[Federal Register Volume 77, Number 238 (Tuesday, December 11, 2012)]
[Notices]
[Pages 73700-73705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-29858]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-30292; File No. 812-14059]
Mutual of America Life Insurance Company, et al; Notice of
Application
December 5, 2012.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order approving the substitution
of certain securities pursuant to Section 26(c) of the Investment
Company Act of 1940, as amended (the ``1940 Act'' or ``Act'') and an
order of exemption pursuant to Section 17(b) of the Act from Section
17(a) of the Act.
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APPLICANTS: Mutual of America Life Insurance Company (``Mutual of
America''), Wilton Reassurance Life Company of New York (``Wilton,''
and, together with Mutual of America Life Insurance Company, the
``Insurance Companies''), Mutual of America Separate Account No. 2 (the
``Annuity Account''), Mutual of America Separate Account No. 3 (the
``Life Account''), American Separate Account No. 2 (the ``American
Annuity Account''), and American Separate Account No. 3 (the ``American
Life Account,'' and together with the Annuity Account, the Life
Account, and the American Annuity Account, the ``Separate Accounts'').
The Insurance Companies and the Separate Accounts are referred to
herein collectively as the ``Substitution Applicants.'' The Insurance
Companies, the Separate Accounts, and Mutual of America Investment
Corporation (``Investment Corporation'') are also collectively referred
to as the ``Section 17 Applicants.''
SUMMARY OF APPLICATION: The Substitution Applicants seek an order
pursuant to Section 26(c) of the 1940 Act, approving the substitution
of shares of: (a) the Vanguard International Portfolio (``Replacement
International Fund'') of the Vanguard Variable Insurance Fund
(``Vanguard Fund'') for Class A Shares of the DWS International VIP
Fund (``Replaced International Fund'') of the DWS Variable Series I
(``DWS Fund''), and (b) the Mutual of America Bond Fund (``Replacement
Bond Fund'') of Investment Corporation for Class A Shares of the DWS
Bond VIP Fund (``Replaced Bond Fund'') of the DWS Fund, under certain
variable life insurance and annuity contracts issued by the Companies
(collectively, the ``Contracts''). The Replacement International Fund
and the Replacement Bond Fund are sometimes referred to collectively as
``Replacement Funds,'' and the Replaced International Fund and the
Replaced Bond Fund are sometimes referred to collectively as ``Replaced
Funds.'' The Section 17 Applicants seek an order pursuant to Section
17(b) of the 1940 Act exempting them from Section 17(a) of the Act to
the extent necessary to permit them to engage in certain in-kind
transactions in connection with the substitution.
FILING DATE: The application was filed on July 17, 2012, and the
amended and restated application was filed on November 21, 2012.
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 the 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 28, 2012, and should be accompanied
by proof of service on the 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 who wish to be notified of a hearing may
request notification by writing to the Secretary of the Commission.
ADDRESSES: Secretary, SEC, 100 F Street NE., Washington, DC 20549-1090.
Applicants: Mutual of America Life Insurance Company, Mutual of America
Separate Account No. 2, Mutual of America Separate Account No. 3,
Wilton Reassurance Life Company of New York, American Separate Account
No. 2, American Separate Account No. 3, and Mutual of America
Investment Corporation, all located at 320 Park Avenue, New York, New
York 10022-68391.
FOR FURTHER INFORMATION CONTACT: Deborah D. Skeens, Senior Counsel, or
Michael L. Kosoff, Branch Chief, Office of Insurance Products, Division
of Investment Management, at (202) 551-6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.
Applicants' Representations
1. The Insurance Companies, on their own behalf and on behalf of
their respective separate accounts, propose to substitute Class A
shares of the Replacement Funds for shares of the Replaced Funds held
by the Separate Accounts to fund the Contracts.
2. Mutual of America is the depositor and sponsor of the Annuity
Account and the Life Account. Wilton is the depositor and sponsor of
the American Annuity Account and the American Life Account.
3. Each of the Annuity Account, the Life Account, the American
Annuity Account, and the American Life Account is a ``separate
account'' as defined by Rule 0-1(e) under the Act and each is
registered under the Act as a unit investment trust for the purpose of
funding the Contracts. Security interests under the Contracts have been
registered under the Securities Act of 1933. The application sets forth
the registration statement file numbers for the Contracts and the
Separate Accounts.
