Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices 31029

(b) The Schedule of Spreads will set

forth rates of compensation to the Fund

that are reasonable and fair and that are

determined in light of those

considerations set forth in the

application.

(c) The Schedule of Spreads will be

uniformly applied to all Borrowers of

the Fund’s portfolios securities, and will

specify the lowest allowable spread

with respect to a loan of securities to

any Borrower.

(d) If a security is loaned to an

unaffiliated Borrower with a spread

higher than the minimum set forth in

the Schedule of Spreads, all comparable

loans to an Affiliated Broker-Dealer will

be made at no less than the higher

spread.

(e) The Fund’s Program will be

monitored on a daily basis by an officer

of the Fund who is subject to section

36(a) of the Act. This officer will review

the terms of each loan to an Affiliated

Broker-Dealer for comparability with

loans to unaffiliated Borrowers and

conformity with the Schedule of

Spreads, and will periodically, and at

least quarterly, report his or her findings

to the Fund’s Board, including a

majority of the Disinterested Directors.

5. The Fund’s Board, including a

majority of the Disinterested Directors,

(a) will determine no less frequently

than quarterly that all transaction with

Affiliated Broker-Dealers effected during

the preceding quarter were effected in

compliance with the requirements of the

procedures adopted by the Board and

the conditions of the requested order

and that such transactions were

conducted on terms which were

reasonable and fair; and (b) will review

no less frequently than annually such

requirements and conditions for their

continuing appropriateness.

6. The Funds will maintain and

preserve permanently in an easily

accessible place a written copy of the

procedures (and any modifications

thereto) which are followed in lending

securities and shall maintain and

preserve for a period of not less than six

years from the end of the fiscal year in

which any loan occurs, the first two

years in an easily accessible place, a

written record of each loan setting forth

the number of shares loaned, the face

amount of the securities loaned, the fee

received (or the rebate rate remitted),

the identity of the Borrower, the terms

of the loan and any other information or

materials upon which the finding was

made that each loan made to an

Affiliated Broker-Dealer was fair and

reasonable and that the procedures

followed in making such loan were in

accordance with the other undertakings

set forth in the application.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–12133 Filed 5–12–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

First Allmerica Financial Life Insurance

Company, et al.

May 5, 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.

Summary of Application: Applicants

seek an order under Section 26(b) of the

Act approving the proposed substitution

of shares of the Investment Grade

Income Fund of AIT for shares of the

Select Income Fund of AIT and for

shares of Strategic Income Portfolio of

Fulcrum held by the First Allmerica

Separate Accounts and the Allmerica

Financial Life Separate Accounts to

support certain variable life insurance

contracts or variable annuity contracts

(collectively, the ‘‘Variable Contracts’’)

issued by First Allmerica or Allmerica

Financial Life. Applicants also seek an

order under Section 17(b) of the Act

exempting them from Section 17(a) to

the extent necessary to permit the

Applicants, by means of in-kind

redemptions and purchases, to carry out

the above-referenced substitutions of

securities.

Applicants: First Allmerica Financial

Life Insurance Company (‘‘First

Allmerica’’); Allmerica Select Separate

Account, Allmerica Select Separate

Account II, Fulcrum Separate Account,

Group VEL Account, Inheritage

Account, Separate Account VA–K and

VEL II Account (collectively, the ‘‘First

Allmerica Separate Accounts’’);

Allmerica Financial Life Insurance and

Annuity Company (‘‘Allmerica

Financial Life’’); Allmerica Select

Separate Account, Allmerica Select

Separate Account II, Fulcrum Separate

Account, Fulcrum Variable Life

Separate Account, Group VEL Account,

Inheritage Account, Select Account III,

Separate Account IMO, Separate

Account VA–K, VEL Account, VEL II

Account and VEL Account III

(collectively, the ‘‘Allmerica Financial

Life Separate Accounts’’); Allmerica

Investment Trust (‘‘AIT’’) and the

Fulcrum Trust (‘‘Fulcrum’’)

(collectively, the ‘‘Applicants’’).

Filing Date: The application was filed

on January 31, 2000, and amended and

restated on May 3, 2000.

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 SEC’s Secretary and serving

Applicants with a copy of the request,

in person or by mail. Hearing requests

must be received by the Commission by

5:30 p.m. on May 30, 2000 and must 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 writer’s interest, the reason for the

request and the issues contested.

Persons may request notification of the

date of a hearing by writing to the

Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, N.W., Washington, D.C. 20549–

0609. Applicants, Richard M. Reilly,

President, Allmerica Financial Life

Insurance and Annuity Company, 440

Lincoln Street, Worcester, MA 01653,

and copy to George M. Boyd, Esq., First

Allmerica Financial Life Insurance

Company, N–440, 440 Lincoln Street,

Worcester, MA 01653.

FOR FURTHER INFORMATION CONTACT: Ann

L. Vlcek, Senior Counsel, or Keith

Carpenter, 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–

0102.

Applicants’ Representations

1. First Allmerica was organized

under the laws of Massachusetts in

1844. Effective October 16, 1995, the

company converted from a mutual life

insurance company known as State

Mutual Life Assurance Company of

America to a stock life insurance

company and adopted its present name.

The company is a wholly-owned

subsidiary of Allmerica Financial

Corporation (‘‘AFC’’).

2. Allmerica Financial Life is a life

insurance company organized under the

laws of Delaware in July 1974.

Allmerica Financial Life is an indirect,

wholly-owned subsidiary of First

Allmerica, which in turn is a whollyowned subsidiary of AFC.

31030 Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices

1Subject to the completion of the proposed

substitutions, the name of this Fund will be

changed to the Select Investment Grade Income

Fund.

