[Federal Register Volume 65, Number 124 (Tuesday, June 27, 2000)]
[Notices]
[Pages 39633-39638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16147]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24505/File No. 812-12012]


Massachusetts Mutual Life Insurance Company, et al.

June 20, 2000.
AGENCY: Securities and Exchange Commission (the ``Commission'' or 
``SEC'').

ACTION: Notice of application for an order pursuant to Section 26(b) of 
the Investment Company Act of 1940, as amended (the ``1940 Act''), 
approving substitutions of underlying fund shares (the 
``Substitutions'').

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SUMMARY OF APPLICATION: Applicants request an order approving the 
proposed substitutions of the Oppenheimer Multiple Strategies Fund/VA 
of the Oppenheimer Variable Account Funds (the ``Multiple Strategies 
Fund''), the Oppenheimer Main Street Growth & Income Fund/VA of the 
Oppenheimer Variable Account Funds (the ``Main Street Fund''), and the 
MML Blend Fund of the MML Series Investment Fund (the ``MML Blend 
Fund,'' and together with the Multiple Strategies Fund and the Main 
Street Fund, the ``Replacement Portfolios'') for shares of the Panorama 
LifeSpan Balanced Portfolio (the ``Balanced Portfolio''), Panorama 
LifeSpan Capital Appreciation Portfolio (the ``Capital Appreciation 
Portfolio''), and Panorama LifeSpan Diversified Income Portfolio (the 
``Diversified Income Portfolio,'') and together with the Balanced 
Portfolio and the Capital Appreciation Portfolio, the ``Eliminated 
Portfolios''), respectively. With respect to one of the contracts 
funded by MassMutual Variable Life Separate Account I, the Multiple 
Strategies Fund, instead of the MML Blend Fund, will be substituted for 
the Diversified Income Portfolio. Each of the Eliminated Portfolios is 
a portfolio of the Panorama Series Fund, Inc.
    Applicants: Massachusetts Mutual Life Insurance Company 
(``MassMutual''), C.M. Life Insurance Company (``CM Life,'' and 
together with MassMutual, the ``Insurance Companies''), MML 
Distributors, LLC (``MML Distributors''), MML Investors Services, Inc. 
(``MML Services''), Massachusetts Mutual Variable Annuity Separate 
Account 4 (``MassMutual Account 4''), Massachusetts Mutual Variable 
Life Separate Account I (``MassMutual Account I''), C.M. Multi-Account 
A (``CM Account A''), and C.M. Life Variable Life Separate Account I 
(``CM Account I,'' and together with MassMutual Account 4, MassMutual 
Account I and CM Account A, the ``Accounts,'' the Accounts, together 
with the Insurance Companies, MML Distributors and MML Services, the 
``Applicants'').

FILING DATES: The application was filed on March 3, 2000, and amended 
and restated on May 15, 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 by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on July 17, 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, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-0609.

[[Page 39634]]

Applicants: c/o Massachusetts Mutual Life Insurance Company, 1295 State 
Street, Springfield, MA 01111-0001, Attn: James M. Rodolakis, Esq.

