```

[Federal Register Volume 65, Number 221 (Wednesday, November 15, 2000)]
[Notices]
[Pages 69073-69079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29178]

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

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24733; File No. 812-12104]

New England Life Insurance Company, et al.; Notice of Application

November 8, 2000.
AGENCY: The Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to section 26(b) of 
the Investment Company Act of 1940 (the ``1940 Act'') approving a 
substitution of securities, and pursuant to Section 17(b) of the 1940 
Act exempting related transactions from section 17(a) of the 1940 Act

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

    Applicants: New England Life Insurance Company (``NELICO''), New 
England Variable Annuity Separate Account (``Separate Account 1''), New 
England Variable Life Separate Account (``Separate Account 2''), 
Metropolitan Life Insurance Company (``MetLife''), The New England 
Variable Account (``Separate Account 3,'' and collectively with 
Separate Account 1 and Separate Account 2, the ``Separate Accounts''), 
the Metropolitan Series Fund, Inc. (the ``Metropolitan Series''), and 
the New England Zenith Fund (the ``Zenith Fund''). (NELICO, MetLife and 
the Separate Accounts are collectively referred to herein as the 
``Section 26 Applicants.'' The Section 26 Applicants, the Metropolitan 
Series, and the Zenith Fund are collectively referred to herein as the 
``Section 17(b) Applicants.'')

SUMMARY OF APPLICATION: The Section 26 Applicants request an order 
pursuant to section 26(b) of the 1940 Act to permit certain registered 
unit investment trusts to substitute shares of the Putnam International 
Stock Portfolio (the ``Replacement Portfolio'') of the Metropolitan 
Series for shares of the Morgan Stanley International Magnum Equity 
Series (the ``Substituted Portfolio'') of the Zenith Fund currently 
held by those unit investment trusts. The Section 17(b) Applicants 
request an order pursuant to section 17(b) of the 1940 Act to permit 
certain in-kind redemptions and purchases in connection with the 
substitution.
    Filing Date: The application was filed on May 17, 2000, and amended 
and restated on November 8, 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 November 30, 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 may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o Thomas Lenz, 
Esq. and Marie C. Swift, Esq., New England Life Insurance Company, 501 
Boylston Street, Boston, Massachusetts 02116.

FOR FURTHER INFORMATION CONTACT: Keith A. O'Connell, Senior Counsel, or 
Lorna J. MacLeod, 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 Public Reference Branch of the Commission, 450 5th Street, NW., 
Washington, DC 20549 (tel. (202) 942-8090).

Applicants' Representations

    1. NELICO is a life insurance company that is domiciled in 
Massachusetts. Its operations include both life insurance and annuity 
products as well as financial and retirement services. As of December 
31, 1999, NELICO had assets of approximately $7.1 billion. NELICO is 
authorized to operate as a life insurance company in all states, the 
District of Columbia, and Puerto Rico. NELICO was originally organized 
as New England Variable Life Insurance

[[Page 69074]]

Company, a stock life insurance company, in Delaware in 1980, and was a 
wholly owned subsidiary of New England Mutual Life Insurance Company. 
On August 30, 1996, New England Mutual Life Insurance Company merged 
with and into MetLife. MetLife became the parent of New England 
Variable Life Insurance Company, which changed its name to ``New 
England Life Insurance Company,'' and changed its domicile from the 
State of Delaware to the Commonwealth of Massachusetts. NELICO is the 
depositor and sponsor of Separate Account 1 and Separate Account 2.
    2. Separate Account 1 is a separate investment account of NELICO 
and is registered under the 1940 Act as a unit investment trust. 
Separate Account 1 serves as funding vehicle for certain variable 
annuity contracts issued by NELICO (collectively, ``NELICO VA 
Contracts''). Separate Account 1 is a separate account as that term is 
defined in Section 2(a)(37) of the 1940 Act.
    3. Separate Account 2 is a separate investment account of NELICO 
and is registered under the 1940 Act as a unit investment trust. 
Separate Account 2 services as a funding vehicle for certain variable 
life insurance contracts issued by NELICO (collectively, ``NELICO Life 
Contracts''). Separate Account 2 is a separate account as that term is 
defined in Section 2(a)(37) of the 1940 Act.
    4. MetLife is a life insurance company that is domiciled in New 
York, and is a wholly owned subsidiary of MetLife, Inc., a publicly 
traded company. MetLife is the depositor and sponsor of Separate 
Account 3.
    5. Separate Account 3 is a separate investment account of MetLife 
and is registered under the 1940 Act as a unit investment trust. 
