Money Market Fund are purchased, without any sales charge, by the Money
Market Subaccount at net asset value. Shares are redeemed without any
charge or fee to the Separate Account. At May 31, 1994, 26.27% and
73.73% of the J-P Money Market Fund's outstanding shares were owned
beneficially and of record, respectively, by the Contract owners
through the Separate Account and by Jefferson-Pilot. Jefferson-Pilot's
shares represent its ``seed money'' investment held directly in its
General Account.
4. The VIP Fund is a Massachusetts business trust registered under
the 1940 Act as an open-end, diversified management investment company.
The VIP Fund is divided into separate investment portfolios, including
the VIP Money Market Portfolio.
5. On March 31, 1994, J-P Money Market Fund had $21,116,199 in net
assets and the VIP Money Market Portfolio had $572 million in net
assets. For the year ended March 31, 1994, total expenses for the J-P
Money Market Fund and the VIP Money Market Portfolio were .65% and .27%
of average net assets, respectively. For the year ended March 31, 1994,
the VIP Money Market Portfolio had a management fee of .19% of average
net assets, and the J-P Money Market Fund had an annual investment
advisory and management fee of .50% of average daily net assets.
6. The primary investment objective of the J-P Money Market Fund is
maximum current income consistent with liquidity and stability of
principal. The VIP Money Market Portfolio seek to obtain as high a
level of current income as is consistent with preserving capital and
providing liquidity through investment in high-quality U.S. dollar-
denominated money market securities of domestic and foreign issuers.
7. JP Investment Management Company (``JP Management'') provides
investment advice and management services to the J-P Money Market Fund.
JP Management is a registered investment adviser and wholly-owned
subsidiary of Jefferson-Pilot Corporation and is an affiliate of
Jefferson-Pilot. JP Management receives an annual investment advisory
and management fee on an annual basis of .50% of the PJ-P Money Market
Fund's average daily net assets.
8. Fidelity Management & Research Company (``Fidelity
Management''), a registered investment adviser, is the investment
adviser for the VIP Fund, including the VIP Money Market Portfolio.
Fidelity Management is a wholly-owned subsidiary of FMR Corporation,
which is not an affiliate of Jefferson-Pilot.
Prior to January 1, 1994, Fidelity Management's advisory fee was
based on the VIP Money Market Portfolio's gross income, as follows: (a)
Monthly gross income equivalent to an annualized yield of 5% or less
was subject to an annual fee rate of 4% of the Portfolio's gross
income; (b) monthly gross income in excess of an annualized yield of 5%
was subject to an annual rate of 6% of that excess; and (c) the
management fee was limited to a weighted average of a graduated series
of annual limitation rates ranging from 0.5% of its average monthly net
assets up to $1.5 billion to 0.4% of its average monthly net assets in
excess of $6 billion.
As of January 1, 1994, Fidelity Management's advisory fee for the
VIP Money Market Portfolio is comprised of: (a) A basic fee rate, and
(b) an income-based component. The basic fee rate is the sum of two
parts: (a) a group fee rate based on the monthly average net assets of
all funds advised by Fidelity Management, and (b) an individual fund
fee rate of .03%. The group fee rate ranges from a maximum of .37% to a
marginal rate of .1325% if total assets in all of the funds advised by
Fidelity Management rise. One-twelfth of the combined annual fee rate
is applied to the VIP Money Market Portfolio's net assets averaged over
the most recent month, giving a dollar amount which is the fee for that
month. If the VIP Money Market Portfolio's gross yield is 5% or less,
the basic fee is the total management fee. The income-based component
is added to the basic fee only when the VIP Money Market Portfolio's
yield is greater than 5%. The income-based fee is 6% of that portion of
the VIP Money Market Portfolio's yield that represents a gross yield of
more than 5% per year. The maximum income-based component is .24%.
9. Applicants propose to substitute shares of the VIP Money Market
Portfolio for all outstanding shares of the J-P Money Market Fund
attributable to the Contracts (``Substitution'') as soon as practicable
following the issuance of the Commission's order. Applicants state that
Jefferson-Pilot will supplement the prospectus for the Separate Account
to reflect the proposed Substitution.
