[Federal Register: April 8, 2003 (Volume 68, Number 67)]
[Notices]
[Page 17115-17120]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08ap03-132]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-25989; File No. 812-12905]
CUNA Mutual Life Insurance Company, et al.; Notice of Application
April 2, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to section 26(c) of
the Investment Company Act of 1940 (the ``Act'') approving certain
substitutions of securities.
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Applicants: CUNA Mutual Life Insurance Company (the ``Company''), CUNA
Mutual Life Variable Annuity Account (the ``Annuity Account''), and
CUNA Mutual Variable Life Account (the ``Life Account'').
Summary of Application: Applicants request an order to permit the
substitutions by the Company of Z Class shares of the Multi-Cap Growth
Stock Fund (the ``Replacing Fund'') of the Ultra Series Fund (``Ultra
Series'') for Initial Class shares of the MFS Emerging Growth Series
(the ``Replaced Fund'') of the MFS Variable Insurance Trust (``MFS
Trust'').
Filing Date: The application was filed on November 22, 2002 and was
amended and restated on March 28, 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 with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on April 25, 2003, and should be accompanied by
proof of service on Applicants, in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer's interest, the reason for the request, and the
issues contested. Persons 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, c/o Margaret
Gallardo-Cortez, Esq., Assistant Vice President and Associate General
Counsel, CUNA Mutual Life Insurance Company, 5910 Mineral Point Road,
Madison, WI 53701-0391. Copy to David S. Goldstein, Esq., Sutherland
Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW., Washington, DC
20004-2415.
FOR FURTHER INFORMATION CONTACT: H. Yuna Peng, Attorney, at (202) 942-
0676, or Lorna J. MacLeod, Branch Chief, 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 Public Reference Branch of the Commission, 450 5th Street, NW.,
Washington, DC 20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. The Company is a mutual life insurance company organized under
Iowa law in 1879 and incorporated on June 21, 1882. The Company, first
organized as a fraternal benefit society with the name ``Mutual Aid
Society of the Evangelical Lutheran Synod of Iowa and Other States,''
changed its name to ``Lutheran Mutual Aid Society'' in 1911, and
reorganized as a mutual life insurance company called ``Lutheran Mutual
Life Insurance Company'' on January 1, 1938. On December 28, 1984, the
Company changed its name to ``Century Life of America.'' On January 1,
1997, the Company changed its name to ``CUNA Mutual Life Insurance
Company.'' As of December 31, 2002, the Company had assets in excess of
$5 billion.
2. The Company conducts a conventional life insurance business
within the context of the credit union system and is authorized to
transact the business of life insurance, including annuities, in all
states other than New York and in Puerto Rico. For purposes of the Act,
the Company is the depositor and sponsor of each of the Accounts as
those terms have been interpreted by the Commission with respect to
variable life insurance and variable annuity separate accounts.
3. Each Account is a ``separate account'' as defined by Rule 0-1(e)
under the Act. Each Account is registered with the Commission as a unit
investment trust. Each Account is comprised of a number of subaccounts
and each subaccount invests exclusively in one of the insurance
dedicated mutual fund portfolios made available as investment vehicles
underlying the Contracts.
4. The Annuity Account is divided into 11 subaccounts. The assets
of the Annuity Account support variable annuity contracts and interests
in the Account offered through such contracts have been registered
under the Securities Act of 1933.
5. The Life Account is divided into 11 subaccounts. The assets of
the Life
[[Page 17116]]
Account support variable life insurance contracts and interests in the
Account offered through such contracts have been registered under the
1933 Act.
6. The MFS Trust is registered as an open-end management investment
company under the Act and currently offers 15 separate investment
portfolios (each, a ``Fund''), one of which would be involved in the
proposed substitution. The MFS Trust issues a separate series of shares
of beneficial interest in connection with each Fund and has registered
such shares under the 1933 Act on Form N-1A. Massachusetts Financial
Services Company (``MFS'') serves as the investment adviser to each
Fund, including the Replaced Fund. MFS' principal offices are located
at 500 Boylston Street, Boston, Massachusetts 02116.
