[Federal Register: October 28, 2003 (Volume 68, Number 208)]
[Notices]
[Page 61486-61494]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc03-98]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-26229; File No. 812-12989]
Merrill Lynch Life Insurance Company, et al.; Notice of
Application
October 22, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application (the ``Application'') for an order
pursuant to Section 26(c) of the Investment Company Act of 1940 (the
``1940 Act'') approving a substitution of securities and an order of
exemption pursuant to Section 17(b) of the 1940 Act from Section 17(a)
of the 1940 Act.
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Applicants: Merrill Lynch Life Insurance Company (``MLLIC''), Merrill
Lynch Variable Life Separate Account (``Separate Account 1''), Merrill
Lynch Life Variable Life Separate Account II (``Separate Account 2''),
Merrill Lynch Life Variable Annuity Separate Account A (``Separate
Account 3''), ML Life Insurance Company of New York (``MLNY''), ML of
New York Variable Life Separate Account (``Separate Account 4''), ML of
New York Variable Life Separate Account II (``Separate Account 5''), ML
of New York Variable Annuity Separate Account A (``Separate Account
6''), and, only for the purpose of seeking an order of exemption
pursuant to Section 17(b) of the 1940 Act, MLIG Variable Insurance
Trust (``MLIG Trust'') (except for MLLIC, MLNY, and MLIG Trust, each a
``Separate Account;'' Separate Accounts 1 through 6 collectively
referred to herein as the ``Separate Accounts'') (all foregoing
parties, with the exception of MLIG Trust, collectively referred to
herein as the ``Applicants'') (all foregoing parties, with the
inclusion of MLIG Trust, collectively referred to herein as the
``Section 17(b) Applicants'').
Summary of Application: The Applicants request an order pursuant to
Section 26(c) of the 1940 Act to permit certain registered unit
investment trusts to substitute shares of certain portfolios of the
MLIG Trust (the ``Replacement Portfolios'') for shares of certain
portfolios of the AllianceBernstein Variable Products Series Fund, Inc.
(``AllianceBernstein Fund''), the Delaware VIP Trust (``Delaware
Trust''), and the MFS[reg] Variable Insurance Trust\SM\ (``MFS Trust'')
(collectively, the ``Substituted Portfolios'') currently held by those
unit investment trusts. The Section 17(b) Applicants request an order
of the Commission pursuant to Section 17(b) of the 1940 Act exempting
them from Section 17(a) of the 1940 Act to the extent necessary to
permit MLLIC and MLNY to carry out substitutions by redeeming shares
issued by AllianceBernstein Fund, Delaware Trust, and MFS Trust in-kind
and using the proceeds to purchase shares issued by MLIG Trust.
Filing Date: The Application was filed on July 18, 2003 and was amended
and restated on October 9, 2003.
Hearing or Notification of Hearing: An order granting the Application
will be issued unless the Commission orders a hearing. Interested
person may request a hearing by writing to the Secretary of the
Commission and serving Applicants (including Section 17(b) 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 November 12, 2003,
and should be accompanied by proof of service on Applicants (including
Section 17(b) 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 may request notification of a hearing by writing to
the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549-0609. Applicants (including Section
17(b) Applicants), c/o Edward W. Diffin, Jr., Esq., Merrill Lynch
Insurance Group, Inc., 1300 Merrill Lynch Drive, 2nd Floor, Pennington,
New Jersey 08534. Copies to Stephen E. Roth, Esq. and Mary E. Thornton,
Esq., Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Ave., NW.,
Washington, DC 20004.
FOR FURTHER INFORMATION CONTACT: H. Yuna Peng, at (202) 942-0676, or
Lorna J. MacLeod, Branch Chief, at (202) 942-0670, Office of Insurance
Products, Division of Investment Management.
[[Page 61487]]
SUPPLEMENTARY INFORMATION: The following is a summary of the
Application; the complete Application may be obtained for a fee from
the Public Reference Branch of the Commission, 450 5th Street, NW.,
Washington, DC 20549 (tel. (202) 942-8090).
Applicants' Representations
1. MLLIC is a stock life insurance company that is domiciled in
Arkansas. Its operations include both life insurance and annuity
products. MLLIC was incorporated under the laws of the State of
Washington on January 27, 1986 and redomesticated to the State of
Arkansas on August 31, 1991. As of December 31, 2002, MLLIC had assets
of approximately $13.1 billion. MLLIC is authorized to operate as a
life insurance company in forty-nine states, the District of Columbia,
the U.S. Virgin Islands, Guam, and Puerto Rico. MLLIC is a wholly owned
subsidiary of Merrill Lynch Insurance Group, Inc. (``MLIG, Inc.'').
MLLIC is an indirect wholly owned subsidiary of Merrill Lynch & Co.,
Inc., a publicly held company whose shares are traded on the New York
Stock Exchange. MLLIC is the depositor and sponsor of Separate Accounts
1 through 3.
2. Separate Account 1 is a separate investment account of MLLIC and
is registered under the 1940 Act as a unit investment trust. Separate
Account 1 serves as a funding vehicle for certain variable life
insurance contracts issued by MLLIC (the ``Second Generation MLLIC VLI
Contracts''). Under the Second Generation MLLIC VLI Contracts and in
the prospectuses for the Second Generation MLLIC VLI Contracts, MLLIC
reserves the right to substitute shares of one portfolio for shares of
another, including a portfolio of a different investment company.
Separate Account 1 is a ``separate account'' as defined in Section
2(a)(37) of the 1940 Act.