3. Each Applicant separate account is

a ‘‘separate account’’ as defined by Rule

0–1(e) under the Act, and is registered

under the Act as a investment trust.

Each of the 19 Applicant separate

accounts is a segregated asset account of

the indicated Applicant insurance

company. Each of the respective

Applicant separate accounts is used by

the Applicant insurance company of

which it is a part to fund certain

variable annuity or variable life

contracts. Applicant insurance

companies may issue additional

variable contracts funded by Applicant

separate accounts in the future. Certain

sub-accounts of the respective

Applicant separate accounts are

dedicated to owning shares of one of the

investment portfolios of AIT or one of

the investment portfolios of Fulcrum

(AIT and Fulcrum are sometimes

referred to collectively herein as the

‘‘Underlying Funds’’). Accordingly,

each AIT or Fulcrum sub-account

reflects the investment performance of

that portfolio of AIT or Fulcrum in

which the sub-account invests.

4. Each Applicant separate account is

administered and accounted for as part

of the general business of the Applicant

insurance company of which it is a part.

The income, gains or losses (realized or

unrealized) of each Applicant separate

account are credited to or charged

against the assets of that separate

account, without regard to income,

gains or losses of such Applicant

insurance company.

5. As noted above, each of the

Applicant separate accounts serves as a

funding vehicle for certain Variable

Contracts. The terms and conditions,

including charges and expenses,

applicable to the respective Variable

Contracts are described in separate

registration statements relating to each

Variable Contracts. As the Variable

Contracts are currently structured,

holders of any of the Variable Contracts

(‘‘Contractholders’’) may select one or

more of the investment options

available under the Variable Contract

held by the allocating premiums

payable under such contracts to that

sub-account of the relevant Applicant

separate account that corresponds to the

investment option desired. Thereafter,

Contractholders accumulate funds, on a

tax-deferred basis, based on the

investment experience of the selected

sub-account(s). Contractholders may,

during the life of the contract, make

unlimited transfers of accumulation

values among the sub-accounts available

under the Variable Contract held.

Depending on the type of Variable

Contract, the first six or twelve transfers

in a contract year are guaranteed to be

free of any transfer charge. The

Applicant insurance companies do not

currently charge for additional transfers

but reserve the right to do so.

Applicants represent that the relief

requested here will not affect any charge

to which any Contractholder would

otherwise be subject, or affect any right

or privilege to which any

Contractholder would otherwise be

entitled (except for the substitution in

the underlying investment options, as

described herein).

6. AIT is a Massachusetts business

trust that was established on October 11,

1984 and is registered under the Act as

an open-end diversified investment

company. AIT currently consists of 14

different Funds: Select Emerging

Markets Fund, Select Aggressive Growth

Fund, Select Capital Appreciation Fund,

Select Value Opportunity Fund, Select

International Equity Fund, Select

Growth Fund, Select Strategic Growth

Fund, Growth Fund, Equity Index Fund,

Select Growth and Income Fund, Select

Income Fund, Investment Grade Income

Fund, Government Bond Fund and

Money Market Fund (collectively, the

‘‘Funds,’’ and each, a ‘‘Fund’’).

Currently, shares of each Fund are

purchased only by the separate accounts

established by First Allmerica or

Allmerica Financial Life for the purpose

of funding variable annuity contracts

and variable life insurance contracts.

Two AIT Funds are involved in the

proposed substitutions discussed in this

application.

7. The fist AIT Fund involved in the

proposed substitution is AIT’s

Investment Grade Income Fund

(‘‘IGIF’’).1 IGIF seeks as high a level of

total return, which includes capital

appreciation as well as income, as is

consistent with prudent investment

management. To achieve its goal, the

Fund invests in investments grade debt

securities such as bonds and other

corporate debt obligations; obligations

issued or guaranteed by the U.S.

Government, its agencies or

instrumentalities; and market

instruments, including commercial

paper, bankers acceptances, and

negotiable certificates of deposit. The

Fund also may make investments in

mortgage-backed and asset-backed

securities. The Fund may invest up to

25% of its assets in foreign securities

(not including its investments in

American Depository Receipts or ADRs)

and up to 25% of its assets in debt

obligations of supranational entities.

Investment techniques the Fund may

employ include: entering into financial

futures contracts and related options,

forward commitments, purchasing

options, repurchase agreements and

stand-by commitments; investing in

restricted securities, stripped mortgagebacked securities and when-issued

securities; lending portfolio securities;

and writing covered options.

8. The second AIT Fund involved in

the proposed substitution is AIT’s Select

Income Fund (‘‘SIF’’), which seeks a

high level of current income. SIF invests

primarily in investment grade, fixedincome securities. Examples of the types

of securities in which the Fund invests

are corporate debt obligations such as

bonds, notes and debentures, and

obligations convertible into common

stock; commercial paper; obligations

issued or guaranteed by the U.S.

Government, its agencies or

instrumentalities; and debt securities

backed by various types of financial

assets. The Fund may also invest in

mortgage-backed and asset-backed

securities. The Fund’s investments in

corporate debt securities are not limited

to any particular type of company or

industry. The Fund may invest up to

25% of its assets in foreign securities

(not including its investments in ADRs),

up to 35% of its assets in money market

instruments, and up to 25% of its assets

in debt obligations of supranational

entities. The Fund invests primarily

(and in practice invests exclusively) in

investment grade securities rated in the

four highest grades by Moody’s

Investors Services or Standard & Poor’s

Rating Services or similar rating

organizations, and in unrated securities.

Investment techniques the Fund may

employ include: entering into financial

futures contracts and related options,

forward commitments, forward

contracts on foreign currencies,

purchasing options, repurchase

agreements and stand-by commitments;

investing in high yield securities,

restricted securities, stripped mortgagebacked securities and when-issued

securities; lending portfolio securities;

and writing covered options.

