[Federal Register Volume 62, Number 147 (Thursday, July 31, 1997)]
[Notices]
[Pages 41104-41108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20171]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-22765; File No. 812-10722]
Aetna Life Insurance and Annuity Company, et al.
July 25, 1997.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for exemptions under the Investment
Company Act of 1940 (``1940 Act'').
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APPLICANTS: Aetna Life Insurance and Annuity Company (``Aetna
Annuity'') and its Variable Annuity Account B. Variable Annuity Account
C, and Variable Life Account B; and Aetna Insurance Company of America
(``Aetna of America'' and collectively with Aetna Annuity, ``Aetna'')
and its Variable Annuity Account I.
RELEVANT 1940 ACT SECTIONS: Orders requested pursuant to Sections 26(b)
and 17(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 certain
unaffiliated registered management investment companies (``Replaced
Funds'') with shares of certain Aetna-advised, registered management
investment companies (``Substitute Funds''). Applicants also seek an
order, pursuant to Section 17(b) of the 1940 Act, granting exemptions
from Section 17(a) to permit Applicants to carry out the above-
referenced substitutions in part by redeeming shares of the Replaced
Funds in-kind, and using the redemption proceeds to purchase shares of
the Substitute Funds, and to permit Applicants to combine certain
subaccounts holding shares of the same Substitute Fund after the
substitutions.
FILING DATE: The application was filed on July 18, 1997, and amended
and restated on July 24, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be
[[Page 41105]]
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
August 19, 1997, 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
who wish to be notified of a hearing may request notification by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 fifth
Street, N.W., Washington, DC 20549. Applicants, c/o Julie Rockmore,
Esquire, Aetna Life Insurance and Annuity Company, 151 Farmington
Avenue, RE4A, Hartford, CT 06156.
FOR FURTHER INFORMATION CONTACT: Megan L. Dunphy, Attorney, or Mark
Amorosi, 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 is available for a fee from the
Public Reference Branch of the Commission.
Applicants' Representations
1. Aetna Annuity, a stock life insurance company incorporated in
Connecticut, is authorized to issue life insurance and annuities in the
District of Columbia, Guam, Puerto Rico, the Virgin Islands and all
states of the United States. Aetna Annuity is an indirect subsidiary of
Aetna Inc., which is a holding company with shares traded on the New
York Stock Exchange.
2. Aetna of America, a stock life insurance company incorporated in
Connecticut, is authorized to do business in the District of Columbia
and all states of the United States except New York and North Carolina.
Aetna of America is a wholly-owned subsidiary of Aetna Annuity.
3. Aetna Annuity's Variable Annuity Account B, Variable Annuity
Account C and Variable Life Account B and Aetna of America's Variable
Annuity Account I (collectively, the ``Separate Accounts'') are
separate accounts established by Aetna pursuant to the insurance laws
of Connecticut and are registered under the 1940 Act as unit investment
trusts. The assets of each Separate Account support either variable
Annuity contracts or variable life insurance policies issued by Aetna
(``Products''). Interests in each of the Separate Accounts offered
through such Products are registered under the Securities Act of 1933
(``1933 Act'').
4. The variable annuity contracts and variable life policies are
structured to allow the accumulation of assets to fund benefits payable
under the Products (annuity payments or life insurance proceeds). The
assets accumulate in variable or fixed investment options. The variable
investment options are registered management investment companies or
separate series of those companies (``Funds''). Contributions allocated
to a given Fund through a Product are used to buy shares of that Fund.
The shares of each Fund are held in a separate subaccount of a Separate
Account.
5. Most of Aetna's variable annuity contracts are issued as group
contracts where the owner of the contract is the employer, sponsor or
trustee (``Sponsor'') of a group retirement plan. Members of the group
(``Participants'') acquire an interest in the contract and have certain
rights as determined by the group contract or the retirement plan. The
remaining contracts are issued to or on behalf of individuals. All
contracts allow the owners (including Sponsors) of the Product
(``Customers'') or in the case of group contracts or policies,
Participants, to allocate payments among the variable and fixed
investment options available under the contract.