4. The DWS Fund and the Vanguard Fund are registered open-end
management investment companies of the series type (File Number 002-
96461
[[Page 73701]]
and 033-32216, respectively). Investment Corporation is a registered
open-end management investment company of the series type (File Number
033-06486) which only sells its shares to the separate accounts of
Mutual of America and Wilton that are used for their variable annuity
and variable life insurance contracts, including the Replacement Bond
Fund.
5. The substitution will replace an investment option (i.e., the
Replaced Bond Fund) managed by an entity that is not affiliated with
the Substitution Applicants as of the date hereof (other than by way of
certain of the Substitution Applicants owning more than 5% of the
shares of the Replaced Funds) with an investment option (i.e., the
Replacement Bond Fund) that is managed by an investment manager that is
affiliated with Mutual of America. Neither Investment Corporation nor
Replacement Bond Fund's investment adviser, Mutual of America Capital
Management Corporation (``Capital Management'') is affiliated with
Wilton or its separate account. Both the Replaced International Fund
and the Replacement International Fund are managed by entities that are
not affiliated with the Substitution Applicants as of the date hereof
(other than by way of certain of the Substitution Applicants owning
more than 5% of the shares of the Replacement Funds).
6. The Contracts are flexible premium variable annuity and variable
universal life insurance contracts. Under each of the Contracts (the
proper form of which is provided to every Contract owner) as well as
the prospectus for each Contract, the issuing Company reserves the
right to substitute shares of one fund for shares of another fund
managed by either the same investment adviser, or by a different
investment adviser.
7. Applicants represent that the Replacement International Fund has
an investment objective virtually identical to that of the Replaced
International Fund--the Replacement Fund seeks long-term capital
appreciation and the Replaced Fund seeks long-term growth of capital.
Additionally, the Applicants state that the principal investment
strategies of each Fund are substantially similar. Both Funds primarily
invest in the common stock of foreign companies (i.e., non-US domiciled
companies) and are generally well diversified both with respect to
geographic region and industry. Both may also invest in depositary
receipts and convertible securities. Both Funds permit exposure to
emerging markets and have historically allocated assets to this segment
of the market. A comparison of the investing strategies, risks, and
performance of the Replaced International Fund and the Replacement
International Fund is included in the application. The following table
compares the fees and expenses of the Replaced International Fund
(Class A shares) and the Replacement International Fund (Class A
shares) as of the year ended December 31, 2011 and the six months ended
June 30, 2012. Neither the Replaced International Fund nor the
Replacement International Fund is subject to a distribution plan or
shareholder service plan adopted under Rule 12b-1 of the Act. Neither
the Replaced International Fund nor the Replacement International Fund
impose a redemption fee.
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Replaced International Fund Replacement International Fund
---------------------------------------------------------------
DWS International VIP Fund Vanguard International Fund
---------------------------------------------------------------
Six months Six months
Year ended 12/ ended 6/30/ Year ended 12/ ended 6/30/
31/11 2012 31/11 2012
(percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Advisory Fees................................... 0.79 0.79 0.46 0.46
Distribution/Service (12b-1) Fee................ 0.00 0.00 0.00 0.00
Other Expenses.................................. 0.21 0.22 0.05 0.05
---------------------------------------------------------------
Total Annual Fund Operating Expenses........ 1.00 1.01 0.51 0.51
----------------------------------------------------------------------------------------------------------------
Less Contractual Fee Waivers and Expense 0.00 0.00 0.00 0.00
Reimbursements.................................
