[Federal Register: November 15, 2002 (Volume 67, Number 221)]
[Notices]
[Page 69266-69271]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15no02-99]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-25800; File No. 812-12618]
Fortis Benefits Insurance Company, et al.; Notice of Application
November 8, 2002.
AGENCY: Securities and Exchange Commission. (``Commission'').
ACTION: Notice of amended and restated 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: Fortis Benefits Insurance Company (``Fortis Benefits''),
First Fortis Life Insurance Company (``First Fortis''), Variable
Account D of Fortis Benefits Insurance Company (``Account D''), and
Separate Account A of First Fortis Life Insurance Company (``Account
A'') (together, the ``Applicants'').
Summary of Application: Applicants request an order to permit Fortis
Benefits and First Fortis to substitute shares of the Mid Cap Growth
Fund II of Strong Variable Insurance Funds, Inc. (``Strong'') for
shares of the Discovery Fund II of Strong, and shares of the
International Portfolio of Alliance Variable Products Series Funds,
Inc. (``Alliance'') for shares of the International Stock Fund II of
Strong held by Account D and Account A to support variable annuity
contracts (``Contracts'').
[[Page 69267]]
Filing Date: The application was filed on August 29, 2001 and amended
and restated on November 1, 2002.
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 December 3, 2002, 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 Thomas S.
Clark, Esq., Assistant Counsel, Hartford Life Insurance Company, 200
Hopmeadow Street, Simsbury, CT 06089. Copy to David S. Goldstein, Esq.,
Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW.,
Washington, DC 20004-2415.
FOR FURTHER INFORMATION CONTACT: Kenneth C. Fang, Attorney, or Zandra
Y. Bailes, Branch Chief, Office of Insurance Products, Division of
Investment Management at (202) 942-0670.
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 20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. Fortis Benefits is a stock life insurance company incorporated
under the laws of Minnesota. Fortis Benefits is engaged in the
underwriting and sale of life insurance and annuity products in the
District of Columbia and all states but New York. Fortis Benefits is a
wholly-owned indirect subsidiary of Fortis, Inc. As of December 31,
2001, Fortis Benefits had assets of approximately $10 billion. For
purposes of the Act, Fortis Benefits is the depositor and sponsor of
Account D as interpreted by the Commission with respect to variable
annuity separate accounts.
2. First Fortis is a stock life insurance company incorporated
under the laws of New York. First Fortis is engaged in the business of
writing individual and group life insurance and annuity contracts in
New York. First Fortis is a wholly-owned subsidiary of Fortis, Inc. As
of December 31, 2001, First Fortis had assets of approximately $374
million. For purposes of the Act, First Fortis is the depositor and
sponsor of Account A as interpreted by the Commission with respect to
variable annuity separate accounts.
3. Fortis Benefits established Account D on October 14, 1987 as a
segregated investment account under Minnesota law. Under Minnesota law,
the assets of Account D attributable to the Contracts through which
interests are issued are owned by Fortis Benefits but are held
separately from all other assets of Fortis Benefits for the benefit of
the owners of, and the persons entitled to payment under, those
Contracts. Consequently, such assets in Account D are not chargeable
with liabilities arising out of any other business that Fortis Benefits
may conduct. Income, gains, and losses, realized and unrealized, from
the assets of Account D are credited to or charged against Account D
without regard to the income, gains, or losses arising out of any other
business that Fortis Benefits may conduct. Account D is a ``separate
account'' as defined by Rule 0-1(e) under the Act and is registered
with the Commission as a unit investment trust (File No. 811-05439),
and interests in Account D offered through such Contracts have been
registered under the Securities Act of 1933, as amended (the ``1933
Act'') on Form N-4 (File No. 33-63935).
4. First Fortis established Account A on October 1, 1993 as a
segregated investment account under New York law. Under New York law,
the assets of Account A attributable to the Contracts through which
interests are issued are owned by First Fortis but are held separately
from all other assets of First Fortis for the benefit of the owners of,
and the persons entitled to payment under, those Contracts.
Consequently, such assets in Account A are not chargeable with
liabilities arising out of any other business that First Fortis may
conduct. Income, gains, and losses, realized and unrealized, from the
assets of Account A are credited to or charged against Account A
without regard to the income, gains, or losses arising out of any other
business that First Fortis may conduct. Account A is a ``separate
account'' as defined by Rule 0-1(e) under the Act and is registered
with the Commission as a unit investment trust (File No. 811-08154),
and interests in Account A offered through such Contracts have been
registered under the 1933 Act on Form N-4 (File No. 333-20343).