FOR FURTHER INFORMATION CONTACT: Lisa Deitch, Senior Counsel, or Keith 
E. 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 is available for a fee from the 
SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 
20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. MassMutual is a mutual life insurance company established under 
the laws of Massachusetts on May 14, 1851. MassMutual's home office is 
located in Springfield Massachusetts. MassMutual is currently licensed 
to transact life, accident, and health insurance in all states, the 
District of Columbia, Puerto Rico, and certain provinces of Canada.
    2. CM Life is a stock life insurance company organized in 
Connecticut on April 25, 1980. CM Life's home office is located in 
Hartford, Connecticut. CM Life is primarily engaged in the sale of life 
insurance and annuities and is licensed in all states except New York. 
CM Life is a wholly-owned subsidiary of MassMutual.
    3. MassMutual Account 4 was established as a separate account under 
Massachusetts law on July 9, 1997, pursuant to a resolution of the 
Board of Directors of MassMutual. MassMutual Account 4 is registered 
with the Commission as a unit investment trust (``UIT'') under the 1940 
Act. MassMutual Account 4 funds certain variable annuity contracts that 
are issued by MassMutual (the ``MassMutual VA Contracts''). MassMutual 
Account 4 is divided into 41 ``Subaccounts,'' each of which invests in 
a different investment portfolio (``Portfolio'') of one of fourteen 
underlying mutual funds: Calvert Variable Series, Inc., INVESCO 
Variable Investment Funds, Inc., Panorama Series Fund, Inc. (``Panorama 
Fund''), Oppenheimer Variable Account Funds (``Oppenheimer Funds''), 
Fidelity Variable Insurance Products Fund (``Fidelity VIP''), Fidelity 
Variable Insurance Products Fund II (``Fidelity VIP II''), Fidelity 
Variable Insurance Products Fund III (``Fidelity VIP III''), American 
Century Variable Portfolios, Inc., T. Rowe Price Equity Series, Inc. 
(``T. Rowe Price Fund''), MML Series Investment Fund (``MML Series 
Fund''), Janus Aspen Series, Franklin Templeton Variable Insurance 
Products,\1\ Deutsche Asset Manager Management VIT Funds,\2\ and MFS 
Variable Insurance Trust (``MFS Trust'').
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    \1\ Prior to May 1, 2000, this fund was called the Templeton 
Variable Products Series Fund.
    \2\ Prior to May 1, 2000, this fund was called the BT Insurance 
Funds Trust.
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    4. MassMutual Account I was established as a separate account under 
Massachusetts law on July 13, 1988, pursuant to a resolution of the 
Board of Directors of MassMutual. MassMutual Account I is registered 
with the Commission as a UIT under the 1940 Act. MassMutual has 
established designated segments of MassMutual Account I to fund certain 
variable life insurance policies (the ``Variable Life Contracts'') and 
variable riders to certain fixed life insurance policies (the 
``Variable Rider Contracts'') that are issued by MassMutual. The 
designated segment of MassMutual Account I funding the Variable Life 
Contracts is divided into 28 ``Divisions,'' each of which invests in a 
different investment Portfolio of one of six underlying mutual funds: 
MML Series Fund, Panorama Fund, MFS Trust, T. Rowe Price Fund, 
Oppenheimer Funds, and Goldman Sachs Variable Insurance Trust. The 
designated segment of MassMutual Account I funding the Variable Rider 
Contracts is divided into 26 Divisions, each of which invests in a 
different investment Portfolio of one of six underlying mutual funds: 
MML Series Fund, Panorama Fund, MFS Trust, Fidelity VIP II, Oppenheimer 
Funds, and T. Rowe Price Fund.
    5. CM Account A was established as a separate account under 
Connecticut law on August 3, 1994, pursuant to a resolution of the 
Board of Directors of CM Life. CM Account A is registered with the 
Commission as a UIT under the 1940 Act. CM Account A funds certain 
variable annuity contracts that are issued by CM Life (the ``CMVA 
Contracts''). CM Account A is divided into 41 Subaccounts, each of 
which invests in a different investment Portfolio of one of fourteen 
underlying mutual funds. The fourteen underlying funds and their 
corresponding Portfolios are identical to those available under 
MassMutual Account 4.
    6. CM Account I was established as a separate account under 
Connecticut law on February 2, 1995, by the Board of Directors of CM 
Life. CM Account I is registered with the Commission as a UIT under the 
1940 Act. CM Account I funds certain variable life insurance policies 
that are issued by CM Life (the ``CMVUL Contracts,'' together with the 
MassMutual VA Contracts, Variable Life Contracts, Variable Rider 
Contracts, and CMVA Contracts, the ``Contracts''). CM Account I is 
divided into 10 Subaccounts, each of which invests in a different 
investment Portfolio of one of four underlying mutual funds: Panorama 
Fund, Oppenheimer Funds, Fidelity VIP, and Fidelity VIP II.
    7. The Accounts fund the respective variable benefits under the 
Contracts issued by the Insurance Companies. Units of interest in the 
Accounts under the Contracts are registered under the Securities Act of 
1933, as amended (the ``1933 Act''). The assets of each Account are 
held separately from other assets of the respective Insurance Companies 
and are not chargeable with the Insurance Companies' liabilities 
incurred in any other business operations. Accordingly, the income, 
capital gains, and capital losses incurred on the assets of each 
Account are credited to or charged against the assets of that Account, 
without regard to the income, capital gains or capital losses arising 
out of any other business the respective Insurance Company may conduct.
    8. MML Distributors, a Connecticut limited liability company, 
serves as the principal underwriter for the Contracts. MML Services, a 
Massachusetts corporation, also serves as co-underwriter for the 
Contracts. Both MML Distributors and MML Services are wholly-owned 
subsidiaries of MassMutual, are registered with the Commission as 
broker-dealers, and are members of the National Association of 
Securities Dealers, Inc.
    9. The MassMutual VA Contracts are group, flexible premium, 
combination fixed and variable annuity contracts. The MassMutual VA 
Contracts are sold without an initial sales load, but have a contingent 
deferred sales charge of up to 7% for any withdrawals made during the 
first seven contract years that exceed the free withdrawal amount. The 
MassMutual VA Contracts' variable investment options consist of 41 
Portfolios.
    10. The Variable Life Contracts are individual, flexible premium, 
combination fixed and variable whole life insurance contracts that are 
offered by MassMutual. The Variable Life Contracts have a front-end 
sales load of up to 18% of specified premiums paid through policy year 
five and up to 6% of specified premiums paid through policy year 6 or 
more, depending on when the policies are installed on the 
administration system. The Variable Life Contracts' variable investment 
options consist of 28 Portfolios.

