[Federal Register Volume 62, Number 147 (Thursday, July 31, 1997)]
[Notices]
[Pages 41104-41108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20171]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-22765; File No. 812-10722]


Aetna Life Insurance and Annuity Company, et al.

July 25, 1997.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for exemptions under the Investment 
Company Act of 1940 (``1940 Act'').

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APPLICANTS: Aetna Life Insurance and Annuity Company (``Aetna 
Annuity'') and its Variable Annuity Account B. Variable Annuity Account 
C, and Variable Life Account B; and Aetna Insurance Company of America 
(``Aetna of America'' and collectively with Aetna Annuity, ``Aetna'') 
and its Variable Annuity Account I.

RELEVANT 1940 ACT SECTIONS: Orders requested pursuant to Sections 26(b) 
and 17(b) of the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order pursuant to Section 
26(b) of the 1940 Act, approving the substitution of shares of certain 
unaffiliated registered management investment companies (``Replaced 
Funds'') with shares of certain Aetna-advised, registered management 
investment companies (``Substitute Funds''). Applicants also seek an 
order, pursuant to Section 17(b) of the 1940 Act, granting exemptions 
from Section 17(a) to permit Applicants to carry out the above-
referenced substitutions in part by redeeming shares of the Replaced 
Funds in-kind, and using the redemption proceeds to purchase shares of 
the Substitute Funds, and to permit Applicants to combine certain 
subaccounts holding shares of the same Substitute Fund after the 
substitutions.

FILING DATE: The application was filed on July 18, 1997, and amended 
and restated on July 24, 1997.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be

[[Page 41105]]

issued unless the Commission orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the Commission and 
serving Applicants with a copy of the request, personally or by mail. 
Hearing requests should be received by the Commission by 5:30 p.m. on 
August 19, 1997, and should be accompanied by proof of service on 
Applicants, in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 fifth 
Street, N.W., Washington, DC 20549. Applicants, c/o Julie Rockmore, 
Esquire, Aetna Life Insurance and Annuity Company, 151 Farmington 
Avenue, RE4A, Hartford, CT 06156.

FOR FURTHER INFORMATION CONTACT: Megan L. Dunphy, Attorney, or Mark 
Amorosi, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the Commission.

Applicants' Representations

    1. Aetna Annuity, a stock life insurance company incorporated in 
Connecticut, is authorized to issue life insurance and annuities in the 
District of Columbia, Guam, Puerto Rico, the Virgin Islands and all 
states of the United States. Aetna Annuity is an indirect subsidiary of 
Aetna Inc., which is a holding company with shares traded on the New 
York Stock Exchange.
    2. Aetna of America, a stock life insurance company incorporated in 
Connecticut, is authorized to do business in the District of Columbia 
and all states of the United States except New York and North Carolina. 
Aetna of America is a wholly-owned subsidiary of Aetna Annuity.
    3. Aetna Annuity's Variable Annuity Account B, Variable Annuity 
Account C and Variable Life Account B and Aetna of America's Variable 
Annuity Account I (collectively, the ``Separate Accounts'') are 
separate accounts established by Aetna pursuant to the insurance laws 
of Connecticut and are registered under the 1940 Act as unit investment 
trusts. The assets of each Separate Account support either variable 
Annuity contracts or variable life insurance policies issued by Aetna 
(``Products''). Interests in each of the Separate Accounts offered 
through such Products are registered under the Securities Act of 1933 
(``1933 Act'').
    4. The variable annuity contracts and variable life policies are 
structured to allow the accumulation of assets to fund benefits payable 
under the Products (annuity payments or life insurance proceeds). The 
assets accumulate in variable or fixed investment options. The variable 
investment options are registered management investment companies or 
separate series of those companies (``Funds''). Contributions allocated 
to a given Fund through a Product are used to buy shares of that Fund. 
The shares of each Fund are held in a separate subaccount of a Separate 
Account.
    5. Most of Aetna's variable annuity contracts are issued as group 
contracts where the owner of the contract is the employer, sponsor or 
trustee (``Sponsor'') of a group retirement plan. Members of the group 
(``Participants'') acquire an interest in the contract and have certain 
rights as determined by the group contract or the retirement plan. The 
remaining contracts are issued to or on behalf of individuals. All 
contracts allow the owners (including Sponsors) of the Product 
(``Customers'') or in the case of group contracts or policies, 
Participants, to allocate payments among the variable and fixed 
investment options available under the contract.
    6. Variable life policies issued by Aetna Annuity include 
individual variable life, second to die, corporate variable universal 
life and group variable life policies. Premium payments under the 
policies accumulate in variable and fixed investment options in the 
same manner as for variable annuity contracts. Accumulated amounts are 
used to fund death benefits and withdrawals payable under the policies.
    7. There are currently 53 different Funds offered as variable 
investment options under the various Products, of which 11 have Aetna 
Annuity as the investment adviser and its affiliate, Aeltus Investment 
Management, Inc., as the subadviser (``Aetna Funds''). The Funds are 
registered as management investment companies under the 1940 Act and 
the shares of each Fund are registered under the 1933 Act.
    8. Aetna is organizing a new management investment company, 
Portfolio Partners, Inc. (``Portfolio Partners''), which will be 
authorized to issue shares in series (``Portfolios''), each having its 
own investment objectives and policies and its own assets. Aetna will 
serve as the investment adviser of Portfolio Partners and has 
contracted with unaffiliated third parties to manage the assets of each 
series of Portfolio Partners as subadviser.
    9. Applicants propose to substitute shares of the Substitute Funds, 
five Portfolios and two Aetna Funds, for shares of the Replaced Funds, 
eleven unaffiliated Funds (see Table 1).

