[Federal Register Volume 60, Number 235 (Thursday, December 7, 1995)]
[Notices]
[Pages 62904-62906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29831]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21559; File No. 812-9706]
PaineWebber Life Insurance Company, et al.
November 30, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: PaineWebber Life Insurance Company (``PaineWebber Life''),
and PaineWebber Variable Annuity Account (the ``Account'').
RELEVANT 1940 ACT SECTIONS: Approval requested under Section 26(b) of
the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section
26(b) of the 1940 Act approving the substitution of shares of the
Balanced Portfolio (``BP'') of the PaineWebber Series Trust (``Trust'')
for the shares of the Asset Allocation Portfolio (``AAP'') of the
Trust.
FILING DATE: The application was filed on August 4, 1995.
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 on this application by writing to the
Secretary of the SEC and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on December 26, 1995 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 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, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Applicants, Mr. Richard J.
Tucker, PaineWebber Life Insurance Company, 1200 Harbor Boulevard,
Weehawken, New Jersey 07087.
FOR FURTHER INFORMATION CONTACT: Joseph G. Mari, Senior Special
Counsel, or Wendy Friedlander, Deputy Chief, both at (202) 942-0670,
Office of Insurance Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Commission's
Public Reference Branch.
Applicants' Representations
1. PaineWebber Life is a stock life insurance company organized
under California law in 1956. PaineWebber Holdings, Inc., a wholly-
owned subsidiary of PaineWebber Group, Inc., owns 100 percent of the
stock of PaineWebber Life. The Account, established by PaineWebber Life
to fund variable annuity contracts (``Contracts'') on December 31,
1992, pursuant to California law, is registered with the Commission as
a unit investment trust. The assets of the Account are divided among
ten investment divisions (``Divisions''), each of which invests in
shares of one of the ten designated portfolios of the Trust, including
the BP and AAP, each with its own investment objectives and investment
portfolio. The Trust is an open-end diversified management investment
company registered under the 1940 Act.\1\ Mitchell Hutchins Asset
Management, Inc. (``Mitchell Hutchins''), a registered investment
adviser under the Investment Advisers Act of 1940, is the investment
adviser and administrator for the Trust.
\1\The Trust was established in November 1986 to function as the
underlying investment medium for the separate account of an
otherwise unaffiliated insurance company and subsequently of a
separate account of an affiliate of that insurance company. Those
two separate accounts, together with the Account, are the only
separate accounts invested in the Trust. The unaffiliated insurance
company separate accounts hold shares in all the Portfolios of the
Trust except the BP, Fixed Income and Aggressive Growth Portfolios.
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2. PaineWebber Incorporated (``PWI''), a wholly-owned subsidiary of
PaineWebber Group, Inc., a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc., acts as principal underwriter
for the Contracts.
3. The BP seeks total return while preserving capital by investing
in equity securities and by investing no less than 25% of its assets in
fixed income securities. The BP pays its investment adviser an annual
fee of .75% of average daily net assets. The total assets of the
[[Page 62905]]
BP as of December 31, 1994, were approximately $12 million. The AAP
seeks to provide a high total return with low volatility by allocating
investments among equity securities, long- and mid-term debt securities
and money market instruments. The AAP pays its investment adviser an
annual fee of .75% of average daily net assets as compensation for its
services. The total assets of the AAP as of December 31, 1994, were
approximately $23.3 million.
4. On July 20, 1995, the Board of Trustees of the Trust (``Board'')
approved both changing the name and the investment policies of the AAP.
The changes will cause the AAP to operate more as a balanced fund in
that it would invest in a combination of equity securities, investment
grade debt obligations and money market instruments. The AAP name will
be changed to the ``Balanced Portfolio.''
5. Also on July 20, 1995, the Board determined that it was in the
best interest of the shareholders of the BP to terminate the sale of
shares of that Portfolio, effective July 21, 1995. The Board based its
decision on (a) the minimal assets of BP after almost three years of
operations; (b) disproportionately high expenses; (c) the investment
adviser's indication that the small size of the Portfolio, partially
the result of the Portfolio being offered to only one separate account,
makes it difficult to make appropriate investment decisions and comply
with the diversification requirements applicable to variable insurance
products under section 817(h) of the Internal Revenue Code (``Code'');
and (d) PaineWebber Life's assertion that because the investment
objectives and policies of the BP and the AAP, as recently changed by
the Board, are substantially similar, the two Portfolios basically
compete for the same investment goals of Contract purchasers.
PaineWebber Life was notified of the Board's determination and
discontinued accepting premium payments in the Balanced Division.
6. PaineWebber Life proposes that shares of the AAP be substituted
for the shares of the BP now held by the Account's Balanced Division.
The substitution would be effected at net asset value so that the
dollar value of the amount invested in shares of the BP would be the
same as the amount invested in shares of the AAP after the
substitution. Contract owners will be able to direct their interests in
the BP among the remaining eight Portfolios of the Trust (``Remaining
Portfolios'') if they do not want to move their interests to the AAP.