7. Ultra Series is registered as an open-end management investment
company under the Act and currently offers 10 separate investment
portfolios, one of which would be involved in the proposed
substitution. Ultra Series issues a separate series of shares of
beneficial interest in connection with each portfolio (also a
``Fund''), and has registered such shares under the 1933 Act on Form N-
1A. MEMBERS Capital Advisors, Inc. (``MCA'') is the investment adviser
of each Fund, including the Replacing Fund. Under a unitary fee
arrangement, MCA, at its own expense, also provides or arranges for the
provision of substantially all other services required by Ultra Series
through service agreements with affiliated and unaffiliated service
providers. Such services include all administrative, accounting and
legal services as well as the services of custodians, transfer agents
and dividend disbursing agents. The Funds of Ultra Series do, however,
pay their own auditor's fees, compensation to (and expenses of)
trustees who are not interested persons, independent counsel fees, and
extraordinary expenses.
8. The Company and CUNA Mutual Investment Corporation (``CMIC'')
each own a one-half interest in MCA. MCA's principal offices are
located at 5910 Mineral Point Road, Madison, Wisconsin 53701.
9. MCA manages the assets of various Funds of Ultra Series,
including the Replacing Fund, using a ``manager of managers'' approach
under which MCA may allocate some or all of a Fund's assets among one
or more ``specialist'' subadvisers. MCA monitors the performance of
each subadviser to the extent that it deems appropriate to achieve a
Fund's investment objective, reallocates portfolio assets among its own
portfolio management team and individual subadvisers, or recommends to
the Ultra Series' board of trustees that particular subadvisers be
employed or terminated for a Fund.
10. MCA and the Replacing Fund have entered into a subadvisory
agreement with Wellington Management Company, LLP (``Wellington
Management'') to provide portfolio management services pursuant to
which Wellington Management selects the Replacing Fund's investments
and places orders to buy and sell the Replacing Fund's investments.
Wellington Management's principal offices are located at 75 State
Street, Boston, Massachusetts, 02109.
11. The Contracts are flexible premium variable annuity and
variable life insurance contracts. The variable annuity Contracts
provide for the accumulation of values on a variable basis, fixed
basis, or both, during the accumulation period, and provide settlement
or annuity payment options on a variable or fixed basis. The variable
life insurance Contracts provide for the accumulation of values on a
variable basis, fixed basis, or both, throughout the insured's life,
and for a substantial death benefit upon the death of the insured.
Under each of the Contracts, the Company reserves the right to
substitute shares of one Fund for shares of another, or of another
investment portfolio, including a portfolio of a different management
investment company.
12. For as long as a variable life insurance Contract remains in
force or a variable annuity Contract has not yet been annuitized, a
Contract owner may transfer all or any part of the Contract value from
one subaccount to any other subaccount or to a fixed account. The
Contracts do not limit the number of transfers of Contract value for
any period of time or reserve to the Company the right to limit the
number of transfers. The Company currently waives applicable fees for
Contract value transfers; however, certain of the variable life
insurance Contracts reserve to it the right to assess a charge of $20
for transfers in excess of four per Contract year and certain of the
annuity Contracts reserve the right to it to assess a charge of $10 for
transfers in excess of twelve per Contract year.
13. The proposed substitution is part of efforts by the Company to
provide a portfolio selection within the Contracts that: (1) Better
represents the designated asset class, (2) provides more stability in
portfolio management, and (3) exhibits more consistency of periodic
returns relative to representative markets.
14. In 1995, when the Company first selected the Replaced Fund as
an investment option under inclusion in the Contracts, the Fund met its
desire for a multi-capitalization investment option. In recent years,
however, the Replaced Fund has, in the Company's view, become more
oriented towards stocks of large-cap growth companies. Although this
has been the result of a strategy of successfully identifying and
holding as portfolio investments the securities of fast-growing
companies and by focusing new purchases in larger companies, the
portfolio composition and general orientation of the Replaced Fund has
shifted and no longer fits the position in the investment option lineup
for the Contracts desired by the Company. In contrast, MCA has recently
retained Wellington Management as the Replacing Fund's subadviser in
order to manage the Fund to fit this position in the lineup. In recent
years, other accounts managed by Wellington Management in this style
have generally invested between 20% and 35% of their total assets in
small-cap and mid-cap growth stocks, thereby providing more consistent
multi-cap exposure. In the Company's judgment, this portfolio
orientation better represents the asset class mix of a portfolio
originally intended for inclusion in the Contracts.
15. Over time, the Replaced Fund has experienced a series of
portfolio manager changes followed by the assignment of several
portfolio managers, each with management responsibility over a portion
of the Replaced Fund's assets. In the Company's view, this led to a
significant increase in the number of portfolio holdings and has
correspondingly raised the portfolio turnover rate to over 231% for
2001. It also has resulted, at times, in concentrations of the Fund's
investments in one or a few industries or sectors while other
industries or sectors have been underrepresented.