                     Table 1.--Funds To Be Replaced                     
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             Replaced fund                       Substitute fund        
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1. Scudder Variable Life Investment      Portfolio Partners Scudder     
 Fund--International Portfolio (Class A   International Growth          
 Shares).                                 Portfolio.                    
2. MSF Emerging Growth Series..........  Portfolio Partners MFS Emerging
                                          Equities Portfolio.           
3. MFS Research Series.................  Portfolio Partners MFS Research
                                          Growth Portfolio.             
4. MFS Value Series....................  Portfolio Partners MFS Value   
                                          Equity Portfolio.             
5. American Century VP Capital           Portfolio Partners MFS Research
 Appreciation (Formerly TCI Growth).      Growth Portfolio.             
6. Alger American Small Capitalization   Portfolio Partners MFS Emerging
 Portfolio.                               Equities Portfolio.           
7. Alger American MidCap Growth          Portfolio Partners T. Rowe     
 Portfolio.                               Price Growth Equity Portfolio.
8. Alger American Growth Portfolio.....  Portfolio Partners T. Rowe     
                                          Price Growth Equity Portfolio.
9. Neuberger & Berman AMT Growth         Portfolio Partners MFS Value   
 Portfolio.                               Equity Portfolio.             
10. Janus Aspen Short-Term Bond          Aetna Variable Encore Fund     
 Portfolio.                               (money market).               
11. Franklin Government Securities       Aetna Income Shares (bond).    
 Trust.                                                                 
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[[Page 41106]]