Separate Account 3 serves as a funding vehicle for certain variable 
annuity contracts originally issued by New England Mutual Life 
Insurance Company, and subsequent to its merger with an into MetLife, 
by MetLife (``MetLife VA Contracts'') (collectively with the NELICO VA 
Contracts and the NELICO Life Contracts, the ``Variable Contracts''). 
Separate Account 3 is a separate account as that term is defined in 
Section 2(a)(37) of the 1940 Act.
    6. New England Securities Corporation (``NES'') serves as principal 
underwriter and distributor for the Variable Contracts. NES is an 
indirect wholly owned subsidiary of NELICO. NES is registered as a 
broker-dealer under the Securities Exchange Act of 1934 and is a member 
of the National Association of Securities Dealers, Inc. NES may enter 
into selling agreements with other broker-dealers registered under the 
Securities Exchange Act of 1934 whose representatives are authorized by 
applicable law to sell the Variable Contracts.
    7. NELICO and MetLife propose to substitute shares of the 
Replacement Portfolio for shares of the Substituted Portfolio in the 
Separate Accounts (the ``Substitution''). NELICO and MetLife have 
expressly reserved the right to substitute shares of one portfolio for 
shares of another, including a portfolio of a different investment 
company. The prospectus for each contract discloses this reservation.
    8. The terms of the NELICO VA Contracts, NELICO Life Contracts, and 
MetLife VA Contracts funded by Separate Account 1, 2 and 3, 
respectively, permit owners of a contract to transfer contract value 
under the contracts among the subaccounts during the accumulation 
period. Separate Accounts 1 and 3 permit owners of a contract to 
exchange annuity units in any subaccount to any other subaccount during 
the annuity period. NELICO and MetLife have reserved the right to limit 
transfers or to impose a charge in connection with a transfer during 
the accumulation period. For Separate Account 1, NELICO has not yet 
imposed any such limit or charge. Exchanges of annuity units in any 
subaccount to any other subaccount after annuitization are limited to 
one per contract year. For Separate Account 2, on all but one of the 
NELICO Life Contracts, NELICO does not currently limit or impose a 
charge on transfers. On one NELICO Life Contract, NELICO currently 
imposes a charge on transfers in excess of 12 in a policy year. For 
Separate Account 3, MetLife currently allows 12 free transfers per year 
during the accumulation period. Additional transfers are subject to a 
$10 charge per transfer. Exchanges of annuity units in any subaccount 
to any other subaccount after annuitization are limited to one per 
contract year.
    9. The Zenith Fund is registered as an open-end management 
investment company under the 1940 Act (File No. 811-3728) and currently 
offers sixteen separate investment portfolios, one of which is the 
Substituted Portfolio. The Zenith Fund issues a separate series of 
shares of beneficial interest in connection with each portfolio, and 
has registered such shares under the Securities Act of 1933 (``1933 
Act'') on Form N-1A (File No. 2-83538). New England Investment 
Management, Inc. (``NEIM'') serves as the investment manager to each 
portfolio except the Capital Growth Series, which is managed by Capital 
Growth Management. NEIM is an indirect wholly owned subsidiary of 
NELICO. NEIM receives an investment advisory fee from each portfolio it 
manages. NEIM has contracted with subadvisers to make the day-to-day 
investment decision for all portfolios it manages. Subadvisers are 
compensated by NEIM, and not by the Zenith Fund. NEIM derives the 
amounts that it pays the subadvisers from its own investment advisory 
fees. Morgan Stanley Asset Management (``MSAM'') is the subadviser to 
the Substituted Portfolio.
    10. The Metropolitan Series is registered as an open-end management 
investment company under the 1940 Act (File No. 811-3618) and currently 
offers 18 separate investment portfolios, one of which is the 
Replacement Portfolio. The Metropolitan Series issues a separate series 
of shares of beneficial interest in connection with each portfolio, and 
has registered such shares under the 1933 Act on Form N-1A (File No. 2-
80751). The Replacement Portfolio became available for investment under 
the Contracts on May 1, 2000. MetLife serves as the investment manager 
to each portfolio, for which it receives investment advisory fees. 
MetLife has contracted with subadvisers to make the date-to-day 
investment decisions for certain portfolios it manages, including the 
Replacement Portfolio. Subadvisers are compensated by MetLife, and not 
by the Metropolitan Series. MetLife derives the amounts that it pays 
the subadvisers from its one investment advisory fees.
    11. Putnam Investment Management, Inc. (``Putnam'') currently 
serves as the subadviser for the Replacement Portfolio. All of the 
outstanding voting and nonvoting securities of Putnam are held of 
record by Putnam Investments, Inc., which is, in turn, except for a 
minority interest owned by employees, owned by Marsh & McLennan 
Companies, Inc., a New York Stock Exchange listed public company whose 
business is insurance brokerage, investment management, and consulting. 