16. The Company believes that it is important that Contract
investment options perform generally in line with representative
markets, particularly given the limited selection of subaccounts
available under the Contracts. In the Company's judgment, the changes
in portfolio management and investment style experienced by the
Replaced Fund have resulted in erratic portfolio performance for the
Replaced Fund and the Company has determined that the Fund has not
performed in line with those representative markets considered by MCA
as providing more diversified multi-cap exposure. In contrast, the
Replacing Fund's subadviser's style of management appears to have a
much more consistent record in this regard. Based on Wellington
Management's three-year
[[Page 17117]]
history managing other accounts (mutual funds and other subadvisory
clients) using this style and disciplines, the Company believes that
the Fund, under Wellington Management's direction, will provide much
more consistent performance than the Replaced Fund has provided.
Applicants believe that replacing the Replaced Fund with the Replacing
Fund will benefit Contract owners and improve the array of investment
options available under the Contracts.
17. Replacing the Replaced Fund with the Replacing Fund is
appropriate and in the best interests of Contract owners because the
stated investment objectives and principal investment strategies of the
Replacing Fund are substantially identical to those of the Replaced
Fund so that Contract owners will have continuity in investment and
risk expectations. In addition, the types of investment advisory and
administrative services provided to the Replacing Fund are
substantially the same as those provided to the Replaced Fund. Finally,
Applicants note that the net expenses for the Replacing Fund were the
same as those for the Replaced Fund for the year ended December 31,
2002.
18. The following chart sets out the investment objective and
principal investment strategies of the Replaced Fund and the Replacing
Fund, as stated in their respective prospectuses.
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Replaced Fund Replacing Fund
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MFS Emerging Growth Series Multi-Cap Growth Stock Fund
Investment Objective: Long term Investment Objective: Long term
growth of capital. capital appreciation.
Principal Investment Strategies: Principal Investment Strategies:
The Fund invests, under normal The Fund invests generally in
market conditions, at least 80% of common stocks, securities
its net assets in common stocks convertible into common stocks and
and related securities, such as related equity securities. Under
preferred stocks, coinvertible normal market conditions, the Fund
securities and depositary receipts will maintain at least 80% of its
for those securities, of emerging assets in these securities.
growth companies. Emerging growth The Fund seeks securities of growth
companies may be of any size, and companies across a broad range of
the Fund's investments may include market capitalization focusing on
securities listed on a securities those with proprietary
exchange or traded in over-the- technologies, management, or
counter (OTC) markets. market opportunities that are
MFS, the Fund's adviser, uses a likely to support earnings growth
bottom-up, as opposed to a top- over extended time periods in
down, investment style in managing excess of the growth rate of the
the Fund. This means that economy and/or the rate of
securities are selected based upon inflation.
fundamental analysis (such as an The Fund may also invest in
analysis of earnings, cash flows, warrants, preferred stocks and
competitive position and debt securities (including non-
management's abilities) performed investment grade debt securities).
by the Fund's manager and MFS' The Fund may invest up to 25% of
large group of equity research its assets in foreign securities,
analysts. including emerging market
While the Fund is a diversified securities.
fund and therefore spreads its
investments across a number of
issuers, it may invest a
relatively large percentage of its
assets in a single issuer as
compared to other funds managed by
MFS. The Fund may invest in
foreign securities (including
emerging market securities)
The Fund has engaged and may engage
in active and frequent trading to
achieve its principal investment
strategies.
------------------------------------------------------------------------
19. The following chart compares advisory fees, other expenses,
total operating expenses (before and after any waivers and
reimbursements), and portfolio turnover rates for the year ended
December 31, 2002, expressed as an annual percentage of average daily
net assets, of the Replaced Fund and the Replacing Fund. Neither the
Initial Class shares of the Replaced Fund nor Z Class shares of the
Replacing Fund are subject to a distribution plan or shareholder
service plan adopted under Rule 12b-1 of the Act.
------------------------------------------------------------------------
Replaced Fund Replacing Fund
---------------------------------------
MFS Emerging Multi-Cap Growth
Growth Series Stock Fund (Z
(Initial Class) Class)
------------------------------------------------------------------------
Advisory Fees................... 0.75% 0.85%
Other Expenses.................. 0.11 0.01
---------------------
Total Operating Expenses.... 0.86% 0.86%
Less Expense Waivers and N/A N/A
Reimbursements.................