3. Separate Account 2 is a separate investment account of MLLIC and
is registered under the 1940 Act as a unit investment trust. Separate
Account 2 serves as a funding vehicle for certain variable life
insurance contracts issued by MLLIC (the ``First Generation MLLIC VLI
Contracts''). Under the First Generation MLLIC VLI Contracts and in the
prospectuses for the First Generation MLLIC VLI Contracts, MLLIC
reserves the right to substitute shares of one portfolio for shares of
another, including a portfolio of a different investment company.
Separate Account 2 is a ``separate account'' as defined in Section
2(a)(37) of the 1940 Act.
4. Separate Account 3 is a separate investment account of MLLIC and
is registered under the 1940 Act as a unit investment trust. Separate
Account 3 serves as a funding vehicle for variable annuity contracts
issued by MLLIC (the ``MLLIC Annuity Contracts''). Under the MLLIC
Annuity Contracts and in the prospectuses for the MLLIC Annuity
Contracts, MLLIC reserves the right to substitute shares of one
portfolio for shares of another, including a portfolio of a different
investment company. Separate Account 3 is a ``separate account'' as
defined in Section 2(a)(37) of the 1940 Act.
5. MLNY is a stock life insurance company that is organized under
the laws of the State of New York. MLNY is a wholly owned subsidiary of
MLIG, Inc. MLNY is also an indirect wholly owned subsidiary of Merrill
Lynch & Co., Inc. MLNY had approximately $1.1 billion of assets under
management as of December 31, 2002. MLNY is authorized to sell life
insurance and annuities in nine states. MLNY is the depositor and
sponsor of Separate Accounts 4 through 6.
6. Separate Account 4 is a separate investment account of MLNY and
is registered under the 1940 Act as a unit investment trust. Separate
Account 4 serves as a funding vehicle for certain variable life
insurance contracts issued by MLNY (the ``First Generation MLNY VLI
Contracts''). Under the First Generation MLNY VLI Contracts and in the
prospectuses for the First Generation MLNY VLI Contracts, MLNY reserves
the right to substitute shares of one portfolio for shares of another,
including a portfolio of a different investment company. Separate
Account 4 is a ``separate account'' as defined in Section 2(a)(37) of
the 1940 Act.
7. Separate Account 5 is a separate investment account of MLNY and
is registered under the 1940 Act as a unit investment trust. Separate
Account 5 serves as a funding vehicle for certain variable life
insurance contracts issued by MLNY (the ``Second Generation MLNY VLI
Contracts''). Under the Second Generation MLNY VLI Contracts and in the
prospectuses for the Second Generation MLNY VLI Contracts, MLNY
reserves the right to substitute shares of one portfolio for shares of
another, including a portfolio of a different investment company.
Separate Account 5 is a ``separate account'' as defined in Section
2(a)(37) of the 1940 Act.
8. Separate Account 6 is a separate investment account of MLNY and
is registered under the 1940 Act as a unit investment trust. Separate
Account 6 serves as a funding vehicle for variable annuity contracts
issued by MLNY (the ``MLNY Annuity Contracts''). Under the MLNY Annuity
Contracts and in the prospectuses for the MLNY Annuity Contracts, MLNY
reserves the right to substitute shares of one portfolio for shares of
another, including a portfolio of a different investment company.
Separate Account 6 is a ``separate account'' as defined in Section
2(a)(37) of the 1940 Act.
9. Merrill Lynch, Pierce, Fenner & Smith Incorporated (``MLPF&S'')
serves as principal underwriter and distributor for the Variable
Contracts. MLPF&S was organized in 1958 under the laws of the State of
Delaware and is registered as a broker-dealer under the Securities
Exchange Act of 1934 (the ``1934 Act''). It is a member of the NASD.
MLPF&S may enter into selling agreements with other broker-dealers
registered under the 1934 Act whose representatives are authorized by
applicable law to sell the Variable Contracts.
10. AllianceBernstein Variable Products Series Fund, Inc.
(``AllianceBernstein Fund'') is registered as an open-end management
investment company under the 1940 Act and currently offers 19 separate
investment portfolios, one of which would be involved in the proposed
substitutions. The AllianceBernstein Fund issues a separate series of
shares of common stock in connection with each portfolio, and has
registered such shares under the Securities Act of 1933 (``1933 Act'')
on Form N-1A. Each separate series offers only two classes of shares,
Class A shares and Class B shares. The distinction between Class A
shares and Class B shares is the imposition of a distribution fee of an
annual rate of 0.25% (capped at a maximum annual rate of 0.50%) of each
series' average daily net assets attributable to the Class B shares
pursuant to Rule 12b-1 under the 1940 Act. Shareholders that would be
affected by the proposed substitutions are currently invested in Class
A shares of the Substituted Portfolio. Alliance Capital Management,
L.P. (``Alliance'') serves as the investment adviser to each portfolio
of the AllianceBernstein Fund. Alliance Capital Management Corporation,
the sole general partner of Alliance, is an indirect wholly owned
subsidiary of The Equitable Life Assurance Society of the United
States, which is in turn a wholly owned subsidiary of AXA Financial,
Inc., a holding company which is controlled by AXA. Alliance receives
an investment advisory fee from each portfolio it manages.
