[Federal Register Volume 67, Number 70 (Thursday, April 11, 2002)]
[Notices]
[Pages 17736-17739]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 02-8806]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-25509; File No. 812-12668]
Lincoln Benefit Life Company, et al.
April 4, 2002.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of an application for an order pursuant to Section 26(c)
of the Investment Company Act of 1940 (the ``1940 Act'') approving a
substitution of underlying fund shares by certain unit investment
trusts.
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Applicants: Lincoln Benefit Life Company (``Lincoln Benefit''),
Lincoln Benefit Life Variable Annuity Account (the ``VA Account''), and
Lincoln Benefit Life Variable Life Account (the ``VL Account'')
(collectively, the ``Applicants'').
Summary of Application: Applicants request an order to permit
certain registered unit investment trusts to substitute shares of the
T. Rowe Price MidCap Growth Fund (the ``Replacement Fund'') of the T.
Rowe Price Equity Series, Inc. (``TRP Equity Series'') for shares of
the Strong Discovery Fund II (the ``Replaced Fund'') of the Strong
Variable Insurance Funds, Inc. (``Strong VI Funds'').
Filing Date: The application was filed on October 19, 2001, and
amended and restated on March 19, 2002.
Hearing or Notification of Hearing: An order granting the
application will be issued unless the SEC orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the SEC
and serving Applicants with a copy of the request, in person or by
mail. Hearing requests must be received by the SEC by 5:30 p.m. on
April 29, 2002, and must 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 requester'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 SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC, 20549-
0609; Applicants, c/o Jorden Burt LLP, 1025 Thomas Jefferson Street,
N.W., Suite 400 East, Washington, DC, 20007-0806, Attention:
Christopher S. Petito, Esq.
FOR FURTHER INFORMATION CONTACT: Kenneth C. Fang, Attorney, or William
J. Kotapish, Assistant Director, at (202) 942-0670, Office of Insurance
Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application is available for a fee from the
Public Reference Branch of the SEC, 450 Fifth Street, NW, Washington,
DC, 20549 (tel. (202) 942-8090).
Applicants' Representations
1. Lincoln Benefit is a stock life insurance company organized
under the laws of the state of Nebraska in 1938. Lincoln Benefit is an
indirect wholly-owned subsidiary of The Allstate Corporation.
2. The VA Account is a segregated asset account of Lincoln Benefit.
It was established by Lincoln Benefit in 1992, in accordance with the
laws of the state of Nebraska and is registered as a unit investment
trust under the 1940 Act. Lincoln Benefit issues certain variable
annuity contracts through the VA Account.
3. The VL Account was established by Lincoln Benefit in 1992 in
accordance with laws of the state of Nebraska and is registered as a
unit investment trust under the 1940 Act. The VL Account is used to
fund certain variable life insurance policies issued by Lincoln
Benefit.
4. The above noted segregated asset accounts are referred to as
``Separate Account Applicants.'' Certain variable annuity contracts and
variable life policies issued by Lincoln Benefit through the Separate
Account Applicants are referred to herein as ``Contracts.'' The
variable interests under the Contracts are registered with the SEC
under the Securities Act of 1933.
5. Strong VI Funds was organized as a Wisconsin corporation on
December 28, 1990. Strong VI Funds currently
[[Page 17737]]
issues shares in four investment portfolios, of which the Replaced Fund
is one. Shares of the Replaced Fund were sold to separate accounts of
eleven insurance companies, including Lincoln Benefit, for the purpose
of funding variable annuity and variable life insurance policies.
Strong VI Funds is registered as an open-end management investment
company under the 1940 Act and its shares are registered as securities
under the 1933 Act. The Replaced Fund is managed by Strong Capital
Management Inc. (``SCM''). SCM is not affiliated with Lincoln Benefit.
6. If the requested substitution order is granted, Lincoln Benefit,
on behalf of the Separate Account Applicants, will substitute shares of
the Replacement Fund, a series of the TRP Equity Series, for shares of
the Replaced Fund. TRP Equity Series was organized as a Maryland
corporation in 1994. It offers its shares in seven series. Shares of
the Replacement Fund are offered at net asset value and are not subject
to Rule 12b-1 fees. TRP Equity Series is registered as an open-end
management investment company under the 1940 Act and its shares are
registered as securities under the 1933 Act. Its shares are sold only
to insurance company separate accounts to fund variable life insurance
policies and variable annuity contracts. T. Rowe Price Associates, Inc.