From November 9, 1998 until January 24, 2000, Santander Global 
Advisors, Inc. (``Santander'') was the subadviser for the Replacement 
Portfolio (then known as the Santander International Stock Portfolio). 
On November 29, 1999, Santander notified the Replacement Portfolio that 
is was resigning as subadviser as of January 28, 2000, and was being 
closed by its ultimate majority shareholder. On January 11, 2000, the 
Board of Directors of the Metropolitan Series (the ``Met Series 
Board'') voted to terminate the sub-investment management agreement 
with Santander relating to the

[[Page 69075]]

Replacement Portfolios effective January 24, 2000. The Met Series Board 
also voted to retain Putnam as the new subadviser for the Replacement 
Portfolio effective the same date. The shareholders of the Replacement 
Portfolio approved Putnam as the new subadviser at a special meeting of 
shareholders on March 31, 2000.
    12. The following chart sets out the investment objectives and 
certain policies of the Substituted Portfolio and the Replacement 
Portfolios, as stated in their respective prospectuses and statements 
of additional information.

------------------------------------------------------------------------
       Substituted portfolio                Replacement portfolios
------------------------------------------------------------------------
Morgan Stanley International Magnum  Putnam International Stock
 Equity Series of Zenith Fund         Portfolio of Metropolitan Series
Investment Objective:                Investment Objective:
    Long-term capital appreciation   Long-term growth of capital.
     through investment primarily
     in international equity
     securities.
Investment Policies:                 Investment Policies:
    MSAM invests the Series' assets  The Portfolio normally invests
     in a diversified portfolio of    mostly in the common stocks of
     equity securities of foreign     companies outside the United
     issuers domiciled in EAFE        States. Putnam selects countries
     countries. MSAM may also         and industries it believes are
     invest up to 5% of the Series'   attractive. Putnam then seeks
     total assets in non-EAFE         stocks offering opportunity for
     countries, including emerging    gain. These may include both
     markets. MSAM seeks to achieve   growth and value stocks. The
     superior long-term returns by    Portfolio invests mainly in mid-
     creating a diversified           sized and large companies,
     portfolio of stock that MSAM     although the Portfolio can invest
     believes are undervalued. To     in companies of any size. The
     achieve this goal, MSAM          Portfolio will usually be invested
     implements a combination of      in issuers located in at least
     strategic geographic assets      three countries, not including the
     allocation and fundamental,      U.S. Under normal conditions, the
     value-oriented stock selection   Portfolio will not invest more
     implemented by regional          than 15% of its net assets in the
     experts around the globe.        equity securities of companies
                                      domiciled in ``emerging
                                      countries,'' as defined by Morgan
                                      Stanley Capital International.
------------------------------------------------------------------------

    13. The following chart compares the fees payable for advisory and 
subadvisory services, expressed as an annual percentage of average 
daily net assets, by the Substituted Portfolio and the Replacement 
Portfolio.

----------------------------------------------------------------------------------------------------------------
                     Substituted portfolio                                    Replacement portfolio
----------------------------------------------------------------------------------------------------------------
       Morgan Stanley International Magnum Equity Series              Putnam International Stock Portfolio
----------------------------------------------------------------------------------------------------------------
         Annual advisory fees          Annual subadvisory fees    Annual advisory fees   Annual subadvisory fees
----------------------------------------------------------------------------------------------------------------
0.90%................................  0.75% of the first $30   0.90% of the first $500  0.65% of the first $150
                                        million.                 million.                 million
                                       0.60% of the next $40     0.85% of the next $500   0.55% of the next $150
                                        million.                 million.                 million
                                       0.45% of the next $30     0.80% over $1 billion.   0.45% over $300
                                        million.                                          million.
                                        0.40% over $100
                                        million.
----------------------------------------------------------------------------------------------------------------

    14. The following chart compares the total operating expenses 
(before and after any waivers and reimbursements) for the year ended 
December 31, 1999, expressed as an annual percentage of average daily 
net assets, of the Substituted Portfolio and the Replacement Portfolio. 
Neither Portfolio has adopted any plan pursuant to Rule 12b-1 under the 
1940 Act.

----------------------------------------------------------------------------------------------------------------
                                                                 Substituted portfolio    Replacement portfolio
                                                               -------------------------------------------------
                                                                     Morgan Stanley
                                                                  International Magnum     Putnam International
                                                                   Equity Series  (in      Stock Portfolio  (in
                                                                        percent)                 percent)
----------------------------------------------------------------------------------------------------------------
Management Fees...............................................                     0.90                     0.90
Other Expenses................................................                     0.40                     0.22
                                                               -------------------------------------------------
    Total Operating Expenses..................................                     1.30                     1.12
Less Expense Waivers and Reimbursements.......................                    (\1\)                    (\1\)
                                                               -------------------------------------------------
    Net Operating Expenses....................................                     1.30                    1.12
----------------------------------------------------------------------------------------------------------------
\1\ N/A.