Net Operating Expenses.......... 0.86% 0.86%
Portfolio Turnover.............. 114.67% 156.51%
------------------------------------------------------------------------
20. The Replaced Fund has an expense offset arrangement that
reduces the Fund's custody fee based upon the amount of cash maintained
by the Portfolio with its custodian and dividend disbursing agent.
``Other Expenses'' do not take into account these expense reductions,
and are therefore higher than the actual expenses of the series. Had
these fee reductions been taken into account, ``Net Expenses'' for the
Replaced Fund would equal 0.85%.
21. The following chart compares the fees paid for advisory and
subadvisory services for the fiscal year ending December 31, 2002,
expressed as an annual percentage of average daily net assets, by the
Replaced Fund and the Replacing Fund.
[[Page 17118]]
------------------------------------------------------------------------
Replaced Fund Replacing Fund
------------------------------------------------------------------------
MFS Emerging Growth Series (Initial Multi-Cap Growth Stock Fund (Z
Class) Class)
------------------------------------------------------------------------
Annual Annual
Annual Advisory Subadvisory Fee Annual Unitary Subadvisory Fee
Fee (paid by the Management Fee (paid by the
Adviser) Adviser)
------------------------------------------------------------------------
Wellington
Management
0.75% NA 0.85% First $100M--
0.50%
Above $100M--
0.40%
------------------------------------------------------------------------
22. The following table compares the respective asset levels,
expense ratios, and performance data of the two Funds for each of the
past three fiscal years. Wellington Management has been the Replacing
Fund's subadviser since May 1, 2002.
------------------------------------------------------------------------
Net assets at end Expense Total
MFS Emerging Growth Fund of period ratio return
------------------------------------------------------------------------
2000......................... $2,312,406,000 .85% -19.61%
2001......................... 1,462,000,000 .86 -33.49
2002......................... 774,775,000 .85 -33.76
------------------------------
Multi-Cap Growth Fund
------------------------------------------------------------------------
2000......................... $9,897,000 .91% -9.52%
2001......................... 13,923,000 .86 -30.89
2002......................... 75,326,000 .86 -25.21
23. Applicants believe that the Replacing Fund is an appropriate
replacement for the Replaced Fund for each Contract. The Replacing Fund
has a substantially identical investment objective as that of the
Replaced Fund. Both pursue their investment objective by investing
primarily in companies, of various sizes, which are expected to grow
faster than the general economy. The investment adviser for the
Replaced Fund and the subadviser for the Replacing Fund both rely on
internal research and use a ``bottom-up'' stock selection approach to
portfolio management (as opposed to a ``top-down,'' economic
forecasting oriented approach). There are, however, some distinctions
between the way in which the principal investment strategies are
pursued by the Replaced Fund and the Replacing Fund.
24. The primary differences in the implementation of investment
strategies of the Replaced Fund and the Replacing Fund manifest in the
degree of flexibility exercised by their adviser or subadviser in
implementing the strategies. For example, whereas the Replaced Fund's
investment adviser employs no firm guidelines limiting the size of its
capitalization exposures, the Replacing Fund's subadviser typically
limits large-cap exposure to a range of 60%-90% of total assets, mid-
cap exposure to 25% or less of total assets, and small-cap exposure to
20% or less of total assets. Similarly, the Replaced Fund's adviser
does not limit its exposure to any single industry; in contrast, the
Replacing Fund's subadviser generally limits its industry exposure to
no more than 15 percentage points in excess of that industry's weight
in the Fund's benchmark index. Moreover, the Replaced Fund has often
concentrated its portfolio in relatively few large holdings, with some
exceeding 10% of total assets, while much of the rest of its portfolio
is often scattered over a few hundred very small holdings. In contrast,
the Replacing Fund's subadviser has generally managed other accounts
with the same style as the Replacing Fund with few holdings
representing more than 5% of the Fund's total assets and fewer than 110
holdings overall. Finally, the annual portfolio turnover rate for the
Replaced Fund has ranged from 114% to 231% over the last three years as
it has tried to respond to current market conditions. In contrast,
other accounts managed by the Replacing Fund's subadviser with the same
style as the Replacing Fund have experienced annual turnover rates
ranging from 90% to 140% during the past three years. The Company
believes that this likely is a reflection of Wellington Management's
longer-term perspective on the stocks it has purchased. In addition,
the Replacing Fund has available to it transactional advantages
attributable to achieved economies of scale comparable to that of the
Replaced Fund's manager and has the same expense ratio as the Replaced
Fund.