Net Annual Fund Operating Expenses.............. 1.00 1.01 0.51 0.51
Portfolio Turnover Rate......................... 174 51 33 26
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8. The Applicants state that the Replacement Bond Fund has an
investment objective similar to that of the Replaced Bond Fund. Both
Funds have objectives that relate to current income as well as
preservation of capital. While the Replaced Bond Fund also seeks to
maximize total return, and invests for capital appreciation in addition
to current income, its investment approach, security selection process
and higher portfolio turnover rates have resulted in a more risky
investment strategy than that of the Replacement Bond Fund (as further
discussed below). Both Funds pursue their investment objectives by
primarily investing, under normal market conditions, in publicly-
traded, investment-grade debt securities. Each invests in investment
grade bonds issued by US corporations or by the US Government or its
agencies, such as bonds, notes, debentures, zero coupon securities and
mortgage-backed securities. Further, the Replacement Bond Fund and the
Replaced Bond Fund both utilize the same benchmark, the Barclay's
Capital U.S. Aggregate Bond Index, to measure their relative investment
performance. A comparison of the investing strategies, risks, and
performance of the Replaced Bond Fund and the Replacement Bond Fund is
included in the application. The following table compares the fees and
expenses of the Replaced Bond Fund (Class A shares) and the Replacement
Bond Fund (Class A shares) as of the year ended December 31, 2011 and
the six months ended June 30, 2012. Neither the Replaced Bond Fund nor
the Replacement Bond Fund is subject to a distribution plan or
shareholder service plan adopted under Rule 12b-1 of the Act. Neither
the Replaced Bond Fund nor the Replacement Bond Fund impose a
redemption fee.
[[Page 73702]]
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Replaced Bond Fund Replacement Bond Fund
---------------------------------------------------------
DWS Bond Fund Mutual of America Bond
------------------------------ Fund
---------------------------
Year ended 12/ Six months Six months
31/11 ended 6/30/ Year ended ended 6/30/
(percent) 2012 12/31/11 2012
(percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Advisory Fees......................................... 0.39 0.39 0.40 \1\ 0.40
Distribution/Service (12b-1) Fee...................... 0.00 0.00 0.00 0.00
Other Expenses........................................ 0.23 0.22 0.15 0.17
---------------------------------------------------------
Total Annual Fund Operating Expenses.............. 0.62 0.61 0.55 0.57
----------------------------------------------------------------------------------------------------------------
Less Contractual Fee Waivers and Expense 0.00 0.00 0.00 0.00
Reimbursements.......................................
Net Annual Fund Operating Expenses.................... 0.62 0.61 0.55 0.57
Portfolio Turnover.................................... 219 144 30 16.97
----------------------------------------------------------------------------------------------------------------
\1\ Applicants represent that if an order of the Commission is granted pursuant to Section 26(c) of the Act
approving the substitution described herein, then on or before the date of substitution, the investment
adviser to the Replacement Bond Fund will amend its investment advisory contract to reduce its advisory fee by
0.01% to equal 0.39% of average daily net assets for all shareholders of the fund.
9. The Substitution Applicants state that the proposed substitution
is part of the Companies' ongoing efforts to provide the Contracts with
investment options that have: (1) A competitive fee structure relative
to other funds in the same asset class peer group; (2) demonstrated the
ability to achieve competitive long-term investment returns relative to
other funds in the same asset class peer group; and (3) contributed to
and enhanced the goal of offering an attractive array of investment
options covering many various investment styles, objectives, and
categories in the risk/return spectrum. The Substitution Applicants
further state that substituting the Replacement Funds for the Replaced
Funds will provide Contract owners with investment options that have
not only virtually identical investment objectives and substantially
similar principal investment strategies and principal investment risks
to their respective Replaced Fund, but are, overall, less expensive
relative to other funds in their respective asset classes, better
positioned to achieve consistent long-term above-average investment
performance, and have substantially greater potential for continued
growth in assets under management. Substitution Applicants further
state that following the substitution Contract owners will have
reasonable continuity with respect to their investment expectations.
For these reasons and the reasons discussed below, the Substitution
Applicants believe that substituting the Replacement Funds for the
Replaced Funds is appropriate and in the best interest of Contract
owners.