    10. Applicants represent that the Substitute Funds have investment 
objectives the same as, similar to, or consistent with the objectives 
of the Replaced Funds. For each of the substitutions numbered 1-4 in 
Table 1 above, the Replaced Fund and Substitute Fund are ``clone'' 
funds of the same retail fund and have the same investment objectives, 
and the investment adviser of the Replaced Fund will continue to 
provide investment advice to the Substitute Fund as a sub-adviser to 
the Fund.
    For each of the Substitutions numbered 5-9 in Table 1 above, 
Applicants state that the investment objectives of the Replaced Fund 
and Substitute Fund involved are not the same, but are substantially 
similar. For each substitution, Applicants have concluded that, the 
investment objectives of the Substitute Funds are sufficiently similar 
to those of the Replace Funds so that the investment objectives of 
Customers and Participants can be met.
    In the substitutions numbered 10 and 11 in Table 1 above, 
Applicants state that the investment objectives of the two funds, 
although different, are generally consistent. For each substitution, 
Applicants have concluded that the investment objectives are 
sufficiently consistent with those of the Replace Funds so that the 
essential investment objectives of Customers and Participants can be 
met.
    11. Applicants state that the proposed substitutions are part of an 
overall business plan of Aetna to make its Products more competitive 
and thus more attractive to Customers and more efficient to administer 
and oversee. Applicants represent that the proposed substitutions and 
related transactions will be in the best interest of Customers and 
Participants in that they will (i) continue to provide the benefits of 
third party asset management while increasing Aetna's ability to 
control the expenses associated with the management and administration 
of the Funds; (ii) replace Funds with higher than average volatility, 
performance inconsistency and/or below average performance; (iii) 
replace funds with insufficient assets to remain cost effective, and 
(iv) reduce costs and the potential for conflicts.
    12. The prospectuses for each of the registration statements 
affected by the proposed substitution will be amended to describe the 
Substitute Funds, identify which Funds are being replaced and disclose 
the impact of the Substitutions on Fund fees and expenses. The 
amendments will be distributed to all Customers and Participants.
    13. Aetna will file with the Commission a new registration 
statement on Form N-1A, registering Portfolio Partners under the 1940 
Act and registering shares in each Portfolio under the 1933 Act. 
Applicants state that copies of the Portfolio prospectuses will be 
distributed to Customers and Participants. Alternatively, Applicants 
may send summaries (Summaries) of the Portfolio prospectuses to 
Participants describing the material features of each Portfolio, 
including its investment objective and policies, risks, investment 
adviser, and to the extent applicable, past performance and a 
comparison of that performance to an appropriate index. The Summaries 
also will advise Participants that before they make any decision to 
transfer assets, they are entitled to review the Substitute Fund 
prospectuses and amendments to the prospectuses for their Products, and 
include instructions on how to obtain free copies.
    14. Applicants state that the prospectuses for the Portfolios and 
amendments to the Product prospectuses will be accompanied by notices 
to all Customers and Participants advising them of the substitutions. 
The notice will be sent to all Customers and Participants at least 60 
days prior to the date the substitutions (``Substitution Date'') will 
take place and will describe the Portfolios and their sub-advisers, the 
funds affected by the substitutions, the reasons for engaging in the 
substitutions, and the material terms and conditions of the 
substitutions. The notice also will advise Customers and Participants 
that they can transfer assets from any Replaced or Substitute Fund to 
any other funding options available under their Product, without charge 
and without limitation on the number of transfers from the date of the 
notice through a date at least 30 days following the date of the 
substitution, or withdraw assets from the Products subject to 
applicable deferred sales charges. Customers and Participants who had 
assets in Replaced Funds will be sent confirmation of the substitutions 
within five days following the Substitution Date confirming that the 
substitutions have been completed.
    15. Applicants represent that the proposed substitutions will be 
effected by redeeming shares of the Replaced Funds on the Substitution 
Date at net asset value and using the proceeds to purchase shares of 
the Substitute Funds at net asset value on the same date. No transfer 
or similar charges will be imposed by Aetna and, at all times, all 
contract and policy values will remain unchanged and fully invested.
    16. The use of in-kind redemptions and contributions will be done 
in a manner consistent with the investment objectives and policies and 
diversification requirements of the applicable Substitute Fund, and 
Aetna Annuity and each Substitute Fund's subadviser will review the in-
kind redemptions to assure that the assets proposed are suitable for 
the Substitute Fund. The assets subject to in-kind redemption and 
purchase will be valued based on the normal valuation procedures of the 
redeeming and purchasing Funds. Applicants state that any 
inconsistencies in valuation procedures between the Replaced Fund and 
the Substitute Fund will be reconciled so that the redeeming and 
purchasing values are the same.
    17. Applicants state that after the substitutions have been 
completed, in several instances, there will be two or more subaccounts 
of the same Separate Account holding shares of the same Substitute 
Fund. In any such instance, Applicants intend to combine those two 
subaccounts into a single subaccount by transferring shares from one 
subaccount to the other. The transfers will be done at net asset value 
on the same date so that there is no financial impact to any Customer 
or Participant.