[[Page 39635]]

    11. The Variable Rider Contracts are issued in connection with 
group, flexible premium, adjustable life insurance policies that are 
offered by MassMutual. The Variable Rider Contracts' variable 
investment options consist of 26 Portfolios.
    12. The CMVA Contracts are individual, flexible premium, 
combination fixed and variable annuity contracts. The sales load and 
variable investment options of the CMVA Contracts are identical to 
those of the MassMutual VA Contracts discussed earlier.
    13. The CMVUL Contracts are individual, flexible premium, 
combination fixed and variable universal life insurance policies. The 
CMVUL Contracts have a premium charge that is applied to premium 
payments received during the first seven policy years after issue or 
the effective date of an increase in the specified amount (the amount 
of insurance coverage applied for). The maximum premium charge applied 
in a policy year will be 6% of premiums received during that policy 
year, up to the annual target premium (that varies by insured's age, 
underwriting class, and tobacco status) for the policy. The CMVUL 
Contracts' variable investment options consist of 10 Portfolios.
    14. The Balanced Portfolio, the Capital Appreciation Portfolio, and 
the Diversified Income Portfolio (collectively, the ``Eliminated 
Portfolio'') of the Panorama Fund are currently investment options 
under each of the Contracts. The Panorama Fund is an open-end 
management investment company. Shares of the Panorama Fund are sold 
only as underlying investments for variable life insurance policies and 
variable annuity contracts issued by MassMutual or CM Life. 
OppenheimerFunds, Inc. (``OFI'') is the investment adviser to the 
Panorama Fund.
    15. Applicants state that the Eliminated Portfolios are asset 
allocation Portfolios that seek their objectives by allocating their 
assets between two asset classes--stocks and bonds. The stock class 
includes all types of equity securities, such as common stocks, 
preferred stocks, warrants and other securities convertible into common 
stocks. The bond class includes a variety of debt securities, such as 
long-term and short-term corporate and government debt securities, 
mortgage-related obligations, and notes.
    16. Applicants represent that the investment objective of the 
Balanced Portfolio is to seek a blend of capital appreciation and 
income. It allocates its investments among stocks (predominantly in 
common stocks and other equity securities) and bonds (corporate and 
government bonds, including high-yield bonds), with a slightly stronger 
emphasis on stocks. Applicants also represent that the expense ratio of 
the Balanced Portfolio for the last three years was as follows: 1999: 
0.91% (management fee of 0.85% and other expenses of 0.06%); 1998: 
0.93% (management fee of 0.85% and other expenses of 0.08%); and 1997: 
0.97% (management fee of 0.085% and other expenses of 0.12%). As of 
December 31, 1999, the Balanced Portfolio had approximately $97 million 
in assets, of which approximately $41.1 million represented Contract 
owner money, with the balance being seed money MassMutual provided.
    17. Applicants represent that the investment objective of the 
Capital Appreciation Portfolio is to seek long-term capital 
appreciation; current income is not a primary consideration. It 
emphasizes investments in domestic and foreign common stocks, as well 
as some preferred stocks and other equity securities, but also holds 
some corporate bonds and notes, U.S. Government securities, and lower-
grade high-yield securities. Applicants also represent that the expense 
ratio of the Capital Appreciation Portfolio for the last three years 