10. As shown in more detail in the application, the total operating
expense ratios for the Replacement International Fund and Replacement
Bond Fund are lower than the net expense ratio for Class A shares of,
respectively, the Replaced International Fund and the Replaced Bond
Fund. Substitution Applicants also state that the Replacement
International Fund outperformed the Replaced International Fund
significantly and consistently for the one-, five-, and ten-year
periods ended June 30, 2012. Similarly, Substitution Applicants state
that the Replacement Bond Fund outperformed the Replaced Bond Fund
significantly and consistently for the one-, five-, and ten-year
periods ended June 30, 2012. Applicants assert that the Replacement
Funds are appropriate replacements for the Replaced Funds for each
Contract, and that each Replacement Fund represents an investment
option that is appropriate and suitable given the investment
objectives, principal investment strategies, and principal investment
risks of the corresponding Replaced Fund and that offers the
opportunity for lower fees and expenses and higher long-term investment
returns in the future. Moreover, Applicants further assert that the
replacement of the Replacement Funds with the Replaced Funds is
consistent with the protection of Contract owners and the purposes
fairly intended by the policy and provisions of the Act and, thus,
meets the standards necessary to support an order pursuant to Section
26(c) of the Act.
11. By supplements to the Contract prospectuses, the Companies have
notified existing Contract owners (and will notify new Contract owners
who purchase a Contract subsequent to the date of the supplement but
prior to the date of substitution) of their intention to take the
necessary actions, including seeking the order requested by this
Application, to carry out the proposed substitution as described
herein. The supplements advised Contract owners that the Companies
intended to file an application to seek approval of the substitution,
and that if the substitution is approved, any Contract value allocated
to a subaccount investing in a Replaced Fund on the date of
substitution would be automatically transferred to the subaccount
investing in the corresponding Replacement Fund. In addition, the
supplements disclosed that any Contract owner not wanting his or her
entire Contract value in the Replaced Fund(s) to be automatically
transferred to the respective Replacement Fund on the date of
substitution should consider transferring the Contract value in the
Replaced Fund(s) to other investment options available under the
Contract or, subject to the provisions of the Employer's Plan or the
applicable Contract, to another provider prior to the date of
substitution. The supplements also disclosed to Contract owners that
the Companies do not impose charges in connection with the transfer
among or withdrawal from any of the investment options available under
the Contract, nor do they impose restrictions on transfers (other than
frequent transfer restrictions). Finally, the supplements disclosed
that the Companies would bear all expenses related to the substitution,
and that there would be no tax consequences for Contract owners as a
result of the substitution. Within five days following the date of
substitution, Contract owners affected by the substitution will be
notified in writing that the substitution was carried out. This notice
will restate the information set forth in the prospectus supplements
described above. The current prospectus for each Replacement Fund will
have been provided to all Contract owners prior to the date of
substitution and all Contract
[[Page 73703]]
owners will have been given sufficient advance notice of the date on
which the substitution will take effect.
12. The proposed substitution 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 separate accounts.
13. It is anticipated that the proposed substitution will occur on
or about March 22, 2013. The Companies' separate accounts may carry out
the proposed substitution by redeeming some or all shares of the
Replaced Funds in-kind on a pro-rata basis, such that each Replacement
Fund will receive an approximate proportionate share of every security
position in the corresponding Replaced Fund's portfolio in accordance
with the conditions set forth in the Commission's no-action letter
issued to Signature Financial Group, Inc. (available December 28, 1999)
(``Signature Letter''). The adviser(s) to each Replacement Fund will
review the proportionate share of securities holdings of the
corresponding Replaced Fund to determine whether its portfolio holdings
would be suitable investments for the Replacement Fund in the overall
context of that Fund's investment objectives and policies and
consistent with the management of that Fund. If a Replacement Fund
declines to accept particular securities of the corresponding Replaced
Fund for the purchase of in-kind of shares of the Replacement Fund,
then the Replaced Fund will liquidate those portfolio securities and
shares of the Replacement Funds will be purchased with cash equal in
value to the liquidated portfolio securities. In either event, the
proceeds of such redemptions will be used to purchase shares of the
Replacement Funds. Redemption requests and purchase orders will be
placed simultaneously so that Contract values will remain fully
invested at all times. All redemptions of shares of the Replaced Funds
and purchases of shares of the Replacement Funds will be effected in
accordance with Section 22(c) of the Act and Rule 22c-1 thereunder.