(``T. Rowe Price'') serves as investment adviser to the Replacement
Fund. Neither T. Rowe Price nor the Replacement Fund is affiliated with
Lincoln Benefit.
7. SCM is planning to close the Replaced Fund. SCM reached this
conclusion based on the Replaced Fund's small asset size, lack of
expected asset growth and lack of economies of scale. On April 5, 2001,
the Replaced Fund's Board of Directors voted to close the Replaced Fund
to new participation agreements. Applicants have been advised that SCM
intends to recommend that the Replaced Fund be liquidated once its
various insurance company shareholders have arranged for alternative
investments. Applicants do not know how long this process might take.
8. On June 1, 2001, the Replaced Fund and its related parties
notified Applicants that, as to the Replaced Fund, effective December
1, 2001, they were terminating the Participation Agreement between and
among Lincoln Benefit Life Company, Strong VI Funds, SCM, and Strong
Funds Distributors, Inc. (the distributor for the Replaced Fund), dated
April 6, 1998. As a result of the termination, the Replaced Fund no
longer will make its shares available for investment with respect to
Contracts purchased after the effective date of the termination. The
Replaced Fund will continue to honor purchase orders placed with
respect to Contracts purchased prior to December 1, 2001.
9. Lincoln Benefit has determined that in light of the impending
closure and liquidation of the Replaced Fund, it would be best for the
company and the Contract owners invested in the Replaced Fund
(``Owners'') to substitute the shares of the Replaced Fund with shares
of the Replacement Fund (the ``Substitution''). If Applicants were to
take no action until the Replaced Fund liquidates, affected Owners
could be injured as a result of the likely increase in the Replaced
Fund's expense ratio as other insurance companies exit the Replaced
Fund. Accordingly, Applicants request the SEC's approval to effect the
Substitution.
10. Lincoln Benefit will redeem for cash all of the shares of the
Replaced Fund that it currently holds on behalf of the Separate Account
Applicants at the close of business on the date selected for the
Substitution. Lincoln Benefit, on behalf of each Separate Account
Applicant, will simultaneously place a redemption request with the
Replaced Fund and a purchase order with the Replacement Fund, so that
each purchase will be for the exact amount of the redemption proceeds.
As a result, at all times monies attributable to Owners then invested
in the Replaced Fund will remain fully invested and will result in no
change in the amount of any Owner's contract value, death benefit or
investment in the applicable Separate Account Applicant.
11. The full net asset value of the redeemed shares held by the
Separate Account Applicants will be reflected in the Owners'
accumulation unit or annuity unit values following the Substitution.
Lincoln Benefit has undertaken to assume all transaction costs and
expenses relating to the Substitution, including any direct or indirect
costs of liquidating the assets of the Replaced Fund, so that the full
net asset value of redeemed shares of the Replaced Fund held by the
Separate Account Applicants will be reflected in the Owners'
accumulation unit or annuity unit values following the Substitution.
12. Applicants anticipate that until the Substitution occurs, SCM
will conduct the trading of portfolio securities in accordance with the
investment objectives and strategies stated in the Replaced Fund's
prospectus and in a manner that provides for the anticipated
redemptions of shares held by the Separate Account Applicants.
13. Applicants have determined, based on advice of counsel familiar
with insurance laws, that the Contracts allow the Substitution as
described in the application, and that the transactions can be
consummated as described therein under applicable insurance laws and
under the Contracts. In addition, prior to effecting the Substitution,
Applicants will have complied with any regulatory requirements they
believe are necessary to complete the transactions in each jurisdiction
where the Contracts are qualified for sale.
14. Affected Owners will not incur any fees or charges as a result
of the Substitution, nor will the rights or obligations of Lincoln
Benefit under the Contracts be altered in any way. The proposed
Substitution will not have any adverse tax consequences to Owners. The
proposed Substitution will not cause Contract fees and charges
currently being paid by existing Owners to be greater after the
proposed Substitution than before the proposed Substitution. The
proposed Substitution will not be treated as transfers for the purpose
of assessing transfer charges. Lincoln Benefit will not, with respect
to shares substituted, exercise any right it may have under the
Contracts to collect transfer fees or impose any additional restriction
on transfers during the Free Transfer Period, as defined in paragraph
16 below.