Terms and Conditions of the Transactions

1. Terms

    The significant terms of the substitutions described in the 
application include:
    a. The Substitute Funds have objectives, policies and restrictions 
sufficiently similar to the objectives of the Replaced Funds so that 
the Customers' and Participants' objectives will continue to be met.
    b. Aetna will waive its fees and/or reimburse the Portfolios' 
expenses so that through April 30, 1999, the fees and expenses of the 
Portfolios will not exceed the fees and expenses set forth for those 
Funds in the application, which in all cases are less than those of the 
Replaced Funds. Aetna anticipates that after April 30, 1999, the fees 
and expenses of the Portfolios will continue to be less than or equal 
to those currently charged by the applicable Replaced Funds, assuming 
that the asset levels of the Portfolios do not decrease significantly.
    c. Customers may transfer assets from the Replaced or Substitute 
Funds to any other Fund available under their Product without any 
charge from the

[[Page 41107]]

date of notice through a date at least 30 days following the 
Substitution Date.
    d. The substitutions, in all cases, will be effected at the net 
asset value of the respective shares in conformity with Section 22(c) 
of the 1940 Act and Rule 22c-1 thereunder, without the imposition of 
any transfer or similar charge by Aetna.
    e. The substitution will take place at relative net asset value 
with no change in the amount of any Customer's or Participant's 
contract or policy value or in the dollar value of his or her 
investment in such contract or policy. Customers and participants will 
not incur any fees or charges as a result of the proposed 
substitutions, nor will their rights or Aetna's obligations under the 
contracts be altered in any way. All expenses incurred in connection 
with the proposed substitutions, including legal, accounting and other 
fees and expenses, will be paid by Aetna. The proposed substitutions 
will not cause the contract fees and charges currently being paid by 
existing Customers and Participants to be greater after the proposed 
substitutions than before the proposed substitutions.
    f. Redemptions in-kind will be done in a manner consistent with the 
investment objectives and policies and diversification requirements of 
the applicable Substitute Fund and Aetna Annuity and each Substitute 
Fund's subadviser will review the in-kind redemptions to assure that 
the assets proposed for the Fund are suitable for the Substitute fund. 
Consistent with Rule 17a-7(d) under the 1940 Act, no brokerage 
commissions, fees (except customary transfer fees) or other 
remuneration will be paid in connection with the in-kind transactions.
    g. The substitutions will not be counted as new Fund selections in 
determining the limit on the total number of Funds that Customers and 
Participants can select during the life of a Product.
    h. The substitutions will not alter in any way the annuity or life 
benefits, tax benefits or any contractual obligations of Aetna under 
the Products.
    i. Customers and Participants may withdraw amounts under the 
Products or terminate their interest in a Product, under the conditions 
that currently exists, including payment of any applicable deferred 
sales charge.
    j. Customers and Participants affected by the substitutions will be 
sent confirmation of the substitutions within five days following the 
Substitution Date identifying each substitution made on behalf of that 
Customer or Participant.

2. Conditions

    The substitutions described in the application will not be 
completed unless all of the following conditions are met:
    a. The Commission will have issued an order approving the 
substitutions under Section 26(b) of the 1940 Act.
    b. The Commission will have issued an order exempting the in-kind 
redemptions and the combination of subaccounts from the provisions of 
section 17(a) of the 1940 Act as necessary to carry out the 
substitutions as described in the application.
    c. The Commission will have declared effective the amendments to 
the registration statements for the Products describing the 
substitutions.
    d. The Commission will have declared the registration statement for 
Portfolio Partners and its Portfolios effective.
    e. Each Customer will have been sent a copy of the effective 
prospectuses for the Substitute Funds and the effective amendments to 
the applicable Product prospectus.
    f. Aetna will have satisfied itself, based on advice of counsel 
familiar with insurance laws, that the contracts involved in all the 
Products allow the substitutions of Funds as described in the 
application and that the transactions can be consummated as described 
herein under applicable insurance laws and under the various contracts 
and policies governing the Products.
    g. Aetna will have complied with any regulatory requirements it 
believes necessary to complete the transactions in each jurisdiction 
where the Products are qualified for sale.
    h. Aetna will have sent to Customers and Participants at least 60 
days prior to the Substitution Date a notice, describing the terms of 
the substitutions and of Customers' and Participant's rights in 
connection with them.
    i. Participants will have been sent amendments to the Product 
prospectuses and either prospectuses for the Portfolios or Summaries of 
them with written instructions on how to request a Portfolio 
prospectus, as provided in the relief granted to Aetna by the staff of 
the Commission. See Aetna Life Insurance and Annuity Company (pub. 
avail. Jan. 6, 1997).

