FR Doc 03-16517

[Federal Register: July 1, 2003 (Volume 68, Number 126)]
[Notices]
[Page 39163-39168]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jy03-100]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26080; File No. 812-12938]

Western-Southern Life Assurance Company, et al.; Notice of
Application

June 25, 2003.
AGENCY: The 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: Western-Southern Life Assurance Company (``Western-
Southern''), Separate Account 1 of Western-Southern (``Western-Southern
Separate Account 1''), Separate Account 2 of Western-Southern
(``Western-Southern Separate Account 2,'' together with Western-
Southern Separate Account 1, the ``Western-Southern Separate
Accounts''), Integrity Life Insurance Company (``Integrity''), Separate
Account I of Integrity (``Integrity Separate Account I''), Separate
Account II of Integrity (``Integrity Separate Account II,'' together
with Integrity Separate Account I, the ``Integrity Separate
Accounts''), National Integrity Life Insurance Company (``National
Integrity''), Separate Account I of National Integrity (``National
Integrity Separate Account I''), Separate Account II of National
Integrity (``National Integrity Separate Account II,'' together with
National Integrity Separate Account I, the ``National Integrity
Separate Accounts), Columbus Life Insurance Company (Columbus Life''
and together with Western-Southern, Integrity and National Integrity,
the ``Insurance Companies'' and each individually, an ``Insurance
Company'') and Separate Account 1 of Columbus Life (``Columbus Life
Separate Account 1,'' and together with the Western-Southern Separate
Accounts, the Integrity Separate Accounts and the National Integrity
Separate Accounts, the ``Separate Accounts'') (collectively, the
``Applicants'').

Summary of Application: Applicants request an order approving the
substitution of shares of (i) the Touchstone Money Market Fund for
shares of the Fidelity VIP Money Market Portfolio and (ii) the Putnam
VT International Equity Fund (formerly the Putnam VT International
Growth Fund) for the Touchstone International Equity Fund (each a
``Substitution'' collectively the ``Substitutions'').

Filing Date: The application was filed on March 4, 2003 and was amended
and restated on June 19, 2003.

Hearing or Notification of Hearing: An order granting the application
will be issued unless the commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on July 18, 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: G. Stephen Wastek,
Esq., Integrity Life Insurance Company, 515 West Market Street,
Louisville, Kentucky 40202, Elisabeth A. Dahl, Esq., Western-Southern
Life Assurance Company, 400 Broadway, Cincinnati, Ohio 45202 and Robert
N. Hickey, Esq., Sullivan & Worcester LLP, 1666 K Street, NW.,
Washington, DC 20006.

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 Fifth Street, NW.,
Washington, DC 20549 (tel. (202) 942-8090).

Applicant's Representations

1. Western-Southern is a stock life insurance company organized
under the laws of the State of Ohio. It is a wholly-owned subsidiary of
The Western and Southern Life Insurance Company (``WSLIC''). WSLIC is a
wholly-owned subsidiary of Western-Southern Mutual Holding Company, a
mutual holding company organized under the laws of the State of Ohio in
2000.
2. Integrity is a stock life insurance company organized under the
laws of Ohio. Integrity is an indirect wholly-owned subsidiary of
WSLIC.
3. National Integrity is a stock life insurance company organized
under the laws of New York. National Integrity is a direct wholly-owned
subsidiary of Integrity and an indirect wholly-owned subsidiary of
WSLIC.
4. Columbus Life is a stock life insurance company organized under
the laws of the State of Ohio. It is a wholly-owned subsidiary of
WSLIC.
5. Western-Southern Separate Account 1 was established under Ohio
law in 1992. Western-Southern Separate Account 1 is registered under
the Act as a unit investment trust and is used to fund variable annuity
contracts issued by Western-Southern. Two variable annuity contracts
funded by Western-Southern Separate Account 1 are affected by this
application.
6. Western-Southern Separate Account 2 was established under Ohio
law in 1994. Western-Southern Separate Account 2 is registered under
the Act as a unit investment trust and is used to fund variable annuity
contracts issued by Western-Southern. One variable annuity contract
funded by Western-Southern Separate Account 2 is affected by this
application.
7. Integrity Separate Account I was established under Ohio law in
1986. Integrity Separate Account I is registered under the Act as a
unit investment trust and is used to fund variable annuity contracts
issued by Integrity. Three variable annuity contracts funded by
Integrity Separate Account I are affected by this application.
8. Integrity Separate Account II was established under Ohio law in
1992. Integrity Separate Account II is registered under the Act as a
unit investment trust and is used to fund variable annuity contracts
issued by Integrity. One variable annuity contract funded by Integrity
Separate Account II is affected by this application.
9. National Integrity Separate Account I was established under New
York law in 1992. National Integrity Separate Account I is registered
under the Act as a unit investment trust and is used to fund variable
annuity contracts issued by National Integrity. Three variable annuity
contracts funded by National Integrity Separate Account I are affected
by this application.
10. National Integrity Separate Account II was established under
New York law in 1992. National Integrity Separate Account II is
registered under the Act as a unit investment trust and is used to fund
variable annuity