11. Delaware VIP Trust (``Delaware Trust'') is registered as an
open-end management investment company under the 1940 Act and currently
offers
[[Page 61488]]
19 separate investment portfolios, one of which would be involved in
the proposed substitutions. Delaware Trust issues a separate series of
shares of common stock in connection with each portfolio, and has
registered such shares under the 1933 Act on Form N-1A. Each separate
series offers only two classes of shares, Standard Class shares and
Service Class shares. The distinction between Standard Class shares and
Service Class shares is the imposition of a distribution fee of an
annual rate of 0.25% (capped at a maximum annual rate of 0.50%) of each
series' average daily net assets attributable to the Service Class
shares pursuant to Rule 12b-1 under the 1940 Act. Shareholders that
would be affected by the proposed substitutions are currently invested
in Standard Class shares of the Substituted Portfolio. Delaware
Management Company (``DMC'') serves as the investment adviser to each
portfolio of Delaware Trust. DMC is a series of Delaware Management
Business Trust, which is an indirect, wholly owned subsidiary of
Delaware Management Holdings, Inc. DMC is paid fees by the Delaware VIP
Trend Series.
12. MFS[reg] Variable Insurance TrustSM (``MFS Trust'')
is registered as an open-end management investment company under the
1940 Act and currently offers 15 separate investment portfolios, two of
which would be involved in the proposed substitutions. MFS Trust issues
a separate series of shares of common stock in connection with each
portfolio, and has registered such shares under the 1933 Act on Form N-
1A. Each separate series offers only two classes of shares, Initial
Class shares and Service Class shares. The distinction between Initial
Class shares and Service Class shares is the imposition of a
distribution fee of an annual rate of 0.25% of each series' average
daily net assets attributable to the Service Class shares pursuant to
Rule 12b-1 under the 1940 Act. Shareholders that would be affected by
the proposed substitutions are currently invested in Initial Class
shares of the Substituted Portfolios. Massachusetts Financial Services
Company (``MFS'') serves as the investment adviser to each of the
portfolios of the MFS Trust. MFS is a subsidiary of Sun Life of Canada
(U.S.) Financial Services Holdings, Inc., which, in turn, is a indirect
wholly owned subsidiary of Sun Life Assurance Company of Canada. MFS is
paid fees by each of the MFS Trust portfolios for its services.
13. MLIG Variable Insurance Trust (``MLIG Trust'') is registered as
an open-end management investment company under the 1940 Act and
currently offers 24 separate investment portfolios, two of which would
be involved in the proposed substitutions. MLIG Trust issues a separate
series of shares of common stock in connection with each portfolio, and
has registered such shares under the 1933 Act on Form N-1A. Each
separate series offers only one class of shares, and has not adopted a
plan pursuant to Rule 12b-1 under the 1940 Act. Roszel Advisors, LLC
(``Roszel Advisors'') serves as the investment manager of the MLIG
Trust and each of the portfolios therein. Roszel Advisors is a wholly
owned subsidiary of MLIG, Inc. Roszel Advisors receives management fees
from each of the portfolios. DMC is the subadviser to the Roszel/
Delaware Trend Portfolio. PIMCO Advisors Retail Holdings LLC and
Cadence Capital Management LLC (``PIMCO'' and ``Cadence,''
respectively) are the subadvisers to the Roszel/PIMCO CCM Capital
Appreciation Portfolio.
14. The MLIG Trust and Roszel Advisors obtained an order from the
Commission pursuant to Section 6(c) of the 1940 Act exempting them from
Section 15(a) of the 1940 Act and Rule 18f-2 under the 1940 Act, with
respect to subadvisory agreements (the ``Manager of Managers Order'').
The Manager of Managers Order permits the MLIG Trust and Roszel
Advisors to enter into and materially amend investment subadvisory
agreements without obtaining shareholder approval. The relief granted
in the Manager of Managers Order extends to all of the portfolios of
the MLIG Trust that will be involved in the proposed substitutions.
15. The following chart sets out the investment objectives and
certain policies of each Substituted Portfolio and each Replacement
Portfolio, as stated in their respective prospectuses and statements of
additional information.
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Substituted portfolios Replacement portfolios
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AllianceBernstein Quasar Portfolio of the Roszel/Delaware Trend Portfolio of the MLIG Trust.
AllianceBernstein Fund.
Investment Objective--To seek growth of capital by Investment Objective--To seek long-term capital
pursuing aggressive investment policies. The portfolio appreciation.
treats current income as incidental to its objective.
Investment Policies--Generally, the portfolio invests Investment Policies--The portfolio invests at least 65%
in a widely diversified mix of equity securities of total assets in small cap equities of companies
across many industries that offer the possibility of believed to have potential for high earnings growth.
above-average earnings growth. Currently, the The portfolio's investment adviser seeks small
portfolio's investment adviser emphasizes investing in companies that offer substantial opportunities for
small cap companies, and it invests both in well-known long-term price appreciation because they are poised
and established companies and in new and unseasoned to benefit from changing and dominant social and
companies. The portfolio may invest in any securities political trends. The portfolio's investment adviser
with the potential for capital appreciation. In evaluates company management, product development and
choosing securities, the portfolio's investment sales and earnings, and it seeks market leaders,
adviser considers the economic and political outlook, strongproduct cycles, innovative concepts, and
management capabilities and practices, and trends in industry trends. Also considered are a company's price-
the determinants of corporate profits, among others. to-earning ratio, estimated growth rates, market cap,
The portfolio may also invest in non-convertible and cash flows to determine the company's
bonds, preferred stocks, and foreign securities. attractiveness. To reduce the risk of investing in
small cap companies, the portfolio invests in a well-
diversified portfolio of different stocks representing
a wide array of industries. The portfolio uses the
Russell 2500 Growth Index as a performance benchmark.
The portfolio may invest up to 25% of total assets in
foreign securities.
Delaware VIP Trend Series of the Delaware Trust.
Investment Objective--To seek long-term capital
appreciation.
[[Page 61489]]
Investment Policies--The Series invests mainly in
stocks of small, growth-oriented or emerging companies
that the portfolio's investment adviser believes are
responsive to changes in the marketplace and have
prospects for continued growth. The portfolio's
investment adviser looks for market leaders, strong
product cycles, innovative concepts, and industry
trends, and also examines price-to-earnings ratios,
estimated growth rates, market caps, and cash flow
when it selects stocks for investment.