6. Variable life policies issued by Aetna Annuity include
individual variable life, second to die, corporate variable universal
life and group variable life policies. Premium payments under the
policies accumulate in variable and fixed investment options in the
same manner as for variable annuity contracts. Accumulated amounts are
used to fund death benefits and withdrawals payable under the policies.
7. There are currently 53 different Funds offered as variable
investment options under the various Products, of which 11 have Aetna
Annuity as the investment adviser and its affiliate, Aeltus Investment
Management, Inc., as the subadviser (``Aetna Funds''). The Funds are
registered as management investment companies under the 1940 Act and
the shares of each Fund are registered under the 1933 Act.
8. Aetna is organizing a new management investment company,
Portfolio Partners, Inc. (``Portfolio Partners''), which will be
authorized to issue shares in series (``Portfolios''), each having its
own investment objectives and policies and its own assets. Aetna will
serve as the investment adviser of Portfolio Partners and has
contracted with unaffiliated third parties to manage the assets of each
series of Portfolio Partners as subadviser.
9. Applicants propose to substitute shares of the Substitute Funds,
five Portfolios and two Aetna Funds, for shares of the Replaced Funds,
eleven unaffiliated Funds (see Table 1).
Table 1.--Funds To Be Replaced
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Replaced fund Substitute fund
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1. Scudder Variable Life Investment Portfolio Partners Scudder
Fund--International Portfolio (Class A International Growth
Shares). Portfolio.
2. MSF Emerging Growth Series.......... Portfolio Partners MFS Emerging
Equities Portfolio.
3. MFS Research Series................. Portfolio Partners MFS Research
Growth Portfolio.
4. MFS Value Series.................... Portfolio Partners MFS Value
Equity Portfolio.
5. American Century VP Capital Portfolio Partners MFS Research
Appreciation (Formerly TCI Growth). Growth Portfolio.
6. Alger American Small Capitalization Portfolio Partners MFS Emerging
Portfolio. Equities Portfolio.
7. Alger American MidCap Growth Portfolio Partners T. Rowe
Portfolio. Price Growth Equity Portfolio.
8. Alger American Growth Portfolio..... Portfolio Partners T. Rowe
Price Growth Equity Portfolio.
9. Neuberger & Berman AMT Growth Portfolio Partners MFS Value
Portfolio. Equity Portfolio.
10. Janus Aspen Short-Term Bond Aetna Variable Encore Fund
Portfolio. (money market).
11. Franklin Government Securities Aetna Income Shares (bond).
Trust.
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[[Page 41106]]
10. Applicants represent that the Substitute Funds have investment
objectives the same as, similar to, or consistent with the objectives
of the Replaced Funds. For each of the substitutions numbered 1-4 in
Table 1 above, the Replaced Fund and Substitute Fund are ``clone''
funds of the same retail fund and have the same investment objectives,
and the investment adviser of the Replaced Fund will continue to
provide investment advice to the Substitute Fund as a sub-adviser to
the Fund.
For each of the Substitutions numbered 5-9 in Table 1 above,
Applicants state that the investment objectives of the Replaced Fund
and Substitute Fund involved are not the same, but are substantially
similar. For each substitution, Applicants have concluded that, the
investment objectives of the Substitute Funds are sufficiently similar
to those of the Replace Funds so that the investment objectives of
Customers and Participants can be met.
In the substitutions numbered 10 and 11 in Table 1 above,
Applicants state that the investment objectives of the two funds,
although different, are generally consistent. For each substitution,
Applicants have concluded that the investment objectives are
sufficiently consistent with those of the Replace Funds so that the
essential investment objectives of Customers and Participants can be
met.