9. Overall management services are

provided to AIT by Allmerica Financial

Investment Management Services, Inc.

(‘‘AFIMS’’ and/or the ‘‘Manager’’), an

indirect, wholly-owned, subsidiary of

AFC. AFIMS is an investment adviser

registered under the Investment

Advisers Act of 1940, as amended.

Under the terms of a management

agreement between AIT and AFIMS (the

‘‘Management Agreement’’), AFIMS

manages AIT’s business affairs and has

general responsibility for the

management of the investments of the

Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices 31031

Funds, subject to the control of the

Board of Trustees of AIT.

10. AFIMS, at its expense, has

contracted with investment sub-advisers

to manage the investments of the Funds.

Each sub-adviser has been selected on

the basis of various factors including

management experience, investment

techniques and staffing, and is

authorized to engage in portfolio

transactions on behalf of the applicable

Fund subject to such general or specific

instructions as may be given by the

trustees and/or AFIMS. Allmerica Asset

Management, Inc. (‘‘AAM’’) serves as

sub-adviser for IGIF. Incorporated in

1993, AAM has approximately $13

billion under management as of

December 31, 1999. AAM serves as

investment adviser to investment

companies and affiliated insurance

company accounts. Standish, Ayer &

Wood, Inc. (‘‘SAW’’) serves as subadviser for SIF. Founded in 1993, the

firm had approximately $44 billion in

assets under management as of

December 31, 1999. SAW manages

portfolios for pension plans, financial

institutions and endowment and

foundation funds.

11. AFIMS is responsible for the

payment of all fees to the sub-advisers.

Other than the expenses specifically

assumed by AFIMS under the

Management Agreement, all expenses

incurred in the operation of AIT are

borne by AIT, including fees and

expenses associated with the

registration and qualification of AIT’s

shares under the Securities Act of 1933;

other fees payable to the SEC;

independent accountant, legal and

custodian fees; association membership

dues; taxes; interest; insurance

premiums; brokerage commissions; fees

and expenses of the trustees who are not

affiliated with AFIMS; expenses for

proxies, prospectuses and reports to

shareholders; and Fund recordkeeping

expenses and other expenses. A

prospectus for AIT accompanies the

prospectus of each of the Variable

Contracts that offers one or more of the

Funds as an investment option.

12. For its services, AFIMS is entitled

to receive a fee from each Fund at AIT,

based on the average daily net asset

value of each Fund. In addition, AFIMS

has voluntarily undertaken to reimburse

each Fund for its fees and expenses that

exceed the applicable expense

limitation set for that Fund. The

expenses which are subject to the

voluntary expense limitations include

management fees; independent

accountant, legal and custodian fees;

recordkeeping expenses; fees and

expenses of the trustees who are not

affiliated with AFIMS; association

membership dues and insurance;

expenses for proxies, prospectuses and

reports to shareholders; and fees

associated with the registration of Fund

shares. AFIMS has declared voluntary

expense limitations for IGIF and SIF of

1.00% of each Fund’s average daily

assets. The expense limitations may be

removed at any time after a Fund’s first

fiscal year of operations with notice to

existing shareholders. Actual expenses

have been well below such expense

limitations for both Funds.

13. Fulcrum is a Massachusetts

business trust that was established on

September 8, 1993 and commenced

operations on February 1, 1996. Prior to

September 1, 1998, the Trust’s name

was ‘‘The Palladian Trust.’’ Fulcrum is

registered under the Act as an open-end

diversified investment company and

currently consists of five different

portfolios; Global Interactive/Telecomm

Portfolio, the International Growth

Portfolio, the Growth Portfolio, the

Value Portfolio and the Strategic Income

Portfolio (collectively, the ‘‘Portfolios,’’

and each, a ‘‘Portfolio’’).

14. The Fulcrum Strategic Income

Portfolio (‘‘SIP’’) is the only Fulcrum

Portfolio involved in the proposed

substitution discussed in this

application. SIP seeks to make money

for investors by investing for high

current income and capital appreciation

in a variety of fixed-income securities.

SIP invests primarily in investment

grade corporate debt securities and

securities issued or guaranteed as to

principal or interest by the U.S.

Government or its agencies or

instrumentalities; below investmentgrade corporate debt securities; and

foreign securities which include

government debt of developed and

emerging markets, corporate obligations

of foreign companies, and debt

obligations of supranational entities.

Debt securities in which SIP may invest

include bonds, notes, debentures,

mortgage-backed and asset-backed

securities, and other similar

instruments. Although SIP may invest

up to 50% of its assets in below

investment grade securities, or junk

bonds, SIP has generally invested most

of its assets in investment grade

securities. Investment techniques the

Fund may employ include: commercial

paper, indexed securities, securities of

other investment companies, restricted

securities, variable and floating rate

securities and warrants; foreign

currency transactions, futures contracts,

repurchase agreements, reverse

repurchase agreements, short sales

against the box, and short sales;

leveraging; purchasing options; and

lending portfolio securities.

15. AFIMS serves as overall manager

of Fulcrum, and is responsible for

managing Fulcrum’s daily business and

has general responsibility for the

management of the investments of the

Portfolios. Portfolio managers (the

‘‘Portfolio Managers’’) have been hired

to handle the day-to-day investment

management of the Portfolios. The

Portfolio Managers’ activities are subject

to general oversight by the trustees and

AFIMS. AAM serves as Portfolio

Manager of SIP. For these services, each

Portfolio pays an overall management

fee, computed and accrued daily and

paid monthly, based on its average daily

net assets. The overall fee varies based

on the performance of that Portfolio

(after expenses) compared to that of an

appropriate benchmark. The Portfolio

Manager receives 80% of the fee, and

AFIMS receives the remaining 20%. For

the period beginning on the effective

date of a Portfolio manager agreement

with a new Portfolio Manager and

ending with the last day of the twelfth

full calendar month thereafter, each

Portfolio pays a monthly advisory fee

calculated at an annual rate of 0.80% of

the Portfolio’s average daily net assets.