MFS Research Series of the MFS Trust................... Roszel/PIMCO CCM Capital Appreciation Portfolio of the
MLIG Trust.
Investment Objective--To seek long-term growth of Investment Objective--To seek long-term capital
capital and future income. appreciation.
Investment Policies--Normally, the Series invests at Investment Policies--The portfolio invests at least 65%
least 80% of its net assets in common stocks and of total assets in large cap stocks of companies
related securities (preferred stocks, convertible believed to have potential for high earnings growth.
securities and depositary receipts for those These companies are generally well-established issuers
securities), and focuses on companies, regardless of with strong business franchises and favorable long-
size, believed to have favorable prospects for long- term growth prospects. The portfolio's investment
term growth, attractive valuations based on current adviser seeks to achieve a consistent, favorable
and expected earnings or cash flow, dominant or balance of growth and value with stocks of companies
growing market share, and superior management. The in the Russell 1000 and the S&P 500 Indexes. In
Series may also invest in junk bonds and in foreign choosing companies to invest in, the portfolio's
securities(including emerging markets securities). The investment adviser first looks at dividend growth,
Series' assets are allocated among various industries. earnings growth, relative growth of earnings over
time, the company's history of meeting earnings
targets, and price-to-earnings ratios and other ratios
that reveal value. The most promising companies are
then evaluated on the basis of management strength,
competitiveness in their industries, business
prospects, and profitability. The portfolio sells
stocks when their price declines relative to other
stocks invested in by the portfolio or to other
companies in the same business industry or when the
issuer's earnings decline. The portfolio may invest up
to 10% of total assets in foreign securities. The
portfolio uses the S&P 500 Index as a benchmark index.
MFS Investors Trust Series of the MFS Trust.
Investment Objective--To provide long-term growth of
capital, with reasonable current income as a secondary
objective.
Investment Policies--Normally, the Series invests at
least 65% of net assets in common stocks and related
securities (preferred stocks, convertible securities
and depositary receipts for those securities). The
portfolio's investment adviser generally focuses on
companies with larger market caps(although it may
invest in companies of any size) believed to have
sustainable growth prospects and attractive valuations
based on current and expected earnings or cash flow.
The portfolio's investment adviser will attempt to
generate gross current income equal to about 90% of
the dividend yield on the Standard & Poor's 500
Composite Stock Index. The portfolio's investment
adviser selects securities by analyzing earnings, cash
flows, competitive position and management's
abilities. The Series may invest in foreign equity
securities.
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16. The following chart describes the fees payable for advisory
services (before any waivers and reimbursements) for the year ending
December 31, 2002, expressed as an annual percentage of average daily
net assets, by each Substituted Portfolio and each Replacement
Portfolio.
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Substituted portfolios Percent Replacement portfolios Percent
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AllianceBernstein Quasar Portfolio, Annual 1.00 Roszel/Delaware Trend Portfolio, Annual 0.85
Advisory Fees. Advisory Fees.
Delaware VIP Trend Series, Annual Advisory Fees 0.75 ........
MFS Research Series, Annual Advisory Fees...... 0.75 Roszel/PIMCO CCM Capital Appreciation 0.80
Portfolio, Annual Advisory Fees.
MFS Investors Trust Series, Annual Advisory 0.75 ...........................................
Fees.
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17. The following charts compare the total operating expenses
(before and after any waivers and reimbursements) for the year ended
December 31, 2002, expressed as an annual percentage of average daily
net assets, of each Substituted Portfolio and each Replacement
Portfolio. None of the relevant classes of shares of the Replacement
Portfolios have adopted a plan pursuant to Rule 12b-1 under the 1940
Act.
[[Page 61490]]
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Substituted portfolios (in percent) Replacement
---------------------------------------------------------------------------------------------- portfolios (in
percent)
AllianceBernstein Delaware VIP ------------------
Quasar Portfolio Trend series Roszel/Delaware
Trend Portfolio
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Management fees........................................ 1.00 0.75 0.85
12b-1 fees............................................. N/A N/A N/A
Other expenses......................................... 0.25 0.09 0.97
--------------------
Total operating expenses........................... 1.25 0.84 1.82
Less expense waivers and reimbursements................ N/A N/A (0.67)
--------------------
Net operating expenses............................. 1.25 0.84 1.15
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Roszel/PIMCO CCM
MFS Research MFS Investors Capital
series Trust series Appreciation
Portfolio
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Management Fees........................................ 0.75 0.75 0.80
12b-1 fees............................................. N/A N/A N/A
Other expenses......................................... 0.12 0.13 0.97
--------------------
Total operating expenses........................... 0.87 0.88 1.77
Less expense waivers and reimbursements................ N/A N/A (0.67)
--------------------
Net operating expenses............................. 0.87 0.88 1.10
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18. ``Other Expenses'' for the Roszel/Delaware Trend Portfolio and
the Roszel/PIMCO CCM Capital Appreciation Portfolio are based on
estimates for the fiscal year ended December 31, 2003. In addition,
MLIG Trust has entered into an expense limitation arrangement with
Roszel Advisors whereby Roszel Advisors will reimburse the Roszel/
Delaware Trend Portfolio and the Roszel/PIMCO CCM Capital Appreciation
Portfolio to the extent total operating expenses (excluding interest,
taxes, brokerage commissions, expenses in the form of fees paid to the
Trust service providers by brokers in connection with directed
brokerage arrangements, other expenditures that are capitalized in
accordance with generally accepted accounting principles, and other
extraordinary expenses not incurred in the ordinary course of each
Portfolio's business) exceed certain limits. The expense limitation
agreement is effective through April 30, 2004, and is expected to
continue from year to year, conditioned upon approval for continuance
by the board of trustees of the MLIG Trust. Net Operating Expenses for
the AllianceBernstein Quasar Portfolio do not reflect fees waived or
expenses assumed by Alliance during the year ended December 31, 2002.
