[Federal Register Volume 65, Number 11 (Tuesday, January 18, 2000)]
[Notices]
[Pages 2651-2656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1057]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-24237; File No. 812-11638]


Pacific Life Insurance Company, et al.; Notice of Application

 January 11, 2000.
AGENCY:  Securities and Exchange Commission (``SEC'' or 
``Commission'').

ACTION:  Notice of application for an order of approval pursuant to 
Section 26(b) of the Investment Company Act of 1940 (the ``Act'') and 
an order granting exemptive relief pursuant to Section 17(b) of the Act 
from the provisions of section 17(a) of the Act.

-----------------------------------------------------------------------

SUMMARY OF APPLICATION:  Applicants seek an order under Section 26(b) 
for the Act to permit each subaccount of Pacific Life Insurance Company 
(``Pacific Life'') that serves as a funding vehicle for the Pacific 
Innovations Trust variable annuity contracts (``Variable Contracts''), 
to replace shares of each portfolio of Pacific Innovations Trust with 
shares of a designated portfolio of Pacific Select Fund. Applicants 
also seek an exemption from Section 17(a) of the Act to the extent 
necessary: (i) To permit the consolidation of Pacific Life Insurance 
Company Separate Account A (``Separate Account A''), a segregated asset 
account of Pacific Life that serves as a funding vehicle for certain 
variable annuity contracts issued by Pacific Life, and Separate Account 
B (collectively, the ``Accounts''), by transferring the assets and 
liabilities of Separate Account B to Separate Account A; and (ii) to 
permit Applicants to carry out the substitutions described herein by 
way of in-kind redemptions and purchases.
    Applicants: Pacific Life Insurance Company, Pacific Life Insurance 
Company Separate Account A, Pacific Life Insurance Company Separate 
Account B, Pacific Select Fund (``Select Fund''), and Pacific 
Innovations Trust (``Innovations Trust'').
    Filing Dates: The application was filed on May 28, 1999, and was 
amended and restated on December 9, 1999.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Secretary of 
the Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the SEC 
by 5:30 p.m., on February 2, 2000, 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, Commission, 450 Fifth Street, N.W., Washington, 
DC 20549-0609. Applicants, c/o Robin Yonis Sandlaufer, Esq., Vice 
President and Investment Counsel, Pacific Life Insurance Company, 700 
Newport Center Drive, Newport Beach, CA 92660.

FOR FURTHER INFORMATION CONTACT:  Paul G. Cellupica, Senior Counsel, or 
Susan M. Olson, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, 
DC 20549 (202-942-8090).

Applicant's Representations

    1. Pacific Life is a life insurance company that is domiciled in 
California. Its operations include both life insurance and annuity 
products as well as financial and retirement services. As of December 
31, 1998, Pacific Life managed $290 billion in assets. Pacific Life is 
authorized to conduct a life insurance and annuity business in the 
District of Columbia and all states except New York. Pacific Life was 
originally organized on January 2, 1868, under the name ``Pacific 
Manual Life Insurance Company of California'' and reincorporated as 
``Pacific Mutual Life Insurance Company'' on July 22, 1936. On 
September 1, 1997, it converted from a mutual life insurance company to 
a stock life insurance company ultimately controlled by a mutual 
holding company. Pacific Life is the depositor for the Accounts.
    2. Separate Account A is a segregated asset account of Pacific Life 
and is registered under the Act as a unit investment trust. Separate 
Account A serves as a funding vehicle for variable annuity contracts 
issued by Pacific Life known as ``Pacific Portfolios,'' ``Pacific 
One,'' and ``Pacific Value.'' Separate Account A currently has 20 
subaccounts, each investing in a portfolio of the Select Fund.
    3. Separate Account B is a segregated asset account of Pacific Life 
and is registered under the Act as a unit investment trust. Separate 
Account B was established by Pacific Life and serves as a funding 
vehicle for the Variable Contracts. Separate Account B is divided into 
seven subaccounts each of which invests in a separate portfolio of 
Innovations Trust.
    4. Innovations Trust is registered as an open-end management 
investment company under the Act and currently offers seven investment 
portfolios (``Innovations Portfolios''). Other than shares purchased by 
an affiliate of Pacific Life in connection with the initial 
capitalization of Innovations Trust, shares of the Innovations 
Portfolios are sold to and held only by Separate Account B.
    5. Select Fund is a registered open-end management investment 
company that currently offers 20 separate portfolios (the ``Select 
Portfolios'') which are available to Separate Account A 
Contractholders. Shares of Select Fund currently are offered only to 
Pacific Life separate accounts for the purpose of serving as an 
investment vehicle for variable annuity and variable life insurance 
contracts offered or administered by Pacific Life.