was as follows: 1999: 0.93% (management fee of 0.85% and other expenses 
of 0.08%); 1998: 0.93% (management fee of 0.85% and other expenses of 
0.08%); and 1997: 0.99% (management fee of 0.85% and other expenses of 
0.14%). As of December 31, 1999, the Capital Appreciation Portfolio had 
approximately $81 million in assets, of which approximately $35 million 
represented Contract owner money, with the balance being seed money 
MassMutual provided.
    18. Applicants represent that the investment objective of the 
Diversified Income Portfolio is to seek high current income, with 
opportunities for capital appreciation. It emphasizes investments in 
bonds, such as U.S. Government securities, mortgage-related and asset-
backed securities, and corporate bonds, including high-yield bonds, but 
holds some common stocks. Applicants further represent that the expense 
ratio of the Diversified Income Portfolio for the last three years was 
as follows: 1999: 0.83% (management fee of 0.75% and other expenses of 
0.08%); 1998: 0.84% (management fee of 0.75% and other expenses of 
0.09%); and 1997: 0.84% (management fee of 0.75% and other expenses of 
0.09%). As of December 31, 1999, the Diversified Income Portfolio had 
approximately $46 million in assets, of which $20 million represented 
Contract owner money, with the balance being seed money MassMutual 
provided.
    19. The MML Blend Fund, a separate series of the MML Series Fund, 
is currently an investment option under the Mass Mutual VA Contracts, 
Variable Life Contracts, and the CMVA Contracts, and is the proposed 
substitute portfolio for the Diversified Income Portfolio. The MML 
Series Fund is a no-load, open-end investment management company. 
Applicants state that shares of the MML Series Fund are sold only as 
underlying investments for variable life insurance policies and 
variable annuity contracts issued by Mass Mutual, CM Life, or another 
MassMutual wholly-owned subsidiary, MML Bay State Life Insurance 
Company. MassMutual serves as the investment adviser to the MML Series 
Fund. Applicants also state that the investment objective of the MML 
Blend Fund is to seek a high total rate of return over an extended 
period of time, consistent with prudent investment risk and capital 
preservation, by investing in equity, fixed income, and money market 
securities. The expense ratio of the MML Blend Fund for the last three 
years was as follows: 1999: 0.38% (management fee of 0.37% and other 
expenses of 0.01%); 1998: 0.37% (management fee of 0.37% and other 
expenses of 0.00%); and 1997: 0.38% (management fee of 0.38% and other 
expenses of 0.00%). As of December 31, 1999, the MML Blend Fund had 
approximately $2.73 billion in assets.
    20. The Main Street Fund and the Multiple Strategies Fund (together 
with the Main Street Fund and the MML Blend Fund, the ``Replacement 
Portfolios'') are separate series of the Oppenheimer Funds, an open-end 
diversified management in investment company. The Main Street Fund is 
an investment option under the MassMutual VA Contracts, Variable Life 
Contracts, Variable Rider Contracts, and CMVA Contracts. The Multiple 
Strategies Fund is an investment option under the Variable Life 
Contracts and the Variable Rider Contracts, and as of May 1, 2000, is 
an investment option under the MassMutual VA Contracts and the CMVA 
Contracts. OFI is the investment adviser to the Oppenheimer Funds.
    21. Applicants represent that the investment objective of the Main 
Street Fund is to seek a high total return, which includes growth in 
the value of its shares as well as current income, from investments in 
mostly common stocks and other equity securities and some debt 
securities. Applicants also