7. On the date of the substitution, the per share values of each of
the Portfolios will be determined in the normal course of business. The
shares underlying the contract values in the BP will be redeemed by
PaineWebber Life and the net asset values applied to purchase shares of
the AAP at net asset value. The investment securities held by the BP
will be disposed of and any expense incurred in disposing of the
investment securities and effecting substitution will be shared by
PaineWebber Life and Mitchell Hutchins. There will be no change in the
amount of the Contract owner's cash value as a result of the
substitution.
8. The Contracts reserve to PaineWebber Life the right to replace
the shares of the Trust held by the Separate Account with shares of
another series or another registered investment company, subject to
Commission approval. Contract owners were notified that shares of the
BP were no longer available as an investment option for purchase or
transfer under the Contracts and that PaineWebber Life intended to file
this application with the SEC seeking an Order permitting it to
effectuate the proposed substitution. Contract owners with allocation
instructions on file with PaineWebber Life that currently direct net
premiums to the BP have been notified of the discontinuance of the BP
as an investment option.
9. Upon receipt of SEC approval of the proposed substitution,
Contract owners with Contract values in the BP will be provided a form
with which they can elect to transfer their Contract values to one or
more of the Remaining Portfolios. Contract owners will be advised that
the AAP has an investment objective most similar to the BP in which the
Contract owner has values invested. If no instructions are received
within 30 days after notice of the request to elect, Contract values in
the BP will be transferred automatically to the AAP.
10. The Contracts provide Contract owners the right to transfer
part or all of the Contract value from one allocation option to one or
more of the remaining options. The Contracts also provide that each
transfer in excess of 12 in a calendar year is subject to a $10 charge,
which has been waived by PaineWebber Life until further notice. The
substitution of the shares of one or more of the Remaining Portfolios
for shares of the BP will not be considered a ``transfer'' for the
purpose of the above limitation. Contract owners will not be subject to
any charges or costs for the substitution.
Applicants' Legal Analysis
1. Section 26(b) of the 1940 Act prohibits the depositor or trustee
of a registered unit investment trust holding the security of a single
issuer from substituting another security for such security unless the
Commission has approved the substitution. Section 26(b) provides that
the Commission will approve a substitution if it is consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the 1940 Act.
2. Contract owners will not be subject to any additional fees or
charges as a result of the substitution. The substitution will not
affect any benefits, rights or Contract values under the Contracts nor
will it affect the purchase payment dates under the Contracts used in
determining the early withdrawal charge. Contract owners will be given
notice of the substitution and an opportunity to allocate existing
Contract values among the eight Remaining Portfolios as they wish.
3. Since the Account can no longer purchase shares of the BP, with
normal redemptions the BP is expected to shrink rapidly. Applicants
state that because of the relatively minor amount of total net assets
in the BP, the fact that only one separate account had been investing
in the BP when the sale of shares was terminated, and the resulting
expense level and investment limitations, PaineWebber Life believes
investment in the BP is no longer appropriate. Applicants contend that
combining the assets of the BP and AAP, and the investment in the
Portfolio by three separate accounts, should enhance its asset growth
abilities.
4. Applicants state that the diminishing amount of assets in the BP
makes it difficult for the investment adviser to make appropriate
investments for the Portfolio that will meet the Code's requirement for
diversification. Failure to meet the diversification requirement could
result in the entire Contract being currently taxable, not just that
portion of the Contract that is invested in the non-complying
Portfolio. Applicants state that it was determined that it was more
important to the interests and the benefit of Contract owners to
preserve the tax status enjoyed by Contract owners than to maintain the
Portfolio which is no longer available for additional purchase.
Applicants also contend that the minimal amount of total net assets
available for investment and the termination of the sale of shares
diminishes investment opportunities and handicaps Mitchell Hutchins in
its
[[Page 62906]]
ability to invest in potentially advantageous securities.
5. Applicants state that expenses incurred by the BP have remained
relatively high, and a large portion of the BP's expenses is fixed.
Applicants represent that the lack of substantial assets in the BP
results in high operating expenses that are borne by the Contract
owners. The BP's 1994 actual expenses of 1.56% of average total net
assets were higher than expenses of 1.03% of average total net assets
for the AAP. Applicants contend that in comparing the expenses of the
BP and AAP, the asset base of the BP and the increasing asset base of
the AAP is a relevant consideration. Applicants assert that the
increase in total assets of the AAP resulting from the substitution
should result in a lessening of its overall expenses.
6. Applicants state that the AAP offers Contract owners investments
compatible with the objectives of Contract owners investing in the BP.
Applicants state that management of PaineWebber Life, in consultation
with Mitchell Hutchins, studied the investment objectives, policies and
restrictions of each of the Remaining Portfolios to form an opinion as
to which of the Remaining Portfolios appeared most closely identified
with the investment intent of a Contract owner invested in the BP. It
was concluded that a Contract owner who had Contract values invested in
the BP was primarily interested in a Portfolios with an objective of a
stable return while preserving capital. The investment objective of the
AAP is to seek a high total return with low volatility, and the recent
revision of the investment policies of the BP led to the conclusion
that the AAP most closely suits the investment intent of the Contract
owner who now has Contract values invested in the BP.
Applicants' Conclusion
For the reasons discussed above, applicants submit that the
proposed substitution of shares of the AAP for shares of the BP is
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29831 Filed 12-6-95; 8:45 am]
BILLING CODE 8010-01-M