10. At the close of business on the date of the Substitution,
Jefferson-Pilot will redeem for cash all shares of the PJ-P Money
Market Fund it currently holds on behalf of the Separate Account. On
the business day following the Substitution, Jefferson-Pilot will
redeem for cash all shares of the J-P Money Market Fund that it
currently owns, representing its ``seed money'' investment held
directly in its General Account. The J-P Money Market Fund will process
a redemption request and, simultaneously, the VIP Money Market
Portfolio will process a purchase order for the exact amount of the
redemption proceeds. The redemption request and the purchase order will
be at prices based on the current net assets values per share next
computed after receipt thereof and, therefore, in a manner consistent
with Rule 22c-1 under the 1940 Act. Monies attributable to Contract
owners currently invested in the J-P Money Market Fund will be fully
invested at all times. The full net asset value of and number of
redeemed J-P Money Market Fund shares held by the Separate Account will
be reflected in the Contract owner's accumulation unit values following
the Substitution.
11. All expenses and transaction costs of the Substitution,
including applicable brokerage commissions, will be assumed by
Jefferson-Pilot and reflected in the redemption proceeds.
12. Within five days after the Substitution, Contract owners will
be sent a written notice of the Substitution (``Notice''), the
prospectus for the VIP Fund, and the supplement to the prospectus for
the Separate Account describing the Substitution. The Notice will
advise Contract owners that for a period of thirty days from the
mailing of the Notice (``Free Transfer Period''), Contract owners may
transfer all assets, as substituted, to any other available Subaccount,
without limitation and without charge. Following the Substitution,
Contract owners will be afforded the same contract rights, including
surrender and other transfer rights, with regard to amounts they have
currently invested under the Contracts. There are no currently
applicable surrender fees or redemption charges under the Contracts.
Applicable deferred sales charges, however, will be imposed.
Applicants' Legal Analysis
1. The Applicants request that the Commission issue an order under
Section 26(b) of the 1940 Act to the extent necessary to permit the
substitution of shares of the VIP Money Market Portfolio for the shares
of the PJ-P Money Market Fund held by Separate Account.\2\ Thereafter,
the VIP Money Market Portfolio will serve as one of the eligible
funding vehicles for the Contracts.
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\2\Applicants state that to the extent that any aspect of the
Substitution may be deemed to require approval under Section 11 of
the 1940 Act, they intend to rely on the exemptive provisions of
Rule 11a-2 under the 1940 Act.
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2. Section 26(b) of the 1940 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 shall have approved such
substitution. 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 policy
and provisions of this title.''
3. Applicants state that the purposes, terms, and conditions of the
Substitution are consistent with the principals and purposes of Section
26(b), do not entail any of the abuses that Section 26(b) is designed
to prevent, including costly forced redemptions, and are consistent
with the protection of investors and the purposes fairly intended by
the 1940 Act. Applicants further state that the Substitution has been
determined by Jefferson-Pilot to be in the best interests of Contract
owners for the following reasons.
4. Applicants state that the objectives, policies and restrictions
of the J-P Money Market Fund and the VIP Money Market Portfolio are
substantially similar--both are money market funds that seek to comply
with Rule 2a-7 under the 1940 Act. Further, given Rule 2a-7
requirements, the credit quality, maturity and diversification
requirements applicable to each Fund are identical.
5. Applicants state that, due to the J-P Money Market Fund's
relatively insignificant total net assets ($21,116,119 at March 31,
1994), J-P Management has had greater difficulty making appropriate
investments than it would have had if that Fund had greater assets.
Applicants submit that, due to the VIP Money Market Portfolio's larger
asset size, it is not expected to experience the type of difficulties
experienced by the J-P Money Market Fund with its smaller asset base in
adhering to diversification requirements applicable to money market
funds under Rule 2a-7. Additionally, Fidelity Management, the VIP Money
Market Portfolio's investment adviser, has specialized in the
management of mutual funds since 1946 and is a widely recognized expert
in money management.
6. Applicants state that the expense ratio of the VIP Money Market
Portfolio (.27%) is lower than that of the J-P Money Market Fund
(.65%), which has remained relatively high for this type of fund.