14. Contract owners will not incur any fees or charges as a result
of the substitution, nor will their rights or the Companies'
obligations under the Contracts be altered in any way, and the
substitution will not change Contract owners' insurance benefits under
the Contracts. All applicable expenses incurred in connection with the
substitution, including brokerage commissions and legal, accounting,
and other fees and expenses, will be paid by the Companies. In
addition, the substitution will not impose any tax liability on
Contract owners. The substitution will not cause the Contract fees and
charges currently being paid by existing Contract owners to be greater
after the substitution than before the substitution. Because the
Contracts do not limit the number of transfers permitted among
investment options (other than certain limitations to deter frequent
trading activity), and do not impose (or reserve the right to impose)
any charges or fees for transfers or withdrawals, Contract owners will
be able to transfer Contract value from the subaccounts investing in
the Replaced Funds (before the date of substitution) or the Replacement
Funds (after the date of substitution) to other investment options
without restriction. Certain Contract owners may also transfer their
Contract value, subject to the provisions of their Employer's Plan or
the applicable Contract, to a new provider without charge.
15. With respect to the substitution involving the Replaced Bond
Fund and the Replacement Bond Fund, for those who are Contract owners
on the date of the proposed substitution, each Company will reimburse,
on the last business day of each fiscal period (not to exceed a fiscal
quarter) during the twenty-four months following the date of the
proposed substitution, Contract owners investing in the Replacement
Bond Fund to the extent that the sum of the Replacement Bond Fund's
total annual fund operating expenses as expressed as a percentage of
the average assets of the fund (after any applicable fee waiver and/or
expense reimbursement) and subaccount expenses for such period exceed,
on an annualized basis, the sum of the corresponding Replaced Bond
Fund's total annual fund operating expenses (after any applicable fee
waiver and/or expense reimbursement) and subaccount expenses for the
fiscal year preceding the date of the proposed substitution. In
addition, for twenty-four months following the proposed substitution,
each Company will not increase Contract charges or asset-based fees of
the subaccount investing in the Replacement Bond Fund for Contracts
outstanding on the date of the proposed substitution.
16. With respect to the substitution involving the Replaced
International Fund and the Replacement International Fund, the
Applicants represent that they will not receive, for three years from
the date of the substitution, any direct or indirect benefits paid by
the Replacement International Fund, its advisors or underwriters (or
their affiliates), in connection with assets attributable to Contracts
affected by the substitution, at a higher rate than Applicants have
received from the corresponding Replaced International Fund, its
advisors or underwriters (or their affiliates), including without
limitation Rule 12b-1 fees, shareholder service, administration, or
other service fees, revenue sharing, or other arrangements in
connection with such assets. Applicants represent that the substitution
involving the Replaced International Portfolio and the Replacement
International Portfolio and the selection of the Replacement
International Fund were not motivated by any financial consideration
paid or to be paid by the Replacement International Fund, its advisors,
underwriters, or their respective affiliates.
17. Additionally, with respect to the Replacement Bond Fund, the
Applicants represent that, if an order of the Commission is granted
pursuant to Section 26(c) of the Act approving the substitution
described herein, then on or before the date of substitution, Capital
Management, the adviser to the Replacement Bond Fund, will amend its
investment advisory contract to reduce its advisory fee by 0.01% to
equal 0.39% of average daily net assets. In other words, on or before
the date of substitution, the advisory fee for the Replacement Bond
Fund will be equal to the advisory fee of the Replaced Bond Fund.
Applicants further represent that, following this reduction, the
advisory fee for the Replacement Bond Fund will not be increased
without first obtaining shareholder approval.
18. The Companies are also seeking approval of the proposed
substitution from any state insurance regulators whose approval may be
necessary or appropriate.
Legal Analysis and Conditions
Section 26(c) Relief
1. The Substitution Applicants request that the Commission issue an
order pursuant to Section 26(c) of the Act approving the proposed
substitution. Section 26(c) of the Act requires the depositor of a
registered unit investment trust holding the securities of a single
issuer to obtain Commission approval before substituting the securities
held by the trust.
2. Applicants assert that 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
[[Page 73704]]
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 and the
fixed account. 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 limitation. In
addition, Contract owners always have the right to change their
allocations at any time without restrictions or charges of any sort.
The proposed substitution, therefore, will not result in the type of
costly forced redemption that Section 26(c) was designed to prevent. In
addition, Contract owners have the right to transfer their Contract
value, subject to the provisions of their Employer's Plan or the
applicable Contract, to a new provider and the Companies will not
impose a fee or charge for such transfer.