After the first 12 full calendar months

with a new Portfolio Manager, as

described above, each Portfolio pays a

monthly advisory fee equal to a basic

fee, plus or minus an incentive fee. The

fee might be reduced if absolute

performance is negative. The monthly

basic fee equals one-twelfth of the

annual basic fee rate of 2.0% multiplied

by average daily net assets over the

previous 12 months. The incentive fee

ranges from ¥2.0% to +2.0% on an

annual basis, depending on a

comparison of the Portfolio’s

performance (reflecting a deduction of

portfolio expenses) and the performance

of a selected benchmark index over the

past 12 months. The monthly incentive

fee, like the monthly basic fee, is

calculated by multiplying one-twelfth of

the incentive fee rate on an annual basis

by the average daily net assets over the

previous 12 months. Accordingly, the

total fee could range from 0.0% to an

annual rate of 4.0%, depending on

performance.

16. AFIMS has agreed to limit

operating expenses and reimburse those

expenses to the extent that each

Portfolio’s ‘‘other expenses’’ (i.e.,

expenses other than management fees)

exceed the expense limitations set for

the Portfolios. AFIMS has guaranteed

these expense limitations through June

30, 2000. For the two years following

the date that the expense limitations

end and subject to certain conditions,

each Portfolio will reimburse AFIMS for

31032 Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices

2Each of the Variable Contracts reserves to the

issuing Applicant insurance company the right,

subject to Commission approval, to substitute

shares of another management investment company

held by a sub-account of the separate account issuer

of the contract. This reservation of right is disclosed

in the registration statement relating to each

Variable Contract.

any Portfolio expenses it reimbursed

pursuant to the expense limitations. The

limitation on ‘‘other expenses’’ for SIP

is an annual rate of 1.50% of average

daily net assets.

17. In accordance with its authority

under the Variable Contracts,2 and

subject to the approval of the

Commission under Section 26(b) of the

Act, Applicant insurance companies

have approved a proposal to make

certain substitutions of shares held in

sub-accounts of the Applicant separate

accounts. Applicants propose to

substitute shares of IGIF for shares of

SIF and for shares of SIP.

18. Applicants maintain that IGIF and

SIF have similar investment objectives

and seek to achieve these objectives by

investing in similar types of fixedincome securities and utilizing

comparable investment strategies.

Applicants have concluded that the

investment objectives and policies of

IGIF are sufficiently similar to those of

SIF that the essential objectives and risk

expectations of Contractholders can

continue to be met. Applicants believe

that the proposed substitution of IGIF

for SIF will benefit Contractholders in

that (1) IGIF has a lower investment

advisory fee schedule than SIF, (2) IGIF

has a better one- and five-year

performance record than SIF, and (3)

IGIF has a larger asset base than SIF

which may provide certain economies

of scale and lower expenses.

19. Applicants assert that, as a result

of the proposed substitution, the

Contractholders who currently invest in

SIF will benefit from the lower

investment advisory fee of IGIF. The

current investment advisory fees paid

by each Fund are listed in the following

chart.

Investment Adviser and Sub-Adviser

Fees

The Manager receives fees computed

daily at an annual rate based on the

average daily net asset value of each

Fund as set forth below.

Investment

grade income fund

(percent)

Select income fund

(percent)

First $50 million 0.50 0.60

Next $50 million 0.45 0.55

Over $100 million ................. 0.40 0.45

The Manager pays each sub-adviser

fee computed at an annual rate based on

the average daily net asset value of each

Fund as set forth below.

Investment Grade Income Fund:

0.20%.

Select Income Fund: 0.20%.

20. Applicants state that IGIF has a

better performance record than SIF for

the one- and five-year periods ended

December 31, 1998.

21. Applicants maintain that, as

shown in the table below, IGIF has a

larger asset base than SIF which may

provide certain economies of scale,

resulting in lower expenses, compared

to SIF. The net assets of each Fund as

of September 30, 1999 were as follows:

Net assets

(in millions)

Investment grade income

fund ................................... $250.2

Select income fund ............... $176.9

22. Applicants state that the expense

ratio for IGIF is significantly lower in

comparison to SIF, which is due

primarily to the difference in the level

of investment advisory fees between the

two Funds. The fees and expenses

incurred for the fiscal year ended

December 31, 1998 by each Fund are as

follows:

ANNUAL FUND OPERATING EXPENSES

[Expenses deducted from fund assets—as of 12/31/98]

Investment

grade income fund

(percent)

Select income fund

(percent)

Investment advisory fees ................................................................................................................................................. .43 .54

Other expenses ............................................................................................................................................................... .09 .10

Total operating expenses 1 ...................................................................................................................................... .52 .64

1 Until further notice, the Manager has declared a voluntary expense limitation of 1.00% for the Select Income Fund and Investment Grade Income Fund.

23. For the foregoing reasons,

Applicants submit that the proposed

substitution of the shares of IGIF for

shares of SIF is in the best interest of

Contractholders.

24. Applicants maintain that IGIF and

SIP have similar investment objectives

and seek to achieve these objectives by

investing in similar types of fixedincome securities and utilizing

comparable investment strategies.

Applicants have concluded that the

investment objectives and policies of

IGIF are sufficiently similar to those of

SIP that the essential objectives and risk

expectations of Contractholders can

continue to be met. Applicants believe

that the proposed substitution of IGIF

for SIP will benefit Contractholders in

that (1) IGIF has a larger asset base than

SIP which should provide certain

economies of scale and lower expenses,

and (2) IGIF has a better performance

record than SIP.