25. To the extent that the annualized ratio of expenses to average
net assets of the Replacing Fund exceeds, for each fiscal period (such
period being less than 90 days) during the twenty-four months following
the substitutions, 0.85%, the Company will, for each Contract
outstanding on the date of the proposed substitutions, make a
corresponding reduction in separate account expenses (or subaccount)
expenses on the last day of such fiscal period, such that the ratio of
the Replacing Fund's expenses to average net assets, together with the
ratio of expenses to average net assets of the corresponding separate
account (or subaccount) will, on an annualized basis, be no greater
than the sum of 0.85% and the ratio of expenses to average net assets
of the separate account (or subaccount) for the fiscal year ended
December 31, 2002. In addition, for twenty-four months following the
substitutions, the Company will not increase asset-based fees or
charges for Contracts outstanding on the day of the proposed
substitutions.
26. By supplements to the May 1, 2002 prospectuses for the
Contracts and the Accounts (substantially in the form attached as
Exhibit C to the initial application), the Company will notify owners
of the Contracts of their intention to take the necessary actions,
including seeking the order requested
[[Page 17119]]
by this application, to carry out the proposed substitution as
described herein.
27. The supplements about the proposed substitution will advise
Contract owners that from the date of the supplement until the date of
the proposed substitution, the Company will not (except as described in
the next section) suspend its current waivers of transfer charges or
exercise any rights reserved by it under any Contract to impose
additional charges for transfers until at least 30 days after the
proposed substitution. Similarly, the supplements will disclose that,
from the date of the supplement until the date of the proposed
substitution, the Company will permit Contract owners to make one
transfer of Contract value out of the subaccount currently holding
shares of the Replaced Fund to another subaccount without the transfer
being treated as one of a limited number of transfers permitted without
a transfer charge. The supplements also will advise Contract owners
that if the proposed substitution is carried out, then each Contract
owner affected by the substitution will be sent a written notice
(described immediately below) informing them of the fact and details of
the substitution.
28. Within five days after the proposed substitution, any Contract
owners who are affected by the substitution will be sent a written
notice informing them that the substitution was carried out. Current
prospectuses for the Replacing Fund will be sent to Contract owners on
or before the time the notices are sent. The notice as delivered in
certain jurisdictions also may explain that, under insurance
regulations in those jurisdictions, Contract owners affected by the
substitutions may exchange their Contract for a fixed-benefit life
insurance contract or fixed-benefit annuity contract during the 60 days
following the substitutions.
29. The Company will carry out the proposed substitutions by
redeeming Initial Class shares of the Replaced Fund held by the
Accounts for cash and applying the proceeds to the purchase of Z Class
shares of the Replacing Fund. The proposed substitutions will take
place at relative net asset value with no change in the amount of any
Contract owner's Contract value or death benefit or in the dollar value
of his or her investment in any of the Accounts. Contract owners will
not incur any fees or charges as a result of the proposed
substitutions, nor will their rights or the Company's obligations under
the Contracts be altered in any way. All applicable expenses incurred
in connection with the proposed substitutions, including brokerage
commissions and legal, accounting, and other fees and expenses, will be
paid by the Company. In addition, the proposed substitutions will not
impose any tax liability on Contract owners. The proposed substitutions
will not cause the Contract fees and charges currently being paid by
existing Contract owners to be greater after the proposed substitutions
than before the proposed substitutions.
30. The proposed substitution will not be treated as a transfer of
Contract value or an exchange of annuity units for the purpose of
assessing transfer charges or for determining the number of remaining
``free'' transfers or exchanges in a Contract year. The Company will
not exercise any right it may have under the Contracts to impose
charges for Contract value transfers or annuity unit exchanges under
the Contracts for a period of at least 30 days following the proposed
substitutions. Similarly, the Company will permit Contract owners to
make one transfer of Contract value (or annuity unit exchange) out of
the Replaced Fund subaccount to another subaccount without the transfer
(or exchange) being treated as one of a limited number of transfers (or
exchanges) permitted without a transfer charge. Likewise, for at least
30 days following the proposed substitutions, the Company will permit
Contract owners affected by the substitutions to make one transfer of
Contract value (or annuity unit exchange) out of Replacing Fund
subaccount to another subaccount without the transfer (or exchange)
being treated as one of a limited number of transfers (or exchanges)
permitted without a transfer charge.