[[Page 39164]]

contracts issued by National Integrity. One variable annuity contract
funded by National Integrity Separate Account II is affected by this
application.
11. Columbus Life Separate Account 1 was established under Ohio law
in 1998. Columbus Life Separate Account 1 is registered under the Act
as a unit investment trust and is used to fund variable universal life
insurance policies issued by Columbus Life. One variable universal life
insurance policy funded by the Columbus Life Separate Account 1 is
affected by this application. The eleven variable annuity contracts and
one variable universal life insurance policy affected by this
application are hereinafter collectively referred to as the
``Contracts.''
12. Purchase payments under the Contracts are allocated to one or
more subaccounts of the Separate Accounts (the ``subaccounts'').
Income, gains and losses, whether or not realized, from assets
allocated to the Separate Accounts are, as provided in the Contracts,
credited to or charged against the Separate Accounts without regard to
other income, gains or losses of the applicable Insurance Company. The
assets maintained in the Separate Accounts will not be charged with any
liabilities arising out of any other business conducted by the
applicable Insurance Company. Nevertheless, all obligations arising
under the Contracts, including the commitment to make annuity payments
or death benefit payments, are general corporate obligations of the
applicable Insurance Company. Accordingly, all of the assets of each of
the Insurance Companies are available to meet its obligations under its
Contracts.
13. Each of the Contracts permits allocations of accumulation value
to available subaccounts that invest in specific investment portfolios
of underlying mutual funds. Each Contract offers between 17 and 33
portfolios with respect to the Contracts funded by the Western-Southern
Separate Accounts and Columbus Life Separate Account 1 and between 56
and 61 portfolios with respect to the Contracts funded by the Integrity
Separate Accounts and the National Integrity Separate Accounts. Each of
the Contracts offers the Fidelity VIP Money Market Portfolio and/or the
Touchstone International Equity Fund, the portfolios that are the
subject of the Substitutions (the ``Replaced Funds''). Before the date
of the Substitutions, the Touchstone Money Market Fund, which is
proposed as the replacement for the Fidelity VIP Money Market
Portfolio, and the Putnam VT International Equity Fund, which is
proposed as the replacement for the Touchstone International Equity
Fund, (each a ``Replacement Fund'' and together, the ``Replacement
Funds''), if not already offered under the Contracts, will be added to
the Contracts, as applicable. In addition, included in the Contracts
are several alternative fixed interest rate options that are available
to contract owners.
14. Each of the Contracts permit transfers of accumulation value
from one subaccount to another subaccount at any time prior to the
extended coverage period that begins at the insured's age 100 (in the
case of Contracts relating to the variable insurance policy) or prior
to annuitization (in the case of Contracts relating to variable
annuities), subject to certain restrictions and charges described
below. No sales charge applies to such a transfer of accumulation value
among subaccounts.
15. The Contracts permit up to twelve free transfers during any
contract year. A fee may be imposed on transfers in excess of twelve
transfers in a contract year. Transfers must be at least $250, or, if
less, the entire amount in the subaccount from which value is to be
transferred. A variety of types of automatic scheduled transfers are
permitted without charge and are not counted against the twelve free
transfers in a contract year.
16. Each of the Contracts reserves the right, upon notice to
contract owners and compliance with applicable law, to add, combine or
remove subaccounts, or to withdraw assets from one subaccount and put
them into another subaccount. This reserved right is disclosed in each
Contract's prospectus.
17. Each Insurance Company, on its behalf and on behalf of the
Separate Accounts set forth below, propose the following Substitutions:

------------------------------------------------------------------------
Proposed substitution Separate accounts
------------------------------------------------------------------------
(i) the Touchstone Money Market Fund Integrity Separate Account I,
for shares of the Fidelity VIP Money Integrity Separate Account II,
Market Portfolio. National Integrity Separate
Account I, National Integrity
Separate Account II.
(ii) the Putnam VT International Equity Western-Southern Separate
Fund for shares of the Touchstone Account 1, Western-Southern
International Equity Fund. Separate Account 2, Integrity
Separate Account I, Integrity
Separate Account II, National
Integrity Separate Account I,
National Integrity Separate
Account II, Columbus Life
Separate Account 1.
------------------------------------------------------------------------

18. In the case of the Substitution relating to the Touchstone
Money Market Fund, shares of each class of the Replaced Fund will be
liquidated and the proceeds will be used to purchase shares of the
equivalent corresponding class of the Replacement Fund. Class I shares
of the Touchstone Money Market Fund (which have no Rule 12b-1 fee) will
be substituted for Initial class shares of the Fidelity VIP Money
Market Portfolio (which have no Rule 12b-1 fee) and Class SC shares of
Touchstone Money Market Fund (which have a Rule 12b-1 fee of 0.25%)
will be substituted for Service Class 2 shares of the Fidelity VIP
Money Market Portfolio (which have a Rule 12b-1 fee of 0.25%). In the
case of the Substitution relating to the Putnam VT International Equity
Fund, Class IB shares of the Putnam VT International Equity Fund (which
have a Rule 12b-1 fee of 0.25%) will be substituted for Class I shares
of the Touchstone International Equity Fund (which have no Rule 12b-1
fee).
19. Touchstone Advisors, Inc. (``Touchstone''), a wholly-owned
subsidiary of WSLIC, serves as the investment adviser to the Touchstone
International Equity Fund and to the Touchstone Money Market Fund.
Fidelity Management and Research Company serves as the investment
adviser to the Fidelity VIP Money Market Portfolio. Putnam Investment
Management, LLC serves as investment adviser to the Putnam VT
International Equity Fund. Fidelity Management and Research Company and
Putnam Investment Management, LLC are unaffiliated with Touchstone and
the Insurance Companies.
20. The investment objectives, policies and restrictions of the
Replacement Funds are in each case substantially similar to the
investment objectives, policies and restrictions of the respective
Existing Funds. Set forth below is a description of the investment
objectives and principal investment policies of each Existing Fund and
its corresponding Replacement Fund.
21. The Fidelity VIP Money Market Portfolio is a separate series of
the Variable Products Insurance Fund. The Fidelity VIP Money Market
Portfolio

[[Page 39165]]