25. Applicants believe that SIP has

not grown to a size to allow it to operate

efficiently. As shown in the table below,

IGIF has a larger asset base than SIP,

which should provide certain

economies of scale, resulting in lower

expenses, compared to SIP. After the

proposed substitution, SIP would be

dissolved. The net assets of SIP and IGIF

as of September 30, 1999 are as follows:

Net assets

(in millions)

Fulcrum strategic income

portfolio ............................. $2.4

AIT investment grade income

fund ................................... 250.2

26. Applicants state that the expense

ratio for IGIF is significantly lower in

comparison to SIP. The fees and

expenses incurred for the fiscal year

ended December 31, 1998 by each Fund

are as follows:

Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices 31033

ANNUAL FUND OPERATING EXPENSES

[Expenses deducted from fund assets before fee limitations—as of 12/31/98]

Investment

grade income fund

(percent)

Strategic income portfolio (percent)

Investment advisory fees ................................................................................................................................................. .43 2 .67

Other expenses ............................................................................................................................................................... .09 3 6.49

Total operating expenses ......................................................................................................................................... 1 .52 7.16

1 Until further notice. the investment adviser has declared a voluntary expense limitation of 1.00% for the Investment Grade Income Fund. 2The Investment advisory fee for the Strategic Income Portfolio listed above was based on the performance of the portfolio during 1998 and

can vary from 0% to 4.00%. 3The Manager has agreed to a voluntary expense limitation on the ‘‘other expenses’’ at an annual rate of 1.50% of the average daily net assets of the Strategic Income Portfolio. The expense limitation is guaranteed through June 30, 2000. Subject to certain conditions, the Strategic

Income Portfolio will reimburse the Manager for any portfolio expenses it reimbursed pursuant to the expense limitation for the two years following the date that the expense limitation ends.

27. Set forth below are charts showing

gross and net operating expenses,

including investment advisory fees, for

IGIF, SIP and SIF for the years ended

December 31, 1996—December 31,

1999.

Year ended

12/31/99

(percent)

Year ended

12/31/98

(percent)

Year ended

12/31/97

(percent)

Year ended

12/31/96

(percent)

Gross Net Gross Net Gross Net Gross Net

Investment Grade Income Fund

Management fees ............................................................................................ 0.43 0.43 0.43 0.43 0.41 0.41 0.40 0.40

Other expenses ................................................................................................ 0.07 0.07 0.09 0.09 0.10 0.10 0.12 0.12

Total operating expenses ......................................................................... 0.50 0.50 0.52 0.52 0.51 0.51 0.52 0.52

Strategic Income Portfolio

Management fees ............................................................................................ 0.35 0.23 0.67 0.47 0.41 0.41 0.80 0.80

Other expenses ................................................................................................ 3.26 1.27 6.49 1.71 6.27 1.20 11.5 6.57

Total operating expenses ......................................................................... 3.61 1.50 7.16 2.18 6.68 1.61 12.3 7.37

Select Income Fund

Management fees ............................................................................................ 0.52 0.52 0.54 0.54 0.59 0.59 0.60 0.60

Other expenses ................................................................................................ 0.09 0.09 0.10 0.10 0.13 0.13 0.14 0.15

Total operating expenses ......................................................................... 0.61 0.61 0.64 0.64 0.72 0.72 0.74 0.74

28. Applicants state that IGIF has a

better performance record than SIP.

Applicants have no reason to believe

that, in the near term, the performance

of SIP will match or exceed that of IGIF.

29. Applicants also believe that the

substitution would provide

Contractholders a more predictable

advisory fee. IGIF’s investment advisory

fee is an annual rate of 0.50% of average

daily net assets on the first $50 million

of assets, 0.45% on the next $50 million

of assets, and 0.40% on assets over $100

million. SIP’s advisory fee can vary from

0% to 4.00% depending on

performance.

30. For the foregoing reasons,

Applicants submit that the proposed

substitution of the shares of IGIF for

shares of SIP is in the best interest of

Contractholders.

31. Applicant insurance companies

will effect the substitutions as soon as

practicable following the issuance of the

requested order, as follows. As of the

effective date of the substitutions

(‘‘Effective Date’’), shares of SIF and SIP

held by the various Applicant separate

accounts will be redeemed by the

Applicant insurance companies. The

proceeds of such redemptions, which

may be effected in-kind, will then be

used to purchase the appropriate

number of shares of IGIF. Since it is

anticipated that the proposed

substitution will be effected by in-kind

transfer of assets, Contractholders will

be fully invested at all times. The

proposed substitutions will take place at

relative net asset value with no charge

in the amount of any Contractholder’s

account value, cash value or death

benefit or in the dollar value of his or

her investment in any of the Applicant

separate accounts. Contractholders will

not incur any fees or charges as a result

of the proposed substitutions, nor will

their rights nor the Applicant insurance

companies’ obligations under the

Variable 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 the Applicant insurance

companies. In addition, the proposed

substitutions will not impose any tax

liability on Contractholders. The

proposed substitutions will not cause

the Variable Contract fees and charges

currently being paid by existing

Contractholders to be greater after the

proposed substitutions than before the

31034 Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices

proposed substitutions. The proposed

substitutions (and any transfer in

advance of the substitution) will not be

subject to a transfer charge and will not

be counted toward any limit on transfers

guaranteed not to be subject to a transfer

charge.

32. Two of the Applicant separate

accounts, the First Allmerica Inheritage

Account and Allmerica Financial Life

VEL Account III, currently have subaccounts that invest in SIF and IGIF.