3. The Substitution Applicants submit that the proposed
substitution meets the standards set forth in Section 26(c) and that,
if implemented, the substitution would not raise any of the concerns
that Congress intended to address when the Act was amended to include
this provision. In addition, the Applicants submit that the proposed
substitution meets the standards that the Commission and its Staff have
applied to substitutions that have been approved in the past.
Section 17(b) Relief
1. The Section 17 Applicants request an order under Section 17(b)
of the Act exempting them from the provisions of Section 17(a) to the
extent necessary to permit the Companies to carry out the proposed
substitution as described herein.
2. Section 17(a)(1) of the Act, in relevant part, prohibits any
affiliated person of a registered investment company, or any affiliated
person of such person, acting as principal, from knowingly selling any
security or other property to that company. Section 17(a)(2) of the Act
generally prohibits the persons acting as principals, from knowingly
purchasing any security or other property from the registered
investment company.
3. Shares held by an insurance company separate account are legally
owned by the insurance company. Thus, because Investment Corporation
sells its shares exclusively to the Companies' separate accounts, the
Companies collectively own all of the shares of Investment Corporation,
and separately Mutual of America owns at least 25% of the shares of the
Replacement Bond Fund. Accordingly, Investment Corporation and its
portfolios, including the Replacement Bond Fund, are arguably under the
control of the Companies, as per Section 2(a)(9) (notwithstanding the
fact that the Contract Owners are the beneficial owners of those shares
held in the separate accounts). If Investment Corporation is under the
control of the Companies, then each Company is an affiliated person of
Investment Corporation and its portfolios, including the Replacement
Bond Fund. If Investment Corporation and its portfolios are under the
control of the Companies, then Investment Corporation and its
respective affiliates are affiliated persons of the Companies.
Moreover, Mutual of America owns of record more than 5% of the shares
of the Replacement Bond Fund, and therefore Mutual of America is an
affiliated person of Investment Corporation and the Replacement Bond
Fund. Likewise, Investment Corporation and the Replacement Bond Fund
are each an affiliated person of Mutual of America. Further, Mutual of
America indirectly controls Capital Management, its wholly-owned
indirect subsidiary, and Capital Management is therefore controlled by
Mutual of America. Furthermore, because Capital Management, as the
investment adviser to Investment Corporation, is an affiliated person
of Investment Corporation, Mutual of America and Investment Corporation
(and its portfolios) is each an affiliated person of an affiliated
person of the other. Finally, Mutual of America owns of record more
than 5% of the shares of the Replacement International Fund. Therefore
Mutual of America is an affiliated person of the Replacement
International Fund and the Replacement International Fund is an
affiliated person of Mutual of America. Because the proposed
substitution may be effected, in whole or in part, by means of in-kind
redemptions and subsequent purchases of shares, the proposed
substitution may be deemed to involve one or more purchases or sales of
securities or property between affiliated persons. The proposed
substitution may involve a transfer of portfolio securities by the
Replaced Funds to the Companies; immediately thereafter, the Companies
would purchase shares of the Replacement Funds with the portfolio
securities received from the Replaced Funds. Accordingly, as the
Companies and the Replacement Funds could be viewed as affiliated
persons of one another, it is conceivable that this aspect of the
proposed substitution could be viewed as being prohibited by Section
17(a). The 17(a) Applicants have determined that it is prudent to seek
relief from Section 17(a) in the context of this Application for the
in-kind purchases and sales of the Replacement Funds' shares.