seeks to earn a high level of current income while preserving capital
and providing liquidity. It invests only in high-quality, U.S. dollar
denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their
agencies, and commercial paper and notes.
22. The Touchstone Money Market Fund is a separate series of the
Touchstone Variable Series Trust, an open-end management investment
company registered under the Act. The Touchstone Money Market Fund
seeks high current income, consistent with liquidity and stability of
principal. The Fund invests in high-quality money market instruments.
The Fund's investments may include domestic bank obligations, including
certificates of deposit, bankers' acceptances and time deposits; U.S.
Government obligations issued directly by the U.S. Treasury or by
agencies of the U.S. Government; short-term corporate debt obligations
and taxable and tax-exempt municipal securities.
23. The Touchstone International Equity Fund is a separate series
of the Touchstone Variable Series Trust. The investment objective of
the Touchstone International Equity Fund is to seek long-term growth of
capital through investment in equity securities of foreign issuers. The
Fund seeks growth of capital. This means that the Fund looks for
investments that it thinks will increase in value over a period of 3 to
5 years. Under normal circumstances, the Fund will invest at least 80%
of net assets in the common stock and preferred stock of foreign
companies in at least 3 countries outside of the United States. The
Fund focuses on mid- and large-capitalization located in Europe,
Australia and the Far East. The Fund may invest up to 15% of its assets
in securities issued by companies located in emerging market countries.
24. The Putnam VT International Equity Fund is a separate series of
Putnam Variable Trust, an open-end management investment company
registered under the Act. The Putnam VT International Equity Fund seeks
capital appreciation. It invests mainly in common stocks of companies
outside the United States. The Fund's investment adviser looks for
companies it believes to have favorable investment potential. For
example, it may purchase stocks of companies with stock prices that
reflect a value lower than that which the investment adviser places on
the company. The Fund invests mainly in mid-sized and large companies,
although it can invest in companies of any size. Although the Fund
emphasizes investments in developed countries, it may also invest in
companies located in emerging markets.
25. The Substitutions are a part of a restructuring designed to
eliminate the offering of overlapping funds in the Western-Southern
enterprise and those available from unaffiliated funds which also are
available as investment options, with similar investment objectives and
strategies and to eliminate uncompetitive products based on performance
history or lack of ability to gather assets to be operationally
efficient that serve as funding vehicles for insurance contracts issued
by Western-Southern and its affiliates, including the Insurance
Companies.
26. The Substitution of Touchstone Money Market Fund for Fidelity
VIP Money Market Portfolio, which replaces an outside fund with a fund
for which Touchstone acts as investment adviser also will permit
Touchstone, under the Multi-Manager Order, to hire, monitor and replace
sub-advisers as necessary to seek optimal performance. Before
Touchstone Money Market Fund can rely on the Multi-Manager Order, the
operation of the Touchstone Money Market Fund as a multi-manager fund,
as described in the application for the Multi-Manager Order, will be
approved, following the proposed Substitution, by a majority of the
outstanding voting securities of the Touchstone Money Market Fund.
27. In addition, contract owners with sub-account balances invested
in shares of the Replacement Funds will have a lower management fee and
the same (or lower in the case of Class I shares) total expense ratio
taking into account fund expenses and fee waivers, in the case of the
Touchstone Money Market Fund, and a lower management fee and a lower
total expense ratio taking into account fund expenses (including Rule
12b-1 fees) in the case of the Putnam VT International Equity Fund.
With respect to the Substitution of the Class IB shares of the Putnam
VT International Equity Fund for the Class I shares of the Touchstone
International Equity Fund, the Insurance Companies considered the fact
that the Class IB shares were already an investment option under
certain contracts issued by Integrity and National Integrity. Moreover,
there will be no increase in Contract fees and expenses, including
mortality and expense risk fees and administration and distribution
fees charged to the Separate Accounts as a result of the Substitutions.
The Applicants believe that the Replacement Funds have investment
objectives, policies and risk profiles that are substantially similar
to the corresponding Replaced Funds to make those Replacement Funds
appropriate candidates as substitutes. The Insurance Companies
considered the performance history of the Replaced Funds and the
Replacement Funds and determined that no contract owners would be
materially adversely affected as a result of the Substitutions.
28. With respect to the Substitution relating to the Touchstone
International Equity Fund, the Applicants represent that (i) the
Insurance Companies will not receive, for three years from the date of
the Substitution, any direct or indirect benefits from the Replacement
Fund, its adviser or underwriter (or their affiliates), in connection
with assets representing contract values of Contracts affected by the
Substitution, at a higher rate than they had received from the Replaced
Fund, its adviser or underwriter (or their affiliates), including
without limitation: Rule 12b-1, shareholder service, administration or
other service fees, revenue sharing or other arrangements in connection
with such assets; and (ii) the Substitution and the selection of the
Replacement Fund was not motivated by any financial consideration paid
or to be paid to the Insurance Companies by the Replacement Fund, its
adviser or underwriter or their respective affiliates.
29. The following describes the proposed Substitutions with respect
to each Fund's comparative performance history and comparative fund
expenses.