[[Page 2652]]

    6. Pacific Mutual Distributors (``PMD'') serves as Distributor for 
the Variable Contracts. PMD is an indirect subsidiary of Pacific Life 
and is registered as a broker-dealer with the Commission. Pursuant to 
selling agreements with Pacific Life and PMD, broker-dealers that are 
affiliated with or closely related to Bank of America Corporation 
(``Broker-Dealers'') have been appointed to solicit and/or accept 
applications for the Variable Contracts. The Broker-Dealers are the 
sole broker-dealers that are appointed to solicit and/or accept 
applications for the Variable Contracts. Bank of America Corporation 
recently merged with NationsBank Corporation to form a new bank holding 
company called BankAmerica Corporation. PMD and Pacific Life have been 
informed that the Broker-Dealers no longer intend to actively market 
the Variable Contracts.
    7. Innovations Trust has no source of incoming assets other than 
the Variable Contracts. At present, Pacific Life does not intend to 
seek other potential sellers for the Variable Contracts other than the 
Broker-Dealers. Thus, the risk is presented that Innovations Trust will 
not grow, and indeed may shrink, and a question is presented as to 
whether Innovations Trust is an appropriate investment medium for the 
Variable Contracts.
    8. The Substitutions reflect a determination by Pacific Life to 
ensure that owners of the Variable Contracts (``Contractholders'') have 
available under their Variable Contracts a viable mutual fund with good 
prospects for growth so that Contractholders will have an appropriate 
investment vehicle to help meet their investment goals under the 
Variable Contracts.
    9. Accordingly, pursuant to its authority under the respective 
Variable Contracts and the prospectuses describing the same, and 
subject to the approval of the Commission under Section 26(b) of the 
Act, Pacific Life has determined that each subaccount of Separate 
Account B will replace securities issued by each Innovations Portfolio 
with securities of a designated Select Portfolio that in each case has 
investment objectives and policies that are sufficiently similar to 
those of the corresponding Innovations Portfolio so that 
Contractholders will have reasonable continuity in investment and risk 
expectations. Each replacement of an Innovations Portfolio by a 
designated Select Portfolio is indicated below:

------------------------------------------------------------------------
       Current innovations portfolio        Replacement select portfolio
------------------------------------------------------------------------
Money Market Fund.........................  Money Market Portfolio
Managed Bond Fund.........................  Managed Bond Portfolio
Capital Income Fund.......................  Multi-Strategy Portfolio
Blue Chip Fund............................  Equity Portfolio
Mid-Cap Equity Fund.......................  Growth LT Portfolio
Aggressive Growth Fund....................  Aggressive Equity Portfolio
International Fund........................  International Portfolio
------------------------------------------------------------------------

    The Select Portfolios that would receive monies or in-kind 
securities from the Innovations Portfolios as a result of the proposed 
substitutions (``Substitutions'') are referred to herein as ``Affected 
Select Portfolios.'' Other Select Portfolios (``Additional 
Portfolios'') will be available after the substitution is effected as 
options for Contractholders.
    10. Applicants believe that replacing the current Innovations 
Portfolios with the Select Portfolios is appropriate and in the best 
interests of Contractholders, who will benefit from an underlying fund 
with approximately $10 billion in assets. The proposed Substitutions 
also provide Contractholders with: (1) Underlying portfolios having 
lower expense ratios with the expectation that after the Substitutions, 
the ratios will remain lower; (2) competitive historical portfolio 
performance; (3) a competitive lineup of adviser and subadvisers; (4) 
investment in a fund that underlies Pacific Life's proprietary variable 
annuity and life insurance contracts, and therefore in a fund to which 
Pacific Life has a very strong commitment; and (5) an expanded array of 
variable investment options for Contractholders.
    11. The replacement of the Innovations Money Market Fund with the 
Select Money Market Portfolio will provide Contractholders with a 
substantially similar money market vehicle. The following table 
compares the respective asset levels, performance and annual net 
expense ratios of these two portfolios as of December 31, 1998.