5. On April 2, 2001, Fortis Benefits and First Fortis consummated
agreements with Hartford Life and Annuity Insurance Company (``Hartford
L&A'') and Hartford Life Insurance Company (``Hartford Life''),
respectively, pursuant to which Hartford L&A and Hartford Life would
reinsure all of the individual life insurance and annuity business of
Fortis Benefits and First Fortis, respectively. Additionally, Fortis
Benefits and First Fortis have contracted the administrative servicing
obligations for the Contracts to Hartford L&A and Hartford Life,
respectively. Although Fortis Benefits or First Fortis remains
responsible for all Contract terms and conditions, Hartford L&A and
Hartford Life are responsible for administering the Contracts,
including processing premium payments, paying benefits, providing other
Contract owner services, oversight of investment management of general
account assets supporting the fixed account portion of the Contracts,
and administration of the Accounts. With regard to administration of
the Accounts, Hartford L&A and Hartford Life are responsible for making
filings with the Commission, including the preparation and filing of
applications for orders under section 26(c) of the Act if such becomes
necessary for Fortis Benefits, First Fortis or the Accounts to respond
to various contingencies involving underlying funds.
6. Strong was incorporated in Wisconsin on December 28, 1990.
Strong is a series investment company as defined by Rule 18f-2 under
the Act and is registered under the Act as an open-end management
investment company (File No. 811-6553). Strong issues a separate series
of shares of stock in connection with each fund and has registered
these shares under the 1933 Act on Form N-1A (File No. 33-45321).
Strong Capital Management, Inc. serves as investment adviser to the
Strong Discovery Fund II (``Discovery''), the Strong International
Stock Fund II (``Strong International''), and the Strong Mid Cap Growth
Fund II (``Mid Cap Growth'').
7. Discovery seeks capital growth. This fund primarily invests in a
diversified portfolio of common stocks from small-, medium-, and large-
capitalization companies that offer attractive opportunities for
growth. If market conditions favor fixed-income investments, Discovery
may invest a significant portion of its assets in intermediate- and
long-term investment grade bonds as well as in foreign investments to a
limited extent.
[[Page 69268]]
8. Strong International seeks capital growth. This fund primarily
invests in stocks of foreign issuers that appear to have strong growth
potential relative to their risk.
9. Mid Cap Growth seeks capital growth. This fund invests at least
80% of its assets in stocks of medium-capitalization companies that
have favorable prospects for growth of earnings and capital
appreciation. Other Mid Cap Growth investments include futures and
options transactions as well as writing put and call options and
foreign securities. Except to the extent that Fortis Benefits or First
Fortis may, from time to time, hold 5% or more of the shares of Mid Cap
Growth, Mid Cap Growth is not an affiliated person of Fortis Benefits
or First Fortis.
10. Alliance was incorporated in Maryland on November 17, 1987.
Alliance is a series investment company as defined by Rule 18f-2 under
the Act and is registered under the Act as an open-end management
investment company (File No. 811-5398). Alliance issues a separate
series of shares of common stock in connection with each portfolio and
has registered these shares under the 1933 Act on Form N-1A (File No.
33-18647). Alliance Capital Management, L.P. serves as investment
adviser to the International Portfolio (``Alliance International'').
11. Alliance International seeks a total return on its assets from
long-term growth of capital. This fund normally invests 80% of its
assets in a broad portfolio of marketable securities of established
international companies, companies participating in foreign economies
with prospects for growth, and foreign government securities, including
U.S. companies that have their principal activities and interests
outside the U.S. Except to the extent that Fortis Benefits or First
Fortis may, from time to time, hold 5% or more of the shares of
Alliance International, Alliance International is not an affiliated
person of Fortis Benefits or First Fortis.
12. The Contracts are individual and group flexible premium
deferred combination variable and fixed annuity contracts. The
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 basis, fixed basis,
or both. Under the Contracts, Fortis Benefits and First Fortis reserve
the right to substitute shares of one fund for shares of another.
13. Under the Contracts, a Contract owner may make unlimited
transfers of all or part of the Contract value from one subaccount to
another during the accumulation period and four times per year during
the annuity period. Fortis Benefits and First Fortis currently do not
assess a charge on transfers; however, Fortis Benefits and First Fortis
reserve the right to restrict the frequency of, or otherwise condition,
terminate, or impose charges upon transfers from a subaccount in the
future.