11. Applicants state that the proposed substitutions are part of an
overall business plan of Aetna to make its Products more competitive
and thus more attractive to Customers and more efficient to administer
and oversee. Applicants represent that the proposed substitutions and
related transactions will be in the best interest of Customers and
Participants in that they will (i) continue to provide the benefits of
third party asset management while increasing Aetna's ability to
control the expenses associated with the management and administration
of the Funds; (ii) replace Funds with higher than average volatility,
performance inconsistency and/or below average performance; (iii)
replace funds with insufficient assets to remain cost effective, and
(iv) reduce costs and the potential for conflicts.
12. The prospectuses for each of the registration statements
affected by the proposed substitution will be amended to describe the
Substitute Funds, identify which Funds are being replaced and disclose
the impact of the Substitutions on Fund fees and expenses. The
amendments will be distributed to all Customers and Participants.
13. Aetna will file with the Commission a new registration
statement on Form N-1A, registering Portfolio Partners under the 1940
Act and registering shares in each Portfolio under the 1933 Act.
Applicants state that copies of the Portfolio prospectuses will be
distributed to Customers and Participants. Alternatively, Applicants
may send summaries (Summaries) of the Portfolio prospectuses to
Participants describing the material features of each Portfolio,
including its investment objective and policies, risks, investment
adviser, and to the extent applicable, past performance and a
comparison of that performance to an appropriate index. The Summaries
also will advise Participants that before they make any decision to
transfer assets, they are entitled to review the Substitute Fund
prospectuses and amendments to the prospectuses for their Products, and
include instructions on how to obtain free copies.
14. Applicants state that the prospectuses for the Portfolios and
amendments to the Product prospectuses will be accompanied by notices
to all Customers and Participants advising them of the substitutions.
The notice will be sent to all Customers and Participants at least 60
days prior to the date the substitutions (``Substitution Date'') will
take place and will describe the Portfolios and their sub-advisers, the
funds affected by the substitutions, the reasons for engaging in the
substitutions, and the material terms and conditions of the
substitutions. The notice also will advise Customers and Participants
that they can transfer assets from any Replaced or Substitute Fund to
any other funding options available under their Product, without charge
and without limitation on the number of transfers from the date of the
notice through a date at least 30 days following the date of the
substitution, or withdraw assets from the Products subject to
applicable deferred sales charges. Customers and Participants who had
assets in Replaced Funds will be sent confirmation of the substitutions
within five days following the Substitution Date confirming that the
substitutions have been completed.
15. Applicants represent that the proposed substitutions will be
effected by redeeming shares of the Replaced Funds on the Substitution
Date at net asset value and using the proceeds to purchase shares of
the Substitute Funds at net asset value on the same date. No transfer
or similar charges will be imposed by Aetna and, at all times, all
contract and policy values will remain unchanged and fully invested.
16. The use of in-kind redemptions and contributions will be done
in a manner consistent with the investment objectives and policies and
diversification requirements of the applicable Substitute Fund, and
Aetna Annuity and each Substitute Fund's subadviser will review the in-
kind redemptions to assure that the assets proposed are suitable for
the Substitute Fund. The assets subject to in-kind redemption and
purchase will be valued based on the normal valuation procedures of the
redeeming and purchasing Funds. Applicants state that any
inconsistencies in valuation procedures between the Replaced Fund and
the Substitute Fund will be reconciled so that the redeeming and
purchasing values are the same.
17. Applicants state that after the substitutions have been
completed, in several instances, there will be two or more subaccounts
of the same Separate Account holding shares of the same Substitute
Fund. In any such instance, Applicants intend to combine those two
subaccounts into a single subaccount by transferring shares from one
subaccount to the other. The transfers will be done at net asset value
on the same date so that there is no financial impact to any Customer
or Participant.