Such waivers and assumption of expenses were made on a voluntary basis,
and Alliance has discontinued this waiver. During the fiscal year ended
December 31, 2002, Alliance waived management fees totaling 0.12% and
other expenses totaling 0.02% for the AllianceBernstein Quasar
Portfolio. After considering such reimbursements, actual Net Operating
Expenses were 1.11%. DMC, the adviser to the Series, has contracted to
waive fees and pay expenses through April 30, 2004 in order to prevent
the Series' total operating expenses (excluding any 12b-1 fees, taxes,
interest, brokerage fees, and extraordinary expenses) from exceeding
0.95% of average daily net assets.
19. Pursuant to their authority under the respective Variable
Contracts and the prospectuses describing the same, and subject to the
approval of the Commission under Section 26(c) of the 1940 Act, MLLIC
and MLNY propose to substitute shares of the Replacement Portfolios for
shares of the Substituted Portfolios in the Separate Accounts (the
``Substitutions'').
20. The Substitutions are part of an overall business plan
involving the management of MLLIC and MLNY to make their respective
products, including the Variable Contracts, more competitive (both in
terms of new sales, as well as with regard to the retention of existing
blocks of business) and more efficient to administer and oversee. The
proposed Substitutions are consistent with this business plan and
involve mutual funds with similar investment objectives.
21. Over the past several years, MLLIC and MLNY have engaged in a
thorough review of the efficiencies and structures of all of the
investment options they offer under the Variable Contracts. As part of
this ongoing effort to make the Variable Contracts more competitive,
the Applicants engaged in certain substitutions on May 1, 2002. Based
on their continuing evaluation of the available investment options,
MLLIC and MLNY believe that more concentrated and streamlined
operations for investment options could result in increased operational
and administrative efficiencies and economies of scale for the
Companies. More specifically, MLLIC and MLNY feel that streamlining the
number of nonproprietary fund families available through the Variable
Contracts and altering the available portfolios will simplify the
administration of the Variable Contracts, particularly with regard to
communications with the fund families and the preparation of various
reports and disclosure documents. This streamlining will allow them to
enhance their communication efforts to Variable Contract owners and
sales representatives regarding the available portfolios, and may
provide for more enhanced and timely reporting to MLLIC and MLNY from
fund families and therefore from MLLIC and MLNY to Variable Contract
owners. Furthermore, reducing the number of nonproprietary fund
families also will provide MLLIC and MLNY with more control over fund
changes that affect their Variable Contracts, allowing for appropriate
long-term strategic planning.
22. During this continuing evaluation of the available investment
options, MLLIC and MLNY also have engaged in a thorough review of the
quality of all of the investment options offered under the Variable
Contracts. This due diligence review involved an evaluation of the
investment performance, the investment process, and the investment
[[Page 61491]]
teams responsible for the management of the Substituted Portfolios.
Ultimately, MLLIC and MLNY concluded that the Substituted Portfolios
offered under the Variable Contracts warrant replacement and that it
would be preferable to make alternative investment options available to
both current and future Variable Contract owners. Consequently, MLLIC
and MLNY identified certain investment options (i.e., the Replacement
Portfolios) that MLLIC and MLNY feel would be more competitive and more
attractive to Variable Contract owners. In fact, under certain of the
Variable Contracts (where administratively feasible), MLLIC and MLNY
closed the subaccounts investing in the Substituted Portfolios to the
allocation of premium and contract value on May 1, 2003, and
simultaneously added new investment options that invest in the
Replacement Portfolios.
23. MLLIC and MLNY also feel that these options would better
promote their goals of increasing administrative efficiency of, and
control over, their Variable Contracts if they were a part of their
affiliated fund families. For example, one of the proposed
Substitutions involves the Roszel/Delaware Trend Portfolio, which is
modeled on one of its corresponding Substituted Portfolios, the
Delaware VIP Trend Series; this Replacement Portfolio also shares an
identical investment objective and substantially similar policies,
restrictions, and risks as this Substituted Portfolio. In addition, as
the Replacement Portfolios operate pursuant to the Manager of Managers
Order, the Substitutions would provide protection to Variable Contract
owners by giving Roszel Advisors the agility and flexibility to change
the subadvisers of the Replacement Portfolios should such a change
become warranted or advisable.
24. MLLIC and MLNY will effect the Substitutions as soon as
practicable following the issuance of the requested order as follows.
As of the effective date of the Substitutions (``Effective Date''),
each Separate Account will redeem shares of the applicable Substituted
Portfolios in-kind. The proceeds of such redemptions will then be used
to purchase shares of the corresponding Replacement Portfolios, with
each subaccount of the applicable Separate Account investing the
proceeds of its redemption from the Substituted Portfolios in the
applicable Replacement Portfolios. Following these transactions,
certain Separate Accounts may have two subaccounts holding shares of
the Replacement Portfolios. Each Separate Account will combine the two
subaccounts holding shares of each Replacement Portfolio by
transferring shares on the same date from one of the subaccounts
holding shares of the Replacement Portfolio to the other subaccount
holding shares of the Replacement Portfolio. The net effect of the
Substitutions will be to eliminate the subaccount in each Separate
Account relating to the Substituted Portfolios.