31. The Company is also seeking approval of the proposed
substitutions from any state insurance regulators whose approval may be
necessary or appropriate.
32. The proposed substitution appears to involve the substitution
of securities within the meaning of section 26(c) of the Act.
Applicants therefore request orders from the Commission pursuant to
section 26(c) approving the proposed substitution.
33. All the Contracts expressly reserve for the Company the right,
subject to compliance with applicable law, to substitute shares of one
fund or portfolio held by a subaccount of an Account for another. The
prospectuses for the Contracts and the Accounts contain appropriate
disclosure of this right. The Company has reserved this right of
substitution both to protect itself and its Contract owners in
situations where it believes a fund is no longer appropriate for
Contract owners or where either might be harmed or disadvantaged by
circumstances surrounding the issuer of the shares held by one or more
of its separate accounts and to afford the opportunity to replace such
shares where to do so could benefit itself and Contract owners.
34. Applicants maintain that Contract owners will be better served
by the proposed substitution and that the proposed substitution is
appropriate given the Funds and other investment options available
under the various Contracts. Since its inception, the Replacing Fund
has had investment performance superior to that of the Replaced Fund.
More significantly, the Replacing Fund has had substantially similar
levels of expenses over this same period (substantially identical for
each of the past two years) as the Replaced Fund. Applicants believe
that the Replacing Fund and Replaced Funds are substantially the same
in their stated investment objectives and principal investment
strategies as to afford investors continuity of investment experience,
relative to management style. In addition, Applicants generally submit
that the proposed substitution meets the standards that the Commission
and its staff have applied to similar substitutions that have been
approved in the past.
35. Although the Replaced Fund has substantially more assets than
the Replacing Fund, the Replaced Fund's assets have declined
significantly in recent periods. Although the Replaced Fund benefits
from an expense offset arrangement that reduces the Fund's custody fees
and thus has the effect, along with other arrangements to reduce
expenses, of reducing the Replaced Fund's expenses to slightly lower
than those of the Replacing Fund, there is no assurance that this
expense reduction will continue. Because of the expense limits on the
Contracts discussed above, for two years following the proposed
substitution, Contract owners affected by the proposed substitution
will benefit from a subaccount and underlying Fund with aggregate
expenses that are no higher than the aggregate annualized expenses of
the subaccount and the Replaced Fund for the fiscal year ended December
31, 2002.
36. Applicants believe that Contract owners will be at least as
well off with the Replacing Fund as with the Replaced Fund. The
proposed substitution retains for Contract owners the investment
flexibility that is a central feature of the Contracts. If the proposed
substitution is carried out, all Contract owners will be permitted to
[[Page 17120]]
allocate purchase payments and transfer Contract values between and
among the remaining subaccounts as they could before the proposed
substitution.
37. The proposed substitution is not the type of substitution that
section 26(c) was designed to prevent. Unlike traditional unit
investment trusts where a depositor could only substitute an investment
security in a manner which permanently affected all the investors in
the trust, the Contracts provide each Contract owner with the right to
exercise his or her own judgment and transfer Contract values into
other subaccounts. Moreover, the Contracts will offer Contract owners
the opportunity to transfer amounts out of the affected subaccounts
into any of the remaining subaccounts without cost or disadvantage. The
proposed substitutions, therefore, will not result in the type of
costly forced redemption which section 26(c) was designed to prevent.
38. The proposed substitution also is unlike the type of
substitution that section 26(c) was designed to prevent in that by
purchasing a Contract, Contract owners select much more than a
particular investment company in which to invest their Contract values.
They also select the specific type of coverage offered by the Company
under the Contract, as well as numerous other rights and privileges set
forth in the Contract. Contract owners may also have considered the
size, financial condition, type and reputation for service of the
Company, from whom they purchased their Contract in the first place.
These factors will not change because of the proposed substitution.
39. Applicants submit that the proposed substitution is consistent
with the protection of investors and the purposes fairly intended by
the policy and provisions of the Act.
Conclusion:
Applicants assert that, for the reasons stated above, the requested
order approving the Substitution should be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8439 Filed 4-7-03; 8:45 am]
BILLING CODE 8010-01-P