----------------------------------------------------------------------------------------------------------------
                                                                                 Expense    Performance (total
             Portfolio                    Fund manager          Asset levels     ratios           return)
----------------------------------------------------------------------------------------------------------------
Select Money Market Portfolio......  Pacific Life..........       $479,687,524     0.43%  <bullet> 1 YEAR:
                                                                                           5.29%.
                                                                                          <bullet> 3 YEAR:
                                                                                           5.22%.
                                                                                          <bullet> 5 YEAR:
                                                                                           4.99%.
Innovations Money Market Fund......  Bank of America.......          6,790,573     0.60%  <bullet> 1 YEAR:
                                                                                           5.07%.
                                                                                          <bullet> 3 YEAR: N/A.
                                                                                          <bullet> 5 YEAR: N/A.
----------------------------------------------------------------------------------------------------------------

    12. Although not identical, the investment objectives, policies and 
strategies of the Innovations Managed Bond Fund are comparable to those 
of the Select Managed Bond Portfolio. The following table compares the 
respective asset levels, performance and annual net expense ratios of 
these two portfolios as of December 31, 1998.

----------------------------------------------------------------------------------------------------------------
                                                                                 Expense    Performance (total
             Portfolio                    Fund manager          Asset levels     ratios           return)
----------------------------------------------------------------------------------------------------------------
Select Managed Bond Portfolio......  PIMCO.................       $861,137,477     0.66%  <bullet> 1 YEAR:
                                                                                           9.20%.
                                                                                          <bullet> 3 YEAR:
                                                                                           7.76%.
                                                                                          <bullet> 5 YEAR:
                                                                                           7.34%.
Innovations Managed Bond Fund......  Scudder Kemper                 18,489,218     0.75%  <bullet> 1 YEAR:
                                      Investments, Inc.                                    6.89%.
                                                                                          <bullet> 3 YEAR: N/A.
                                                                                          <bullet> 5 YEAR: N/A.
----------------------------------------------------------------------------------------------------------------

    13. Although not identical, the investment objectives, policies and 
strategies of the Innovations Capital Income Fund are sufficiently 
similar to those of the Select Multi-Strategy Portfolio so that 
Contractholders will

[[Page 2653]]

have reasonable continuity in investment and risk expectations. The 
following table compares the respective asset levels, performance and 
annual net expense ratios of these two portfolios as of December 31, 
1998.

----------------------------------------------------------------------------------------------------------------
                                                              Asset levels
             Portfolio                   Fund manager     ------------------- Performance
                                                             Expense ratios
------------------------------------------------------------------------------------------
Select Multi-Strategy Portfolio...  J.P. Morgan                 $599,329,997       0.71%   <bullet>-1 YEAR:
                                     Investment.                                            18.17%.
                                                                                           <bullet>-3 YEAR:
                                                                                            16.75%.
                                                                                           <bullet>-5 YEAR:
                                                                                            14.44%.
Innovations Capital Income Fund...  Bank of America......         26,075,616      0.87%.   <bullet>-1 YEAR:
                                                                                            7.06%.
                                                                                           <bullet>-3 YEAR: N/A.
                                                                                           <bullet>-5 YEAR: N/A.
----------------------------------------------------------------------------------------------------------------

    14. Although not identical, the investment objectives, policies, 
and strategies of the Innovations Blue Chip Fund are comparable to 
those of the Select Equity Portfolio. The following table compares the 
respective asset levels, performance and annual net expense ratios of 
these two portfolios as of December 31, 1998.