25. Redemption requests and purchase orders will be placed
simultaneously so that contract values will remain fully invested at
all times. All redemptions of shares of the Substituted Portfolios and
purchases of shares of the Replacement Portfolios will be effected in
accordance with Rule 22c-1 of the 1940 Act.
26. The Substitutions will take place at relative net asset value
with no change in the amount of any Variable Contract owner's contract
value or death benefit or in the dollar value of his or her investments
in any of the subaccounts. Variable Contract owners will not incur any
additional fees or charges as a result of the Substitutions, nor will
their rights or MLLIC's and MLNY's obligations under the Variable
Contracts be altered in any way (although Variable Contract owners will
lose their right to vote on whether the MLIG Trust and Roszel Advisors
may enter into and materially amend investment subadvisory agreements
relating to the Replacement Portfolios, pursuant to the Manager of
Managers Order described above). All expenses incurred in connection
with the Substitutions, including legal, accounting, transactional, and
other fees and expenses, including brokerage commissions, will be paid
by MLLIC or MLNY. In addition, the Substitutions will not impose any
tax liability on Variable Contract owners. The Substitutions will not
cause the Variable Contract fees and charges currently paid by existing
Variable Contract owners to be greater after the Substitutions than
before the Substitutions. Neither MLLIC nor MLNY will exercise any
right it may have under the Variable Contracts to impose restrictions
on transfers under the Variable Contracts for a period of at least
thirty days following the Substitutions. To the extent that the total
operating expenses of either of the Replacement Portfolios (taking into
account any expense waiver or reimbursement), for each fiscal quarter
during the twenty-four months following the Substitutions, exceed on an
annualized basis the net expense level of the corresponding Substituted
Portfolio for the fiscal year ended December 31, 2002, MLLIC and MLNY
will, for each Variable Contract outstanding on the date of the
Substitutions, make a corresponding reduction in Separate Account
expenses on the last day of such fiscal quarter, such that the amount
of the Replacement Portfolio's net expenses, together with those of the
corresponding Separate Account will, on an annualized basis, be no
greater than the sum of the net expenses of the corresponding
Substituted Portfolio and the expenses of the Separate Account for the
2002 fiscal year. In addition, for twenty-four months following the
Substitutions, MLLIC and MLNY will not increase asset-based fees or
charges for Variable Contracts outstanding on the day of the
Substitutions. Thereafter, expenses of the Replacement Portfolios will
vary from year to year and may exceed those of their corresponding
Substituted Portfolios. The procedures to be implemented are sufficient
to assure that each Variable Contract owner's cash values immediately
after the Substitutions shall be equal to the cash value immediately
before the Substitutions, and that the Substitutions will not affect
the value of the interests of those owners of other MLLIC and MLNY
variable contracts (other than the Variable Contracts) who currently
have contract value allocated to any of the portfolios of the
AllianceBernstein Fund, the Delaware Trust, the MFS Trust, or the MLIG
Trust.
27. Variable Contract owners have been notified of the Application
by means of a supplement to the prospectus for each of the Variable
Contracts that discloses that the Applicants have filed the Application
and seek approval for the Substitutions (``Pre-Substitution Notice'').
The Pre-Substitution Notice set forth the anticipated Effective Date
and advised Variable Contract owners that contract values attributable
to investments in the Substituted Portfolios will be transferred to the
Replacement Portfolios, without charge (including sales charges or
surrender charges) and without counting toward the number of transfers
permitted without charge, on the Effective Date. The Pre-Substitution
Notice stated that, from the date the initial application was filed
with the Commission through the date thirty (30) days after the
Substitutions, Variable Contract owners may make one transfer of
contract value from the subaccounts investing in the Substituted
Portfolios (before the Substitutions) or the Replacement Portfolios
(after the Substitutions) to any other subaccount without charge
(including sales charges or surrender charges) and without that
transfer counting toward the number
[[Page 61492]]
permitted without charge under the Variable Contract.
28. In addition, MLLIC will solicit approval of the proposed
Substitutions from MLLIC Variable Contract owners and MLNY will solicit
approval of the proposed Substitutions from MLNY Variable Contract
owners. Such approval will be sought from the owners of First
Generation MLLIC VLI Contracts, Second Generation MLLIC VLI Contracts,
MLLIC Annuity Contracts, First Generation MLNY VLI Contracts, Second
Generation MLNY VLI Contracts, and MLNY Annuity Contracts, each voting
as a separate group. This solicitation will make clear that approval of
the proposed Substitutions signifies approval of the Replacement
Portfolios' reliance on the Manager of Managers Order described above.
If MLLIC and MLNY do not receive approval for the Substitutions (and in
effect, the Replacement Portfolios' reliance on the Manager of Managers
Order) for all groups of Contracts, MLLIC and MLNY may decide to effect
the Substitutions only for some or all of those groups whose owners
approve them. Similarly, if MLLIC and MLNY do not receive approval for
all of the Substitutions, MLLIC and MLNY may decide to effect only
those Substitutions that were approved by Variable Contract owners.
Neither MLLIC nor MLNY will effect any proposed Substitution for any
group of Contracts that has not approved that Substitution. Approval
will be obtained by the affirmative vote of the lesser of: (1) A
majority of the outstanding interests in each applicable subaccount
investing in the relevant Substituted Portfolio (measured by the dollar
value of accumulation units), or (2) 67% of such outstanding interests
voted, if votes received represent a majority of such interests. MLLIC
and MLNY will solicit approval of Variable Contract owners by sending
them written voting forms accompanied by a voting information statement
and other disclosure documents in a manner generally consistent with
applicable requirements of Regulation 14A under the 1934 Act
(collectively, ``voting materials''). In particular, the relevant
information statement will disclose, in substance, the information
required by applicable items of Form N-14. Any beneficial financial
interest that MLLIC or MLNY may have in any of the Separate Accounts is
immaterial in relation to the interests of Variable Contract owners and
neither MLLIC nor MLNY will cast any votes. Pursuant to Rule 20a-1
under the 1940 Act, the voting materials have been filed with the
Commission as proxy materials. Applicants anticipate that voting
materials will be sent to Variable Contract owners on October 10, 2003.