Applicants' Legal Analysis

    1. Section 26(b) of the 1940 Act provides, in pertinent part, that 
``[i]t shall be unlawful for any depositor or trustee of a registered 
unit investment trust holding the security of a single issuer to 
substitute another security for such security unless the Commission 
shall have approved such substitution.'' Section 26(b) of the 1940 Act 
also provides that the Commission shall issue an order approving such 
substitution if the evidence establishes that the substitution is 
consistent with the protection of investors and the purposes fairly 
intended by the policies and provisions of the 1940 Act.
    2. Applicants request an order pursuant to section 26(b) of the 
1940 Act approving the substitutions and related transactions. 
Applicants assert that the purposes, terms, and conditions of the 
proposed substitutions are consistent with the protection of investors 
and the purposes fairly intended by the 1940 Act. Applicants further 
assert that the proposed substitutions will not result in the type of 
costly forced redemption that section 26(b) was intended to guard 
against.
    3. Section 17(a)(1) of the 1940 Act prohibits any affiliated 
person, or an affiliate of an affiliated person, of a registered 
investment company, from selling any security other property to such 
registered investment company. Section 17(a)(2) of the 1940 Act 
prohibits any affiliated person from purchasing any security or other 
property from such registered investment company.
    4. Applicants state that redemptions and purchases in-kind involve 
the purchase of property from a registered investment company and the 
sale of property to a registered investment company by Aetna, an 
affiliated person of those investment companies. Similarly, in 
instances where Aetna combines two subaccounts into a single subaccount 
holding shares of the same Substitute Fund, the transfer of property 
could be said to involve purchase and sale transactions between the 
subaccounts by an affiliated person of each separate account.
    5. Applicants request an order pursuant to section 17(b) of the 
1940 Act exempting the in-kind redemptions and purchases and the 
combination of certain subaccounts from the provisions of Section 
17(a). Section 17(b) of the 1940 Act provides that the Commission may 
grant an order exempting a proposed transaction from Section 17(a) if 
evidence establishes that: (1) The terms of the proposed transaction, 
including the consideration to be paid or received, are reasonable and 
fair and do not involve overreaching on the part of any person 
concerned; (2) the proposed transaction is consistent with the policy 
of each registered investment company concerned; and (3) the proposed 
transaction is consistent with the general purposes of the 1940 Act.

[[Page 41108]]

    6. Applicants represent that the terms of the in-kind redemptions 
and purchases are reasonable and fair and do not involve overreaching 
on the part of any person concerned and that the interest of Customers 
and Participants will not be diluted. The in-kind redemptions and 
purchases will be done at values consistent with the policies of both 
the Replaced and Substitute Funds. Both Aetna and the proposed 
subadviser of the Substitute Funds will review all the asset transfers 
to assure that the assets meet the objectives of the Substitute Fund 
and that they are valued under the appropriate valuation procedures of 
the Replace Funds and the Substitute Fund. In-kind redemptions and 
purchases will reduce the brokerage costs that would otherwise be 
incurred in connection with the substitutions. The Applicants represent 
that the transactions are consistent with the policies of each 
investment company involved and the general purposes of the 1940 Act, 
and comply with the requirements of section 17(b).
    7. Applicants represent that the combination of subaccounts is 
intended to reduce administrative costs and thereby benefit Customers 
with assets in those subaccounts. The purchase and sale transactions 
described in the application will be effected based on the net asset 
value of the Fund shares held in the subaccounts and the value of the 
units of the subaccount involved. Therefore, there will be no change in 
value to any Customer or Participant.

Conclusion

    Applicants assert that, for the reasons summarized above, the 
requested order approving the substitution and related transactions 
involving in-kind redemptions and the combination of certain separate 
account subaccounts should be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-20171 Filed 7-30-97; 8:45 am]
BILLING CODE 8010-01-M