4. The 17(a) Applicants submit that the terms of the proposed in-
kind purchases of shares of the Replacement Funds, including the
consideration to be paid and received, as described in this
Application, are reasonable and fair and do not involve overreaching on
the part of any persons concerned. The 17(a) Applicants also submit
that the proposed in-kind purchases will be consistent with the
investment policies of the Vanguard Fund, the DWS Fund, and the
Investment Corporation, and the Replaced and Replacement Funds, as
recited in the current registration statements and reports filed by
them under the Act. Finally, the 17(a) Applicants submit that the
proposed substitution is consistent with the general purposes of the
Act. The 17(a) Applicants assert that, to the extent that the in-kind
purchases are deemed to involve principal transactions among affiliated
persons, the procedures described below should be sufficient to assure
that the terms of the proposed transactions are reasonable and fair to
all Contract owners. The 17(a) Applicants maintain that the terms of
the proposed in-kind purchase transactions, including the consideration
to be paid and received by each fund involved, are reasonable, fair and
do not involve overreaching on the part of any person principally
because the transactions will conform with all but one of the
conditions enumerated in Rule 17a-7. The proposed transactions will
take place at relative net asset values as of the date of substitution
in conformity with the requirements of Section 22(c) of the Act and
Rule 22c-1 thereunder 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 separate accounts. Contract owners will
not suffer any adverse tax consequences as a result of the
substitution. The fees and charges under the Contracts will not
increase because of the substitution. Even though the 17(a) Applicants
may not rely on Rule 17a-7, the 17(a) Applicants believe that the
Rule's conditions outline the type of safeguards that result in
transactions that are fair and reasonable to registered investment
company participants and preclude overreaching in connection
[[Page 73705]]
with an investment company by its affiliated persons.
5. The boards of the Replacement Funds have adopted procedures, as
required by paragraph (e)(1) of Rule 17a-7, pursuant to which their
series may purchase and sell securities to and from their affiliates.
The 17(a) Applicants will carry out the proposed in-kind purchases in
conformity with all of the conditions of Rule 17a-7 and the Replacement
Funds' procedures adopted thereunder, except that the consideration
paid for the securities being purchased or sold may not be entirely
cash. The investment advisers of the Replacement Funds will examine any
securities received from an in-kind redemption, and accept any
securities that they would otherwise have purchased for cash for the
respective portfolio to hold. The circumstances surrounding the
proposed substitution will be such as to offer the Replacement Funds
the same degree of protection from overreaching that Rule 17a-7
provides to them generally in connection with their purchase and sale
of securities under that Rule in the ordinary course of their business.
In particular, the proposed transactions will not be effected at a
price that is disadvantageous to the Replacement Funds. Although the
transactions may not be entirely for cash, each will be effected based
upon (1) the independent market price of the portfolio securities
valued as specified in paragraph (b) of Rule 17a-7, and (2) the net
asset value per share of each Fund involved valued in accordance with
the procedures disclosed in its registration statement and as required
by Rule 22c-1 under the Act. Moreover, consistent with Rule 17a-7(d),
no brokerage commissions, fees, or other cost or remuneration will be
paid in connection with the proposed transactions, except for any
brokerage commissions paid in connection with the liquidation of the
securities that are not distributed as part of the in-kind redemption,
which will be borne by the Companies and not by the Contract owners.
6. Applicants state that, consistent with Section 17(b) and Rule
17a-7(c), any in-kind redemptions and purchases for purposes of the
proposed substitution will be transacted in a manner consistent with
the investment objectives and policies of the Vanguard Fund, the DWS
Fund, and the Investment Corporation, as recited in their registration
statements. Any in-kind redemptions will be effected on a pro-rata
basis, where each Replacement Fund will receive an approximate
proportionate share of every security position in the corresponding
Replaced Fund's portfolio in accordance with the Signature Letter. The
adviser(s) to each Replacement Fund will review the proportionate share
of securities holdings of the corresponding Replaced Fund to determine
whether such holdings would be suitable investments for the Replacement
Fund in the overall context of that Fund's investment objectives and
policies and consistent with the management of that Fund. If the
adviser declines to accept particular portfolio securities of the
Replaced Fund for purchase in-kind of shares of the Replacement Fund,
the Replaced Fund will liquidate those portfolio securities as
necessary and shares of the Replacement Fund will be purchased with
cash equal in value to the liquidated portfolio securities. In
addition, the redeeming and purchasing values of such securities will
be the same.
Conclusion
For the reasons and upon the facts set forth above and in the
application, the Substitution Applicants and the Section 17 Applicants
believe that the requested orders meet the standards set forth in
Section 26(c) of the Act and Section 17(b) of the Act, respectively,
and should therefore, be granted.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29858 Filed 12-10-12; 8:45 am]
BILLING CODE 8011-01-P