[[Page 39636]]

represent that the expense ratio of the Main Street Fund for the last 
three years was as follows: 1999: 0.78% (management fee of 0.73% and 
other expenses of 0.05%); 1998: 0.79% (management fee of 0.74% and 
other expenses of 0.05%); and 1997: 0.83% (management fee of 0.75% and 
other expenses of 0.08%). As of December 31, 1999, the Main Street Fund 
had approximately $555 million in assets.
    22. Applicants state that the investment objective of the Multiple 
Strategies Fund is to seek total return, which includes current income 
and capital appreciation in the value of its shares. It emphasizes 
allocation of its investments among common stocks and other equity 
securities, bonds and other debt securities, and money market 
securities. Applicants further state that the expense ratio of the 
Multiple Strategies Fund for the last three years was as follows: 1999: 
0.73% (management fee of 0.72% and other expenses of 0.01%); 1998: 
0.76% (management fee of 0.72% and other expenses of 0.04%); and 1997: 
0.75% (management fee of 0.72% and other expenses of 0.03%). As of 
December 31, 1999, the Multiple Strategies Fund had approximately $580 
million in assets.
    23. Applicants propose to exercise their rights to substitute the 
Replacement Portfolios for the Eliminated Portfolios as follows: (i) 
the substitution of units of the Divisions of Subaccounts investing in 
the MML Blend Fund for units of the Divisions or Subaccounts investing 
in the Diversified Income Portfolio (except that, with respect to 
MassMutual's Variable Rider Contracts funded by MassMutual Account I, 
the Diversified Income Portfolio will be substituted with the Multiple 
Strategies Fund instead of the MML Blend Fund in order to maintain an 
even mix of MassMutual funds and outside funds); (ii) the substitution 
of units of the Divisions or Subaccounts investing in the Multiple 
Strategies Fund for units of the Divisions or Subaccounts investing in 
the Balanced Portfolio; and (iii) the substitution of units of the 
Divisions or Subaccounts investing in the Main Street Fund for units of 
the Divisions or Subaccounts investing in the Capital Appreciation 
Portfolio. To the extent required by applicable law, substitutions of 
shares attributable to a Subaccount will not be made unless affected 
contract owners have been notified of the change and until the 
Commission has approved the change.
    24. Applicants represent that the Eliminated Portfolios were 
established in 1995 to satisfy a perceived need for asset allocation 
funds. Applicants also represent that these Portfolios have not 
attracted a large amount of interest from the Insurance Companies' 
variable Contract owners, and that the Insurance Companies have no 
reason to believe Contract owner interest will adequately increase. 
Much of the assets that reside within these Portfolios consist of seed 
money.

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                                              Assets at       Percentage
                Fund name                 December 31, 1999   seed money
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Balanced Portfolio......................     $96,660,173.27         57.5
Capital Appreciation Portfolio..........      80,792,123.80         56.2
Diversified Income Portfolio............      46,046,958.44         57.4
------------------------------------------------------------------------