Further, because a large portion of the J-P Money Market Fund expenses
is fixed and the size of the Fund is relatively small and unlikely to
grow significantly, these fixed expenses currently represent, and may
continue to represent, a relatively large percentage of the Fund's
average daily net assets. In contrast, the expense ratio of the VIP
Money Market Portfolio has remained at or near the .27% level for many
years and is likely to continue to be lower because of the Portfolio's
larger asset base. Consequently, Applicants assert that, following the
Substitution, Contract owners will not be exposed to higher expenses
and should benefit from the VIP Money Market Portfolio's lower expense
ratio. Additionally, lower expense ratios generally indicate higher
possible investment returns for Contract owners. For the seven days
ended May 31, 1994, the yield and effective yield were 3.338% and
3.43%, respectively, for the J-P Money Market Fund, and 4.09% and
4.18%, respectively, for the VIP Money Market Portfolio.
7. Applicants states that the assets of the J-P Money Market Fund
on March 31, 1994 were $21,116,119, and that the Fund has not exceeded
a $25 million asset level during the past ten years ended March 31,
1994, a level that the Fund is not expected to exceed in the future. In
comparison, the VIP Money Market Portfolio's assets at March 31, 1994
were $572 million and are expected to increase. Further, while shares
of the VIP Money Market Portfolio are offered to separate accounts of
insurance companies, whether or not affiliated with Fidelity
Management, shares of the J-P Money Market Fund are actively marketed
only to Jefferson-Pilot. Applicants thus submit that the VIP Money
Market Portfolio is more likely to increase in size than the J-P Money
Market Fund.
8. Applicant state that the Contracts reserve Jefferson-Pilot the
right to replace shares of the J-P Money Market Fund held by the
Separate Account with shares of another registered investment company,
such as the VIP Fund, if (i) shares of the J-P Money Market Fund are no
longer available for investment by the Separate Account, or (ii) in
Jefferson-Pilot's judgment, subject to Commission approval, further
investment in the J-P Money Market Fund should become inappropriate.
Jefferson-Pilot represents that further investment in shares of the J-P
Money Market Fund is no longer appropriate in view of the purposes of
the Contracts.
9. Contract owners will incur no transfer fees in connection with
the Substitution. Applicants represent that the Substitution will have
no adverse federal income tax consequences for the Contract owners.
Additionally, the Substitution will in no way alter the insurance
benefits to Contract owners or the contractual obligations of
Jefferson-Pilot. Contract owners will continue to look to Jefferson-
Pilot with regard to their rights under the Contracts.
10. Applicants consent to the following terms of and conditions to
the issuance of an order granting an exemption under Section 26(b):\3\
\3\Counsel for Applicants represents that an amended application
consenting to the terms and conditions will be filed during the
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notice period.
(a) The Substitution is of shares of the J-P Money Market Fund,
which is a money market fund whose objectives, policies and
restrictions and substantially similar to those of the VIP Money
Market Portfolio so as to continue fulfilling Contract owners'
objectives and risk expectations;
(b) If a Contract owner requests, during the Free Transfer
Period, asserts will be reallocated for investment in a Contract
owner selected Subaccount. The Free Transfer Period is sufficient
time for Contract owners to reconsider the Substitution;
(c) The Substitution will, in all cases, be at net asset value
of the respective shares, without the imposition of any transfer or
similar charges;
(d) Jefferson-Pilot will assume all expenses and transaction
costs, including, among others, legal and accounting fees and any
brokerage commissions, relating to the Substitution in a manner that
attributes all transaction costs to Jefferson-Pilot;
(e) The Substitution in no way will alter the insurance benefits
to the Contract owners, the contractual obligations of Jefferson-
Pilot;
(f) The Substitution in no way will alter the tax benefits to
Contract owners;
(g) Contract owners may choose to withdraw amounts credited to
them following the Substitution under conditions that currently
exist under the Contracts, subject to any applicable deferred sales
charge; and
(h) The Substitution is expected to confer certain modest
economic benefits to Contract owners by virtue of the enhanced asset
size of the VIP Money Market Portfolio.
Conclusion
Applicants submit that the exemptive relief requested under Section
26(b) of the 1940 Act is necessary and appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policies and provisions of the 1940
Act. Accordingly the Applicants request that the Commission grant the
necessary exemptions and approvals pursuant to Section 26(b) of the
1940 Act permitting the Substitution.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23992 Filed 9-27-94; 8:45 am]
BILLING CODE 8010-01-M