14. Fortis Benefits and First Fortis, on their behalf and on behalf
of the Accounts, propose to substitute: (1) shares of Mid Cap Growth
for shares of Discovery; and (2) shares of Alliance International for
shares of Strong International. Applicants believe that by making the
proposed substitutions, they can better serve the interests of the
Contract owners.
15. On April 5, 2001, the board of directors of Discovery and
Strong International (the ``Board'') voted to close these Funds (the
``Old Funds'') to new life insurance separate account investors
effective April 6, 2001. Subsequently, on June 1, 2001, Strong
Investments, Inc., Strong's distributor, notified Fortis Benefits and
First Fortis of Strong's intention to terminate its participation
agreements with them--to the extent that such agreements apply to the
Old Funds--effective December 2001 and cease the Old Funds' operations
soon thereafter. Strong Investments, Inc. indicated that the Board
decided to close the Old Funds because of the Old Funds' small asset
base, lack of expected asset growth, and lack of economies of scale.
The Board also requested that all of the insurance companies currently
having separate accounts invested in the Old Funds, including Fortis
Benefits and First Fortis, seek an order from the Commission approving
the substitutions of other securities for shares of Discovery and
Strong International held currently by these separate accounts. Strong
Investments, Inc. therefore suggested that closing the Old Funds would
be best for the Applicants and the Contract owners.
16. Applicants represent that they had no control over the Board's
decision to terminate the Old Funds. Further Applicants believe that
some or all of these other insurance companies will seek an order from
the Commission to substitute shares of certain securities for shares of
the Old Funds. Accordingly, Applicants believe that the resulting
decrease in assets of the Old Funds would likely result in higher
expenses and less favorable performance, to the detriment of the
Contract owners.
17. Mid Cap Growth and Discovery have an identical investment
objective of capital growth. The investment strategies of both funds
are somewhat similar; however, they differ in that Discovery invests in
stocks having a wide range of capitalizations whereas Mid Cap Growth
invests at least 80% of its assets in medium-capitalization stocks. If
the market dictates, both funds will place their assets in other types
of investments: Discovery may invest in intermediate- and long-term
investment grade bonds, and Mid Cap Growth may invest in futures and
options transactions and in foreign securities, as well as write put
and call options. Overall, Applicants believe that both funds have
substantially similar investment risk profiles; although Mid Cap Growth
is permitted to invest in more types of investments, some of which
could entail greater risks than most of the securities in Discovery's
investment portfolio, Mid Cap Growth's actual portfolio, taken as a
whole, is quite comparable to that of Discovery. After the proposed
substitution, Contract owners will still have the ability to invest in
a fund seeking capital growth through medium-capitalization stocks.
Applicants believe that Contract owners will be better off with the
proposed substitution because Mid Cap Growth has more assets and has
had better performance than Discovery in recent periods.
18. Discovery has proven unpopular with investors. Over the last
four years, Discovery has lost 43% of its assets, declining from $214
million at the end of 1997 to only $121 million as of December 31,
2001. Although Mid Cap Growth's assets experienced a decline in 2001,
overall the fund's assets have grown by approximately $321 million over
the last four years. The large growth in Mid Cap Growth's assets has
created greater economies of scale than it had when its asset base was
smaller. Mid Cap Growth currently maintains an expense ratio comparable
to that of Discovery.
19. Mid Cap Growth has cumulative four-year returns that surpass or
are comparable to its benchmark indices, the S&P Mid Cap 400, the
Russell Midcap Index, and the Lipper Multi-Cap Index, even though Mid
Cap Growth averaged returns below its benchmark indices last year.
20. The investment objectives and strategies of Alliance
International and Strong International are substantially the same as
they both seek capital growth through foreign investments. Alliance
International, however, also invests in U.S. companies that have their
principal activities and interests outside of the U.S. Overall,
Applicants believe that both Funds have substantially similar
investment risk
[[Page 69269]]
profiles. In fact, Applicants believe that an investment in Alliance
International would generally entail less risk than would an investment
in Strong International in that Alliance International may invest in a
broader spectrum of investments leading to greater diversification and
correspondingly less risk. After the proposed substitution, Contract
owners will still have the ability to invest in a fund that invests in
the stocks of issuers located or doing business in foreign countries.
Applicants believe that Contract owners will be better off with the
proposed substitution because Alliance International has more assets,
lower expenses, and better performance than Strong International.
21. Alliance International's expense ratio has consistently been
lower than Strong International's expense ratio over the last four
years. Alliance International has an expense ratio of 1.44% as of
December 31, 2001. However, because of expense caps, Contract owners
only paid 0.95%.