Unless extended by either MLLIC or MLNY, votes must be received by
November 7, 2003 to be counted.
29. All Variable Contract owners will have received a copy of the
most recent Replacement Portfolio prospectuses prior to the
Substitutions.
30. Finally, within five (5) days after the Substitutions, Variable
Contract owners will be notified, by means of a supplement to the
prospectus for each of the Variable Contracts, that the Substitutions
were carried out (``Post-Substitution Notice''). The Post-Substitution
Notice will restate the information set forth in the Pre-Substitution
Notice (e.g., advising Variable Contract owners of the ``free''
transfer right).
Applicants' Legal Analysis
1. Section 26(c) of the 1940 Act prohibits any depositor or trustee
of a unit investment trust that invests exclusively in the securities
of a single issuer from substituting the securities of another issuer
without the approval of the Commission. Section 26(c) provides that
such approval shall be granted by order of the Commission, if the
evidence establishes that the substitution is consistent with the
protection of investors and the purposes of the 1940 Act.
2. Section 26(c) was intended to provide for Commission scrutiny of
proposed substitutions which could, in effect, force shareholders
dissatisfied with the substitute security to redeem their shares,
thereby possibly incurring a loss of the sales load deducted from
initial purchase payments, an additional sales load upon reinvestment
of the proceeds of redemption, or both. The section was designed to
forestall the ability of a depositor to present holders of interest in
a unit investment trust with situations in which a holder's only choice
would be to continue an investment in an unsuitable underlying
security, or to elect a costly and, in effect, forced redemption. The
Applicants submit that the Substitutions meet the standards set forth
in Section 26(c) and that, if implemented, the Substitutions would not
raise any of the aforementioned concerns that Congress intended to
address when the 1940 Act was amended to include this provision. In
addition, the Applicants submit that the proposed Substitutions meet
the standards that the Commission and its Staff have applied to
substitutions that have been approved in the past.
3. The replacement of the Substituted Portfolios with the
Replacement Portfolios is consistent with the protection of Variable
Contract owners and the purposes fairly intended by the policy and
provisions of the 1940 Act and, thus, meets the standards necessary to
support an order pursuant to Section 26(c) of the 1940 Act. The
Substitutions will provide Variable Contract owners with comparable
investment vehicles.
4. Although not always identical, the investment objectives,
policies, and strategies of the Replacement Portfolios are comparable
to those of their respective Substituted Portfolios.
5. In each proposed Substitution, the types of investment advisory
and administrative services provided to the Replacement Portfolios by
their various investment advisers are comparable to the types of
investment advisory and administrative services provided to the
Substituted Portfolios by their respective investment advisers.
Variable Contract owners invested in the Delaware VIP Trend Series (one
of the Substituted Portfolios) will enjoy continuity of their
investment adviser due to the ``manager of managers'' approach employed
by Roszel Advisors, the investment adviser to the corresponding
Replacement Portfolio. The Replacement Portfolio will be managed
overall by Roszel Advisors, but much of the day-to-day management
activity will be handled by the subadviser, DMC, the investment adviser
currently managing the Delaware VIP Trend Series. While Variable
Contract owners invested in the AllianceBernstein Quasar Portfolio,
whose investment adviser is currently Alliance, would be managed by a
new investment adviser and a new subadviser, as stated above, the types
of investment advisory and administrative services provided after the
Substitution will be comparable to those received before the
Substitution. Similarly, the same will be true of the Substitution of
shares of the Roszel/PIMCO CCM Capital Appreciation Portfolio (the
Replacement Portfolio), whose investment adviser will be Roszel
Advisors and whose subadvisers will be PIMCO and Cadence, for shares of
the MFS Research Series and MFS Investors Trust Series, whose
investment adviser is MFS.
6. Although the Delaware VIP Trend Series' advisory fee and total
operating expenses are lower than those of the Roszel/Delaware Trend
Portfolio (before any waivers and reimbursements), the
AllianceBernstein Quasar Portfolio's advisory fee and total operating
expenses are higher than those of the Roszel/Delaware Trend Portfolio
(before
[[Page 61493]]
any waivers and reimbursements). Moreover, the proposed Substitutions
will be effected only with the approval of Variable Contract owners.
Finally, MLLIC and MLNY will agree that, for two years from the date of
the Substitutions, they will reduce Separate Account expenses to the
extent the annualized expenses for either Replacement Portfolio for any
fiscal quarter exceed the 2002 net expense level of its corresponding
Substituted Portfolio. Similarly, although the advisory fee and total
operating expenses of the MFS Research Series and the MFS Investors
Trust Series are lower than those of the Roszel/PIMCO CCM Capital
Appreciation Portfolio (before any waivers and reimbursements), MLLIC
and MLNY will effect the proposed Substitutions only if Variable
Contract owner approval is received. And, MLLIC and MLNY will agree
that, for two years from the date of the Substitutions, they will
reduce Separate Account expenses to the extent the annualized expenses
for either Replacement Portfolio for any fiscal quarter exceed the 2002
net expense level of its corresponding Substituted Portfolio.