----------------------------------------------------------------------------------------------------------------
                                                                                 Expense
             Portfolio                    Fund manager          Asset levels     ratios         Performance
----------------------------------------------------------------------------------------------------------------
Select Equity Portfolio............  Goldman Sachs Asset          $503,822,368     0.71%  <bullet>-1 YEAR:
                                      Management.                                          30.28%. <SUP>1</SUP>
                                                                                          <bullet>-3 YEAR:
                                                                                           25.36%.
                                                                                          <bullet>-5 YEAR:
                                                                                           18.84%.
Innovations Blue Chip Fund.........  Bank of America.......         36,412,256     0.94%  <bullet>-1 YEAR
                                                                                           27.80%.
                                                                                          <bullet>-3 YEAR: N/A.
                                                                                          <bullet>-5 YEAR: N/A.
----------------------------------------------------------------------------------------------------------------
<SUP>1</SUP> GSAM began serving as Portfolio Manager on May 1, 1998. Prior to that, a different firm served as Portfolio
  Manager.

    15. Although not identical, the investment objectives, policies, 
and strategies of the Innovations Mid-Cap Equity Fund are comparable to 
those of the Select Growth LT Portfolio. The following table compares 
the respective asset levels, performance and annual net expense ratios 
of these two portfolios as of December 31, 1998.

----------------------------------------------------------------------------------------------------------------
                                                                                 Expense
             Portfolio                    Fund manager          Asset levels     ratios         Performance
----------------------------------------------------------------------------------------------------------------
Select Growth LT Portfolio.........  Janus.................     $1,312,741,866     0.80%  <bullet> 1 YEAR:
                                                                                           58.29%.
                                                                                          <bullet> 3 YEAR:
                                                                                           27.45%.
                                                                                          <bullet> 5 YEAR: N/A.
Innovations Mid-Cap Equity Fund....  Bank of America.......         16,588,510     0.94%  <bullet> 1YEAR:
                                                                                           17.18%.
                                                                                          <bullet> 3 YEAR: N/A.
                                                                                          <bullet> 5 YEAR: N/A.
----------------------------------------------------------------------------------------------------------------

    16. Although not identical, the investment objectives, policies and 
strategies of the Innovations Aggressive Growth Fund are comparable to 
those of the Select Aggressive Equity Portfolio. The following table 
compares the respective asset levels, performance and annual net 
expense ratios of these two portfolios as of December 31, 1998.

----------------------------------------------------------------------------------------------------------------
                                                                                 Expense
             Portfolio                    Fund manager          Asset levels     ratios         Performance
----------------------------------------------------------------------------------------------------------------
Select Aggressive Equity Portfolio.  Alliance Capital......       $219,402,961     0.89%  <bullet> 1 YEAR:
                                                                                           13.22%.
                                                                                          <bullet> 3 YEAR: N/A.
                                                                                          <bullet> 5 YEAR: N/A.
Innovations Aggressive Growth Fund.  Bank of America.......         11,069,644     1.02%  <bullet> 1 YEAR:
                                                                                           (1.77%).
                                                                                          <bullet> 3 YEAR: N/A.
                                                                                          <bullet> 5 YEAR: N/A.
----------------------------------------------------------------------------------------------------------------
\1\ Alliance Capital Management began serving as Portfolio Manager on May 1, 1998. Prior to that date, another
  firm served as Portfolio Manager.

    17. Although not identical, the investment objectives, policies, 
and strategies of the Innovations International Fund are comparable to 
those of the Select International Portfolio. The following table 
compares the respective asset levels, performance and annual net 
expense ratios of the two portfolios as of December 31, 1998.

[[Page 2654]]



----------------------------------------------------------------------------------------------------------------
                                                                                 Expense
             Portfolio                    Fund manager          Asset levels     ratios         Performance
----------------------------------------------------------------------------------------------------------------
Select International Portfolio \1\.  Morgan Stanley Asset         $997,300,194     1.00%  <bullet> 1 YEAR:
                                      Management.                                          5.60%. \2\
                                                                                          <bullet> 3 YEAR:
                                                                                           12.04%.
                                                                                          <bullet> 5 YEAR:
                                                                                           9.88%.
Innovations International Fund.....  Wellington Management          11,127,372     1.24%  <bullet> 1 YEAR:
                                      Company, LLP.                                        11.63%.
                                                                                          <bullet> 3 YEAR: N/A.
                                                                                          <bullet> 5 YEAR: N/A.
----------------------------------------------------------------------------------------------------------------
\1\ Effective January 1, 2000, the name of the International Portfolio was changed to the ``International Value
  Portfolio.'' The Portfolio's investment objective and policies remain the same.
\2\ Morgan Stanley Asset Management began serving as the Portfolio Manager on June 1, 1997. Prior to that date,
  other firms served as Portfolio Manager.