22. Alliance International has performed on par with its benchmark
index, the MSCI EAFE Index. Whereas Alliance International has a five-
year cumulative return of 0.38%, its benchmark index returned 0.90%
over the same period. Last year, Alliance International and its
benchmark posted somewhat comparable losses of -22.35% and -21.21%
respectively.
23. The following charts show the approximate year-end size (in net
assets), expense ratio (ratio of operating expenses as a percentage of
average net assets), and annual total returns for each of the past five
years for each of the funds.
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In percent
---------------------------------------------------
Expense
Net assets ratio
at year-end (before Actual Management Total
(millions) imposition expense fee return
of expense ratio
caps)
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Strong Discovery Fund II:
1997....................................... $214 1.2 1.2 1.00 11.4
1998....................................... 196 1.2 1.2 1.00 7.3
1999....................................... 152 1.2 1.1 1.00 5.1
2000....................................... 136 1.3 1.2 1.00 4.4
2001....................................... 121 1.2 1.2 1.00 4.1
Strong Mid Cap Growth Fund II:
1997....................................... 2 2.0 1.2 1.00 29.8
1998....................................... 18 1.6 1.2 1.00 28.7
1999....................................... 324 1.2 1.1 1.00 89.9
2000....................................... 531 1.2 1.2 1.00 -14.8
2001....................................... 323 1.4 1.2 0.75 -30.8
Strong International Stock Fund II:
1997....................................... 60 1.5 1.5 1.00 -13.50
1998....................................... 47 1.6 1.6 1.00 -4.80
1999....................................... 125 1.3 1.2 1.00 87.20
2000....................................... 55 1.6 1.2 1.00 -39.50
2001....................................... 33 1.5 1.0 1.00 -22.10
Alliance International Portfolio:
1997....................................... 61 1.42 0.95 0.53 3.33
1998....................................... 65 1.37 0.95 0.67 13.02
1999....................................... 81 1.36 0.95 0.69 40.23
2000....................................... 79 1.34 0.95 0.69 -19.86
2001....................................... 64 1.44 0.95 0.61 -22.35
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24. Prior to the date the substitution is effected, Fortis Benefits
and First Fortis will send Contract owners a current prospectus for
Alliance International and Mid Cap Growth (the ``New Funds''). In
addition, by supplements to the various prospectuses for the Contracts
and the Accounts, Fortis Benefits and First Fortis will notify all
owners of the Contracts of their intention to take the necessary
actions, including seeking the orders requested by the Application, to
substitute shares of the Funds as described herein. The supplements
will inform Contract owners that until the date of the proposed
substitutions, owners are permitted to make one transfer of all amounts
under a Contract invested in any one of the affected subaccounts on the
date of the supplement to another subaccount under a Contract (other
than the other affected subaccount) without that transfer being treated
as a transfer for the purpose of assessing transfer charges or for
determining the number of remaining permissible transfers in a Contract
year. The supplements also will inform Contract owners that Fortis
Benefits and First Fortis will not exercise any rights reserved under
any Contract to impose additional restrictions on transfers until at
least 30 days after the proposed substitutions.
25. Fortis Benefits and First Fortis will redeem the shares: (1) Of
Discovery for cash and use the redemption proceeds to purchase shares
of Mid Cap Growth; and (2) of Strong International for cash and use the
redemption proceeds to purchase shares of Alliance International. 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 in
the dollar value of his or her investment in either of the Accounts. As
a result, Contract owners will remain fully invested. Contract owners
will not incur any fees or charges as a result of the proposed
substitutions, nor will their rights or Fortis Benefits' and First
Fortis' obligations under the Contracts be altered in any way. All
expenses incurred in connection with the proposed substitutions,
including legal, accounting, brokerage, and other fees and expenses,
will be the responsibility of Fortis Benefits and/or First Fortis. 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
[[Page 69270]]
existing Contract owners to be greater after the proposed substitutions
than before the proposed substitutions. The proposed substitution will
not, of course, be treated as a transfer for the purpose of assessing
transfer charges or for determining the number of remaining permissible
transfers in a Contract year. Fortis Benefits and First Fortis will not
exercise any right they may have under the Contracts to impose
additional restrictions on transfers under any of the Contracts for a
period of at least 30 days following the substitutions. Contract owners
having Contract value transferred to a New Fund by the proposed
substitutions, may transfer out of the subaccount investing in that
Fund during the 30 days following the date of the proposed
substitutions without that transfer being treated as a transfer for the
purpose of assessing transfer charges or for determining the number of
remaining permissible transfers in a Contract year.