Applicant insurance companies may in

the future cause the First Allmerica

Inheritage Account and Allmerica

Financial Life VEL Account III to

combine those sub-accounts that hold

shares of IGIF. The combination of those

subaccounts that hold shares of IGIF

would not have any impact on the value

of the Variable Contracts involved, the

fees or rights of the Contractholders, or

diminish in any way the obligations of

the Applicant insurance companies

under any Variable Contract. The

Applicant insurance companies would

bear the costs of any such combination,

including any legal and/or accounting

fees relating to them, and the

Contractholders would not incur any

fees or charges as a result of such

combination. in addition, any such subaccount combination would not result

in any adverse tax consequences to the

Contractholders, or any change in the

economic interest or contract values of

any Contractholders.

33. By supplements to the various

prospectuses for the Variable Contracts

and Applicant separate accounts, all

owners of the Variable Contracts will be

notified of the Applicant insurance

companies’ intention to take the

necessary actions, including seeking the

order requested by this application, to

substitute shares of the Underlying

Funds as described herein. The

supplements for the Applicant separate

accounts will advise Contractholders

that from the date of the supplement

until the date of the proposed

substitution, each owner may make one

transfer of all amounts allocated to the

SIF or SIP sub-account to another subaccount without that transfer being

counted toward the limit on transfers

guaranteed not to be subject to a transfer

charge. The supplements also will

inform Contractholders that the

Applicant insurance companies will not

exercise any rights reserved under any

of the Variable Contracts to impose

additional restrictions on transfers until

at least 30 days after the proposed

substitutions. With these supplements,

Contractholders will also receive a

current prospectus relating to IGIF

(unless the Contractholders has already

received that prospectus).

34. In addition to the prospectus

supplements distributed to owners of

Variable Contracts, within five days

after the proposed substitutions, and

Contractholders who were affected by

the substitutions will be sent a written

notice informing them that the

substitutions were carried out and that

they may make one transfer of all

account value under a Variable Contract

invested in any one of the affected subaccounts on the date of the notice to

another sub-account available under

their Variable Contract without that

transfer counting as one of the number

of transfers per year guaranteed to be

free of charge. The notice will also

reiterate the fact that the Applicant

insurance companies will not exercise

any rights reserved by either under any

of the Variable Contracts to impose

additional restrictions on transfers until

at least 30 days after the proposed

substitutions. The notice as delivered in

certain states also may explain that,

under the insurance regulations in those

states. Contractholders who are affected

by the substitutions may exchange their

Variable Contracts for fixed-benefit life

insurance contracts or annuity

contracts, as applicable, issued by the

Applicant insurance companies (or one

of their affiliates) during the 60 days

following the proposed substitutions.

35. The Applicant insurance

companies are also seeking approval of

the proposed substitutions from any

state insurance regulators whose

approval may be necessary or

appropriate.

Applicants’ Legal Analysis

1. Section 26(b) states that it ‘‘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. The

Commission shall issue an order

approving such substitution if the

evidence establishes that it is consistent

with the protection of investors and the

purposes fairly intended by the policy

and provisions of this title.’’ The

purpose of Section 26(b) is to protect the

expectation of investors in a unit

investment trust that the unit

investment trust will accumulate the

shares of a particular issuer and to

prevent unscrutinized substitutions

which might, in effect, force

shareholders dissatisfied with the

substituted security to redeem their

shares, thereby possibly incurring either

a loss of the sales load deducted from

initial purchase payments, an additional

sales load upon reinvestment of the

redemption proceeds, or both. Section

26(b) affords this protection to investors

by preventing a depositor or trustee of

a unit investment trust holding the

shares of one issuer from substituting

for those shares the shares of another

issuer, unless the Commission approves

that substitution.

2. Applicants request that the

Commission issue an order pursuant to

Section 26(b) of the Act approving the

substitutions by the Applicant

insurance companies of shares held by

the Applicant separate accounts as

follows: (1) shares of IGIF for shares of

SIF; and (2) shares of IGIF for shares of

SIP.

3. Applicants state that the Variable

Contracts expressly reserve for the

Applicant insurance companies the

right, subject to compliance with

applicable law, to substitute shares of

another investment company for shares

of an investment company held by a

separate account or a sub-account of a

separate account. Applicants maintain

that the prospectuses for the Variable

Contracts and the separate accounts

contain appropriate disclosure of this

right. Applicants note that the

Applicant insurance companies each

reserved this right of substitution both

to protect themselves and their

Contractholders in situations where

either might be harmed or

disadvantaged by circumstances

surrounding the issuer of the shares

held by one or more of their separate

accounts and to afford the opportunity

to replace such shares where to do so

could benefit itself and Contractholders.

4. Applicants state that, in the case of

the proposed substitution of shares of

IGIF for shares of SIF, SIF would be

replaced by a Fund with a similar

investment objective but which has a

lower investment advisory fee, a better

long-term performance record, and a

larger asset base, potentially resulting in

lower expenses. Applicants maintain

that, in the case of the proposed

substitution of shares of IGIF for shares

of SIP, the interests of Contractholders

will be better served primarily because

SIP would be replaced by a Fund with

similar investment objectives but which

has a larger asset base, potentially

resulting in lower expenses, and a better

performance record.

5. Applicants generally submit that

the proposed substitutions meet the

standards that the Commission and its

staff have applied to similar

substitutions that have been approved

in the past.

6. Applicants anticipate that

Contractholders will be at least as well

off with the proposed array of separate

accounts and sub-accounts after the

proposed substitutions as they have

Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices 31035

3No sub-accounts will be combined at the time

the proposed substitution is effected. The number

of underlying investment options for each of the 19

Applicant separate accounts currently varies from

six to 24.