    18. As of the effective date of the Substitutions (``Effective 
Date''), shares of the Innovations Portfolios will be redeemed in cash 
and in-kind by Pacific Life. The proceeds of such redemptions will then 
be used to purchase shares of the Affected Select Portfolios, either by 
cash or in-kind purchase, with each subaccount of Separate Account B 
investing the proceeds of its redemption from the Innovations Portfolio 
in the corresponding Affected Select Portfolio. The Substitutions will 
take place at respective net asset values. The contract value of any 
affected Contractholder immediately after the Substitutions shall be 
the same as the value immediately before the Substitutions.
    19. Pacific Life will bear the costs of any legal or accounting 
fees of the Substitutions and transactional expenses, including 
brokerage commissions, in liquidating the assets of the Innovations 
Portfolios to be able to make payment to Separate Account B in 
connection with the Substitutions. Contractholders will not incur any 
additional fees or charges as a result of the Substitutions, nor will 
their rights or obligations under any of the Variable Contracts 
diminish in any way.
    20. Contractholders were notified of the application by means of a 
supplement to the prospectus for the Variable Contracts that discloses 
that Applicants would be filing the application and are seeking 
approval for the Substitutions.
    21. Following the date on which the order requested by the 
application is issued, but before the Effective Date of the 
Substitutions, a notice (``Substitution Notice''), in the form of an 
additional supplement to the prospectuses for the Variable Contracts, 
will be mailed to Contractholders setting forth the scheduled Effective 
Date of the Substitutions and advising Contractholders that contract 
values attributable to investments in the Innovations Portfolios will 
be transferred to the subaccounts corresponding to the Affected Select 
Portfolio, without charge, on the Effective Date.
    22. The Substitution Notice will state that Contractholders may 
make transfers of contract value among the variable investment options 
without limit and without any charge for a period of at least 60 days 
from the Effective Date, and that an exchange of subaccount annuity 
units may be made during such period in addition to the four that are 
permitted in a 12-month period.
    23. In light of the fact that Applicants intend, through the 
Substitutions, for Separate Account B to invest in shares of the same 
underlying mutual fund portfolios in which the subaccounts of Separate 
Account A now invest, Pacific Life may determine that no valid business 
purpose would be served by maintaining two distinct separate accounts 
investing in the same underlying fund. Accordingly, to avoid the 
duplication that would result and to save the cost of maintenance of 
Separate Account B, Pacific Life seeks an exemption to the extent 
necessary to permit the consolidation of the Accounts by transferring 
the assets and liabilities of Separate Account B to Separate Account A 
(such transfer is referred to hereing as the ``Proposed Transaction''). 
Separate Account A would continue to exist. The effect of the foregoing 
transaction would be that, as of the closing date for the Proposed 
Transaction, Separate Account A would support the Variable Contracts 
(e.g., those currently funded by Separate Account B), as well as the 
variable contracts designated as Pacific Portfolios, Pacific One and 
Pacific Value.
    24. The Proposed Transaction would be effected with no change in 
the aggregate value of the subaccount units (both accumulation and 
annuity units) involved. There would be no change in the 
Contractholders' contract value and no charges would be imposed or 
other deductions made in connection therewith. The transaction would be 
effected by transferring the assets and corresponding liabilities of a 
subaccount of Separate Account B to the corresponding subaccount of 
Separate Account A, which will be the subaccount that invests in the 
Select Portfolio that will have previously been substituted for the 
Innovations Portfolio.