7. Although not always identical, the investment risks of the
Replacement Portfolios are comparable to those of their respective
Substituted Portfolios.
8. The Section 17(b) Applicants also request that the Commission
issue an order pursuant to Section 17(b) of the 1940 Act exempting them
from Section 17(a) of the 1940 Act to the extent necessary to permit
MLLIC and MLNY to carry out the Substitutions by redeeming shares
issued by AllianceBernstein Fund, Delaware Trust, and MFS Trust in-kind
and using the distributed securities to purchase shares issued by MLIG
Trust.
9. Section 17(a)(1) and (a)(2) of the 1940 Act generally prohibit
any affiliated person of a registered investment company, or any
affiliated person of an affiliated person, from selling any security or
other property to such registered investment company and from
purchasing any security or other property from such registered
investment company. MLLIC and MLNY anticipate that the Substitutions
will be done (in whole or in part) by redeeming shares of the
Substituted Portfolios in-kind rather than in cash and then using those
assets to purchase shares of the Replacement Portfolios. Redemptions
and purchases in-kind involve the purchase of property from a
registered investment company and the sale of property to a registered
investment company by MLLIC, MLNY, and the MLIG Trust, each arguably an
affiliated person of those investment companies.
10. Pursuant to Section 17(a)(1) of the 1940 Act, the Section 17(b)
Applicants may be considered affiliates of one or more of the funds
involved in the Substitutions, based upon the definition of
``affiliated person'' under Section 2(a)(3) of the 1940 Act. Because
the Substitutions may be effected, in whole or in part, by means of in-
kind redemptions and subsequent purchases of shares, and also by means
of in-kind transactions, the Substitutions may be deemed to involve one
or more purchases or sales of securities or property between
affiliates.
11. Any in-kind redemptions and purchases for purposes of the
Substitutions will be effected in a manner consistent with the
investment objectives and policies of the Substituted Portfolios and
the Replacement Portfolios. Subject to the oversight of Roszel
Advisors, DMC will review the securities holdings of the
AllianceBernstein Quasar Portfolio and the Delaware VIP Trend Series,
and PIMCO and Cadence will review the securities holdings of the MFS
Research Series and the MFS Investors Trust Series, and determine which
of these Substituted Portfolio holdings would be suitable investments
for the Roszel/Delaware Trend Portfolio and the Roszel/PIMCO CCM
Capital Appreciation Portfolio, respectively, in the overall context of
the Replacement Portfolios' investment objectives and policies and
consistent with their management of the Replacement Portfolios. The
Section 17(b) Applicants state that securities to be paid out as
redemption proceeds and subsequently contributed to the Replacement
Portfolios to effect the contemplated in-kind purchases of shares will
be valued based on the normal valuation procedures of the redeeming and
purchasing portfolios. The redeeming and purchasing values will be the
same. Consistent with Rule 17a-7(d) under the 1940 Act, no brokerage
commissions, fees, or other remuneration will be paid in connection
with the in-kind transactions. If Roszel Advisors declines to accept
particular portfolio securities of any of the Substituted Portfolios
for purchase in-kind of shares of any of the Replacement Portfolios,
those positions will be liquidated by the applicable Substituted
Portfolio and shares of the corresponding Replacement Portfolio will be
purchased with cash.
12. Section 17(b) of the 1940 Act provides that the Commission may,
upon application, grant an order exempting any transaction from the
prohibitions of Section 17(a) if the evidence establishes that: (1) The
terms of the proposed transaction, including the consideration to be
paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned; (2) the proposed
transaction is consistent with the policy of each registered investment
company concerned, as recited in its registration statement and records
filed under the 1940 Act; and (3) the proposed transaction is
consistent with the general purposes of the 1940 Act.
13. The Section 17(b) Applicants submit that the terms of the
Substitutions, including the consideration to be paid and received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned. The Section 17(b) Applicants also submit that the
Substitutions are consistent with the policies of AllianceBernstein
Fund, Delaware Trust, MFS Trust, and MLIG Trust, and their portfolios,
as recited in the current registration statements and reports filed by
each under the 1940 Act. Finally, the Section 17(b) Applicants submit
that the proposed Substitutions are consistent with the general
purposes of the 1940 Act.
Applicants' Conditions
For purposes of the approval sought pursuant to Section 26(c) of
the 1940 Act, the Substitutions described in the Application will not
be completed unless all of the following conditions are met.
1. The Commission shall have issued an order (i) approving the
Substitutions under Section 26(c) of the 1940 Act as necessary to carry
out the transactions described in the Application; and (ii) exempting
any in-kind redemptions and purchases from the provisions of Section
17(a) of the 1940 Act as necessary to carry out the transactions
described in the Application.
2. Each Variable Contract owner will have been sent (i) prior to
the Effective Date, a copy of the effective prospectus relating to the
relevant Replacement Portfolio, (ii) prior to the Effective Date, a
Pre-Substitution Notice describing the terms of the Substitutions and
the rights of the Variable Contract owners in connection with the
Substitutions, and (iii) a Post-Substitution Notice within five days
after the Substitutions informing them that the Substitutions were
carried out and restating the information set forth in the Pre-
Substitution Notice.
3. MLLIC and MLNY shall have satisfied themselves that (i) the
Variable Contracts allow the substitution of portfolios in the manner
contemplated by the Substitutions and related
[[Page 61494]]
transactions described herein, (ii) the transactions can be consummated
as described in the Application under applicable insurance laws, and
(iii) that any applicable regulatory requirements in each
jurisdiction where the Variable Contracts are qualified for sale have
been complied with to the extent necessary to complete the transaction.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27088 Filed 10-27-03; 8:45 am]
BILLING CODE 8010-01-P