7Applicants note that Rule 17a–7 under the Act

is not available to them in connection with the

Continued

been with the array of separate accounts

and sub-accounts offered prior to the

substitutions. Applicants maintain that

the proposed substitutions retain for

Contractholders the investment

flexibility which is a central feature of

the Variable Contracts. Applicants

represent that, if the proposed

substitutions are carried out, all

Contractholders will be permitted to

allocate purchase payments and transfer

account values between and among the

same number of separate accounts or

sub-accounts as they could before the

proposed substitutions.3

7. Applicants submit that neither of

the proposed substitutions is of the type

that Section 26(b) was designed to

prevent and that, unlike traditional unit

investment trusts where a depositor

could only substitute an investment

security in a manner which

permanently affected all the investors in

the trust, the Variable Contracts provide

each Contractholder with the right to

exercise his or her own judgment and

transfer account values into other subaccounts. Applicants state that,

moreover, the Variable Contracts will

offer Contractholders the opportunity to

transfer amounts out of the affected subaccounts into any of the remaining subaccounts without cost or other

disadvantage. Applicants contend,

therefore, that the proposed

substitutions will not result in the type

of costly forced redemption which

Section 26(b) was designed to prevent.

8. Applicants state that the proposed

substitutions also are unlike the type of

substitution which Section 26(b) was

designed to prevent in that, by

purchasing a Variable Contract,

Contractholders select much more than

a particular investment company in

which to invest their account values.

Applicants explain that Contractholders

may also select the specific type of

insurance coverage offered by either or

both of the Applicant insurance

companies under their Variable Contract

as well as numerous other rights and

privileges set forth in the Variable

Contract. Applicants also believe that

Contractholders may have considered

each or both Applicant insurance

companies’ size, financial condition,

type and reputation for service in

selecting their Variable Contract.

Applicants represent that these factors

will not change as a result of the

proposed substitutions.

9. Applicants request an order of the

Commission pursuant to Section 26(b)

of the Act approving the proposed

substitutions by the Applicant

insurance companies. Applicants

submit that, for all of the reasons stated

above, the proposed substitutions are

consistent with the protection of

investors and the purposes fairly

intended by the policy and provisions of

the Act.

10. Applicants request an order

pursuant to Section 17(b) of the Act

exempting them from the provisions of

Section 17(a) of the Act to the extent

necessary to permit them to effect (i) the

substitutions proposed in this

application by means of in-kind

redemptions and purchases of shares

and (ii) any subsequent consolidation of

sub-accounts of the Applicant separate

accounts as discussed in this

application.

11. Sections 17(a)(1) and (2) of the

Act, in relevant part, prohibit any

affiliated person of a registered

investment company, or any affiliated

person of such a person, or any

principal underwriter for such company

(collectively, ‘‘Transaction Affiliates’’),

acting as principal, from knowingly

selling to or purchasing from that

registered investment company any

security or other property.

12. Section 2(a)(3) of the Act defines

the term ‘‘affiliated person of another

person’’ in relevant part as: (A) any

person directly or indirectly owning,

controlling, or holding with power to

vote, 5 percent or more the outstanding

voting securities of such other person;

(B) any person 5 percent or more of

whose outstanding voting securities are

directly or indirectly owned, controlled,

or held with power to vote, by such

other person; and (C) any person

directly or indirectly controlling,

controlled by, or under common control

with, such other person.

13. Applicants submit that they may

be deemed to be Transaction Affiliates

of one another based upon this

definition. Applicants state that,

because the proposed substitutions may

be affected by means of an in-kind

redemption and a subsequent purchase

of shares, also in an in-kind transaction,

the substitutions may be deemed to

involve on or more purchases or sales of

securities or property between

Transaction Affiliates. Applicants state

that, because the Applicant separate

accounts (as well as other separate

accounts of the Applicant insurance

companies) are registered collectively

with the Commission as a single unit

investment trust of which the Applicant

insurance companies are the depositors,

the Applicant separate accounts are

affiliates persons of each other.

Applicants further state that, because all

of the Applicant separate accounts are

under the common control of the

Applicant insurance companies, they

are all affiliated persons of each other.

14. Applicant assert that, while they

do not concede that Section 17(a)

applies to the proposed substitutions,

the combining of sub-accounts under

the Applicants separate accounts,

because it could be deemed to involve

the transfer of assets from one entity to

another, arguably would involve these

entities, acting as principal, in buying

and selling securities or other property

from one to another in contravention of

Section 17(a).

15. Section 17(b) of the Act provides

that the Commission may, upon

application, grant an order exempting

any proposed transaction from the

provisions of Section 17(a) if the

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, as recited in its registration

statement and reports filed under the

Act; and (3) the proposed transaction is

consistent with the general purposes of

the Act.

16. Applicants submit that, to the

extent that the substitutions and any

subsequent combination of sub-accounts

that hold identical securities are

deemed to involve principal

transactions among Transaction

Affiliates, the manner in which such

substitutions and any combinations are

to be implemented is sufficient to assure

that such transactions do not involve

overreaching on the part of any

Applicant or other person, and are fair

and reasonable and consistent with the

policies and purposes underlying the

Act. Applicants further submit that the

facts and procedures recited in their

application demonstrate that neither the

Underlying Funds nor any of the

Applicant separate accounts will be

participating in the substitutions or any

subsequent combination on a basis less

advantageous than that of any other

participant. Finally, Applicants state

that, but for the fact that the

substitutions may be effected by means

of in-kind redemption and purchase

transactions, rather than in cash, the

procedures described in their

application would comply with all of

the conditions of Rule 17a–7 under the

Act.7

31036 Federal Register / Vol. 65, No. 94 / Monday, May 15, 2000 / Notices

substitutions because: (i) affiliations among the

Applicants do not rise solely by reason of having

common investment advisers, director and/officers;

and (ii) the contemplated redemptions and

subsequent purchases of shares of IGIF may be

effected in-kind and not for cash.