15. Lincoln Benefit has supplemented the prospectuses for the
Contracts to reflect the Substitution. Within five days after the
Substitution, Lincoln Benefit will send to Owners written notice of the
Substitution (the ``Notice''), identifying the shares of the Replaced
Fund that have been eliminated and the shares of the Replacement Fund
that have been substituted. Lincoln Benefit will include in such
mailing the applicable prospectus supplement for the Contracts of the
Separate Account Applicants describing the Substitution. Lincoln
Benefit also will mail a copy of the prospectus for the Replacement
Fund to the Owners, unless they already have received a copy of this
prospectus in the ordinary course.
16. Owners will be advised in the Notice that for a period of at
least 30 days following the mailing of the Notice (the ``Free Transfer
Period''), Owners may transfer all assets, as substituted, to any other
available subaccount without limit or charge. In addition, Owners of
variable annuity Contracts, who as a result of the Substitution are
receiving variable annuity payments based on the Replacement Fund, will
be permitted during the Free Transfer Period to transfer the
substituted amounts to
[[Page 17738]]
variable annuity payments based on other subaccounts, without limit or
charge, notwithstanding any limits on such transfers in the variable
annuity Contracts.
Applicants' Legal Analysis
A. Section 26(c)
1. Section 26(c) of the 1940 Act provides that ``[i]t shall be
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 [SEC] shall have approved such
substitution.'' Section 26(c) of the 1940 Act was enacted as part of
the Investment Company Act Amendments of 1970. Prior to the enactment
of these 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 (5) days after
the substitution. In 1966, the SEC, 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 security, recommended
that Section 26 be amended to require that a proposed substitution of
the underlying investments of a trust receive prior SEC approval.
2. 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.
Applicants submit that they must effect a substitution, in order to
protect Owners from the potential adverse consequences of the closure
and liquidation of the Replaced Fund. Applicants state that they
selected the Replacement Fund as the substitute, because its investment
objectives and policies are substantially similar to those of the
Replaced Fund and it has lower expenses and better long-term
performance. Owners will be assessed no charges whatsoever in
connection with the Substitution and their annual fund expense ratios
are expected to decrease. In addition, to the extent an Owner does not
wish to participate in the Substitution, he or she is free to transfer
to any other option available under the relevant Contract prior to the
Substitution and after the Substitution. No transfer fee will be
charged, and the transfer will not count against any limit on free
transfers under the Contracts.
3. Applicants submit that the Substitution does not present the
type of costly forced redemption or other harms that Section 26(c) was
intended to guard against and is consistent with the protection of
investors and the purposes fairly intended by the 1940 Act for the
following reasons:
(a) The Substitution will continue to fulfill Owners' objectives
and risk expectations, because the Replaced Fund and the Replacement
Fund have substantially similar investment objectives, policies, and
restrictions. Applicants believe that of the investment options
currently available under the Contracts, the Replacement Fund is most
similar to the Replaced Fund.
(b) after receipt of the Notice informing an Owner of the
Substitution, an Owner may request that his or her assets be
reallocated to another subaccount at any time during the Free Transfer
Period without any limit or charge and without the transfer being
counted against any limit on transfers under the Contracts. The Free
Transfer Period provides sufficient time for Owners to consider their
reinvestment options;
(c) the Substitution will be at net asset value of the respective
shares, without the imposition of any transfer or similar charge;
(d) Lincoln Benefit has undertaken to assume all expenses and
transaction costs, including, but not limited to, legal and accounting
fees and any brokerage commissions, in connection with the
Substitution;
(e) the Substitution will in no way alter the contractual
obligations of Lincoln Benefit or the rights and privileges of Owners
under the Contracts;
(f) the Substitution will in no way alter the tax benefits to
Owners;
(g) the Substitution is expected to confer certain economic
benefits on Owners by virtue of enhanced asset size and lower expenses,
as described below;
(h) at the time of the Substitutions, the aggregate fees and
expenses of the Replacement Fund are expected to be lower than those of
the corresponding Replaced Fund; and
(i) Lincoln Benefit does not currently receive, and will not
receive for three years from the date of the requested Commission
order, any direct or indirect benefit from the Replacement Fund, T.