Terms and Conditions of the Transactions
1. Terms
The significant terms of the substitutions described in the
application include:
a. The Substitute Funds have objectives, policies and restrictions
sufficiently similar to the objectives of the Replaced Funds so that
the Customers' and Participants' objectives will continue to be met.
b. Aetna will waive its fees and/or reimburse the Portfolios'
expenses so that through April 30, 1999, the fees and expenses of the
Portfolios will not exceed the fees and expenses set forth for those
Funds in the application, which in all cases are less than those of the
Replaced Funds. Aetna anticipates that after April 30, 1999, the fees
and expenses of the Portfolios will continue to be less than or equal
to those currently charged by the applicable Replaced Funds, assuming
that the asset levels of the Portfolios do not decrease significantly.
c. Customers may transfer assets from the Replaced or Substitute
Funds to any other Fund available under their Product without any
charge from the
[[Page 41107]]
date of notice through a date at least 30 days following the
Substitution Date.
d. The substitutions, in all cases, will be effected at the net
asset value of the respective shares in conformity with Section 22(c)
of the 1940 Act and Rule 22c-1 thereunder, without the imposition of
any transfer or similar charge by Aetna.
e. The substitution will take place at relative net asset value
with no change in the amount of any Customer's or Participant's
contract or policy value or in the dollar value of his or her
investment in such contract or policy. Customers and participants will
not incur any fees or charges as a result of the proposed
substitutions, nor will their rights or Aetna's obligations under the
contracts be altered in any way. All expenses incurred in connection
with the proposed substitutions, including legal, accounting and other
fees and expenses, will be paid by Aetna. The proposed substitutions
will not cause the contract fees and charges currently being paid by
existing Customers and Participants to be greater after the proposed
substitutions than before the proposed substitutions.
f. Redemptions in-kind will be done in a manner consistent with the
investment objectives and policies and diversification requirements of
the applicable Substitute Fund and Aetna Annuity and each Substitute
Fund's subadviser will review the in-kind redemptions to assure that
the assets proposed for the Fund are suitable for the Substitute fund.
Consistent with Rule 17a-7(d) under the 1940 Act, no brokerage
commissions, fees (except customary transfer fees) or other
remuneration will be paid in connection with the in-kind transactions.
g. The substitutions will not be counted as new Fund selections in
determining the limit on the total number of Funds that Customers and
Participants can select during the life of a Product.
h. The substitutions will not alter in any way the annuity or life
benefits, tax benefits or any contractual obligations of Aetna under
the Products.
i. Customers and Participants may withdraw amounts under the
Products or terminate their interest in a Product, under the conditions
that currently exists, including payment of any applicable deferred
sales charge.
j. Customers and Participants affected by the substitutions will be
sent confirmation of the substitutions within five days following the
Substitution Date identifying each substitution made on behalf of that
Customer or Participant.
2. Conditions
The substitutions described in the application will not be
completed unless all of the following conditions are met:
a. The Commission will have issued an order approving the
substitutions under Section 26(b) of the 1940 Act.
b. The Commission will have issued an order exempting the in-kind
redemptions and the combination of subaccounts from the provisions of
section 17(a) of the 1940 Act as necessary to carry out the
substitutions as described in the application.
c. The Commission will have declared effective the amendments to
the registration statements for the Products describing the
substitutions.
d. The Commission will have declared the registration statement for
Portfolio Partners and its Portfolios effective.
e. Each Customer will have been sent a copy of the effective
prospectuses for the Substitute Funds and the effective amendments to
the applicable Product prospectus.
f. Aetna will have satisfied itself, based on advice of counsel
familiar with insurance laws, that the contracts involved in all the
Products allow the substitutions of Funds as described in the
application and that the transactions can be consummated as described
herein under applicable insurance laws and under the various contracts
and policies governing the Products.
g. Aetna will have complied with any regulatory requirements it
believes necessary to complete the transactions in each jurisdiction
where the Products are qualified for sale.
h. Aetna will have sent to Customers and Participants at least 60
days prior to the Substitution Date a notice, describing the terms of
the substitutions and of Customers' and Participant's rights in
connection with them.
i. Participants will have been sent amendments to the Product
prospectuses and either prospectuses for the Portfolios or Summaries of
them with written instructions on how to request a Portfolio
prospectus, as provided in the relief granted to Aetna by the staff of
the Commission. See Aetna Life Insurance and Annuity Company (pub.
avail. Jan. 6, 1997).