Fidelity VIP Money Market Portfolio--Touchstone Money Market Fund

The Applicants represent that the historical performance of
Touchstone Money Market Fund for the year ended December 31, 2002 is
comparable to and for the three-month period ended April 30, 2003 and
year-to-date through April 30, 2003 exceeds that of, Fidelity VIP Money
Market Portfolio. Effective April 28, 2003, Touchstone Money Market
Fund's management fee was reduced to 0.18%. In addition, the Fund
entered into a Sponsor Agreement with Touchstone, effective April 28,
2003, whereby total annual operating expenses for the Class I shares
will not exceed 0.28% and total annual operating expenses for the Class
SC shares will not exceed 0.55% through December 31, 2005. The Sponsor
Agreement will be amended with respect to Class SC shares prior to the
Substitution to provide that total annual operating expenses will not
exceed 0.54% for at least two years from the date of the Substitution.
As a result of the change in management fee and the expense cap
contained in the amended Sponsor Agreement, as set forth below,

[[Page 39166]]

the management fee of Touchstone Money Market Fund is lower than that
of Fidelity VIP Money Market Portfolio, and, including expense waivers,
Touchstone Money Market Fund's total annual operating expenses are the
same (or lower in the case of Class I shares) as those of Fidelity VIP
Money Market Portfolio.

In percent
----------------------------------------------------------------------------------------------------------------
Fidelity VIP
Touchstone money market Touchstone
Fidelity VIP money market money market portfolio money market
portfolio (Initial Class)* fund (Class I) (Service Class fund (Class
\1\ 2)* SC) *
----------------------------------------------------------------------------------------------------------------
Management Fee.............. 0.20 0.18 0.20 0.18
12b-1 fee................... .................................. .............. 25 25
Other Expenses.............. 0.09 0.96 0.09 0.53
Total Annual Operating 0.29 **1.14 0.54 0.96
Expenses...................
Waivers..................... .................................. 0.86 .............. 0.42
Net Expenses................ 0.29 0.28 0.54 0.54
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* Expenses for fiscal year ended December 31, 2002.
** Based on estimated amounts for the current fiscal year.
¹ Pro forma expenses for fiscal year ended December 31, 2002 giving effect to amended Sponsor Agreement.

Found Performance as of April 30, 2003

In percent
----------------------------------------------------------------------------------------------------------------
One Year* Three-Month YTD
----------------------------------------------------------------------------------------------------------------
Fidelity VIP Money Market Portfolio (Initial Class)............. 1.69 0.26 0.36
Touchstone Money Market Fund (Class I) ¹ ²*..................... 1.58 0.27 0.37
----------------------------------------------------------------------------------------------------------------
* For calendar year ended December 31, 2002.
¹ The Class SC shares of Touchstone Money Market Fund was organized on April 28, 2003 and has not yet commenced
operations. No performance information is available.
² The Touchstone Money Market Fund's performance for the one year ended December 31, 2002 reflects total annual
operating expenses of 0.60%. As indicated above, effective April 28, 2003, the total annual operating expenses
of the Fund are limited to 0.28% for Class I shares. If this expense limitation were in effect for the one
year ended December 31, 2002, the Touchstone Money Market Fund's performance would have been 1.90%.

Touchstone International Equity Fund--Putnam VT International Equity
Fund

The Applicants represent that the historical performance of Putnam
VT International Equity Fund for the one-, three-, and five-year
periods ended April 30, 2003 and year-to-date through April 30, 2003
has exceeded that of the Touchstone International Equity Fund. In
addition, as set forth below, the management fee and total annual
operating expenses (including a Rule 12b-1 fee of 0.25%) of Putnam VT
International Equity Fund, both before and after expense waivers, are
lower than those of Touchstone International Equity Fund.

In percent
------------------------------------------------------------------------
Touchstone Putnam VT
International International
Equity Fund Equity Fund
(Class I) * (Class IB) *
------------------------------------------------------------------------
Management Fee.......................... 0.95 0.76
12b-1 fee............................... .............. ¹ 0.25
Other Expenses.......................... 1.72 0.18
Total Annual Operating Expenses......... 2.67 1.19
Waivers................................. 1.42 ..............
Net Expenses............................ 1.25 1.19
------------------------------------------------------------------------
* Expenses for fiscal year ended December 31, 2002.
¹ The Fund has adopted a Distribution Plan with respect to its Class IB
shares to compensate Putnam Retail Management (the Fund*s underwriter)
for services provided and expenses incurred by it as principal
underwriter of the Class IB shares, including payments to insurance
companies and their affiliated dealers for providing services to their
contract holders investing in the Fund. The plan provides for payments
by the Fund to Putnam Retail Management at the annual rate (expressed
as a percentage of average net assets) of up to 0.35% on Class IB
shares. The Trustees of the Fund currently limit payments on Class IB
shares to 0.25% of average net assets.