Applicant's Legal Analysis

    1. Section 26(b) of the Act makes it unlawful for any depositor or 
trustee of a unit investment trust that invests exclusively in the 
securities of a single issuer from substituting the securities of 
another issuer without the approval of the Commission. Section 26(b) 
provides such approval shall be granted by order of the Commission, if 
the evidence establishes that it is consistent with the protection of 
investors and the purposes of the Act.
    2. Section 26(b) was intended to provide for Commission scrutiny of 
proposed substitutions which could, in effect, force shareholders with 
the substitute security to redeem their shares, thereby possibly 
incurring a loss of the sales load deducted from initial purchase 
payments, an additional sales load upon reinvestment of the proceeds of 
redemption, or both. The section was designed to forestall the ability 
of a depositor to present holders of interest in a unit investment 
trust with situations in which a holder's only choice would be to 
continue an investment in an unsuitable security, or to elect a costly 
and, in effect, forced redemption. For the reasons described below, 
Applicants submit that the Substitutions meet the standards set forth 
in Section 26(b) and that, if implemented, the Substitutions would not 
raise any of the aforementioned concerns that Congress intended to 
address when the Act was amended to include this provision.
    3. Applicants assert that the replacement of each of the 
Innovations Portfolios with each of the corresponding Select Portfolios 
is appropriate and in the interests of Contractholders and, thus, meets 
the standards necessary to support an order pursuant to Section 26(b) 
of the Act. The Select Portfolios have comparable investment objectives 
and policies as those of the Innovations Portfolios.

[[Page 2655]]

    4. Apart from the Substitution of the underlying investment 
vehicle, the rights of the Contractholders and the obligations of 
Pacific Life under the Variable Contracts would not be altered by the 
Substitutions except, of course, that Contractholders will not have the 
right to retain their beneficial interest in the Innovations 
Portfolios. Contractholders will not incur any additional tax liability 
as a result of the Substitutions. Also, the rights and obligations of 
Pacific Life under the Variable Contracts will not be altered in any 
way in connection with the Substitution. As previously noted, 
Contractholders will not incur any additional fees or charges as a 
result of the Substitutions, including any legal or accounting fees of 
the Substitutions and transactional expenses, including brokerage 
commissions, in liquidating the assets of the Innovations Portfolios to 
be able to make payments to Separate Account B with the Substitutions.
    5. In accordance with procedures to be implemented by Applicants, 
Contractholders will have the right to transfer cash values among the 
subaccounts invested in the Select Portfolios, including the Additional 
Portfolios under their Variable Contracts, without incurring any 
additional fees or charges with respect to the transfer until at least 
60 days after the Effective Date of the Substitutions. For purposes of 
the restriction on exchanges after annuitization, an exchange of 
subaccount annuity units during such 60-day period will not count as an 
exchange for purposes of the limit of four such exchanges in a twelve-
month period. Each Contractholder has received a prospectus supplement 
and will, prior to the Effective Date, receive a Substitution Notice 
(in the form of an additional prospectus supplement) regarding the 
Substitutions, together with information about other available 
investment options and a prospectus for Select Fund.
    6. Applicants assert that the procedures to be implemented are 
sufficient to assure that Contractholders' accounts values immediately 
before the Substitutions shall be equal to the account values 
immediately after the Substitutions, and that Substitutions will not 
affect the value of the interests of those owners of Pacific Life 
variable contracts who currently have contract value allocated to any 
of the Select Portfolios. Applicants state that any in-kind redemptions 
and purchases for purposes of the Substitution will be effected in a 
manner consistent with the investment objectives and policies of the 
respective underlying funds. Pacific Life or the Portfolio Managers of 
the Select Fund will review the in-kind redemptions to assure that 
assets to be transferred are a suitable investment for the substitute 
Select Portfolios in the overall context of such fund's investment 
objectives and policies. Securities to be paid out as redemption 
proceeds and subsequently contributed to the respective substitute 
Select Portfolios to effect the contemplated in-kind purchases of 
shares, will be valued based on the normal valuation procedures of the 
redeeming and purchasing funds and, consistent with Rule 17a-7(d) under 
the Act, no brokerage commission, fees or other remuneration will be 
paid in connection with the in-kind transactions. Applicants submit 
that, for all the reasons stated above, and particularly to ensure that 
a viable mutual fund is available as an investment vehicle for the 
Variable Contracts, the Substitutions are consistent with the 
protection of investors and the purposes faily intended by the policy 
of the Variable Contracts and provisions of the Act.
    7. 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 a person, acting as principal, from knowingly selling 
any securities or other property to such registered investment company. 
Section 17(a)(2) of the Act generally prohibits such persons from 
knowingly purchasing any security or other property from the registered 
investment company.
    8. Section 17(b) of the Act provides that any person may apply for 
an order of exemption from the provisions of Section 17(a) in 
connection with a transaction prohibited by that section, and that the 
Commission shall grant such an application if evidence establishes 
that: (i) 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; (ii) the 
proposed transaction is consistent with the policy of each registered 
investment company concerned, as recited in its registration statement 
and reports filed under the Act; and (iii) the proposed transaction is 
consistent with the general of the Act.
    9. Applicants asserts that the terms under which the in-kind 
redemptions and purchases will be effected are reasonable and fair and 
do not involve overreaching on the part of any person because the 
Substitutions will not dilute the interests of any affected 
Contractholder. The proposed Substitutions will result in situations 
where in-kind redemptions and purchases are more efficient and where a 
Select Portfolio elects to accept/purchase a security held by the 
Innovations Portfolio. The use of in-kind redemptions of such 
subaccounts are intended to reduce costs and thereby benefit 
contractholders. The in-kind redemptions and purchases will be done at 
values consistent with the policies of both the Innovations Portfolios 
and the Affected Select Portfolios. Both Pacific Life and the Portfolio 
Manager of each Affected Select Portfolio will review the securities 
holdings of the Innovations Portfolio and determine whether in-kind 
redemptions and purchases would be a suitable investment for the 
Affected Select Portfolio in the overall context of such fund's 
investment objectives and policies and consistent with their management 
of the Affected Select Portfolio. Applicants state that securities to 
be paid out as redemption proceeds and subsequently contributed to the 
respective Affected Select Portfolios to effect the contemplated in-
kind purchases of shares, will be valued based on the normal valuation 
procedures of the redeeming and purchasing Portfolios. Any 
inconsistences in valuation procedures between the Innovations 
Portfolio and the Affected Select Portfolio will be reconciled so that 
the redeeming and purchasing values are the same. Therefore, there will 
be no change in value to any Contractholder as a result of the 
Substitutions.
    10. Applicants believe that the terms of the Proposed Transaction 
described in the application, including the consideration to be paid or 
received, are reasonable and fair and do not involve overreaching; and 
are consistent with the general purpose of the Act; and therefore meet 
the conditions for receiving exemptive relief under Section 17(b). The 
Commission has previously granted exemptions from Section 17(a) to 
permit the combination or consolidation of separate accounts registered 
as unit investment trusts, and has also granted numerous exemptions 
from section 17(a) to permit the consolidation of subaccounts of a 
separate account registered as a unit investment trust in connection 
with a substitution. In addition, the Commission has granted exemptions 
from Section 17(a) to permit in-kind redemptions and purchases to carry 
out substitutions.