26. In addition to the supplements described above, Fortis Benefits
and First Fortis will, if necessary, by supplements to the various
prospectuses for the Contracts and the Accounts, notify all owners of
the Contracts of the substitutions immediately after they occur.
27. In addition to the prospectus supplements distributed to
Contract owners, within five days after the proposed substitution, any
Contract owners who were affected by the substitutions will be sent a
written notice informing them that the substitution was carried out and
that they may transfer to another subaccount. Contract value invested
in one of the affected subaccounts may be transferred free of charge
for 30 days following the date of the substitutions without that
transfer counting as one of a limited number of transfers permitted in
a Contract year or as one of a limited number of transfers permitted in
a Contract year. The notice will also reiterate the fact that Fortis
Benefits and First Fortis will not exercise any rights reserved by them
under the Contracts to impose additional restrictions on transfers
until at least 30 days after the proposed substitutions. The notice
will be preceded or accompanied by current prospectuses for the
Alliance International and Mid Cap Growth.
Applicants' Legal Analysis
1. Section 26(c) was added to the Act by the Investment Company
Amendments of 1970. Prior to the enactment of the 1970 amendments, a
depositor of a unit investment trust could substitute new securities
for those held by the trust by notifying the trust's security holders
of the substitution within five days of the substitution. In 1966, the
Commission, concerned with the high sales charges then common to most
unit investment trusts and the disadvantageous position in which such
charges placed investors who did not want to remain invested in the
substituted fund, recommended that section 26 be amended to require
that a proposed substitution of the underlying investments of a trust
receive prior Commission approval.
2. Congress responded to the Commission's concerns by enacting
section 26(c) to require that the Commission approve all substitutions
by the depositor of investments held by unit investment trusts.
3. The proposed substitutions appear to involve the substitution of
securities within the meaning of section 26(c) of the Act. Applicants
therefore request an order from the Commission pursuant to section
26(c) approving the proposed substitutions.
4. Applicants state that the Contracts expressly reserve for Fortis
Benefits and First Fortis the right, subject to compliance with
applicable law, to substitute shares of another management company for
shares of a management company held by a subaccount of the Accounts.
Applicants state that Fortis Benefits and First Fortis reserved this
right of substitution both to protect themselves and their Contract
owners in situations where either might be harmed or disadvantaged by
circumstances surrounding the issuer of the shares held by one or more
of their separate accounts and to afford the opportunity to replace
such shares where to do so could benefit themselves and Contract
owners.
5. In addition to the foregoing, Applicants generally submit that
the proposed substitutions meet the standards that the Commission and
its staff have applied to similar substitutions that have been approved
in the past.
6. Applicants further assert that the proposed substitutions are
not the type of substitutions 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 or cash 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 other disadvantage. Applicants
believe the proposed substitutions, therefore, will not result in the
types of costly forced redemption that section 26(c) was designed to
prevent.
7. Applicants also believe that the proposed substitutions are
unlike the type of substitutions 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
account values. They also select the specific type of insurance
coverage offered by Fortis Benefits and First Fortis under their
Contract as well as numerous other rights and privileges set forth in
the Contract. Contract owners may also have considered Fortis Benefits'
and First Fortis' size, financial condition, type, and reputation for
service in selecting their Contract. Applicants state that these
factors will not change as a result of the proposed substitutions.
8. Fortis Benefits and First Fortis will not receive, for three
years from the date of the substitutions, any direct or indirect
benefits from the New Funds, their advisers or underwriters, or from
affiliates of the New Funds, their advisers or underwriters, in
connection with assets attributable to the Contracts affected by the
substitutions, at a higher rate than each received from the Old Funds,
their advisers or underwriters, or from affiliates of the Old Funds,
their advisers or underwriters, including without limitation Rule 12b-1
fees, shareholder service or administrative or other service fees,
revenue sharing or other arrangements. Fortis Benefits and First Fortis
each represent that the substitutions it carries out and its selection
of New Funds was not motivated by any financial consideration paid or
to be paid to it or to any of its affiliates by any of the New Funds,
their advisers or underwriters, or by affiliates of the New Funds,
their advisers or underwriters.
9. Applicants request an order of the Commission pursuant to
section 26(c) of the Act approving the proposed substitutions by Fortis
Benefits and First Fortis. Applicants submit that, for all the reasons
stated above, the proposed substitutions are consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act.
For the reasons summarized above, Applicants assert that the
proposed substitutions are consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
Act and therefore request that the substitutions be granted.
[[Page 69271]]
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-29040 Filed 11-14-02; 8:45 am]
BILLING CODE 8010-01-P