Fund Performance as of April 30, 2003

[[Page 39167]]

[In percent]
----------------------------------------------------------------------------------------------------------------
1 Year 3 Year 5 Year YTD
----------------------------------------------------------------------------------------------------------------
Touchstone International Equity (Class I)....... -23.50 -22.97 -10.05 -1.75
Putnam VT International Equity Fund (Class IB).. -18.01 -15.40 -1.26 0.12
----------------------------------------------------------------------------------------------------------------

30. The Substitutions will take place at the Funds' relative net
asset values determined on the date of the Substitutions in accordance
with Section 22 of the Act and Rule 22c-1 thereunder with no change in
the amount of any contract owner's cash value or death benefit or in
the dollar value of his or her investment in any of the subaccounts.
Accordingly, there will be no financial impact on any contract owner.
The Substitutions will be effected by having each of the subaccounts
that invests in the Replaced Funds redeem its shares at the net asset
value calculated on the date of the Substitution and purchase shares of
the respective Replacement Fund at the net asset value calculated on
the same date.
31. The Substitutions will be described in supplements to the
prospectuses for the Contracts (``Stickers'') filed with the Commission
and mailed to contract owners. The Stickers will give contract owners
notice of the Substitutions and will describe the reasons for engaging
in the Substitutions. The Stickers will also inform contract owners
with value allocated to a subaccount investing in the Replaced Funds
that no additional amount may be allocated to those subaccounts on or
after the date of the Substitutions. In addition, the Stickers will
inform affected contract owners that they will have the opportunity to
reallocate accumulation value prior to the Substitutions from the
subaccounts investing in the Replaced Funds, and for 30 days after the
Substitutions from the subaccounts investing in the Replacement Funds
to subaccounts investing in other portfolios available under the
respective Contracts, without the imposition of any transfer charge or
limitation and without diminishing the number of free transfers that
may be made in a given contract year.
32. The prospectuses for the Contracts, as supplemented by the
Stickers, will reflect the Substitutions. Each contract owner will be
provided with a prospectus for the Replacement Funds before the
Substitutions, unless such contract owner has already received a copy
of such prospectus in the ordinary course. Within five days after the
Substitutions, the Insurance Companies will each send affected contract
owners written notice that the Substitutions have occurred. This
written notice will also reiterate to contract owners that they will
have the opportunity to reallocate accumulation value for 30 days after
the Substitutions from the subaccounts investing in the Replacement
Funds to subaccounts investing in other portfolios available under the
respective Contracts.
33. The Insurance Companies, as applicable, will pay all expenses
and transaction costs of the Substitutions, including all legal,
accounting and brokerage expenses relating to the Substitutions. No
costs will be borne by contract owners. Affected contract owners will
not incur any fees or charges as a result of the Substitutions, nor
will their rights or the obligations of the Applicants under the
Contracts be altered in any way. The Substitutions will not cause the
fees and charges under the Contracts currently being paid by contract
owners to be greater after the Substitutions than before the
Substitutions. The Substitutions will have no adverse tax consequences
to contract owners and will in no way alter the tax benefits to
contract owners.
34. Applicants believe that their request satisfies the standards
for relief of Section 26(c) of the Act, as set forth below, because the
affected contract owners will have:
(i) Contract values allocated to a subaccount invested in a
Replacement Fund with an investment objective and investment policies
substantially similar to the investment objective and policies of the
Replaced Fund; (ii) Superior or comparable performance to that of the
Replaced Funds; and (iii) Current total annual operating expenses that
are the same or lower than those of the Replaced Fund.