Applicants' Legal Analysis
1. Section 26(b) of the 1940 Act provides, in pertinent part, 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 Commission
shall have approved such substitution.'' Section 26(b) of the 1940 Act
also provides that the Commission shall issue an order approving such
substitution if the evidence establishes that the substitution is
consistent with the protection of investors and the purposes fairly
intended by the policies and provisions of the 1940 Act.
2. Applicants request an order pursuant to section 26(b) of the
1940 Act approving the substitutions and related transactions.
Applicants assert that the purposes, terms, and conditions of the
proposed substitutions are consistent with the protection of investors
and the purposes fairly intended by the 1940 Act. Applicants further
assert that the proposed substitutions will not result in the type of
costly forced redemption that section 26(b) was intended to guard
against.
3. Section 17(a)(1) of the 1940 Act prohibits any affiliated
person, or an affiliate of an affiliated person, of a registered
investment company, from selling any security other property to such
registered investment company. Section 17(a)(2) of the 1940 Act
prohibits any affiliated person from purchasing any security or other
property from such registered investment company.
4. Applicants state that redemptions and purchases in-kind involve
the purchase of property from a registered investment company and the
sale of property to a registered investment company by Aetna, an
affiliated person of those investment companies. Similarly, in
instances where Aetna combines two subaccounts into a single subaccount
holding shares of the same Substitute Fund, the transfer of property
could be said to involve purchase and sale transactions between the
subaccounts by an affiliated person of each separate account.
5. Applicants request an order pursuant to section 17(b) of the
1940 Act exempting the in-kind redemptions and purchases and the
combination of certain subaccounts from the provisions of Section
17(a). Section 17(b) of the 1940 Act provides that the Commission may
grant an order exempting a proposed transaction from Section 17(a) if
evidence establishes that: (1) The terms of the proposed transaction,
including the consideration to be paid or received, are reasonable and
fair and do not involve overreaching on the part of any person
concerned; (2) the proposed transaction is consistent with the policy
of each registered investment company concerned; and (3) the proposed
transaction is consistent with the general purposes of the 1940 Act.
[[Page 41108]]
6. Applicants represent that the terms of the in-kind redemptions
and purchases are reasonable and fair and do not involve overreaching
on the part of any person concerned and that the interest of Customers
and Participants will not be diluted. The in-kind redemptions and
purchases will be done at values consistent with the policies of both
the Replaced and Substitute Funds. Both Aetna and the proposed
subadviser of the Substitute Funds will review all the asset transfers
to assure that the assets meet the objectives of the Substitute Fund
and that they are valued under the appropriate valuation procedures of
the Replace Funds and the Substitute Fund. In-kind redemptions and
purchases will reduce the brokerage costs that would otherwise be
incurred in connection with the substitutions. The Applicants represent
that the transactions are consistent with the policies of each
investment company involved and the general purposes of the 1940 Act,
and comply with the requirements of section 17(b).
7. Applicants represent that the combination of subaccounts is
intended to reduce administrative costs and thereby benefit Customers
with assets in those subaccounts. The purchase and sale transactions
described in the application will be effected based on the net asset
value of the Fund shares held in the subaccounts and the value of the
units of the subaccount involved. Therefore, there will be no change in
value to any Customer or Participant.
Conclusion
Applicants assert that, for the reasons summarized above, the
requested order approving the substitution and related transactions
involving in-kind redemptions and the combination of certain separate
account subaccounts should be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-20171 Filed 7-30-97; 8:45 am]
BILLING CODE 8010-01-M