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 42575

(March 24, 2000), 65 FR 17328.

3Section 4 sets forth OCC’s procedures for

establishing the exercise settlement value for an

index option when the current value for the index

is unavailable or inaccurate.

4The rule change will only apply to series of

index options introduced after the later of: (1) The

date of the Commission’s approval of this rule filing

or (2) the date specified in a new Options

Disclosure document or supplement thereto that

discloses the substance of this rule change.

5OCC By-laws, Article XVII, Section 4(a)(2).

6For example, CME Rule 4003 states. ‘‘[I]f the

New York Stock Exchange (NYSE) does not open

on the day scheduled for the determination of the

Final Settlement Price [of S&P 500 index futures],

then the NYSE-stock component of the Final

Settlement Price shall be based on the next opening

prices of NYSE stocks.’’

17. Accordingly, Applicants request

an order of the Commission pursuant to

Section 17(b) of the Act to permit the

substitutions and related transactions

described in this application.

Applicants submit the proposed

substitutions are consistent with the

policies of each of the Applicant

separate accounts and the Underlying

Funds and with the general purposes of

the Act.

18. Applicants assert that the

Commission, in recent years, has issued

several orders pursuant to Sections

17(b) and 26(b) of the Act under

circumstances similar to those

presented in their application, each of

which provides substantial precedent

for the relief requested by this

application. Applicants submit that

these orders involved transactions in

which registered separate accounts that

serve as funding vehicles for variable

contract were permitted to substitute, by

means of in-kind redemptions and

subsequent purchases, shares of one

mutual fund for shares and another

affiliated mutual fund. Applicants state

that certain of the transactions also were

followed by a consolidation of the

underlying sub-accounts. Applicants

maintain that these orders were

conditioned on certain representations

by the respective applicants, which they

believe appear to fall into five

categories:

(i) The funds to be substituted have

objectives, policies and restrictions

sufficiently similar to the objective of

the replaced funds so that the policy

owners objectives can continue to be

met;

(ii) Variable contract owners would be

given sufficient notice of information

about the substitutions and an

opportunity to ‘‘opt out’’ of the

substitution and transfer their policy

values, without charge, to any other

investment option available under the

policy held;

(iii) Substitutions would take place at

relative net asset value and without the

imposition of any additional expense or

charge, such that no change in the

amount of any variable contract

owners’s investment or expenses would

result;

(iv) Neither the rights of variable

contract owners, nor the obligations of

applicant insurance companies under

the variable contract would be altered as

a result of the substitutions; and

(v) All necessary regulatory

requirements would be satisfied prior to

the effective date of the substitutions,

including compliance with applicable

insurance law and the issuance of the

Commission’s order approving the

substitution.

Applicants represent that the facts

and circumstances underlying their

application meet each of the conditions

listed in (i) through (v) above and are

sufficient to assure that the substitutions

and any subsequent account

combination will be carried out in a

manner that is consistent with Sections

17(b) and 26(a) of the Act.

19. Applicants request that the

Commission issue an order pursuant to

Section 17(b) of the Act exempting them

from the provisions of Section 17(a) of

the Act to the extent necessary to permit

the Applicant insurance companies to

carry out the substitution transactions

described herein. The Applicants

represent that, for all the reasons stated

above, the terms of the proposed

substitutions as set forth herein,

including any consideration to be paid

and received, are reasonable and fair

and do not involve overreaching on the

part of any person concerned.

Furthermore, the Applicants represent

that the proposed substitutions will be

consistent with the policies of the

Applicant insurance companies and the

Underlying Funds as stated in the

current registration statement and

reports filed under the Act by each and

with the general purposes of the Act.

Conclusion

Applicants submit that for the reasons

and upon the facts set forth above, the

requested order of approval pursuant to

Section 26(b) and the requested order

granting exemptive relief pursuant to

Section 17(b) should be granted.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–12132 Filed 5–12–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42769; File No. SR–OCC–

00–01]

Self-Regulatory Organizations; The

Options Clearing Corporation; Order

Approving a Proposed Rule Change

Relating to Exercise Settlement Values

for Expiring Index Options

May 9, 2000.

On January 19, 2000, The Options

Clearing Corporation (‘‘OCC’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’) a

proposed rule change (File No. SR–

OCC–00–01) pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) and on March 14, 2000,

amended the proposed rule change.1

Notice of the proposal was published in

the Federal Register on March 31,

2000.2 No comments letters were

received. For the reasons discussed

below, the Commission is approving the

proposed rule change.

I. Description

The proposed rule change adds new

subparagraph (3) to Article XVII,

Section 4 of OCC’s By-Laws 3 to allow

OCC to establish the exercise settlement

value for expiring index options in

conformity with the establishment of

the final settlement value for related

index futures and options on index

futures when the primary market(s) for

one or more component securities of the

index is closed on the last trading day

before expiration.4 OCC’s current

method for setting the exercise

settlement amount for an underlying

index when the primary market(s) for

securities representing a substantial

portion of the value of the index are

closed on the last trading day before

expiration is to use the reported level of

the underlying index at the close of

trading on the last preceding day for

which a closing index level was

reported.5

However, the valuation method that

would be used by the Chicago

Mercantile Exchange (‘‘CME’’) is to set

the settlement value for index futures

whenever the primary market for a

single component stock of the index is

closed the last trading day before

expiration. In such a situation, CME

would determine the settlement value of

the index by using the reported opening

values for index stocks affected by the

closing when the primary market(s) for

such stocks reports.6 The use of