    Applicants further represent that, as a result, there are not 
enough assets in the Eliminated Portfolios to provide the portfolio 
management flexibility and diversification, which benefit Contract 
owners. Applicants also represent that the performance returns for 
these Portfolios have been fair at best, and the Portfolio fees have 
been relatively high. While there is still a demand for asset 
allocation, Applicants believe that this need can be satisfied best 
with guidance on how to properly allocate assets among the existing 
investment options offered by each Contract rather than by offering 
stand-alone asset allocation Portfolios.
    25. Applicants believe the Substitutions will benefit Contract 
owners by replacing the Eliminated Portfolios with Replacement 
Portfolios having comparable investment objectives and policies and 
generally better historical performance returns, and which the 
Applicants believe are more likely to provide Contract owners with 
favorable investment performance in the future.\3\ Applicants state 
that, in addition, the Substitutions will benefit Contract owners 
because the Replacement Portfolios have lower expense ratios than the 
Eliminated Portfolios.
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    \3\ Applicants state that, although the Balanced Portfolio in 
the past year (but not since inception) has had better historical 
performance returns than the Multiple Strategies Fund, they believe 
the Multiple Strategies Fund is more attractive fund because of its 
lower expense ratio and larger asset base.
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    26. Applicants represent that each Substitution will take place at 
the relative accumulation unit values determined on the date of the 
Substitution in accordance with Section 22 of the Act and Rule 22c-1 
thereunder, Accordingly, there will be no immediate financial impact on 
any Contract owner as a result of the Substitutions. Applicants also 
represent that each Substitution will be effected by having each 
Division or Subaccount that invests in the Eliminated Portfolio redeem 
its shares of the Eliminated Portfolio at the net asset value 
calculated on the date of the Substitutions. The Insurance Companies 
would then cancel the accumulation units of that Division of Subaccount 
credited to the Contracts and credit (in an equal dollar amount) units 
of the Divisions or Subaccounts that invest in the Replacement 
Portfolio. The Insurance Companies would use the proceeds of its 
redemption of shares of the Eliminated Portfolio to purchase shares of 
the Replacement Portfolio.
    27. Applicants represent that the Insurance Companies will schedule 
the Substitutions to occur as soon as practicable following the 
issuance of an order by the Commission granting the relief requested in 
the application. Applicants further represent that, by way of sticker, 
the prospectuses will disclose the proposed Substitutions for several 
months prior to that date. Applicants also represent that the stickers 
will inform existing Contract owners that no additional amounts may be 
allocated to the Subaccounts that invest in the Eliminated Portfolios 
on or after the date of the Substitutions. The stickers also will 
inform affected Contract owners that they will have an opportunity to 
reallocate accumulation value prior to the Substitutions, from the 
Subaccounts investing in the Eliminated Portfolios, or for 30 days 
after the Substitutions, from the Subaccounts investing in the 
Replacement Portfolios, to Subaccounts investing in other Portfolios 
under the Contracts, without the imposition of any transfer charge. 
Applicants also represent that such a transfer will not count against 
the number of free transfers permitted under the Contract. Applicants 
also represents that, after the

[[Page 39637]]

order is issued, a second notification will be provided to all affected 
Contract owners again advising them of the pending Substitutions and of 
their ability to transfer free of charge to the remaining investment 
Divisions or Subaccounts of their choice, or remain in the Eliminated 
Portfolios until the automatic Substitutions on that date. Applicants 
also state that within five days after the Substitutions, the Insurance 
Companies will send affected Contract owners written confirmation that 
the Substitutions have occurred.
    28. Applicants represent that the Insurance Companies will pay all 
expenses and transactions costs of the Substitutions; none will be 
borne by Contract owners. Applicants also represent that affected 
Contract owners will not incur any fees or charges as a result of the 
Substitutions, nor will their rights or the obligations of the 
Insurance Companies under the Contracts be altered in any way. 
Applicants further represent that the Substitutions will not cause the 
fees and charges under the Contracts currently being paid by Contract 
owners to be greater after the Substitutions than before the 
Substitutions. Applicants also represent that the Substitutions, will 
have no adverse tax consequences to Contract owners and will in no way 
alter the tax benefits to Contract owners.
    29. Applicants believe that their request satisfies the standards 
for relief of Section 26(b), as set forth below, because: (i) each 
Substitution involves Portfolios with similar investment objectives; 
(ii) after each Substitution, affected Contract owners will be invested 
in a Replacement Portfolio whose actual performance has been better on 
a historical basis than that of the Eliminated Portfolio; and (iii) 
after each Substitution, affected Contract owners will be invested in a 
Replacement Portfolio whose expenses have been less, and are expected 
to continue to be less on an estimated basis, than those of the 
Eliminated Portfolio.