Applicants' Conditions

    For purposes of the approval sought pursuant to Section 26(b) of 
the Act, the Substitutions described in the application will not be 
completed, unless all of the following conditions are met:

[[Page 2656]]

    1. The Commission shall have issued an order (i) approving the 
Substitutions under Section 26(b) of the Act; (ii) exempting the 
consolidation of Separate Account A and Separate Account B from the 
provisions of Section 17(a) of the Act; and (ii) exempting any in-kind 
redemptions and purchases from the provisions of Section 17(a) of the 
Act as necessary to carry out the transactions described in the 
application.
    2. Each Contract holder will have been sent: (i) A copy of the 
effective prospectus relating to each of the Affected Select Portfolios 
and any necessary amendments to the prospectuses relating to the 
Variable Contracts; and (ii) as soon as reasonable possible after order 
has been issued and prior to the Effective Date of the Substitutions, a 
notice describing the terms of the Substitutions and the rights of the 
Contractholders in connections with the substitutions.
    3. Pacific Life shall have satisfied itself, that: (i) The Variable 
Contracts allow the substitution of portfolios in the manner 
contemplated by the Substitutions and related transactions described 
herein; (ii) the transactions can be consummated as described in the 
application under applicable insurance laws; and (ii) that any 
applicable regulatory requirements in each jurisdiction where the 
Variable Contracts are qualified for sale, have been complied with to 
the extent necessary to complete the transactions.


    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-1057 Filed 1-14-00; 8:45 am]
BILLING CODE 8010-01-M