Rowe Price Inc., or any of its affiliates at a higher rate than Lincoln
Benefit has received from the Replaced Fund, SCM, or any of its
affiliates, including without limitation Rule 12b-1 fees, shareholder
service or administrative or other service fees, revenue sharing or
other arrangements, either with specific reference to the Replacement
Fund or as part of an overall business arrangement.
4. As described below, the Replacement Fund and the Replaced Fund
have investment objectives and policies that are substantially similar.
5. The Replaced Fund's investment objective is to seek capital
growth. The Replaced Fund pursues its objective by investing, under
normal conditions, in securities that its manager believes offer
attractive opportunities for growth. The Replaced Fund usually invests
in a diversified portfolio of common stocks. It invests a substantial
portion of its assets in the stocks of small and mid-capitalization
companies. These are chosen through a combination of in-depth
fundamental analysis of a company's financial reports and direct, on-
site research during company visits. When the manager believes market
conditions favor fixed income investments, the manager has the
flexibility to invest a significant portion of the Replaced Fund's
assets in intermediate- and long-term investment grade bonds. To a
limited extent, the Replaced Fund may also invest in foreign
securities.
6. The Replacement Fund's investment objective is to provide long-
term capital appreciation by investing in mid-cap stocks with potential
for above-average earnings growth. The Replacement Fund pursues its
objective by investing at least 65% of its assets in a diversified
portfolio of common stocks of mid-capitalization companies whose
earnings the adviser expects to grow at a faster rate than the average
company. While most assets will be invested in U.S. common stocks,
other securities may also be purchased, including foreign stocks,
futures, and options in keeping with the Replacement Fund's objective.
7. Applicants represent that the Replacement Fund has objectives,
policies, and restrictions substantially similar to the objectives,
policies and restrictions of the Replaced Fund. The only significant
investment difference between the Replaced Fund and the Replacement
Fund is that the Replacement Fund's investment objective requires it to
invest primarily in the stocks of mid-capitalization companies, whereas
the Replaced Fund may invest in stocks of companies of all sizes. In
practice, however, the Replaced Fund invests a substantial portion of
its assets in mid- and small-capitalization stocks. As a result, the
investment strategies of the two funds overlap substantially. Moreover,
Owners who currently invest in the subaccounts corresponding to the
Replaced Fund will be able to continue to invest in
[[Page 17739]]
small-capitalization stocks by allocating contract value to other
investment options available under the Contracts.
8. Accordingly, Lincoln Benefit has specifically determined that
the Replacement Fund is an appropriate investment vehicle for Owners
who have allocated value to the Replaced Fund and that the Substitution
will be consistent with Owners' investment objectives and risk
expectations.
9. The fees and expenses of the Replacement Fund will be less than
the Replaced Fund's fees and expenses. The total expenses for the
Replacement Fund for the year ended December 31, 2001, were 0.85% of
net assets (0.85% management fee, 0.00% other expenses). The total net
expenses for the Replaced Fund for the year ended December 31, 2001,
were 1.20% of net assets (1.00% management fee, and 0.20% other
expenses) (With respect to the Replaced Fund, SCM may voluntarily waive
its fees. In 2001, SCM did not waive any fees. The Replacement Fund
does not have any fee waiver or expense reimbursement arrangement).
Lincoln Benefit is entitled to receive a service fee from the
investment adviser of each Fund in return for providing certain
administrative support services. Applicants represent that the service
fee rate will not increase as a result of the Substitution.
10. The Replacement Fund has significantly more assets than the
Replaced Fund. It is expected that the lower expense ratios should
continue as a result of the significantly greater assets of the
Replacement Fund.
11. Since its inception on December 31, 1996 the Replacement Fund
has had average annual total returns of 13.81%, which are significantly
higher than the Replaced Fund's five-year average annual returns of
6.41%. In light of the long-term perspective that is more appropriate
under variable contracts, Applicants believe that the longer-term
results are most significant for Owners. Moreover, in any event, as a
result of the planned closing of the Replaced Fund, its performance no
longer will be available to Owners. While there is no guarantee that
past performance will continue, the foregoing return data support
Applicants' view that the Substitution is not expected to diminish
performance or otherwise reduce Contract values.
12. Applicants request an Order of the SEC pursuant to Section
26(c) of the 1940 Act to permit them to effect the Substitution on the
terms set forth in the Application.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-8806 Filed 4-10-02; 8:45 am]
BILLING CODE 8010-01-P