Applicant's Analysis of Law

    1. Section 26(b) of the 1940 Act makes it unlawful for any 
depositor or trustee of a registered UIT holding the security of a 
single issuer to substitute another security for such security unless 
the Commission approves the substitution. The Commission will approve 
such a 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 the 1940 Act.
    2. Section 26(b) of the 1940 Act was enacted as part of the 
Investment Company Act Amendments of 1970 (``1970 Amendments''). Prior 
to the enactment of the 1970 Amendments, Section 26(a)(4)(b) of the Act 
only required that the trust instrument of a UIT provide that the 
sponsor or trustee notify the trust's shareholders within five (5) days 
after a substitution of the underlying securities. The legislative 
history of Section 26(b) describes the underlying purpose of the 
amendment to the section: ``The proposed amendment recognizes that in 
the case of a unit investment trust holding the securities of a single 
issuer notification to shareholders does not provide adequate 
protection since the only relief available to the shareholders, if 
dissatisfied, would be to redeem their shares. A shareholder who 
redeems and reinvests the proceeds in another unit investment trust or 
in an open-end company would under most circumstances be subject to a 
new sales load. The proposed amendment would close this gap in 
shareholder protection by providing for Commission approval of the 
substitution. The Commission would be required to issue an order 
approving the substitution if it finds the substitution consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act.''
    3. The legislative history makes clear that the purpose of Section 
26(b) is to protect the expectation of investors in a UIT that the UIT 
will accumulate shares of a particular issuer by preventing scrutinized 
unsubstituitons 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 premium 
payments, an additional sales load upon reinvestment of the redemption 
proceeds, or both. Moreover, in the issuance product context, a 
Contract owner forced to redeem may suffer adverse tax consequences. 
Section 26(b) affords protection to investors by preventing a depositor 
or trustee of a UIT holding the shares of one issuer from substituting 
for those shares of another issuer, unless the Commission approves that 
substitution.
    4. Applicants submit that the purposes, terms and conditions of the 
Substitutions are consistent with the principles and purposes of 
Section 26(b) and do not entail any of the abuses that Section 26(b) is 
designed to prevent. Applicants assert that substitution is an 
appropriate solution to the unfavorable performance, on a relative 
basis, and higher relative expenses of the Portfolios to be eliminated. 
Applicants believe that the Replacement Portfolios will better serve 
Contract owner interests because the Portfolios' performance returns 
have been better than the performance of, and their expenses have been 
lower than the expenses of, the corresponding Eliminated Portfolios. 
Applicants also submit that the Commission has routinely approved 
substitutions of this type.
    5. Applicants maintain that the Substitutions will not result in 
the type of costly forced redemption that Section 26(b) was intended to 
guard against and, for the following reasons, are consistent with the 
protection of investors and the purposes fairly intended by the Act: 
(i) Each Substitute Portfolio has investment objectives that are 
similar to those of the corresponding Eliminated Portfolio, and permits 
Contract owners continuity of their investment objectives and 
expectations; (ii) the costs of the Substitutions, including any 
brokerage costs, will be borne by the Insurance Companies and will not 
be borne by Contract owners and no charges will be assessed to effect 
the Substitutions; (iii) the Substitutions will, in all cases, be at 
net asset values of the respective units, without the imposition of any 
transfer or similar charge and with no change in the amount of any 
Contract owner's accumulation value; (iv) the Substitutions will not 
cause the fees and charges under the Contracts currently being paid by 
Contract owners to be greater after the Substitutions than before the 
Substitutions; (v) the Contract owners will be given notice prior to 
the Substitutions and will have an opportunity to reallocate 
accumulation values among other available Divisions or Subaccounts 
without the imposition of any transfer charge or limitation, or the 
transfer counting against any limit on the number of permitted or 
charge-free transfers during a year; (vi) within five days after the 
Substitutions, the Insurance Companies will send to affected Contract 
owners written confirmation that the Substitutions have occurred; (vii) 
the Substitutions will in no way alter the insurance benefits to 
Contract owners or the contractual obligations of the Insurance 
Companies; and (viii) the Substitutions will have no adverse tax 
consequences to Contract owners and will in no way alter the tax 
benefits to Contract owners.

Conclusion

    Applicants request an order of the Commission pursuant to Section 
26(b) of the 1940 Act approving the proposed Substitutions. Section 
26(b), in pertinent part, provides that the Commission shall issue an 
order approving a substitution of securities if

[[Page 39638]]

the evidence establishes that it is consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of the 1940 Act. For the reasons and upon the facts set forth above, 
applicants state that the requested order meets the standards set forth 
in Section 26(b) and should, therefore, be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-16147 Filed 6-26-00; 8:45 am]
BILLING CODE 8010-01-M