Applicants' Legal Analysis

1. Section 26(c) of the 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 approves the substitution. The Commission will approve
such a 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 the Act.
2. The purpose of Section 26(c) is to protect the expectation of
investors in a unit investment trust that the unit investment trust
will accumulate shares of a particular issuer by preventing
unscrutinized substitutions that might, in effect, force shareholders
dissatisfied with the substituted security to redeem their shares,
thereby possibly incurring either a loss of the sales load deducted
from initial premium payments, an additional sales load upon
reinvestment of the redemption proceeds, or both. Moreover, in the
insurance product context, a contract owner forced to redeem may suffer
adverse tax consequences. Section 26(c) affords this protection to
investors by preventing a depositor or trustee of a unit investment
trust that holds shares of one issuer from substituting for those
shares the shares of another issuer, unless the Commission approves
that substitution.
3. The purposes, terms and conditions of the Substitution are
consistent with the principles and purposes of Section 26(c) and do not
entail any of the abuses that Section 26(c) is designed to prevent.
4. Substitutions have been common where the substitute portfolio
has investment objectives and policies that are similar to those of the
eliminated portfolio, current expenses that are similar to or lower
than those of the eliminated portfolio, and performance that is similar
to or better than that of the eliminated portfolio.
5. In both cases the investment objectives and policies of the
Replacement Funds are sufficiently similar to those of the
corresponding Replaced Funds that contract owners will have reasonable
continuity in investment expectations. Accordingly, the Replacement
Funds are appropriate investment vehicles for those contract owners who
have contract values allocated to the Replaced Funds.
6. The management fee and current total annual operating expenses
(including Rule 12b-1 fees) are lower than those of the Replaced Fund,
in the case of the Putnam VT International Equity Fund. In the case of
the Touchstone Money Market Fund, the management fee is lower than that
of the Replaced Fund and total annual

[[Page 39168]]

operating expenses, taking into effect expenses waivers, will be the
same (or lower in the case of Class I shares). The Putnam VT
International Equity Fund has had consistently better performance than
the Touchstone International Equity Fund since its inception, and the
Touchstone Money Market Fund has had comparable historical performance
for the year ended December 31, 2002 to that of the Fidelity VIP Money
Market Portfolio and its performance has exceeded that of the Fidelity
VIP Money Market Portfolio for the three-month period ended April 30,
2003 and year-to-date through April 30, 2003.
7. The Substitutions will not result in the type of costly forced
redemption that Section 26(c) was intended to guard against and, for
the following reasons, are consistent with the protection of investors
and the purposes fairly intended by the Act:
(a) Each of the Replacement Funds is an appropriate portfolio to
which to move contract owners with values allocated to the Replaced
Funds because the portfolios have substantially similar investment
objectives and policies.
(b) The costs of the Substitutions, including any brokerage costs,
will be borne by the Insurance Companies and will not be borne by
contract owners. No charges will be assessed to effect the
Substitutions.
(c) The Substitutions will be at the net asset values of the
respective shares without the imposition of any transfer or similar
charge and with no change in the amount of any contract owner's
accumulation value or death benefit.
(d) The Substitutions will not cause the fees and charges under the
Contracts currently being paid by contract owners to be greater after
the Substitutions than before the Substitution and will result in
contract owners' contract values being moved to portfolios with lower
current total annual operating expenses (including a lower current
management fee) than the Replaced Fund, in the case of the Putnam VT
International Equity Fund, and the same (or lower) total annual
operating expenses (including a lower current management fee) as the
current total annual operating expenses of the Replaced Fund in the
case of the Touchstone Money Market Fund.
(e) Touchstone will cap total annual operating expenses of the
Touchstone Money Market Fund Class I shares at 0.28% of average daily
net assets through December 31, 2005 and Class SC shares at 0.54% of
average daily net assets for at least two years from the date of the
Substitution.
(f) All contract owners will be given notice of the Substitutions
prior to the Substitutions and will have an opportunity for 30 days
after the Substitutions to reallocate accumulation value among other
available subaccounts without the imposition of any transfer charge or
limitation and without being counted as one of the contract owner's
free transfers in a contract year.
(g) Within five days after the Substitutions, the Insurance
Companies will send to its affected contract owners written
confirmation that the Substitutions have occurred.
(h) For those contract owners who are contract owners on the date
of the Substitutions, the Insurance Companies will not increase
Separate Account or Contract fees and expenses for a two-year period
beginning on the date of the Substitutions.
(i) The Substitutions will in no way alter the insurance benefits
to contract owners or the contractual obligations of the Insurance
Companies.
(j) The Substitutions will have no adverse tax consequences to
contract owners and will in no way alter the tax benefits to contract
owners.

Conclusion

Applicants assert that for the reasons summarized 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. 03-16517 Filed 6-30-03; 8:45 am]

BILLING CODE 8010-01-P