Total operating expenses for the Replacement Portfolio have been 
adjusted to reflect a higher management fee that shareholders of the 
Replacement Portfolio approved on March 31, 2000. NEIM has voluntarily 
agreed to reduce its fees or to bear the operating expenses (other than 
brokerage costs, interest, taxes, or extraordinary expenses) of the 
Substituted Portfolio in excess of an annual expense limit of 1.30% of 
the Series' average daily net assets. This reduction is subject to the 
obligation of the Series to repay NEIM such expenses in future years, 
if any, when the Series' total operating expenses fall below this 
stated expense limit. Such deferred expenses may be charged to the 
Series in a subsequent year to the extent the charge does not cause the 
Series' total operating expenses in such subsequent year to exceed the 
1.30% expense limit. The Series, however, is not obligated to repay any 
expense paid by NEIM more

[[Page 69076]]

than two years after the end of the fiscal year in which such expense 
was incurred. NEIM may discontinue this expense limitation arrangement 
at any time.
    15. The following table compares the respective asset levels of the 
two portfolios as of December 31, 1999, and compares performance data 
as of June 30, 2000.

----------------------------------------------------------------------------------------------------------------
                                                                   Asset levels (as  Performance (as of June 30,
             Portfolio                     Fund Subadviser           of 12/31/99)               2000)
----------------------------------------------------------------------------------------------------------------
Morgan Stanley International Magnum  Morgan Stanley Asset               $99,851,167  1 YEAR: 15.5%
 Equity Series (substituted           Management.                                    3 YEAR: 6.2%
 portfolio).                                                                         5 YEAR: 7.8%
                                                                                     (Nov. 1, 1994)
Putman International Stock           Putnam Investment                 $317,831,000  1 YEAR: 11.4%
 Portfolio (replacement portfolio).   Management, Inc..                              3 YEAR: 7.1%
                                                                                     5 YEAR: 7.3%
                                                                                     (May 1, 1991)
----------------------------------------------------------------------------------------------------------------

    16. Following the Substitution, the Separate Accounts will each 
have two subaccounts holding shares of the Replacement Portfolio. The 
Separate Accounts will each combine the two subaccounts holding shares 
of the Replacement Portfolio by transferring shares on the same date 
from one of the subaccounts holding shares of the Replacement Portfolio 
to the other subaccount holding shares of the Replacement Portfolio. 
The net effect will be to eliminate one of the subaccounts in each 
Separate Account. The Replacement Portfolio would receive monies or 
inkind securities from the Substituted Portfolio as a result of the 
Substitution.
    17. NELICO and MetLife will effect the Substitution on or about 
December 1, 2000 following the issuance of the requested order as 
follows. As of the effective date of the Substitution (``Effective 
Date''), shares of the Substituted Portfolio will be redeemed in cash 
or in-kind by NELCO and MetLife. The proceeds of such redemptions will 
than be used to purchase shares of the Replacement Portfolio either by 
cash purchases or in-kind purchases, with each subaccount of the 
Separate Accounts investing the proceeds of its redemption from the 
Substituted Portfolio in the Replacement Portfolio.
    18. Applicants represent that the in-kind redemptions and purchases 
will be transacted in a manner consistent with the policies of both the 
Substituted Portfolio and the Replacement Portfolio, as recited in 
their registration statements. Putnam will review the securities 
holdings of the Substituted Portfolio and determine which portfolio 
holdings of the Substituted Portfolio would be suitable investments for 
the Replacement Portfolio in the overall context of such Portfolio's 
investment objectives and policies and consistent with the management 
of the Replacement Portfolio.
    19. Applicants represent that all redemptions of shares of the 
Substituted Portfolio and purchases of shares of the Replacement 
Portfolio will be effected in accordance with Rule 22c-1 of the 1940 
Act. The Substitution will take place at relative net asset value with 
no change in the amount of any Variable Contract owner's contract value 
or death benefit or in the dollar value of his or her investments in 
any of the subaccounts. Applicants represent that Variable Contract 
owners will not incur any additional fees or charges as a result of the 
Substitution, nor will their rights or NELICO's and MetLife's 
obligations under the Variable Contracts be altered in any way. All 
expenses incurred in connection with the Substitution, including legal, 
accounting, transactional, and other fees and expenses, including 
brokerage commissions, will be paid by NELICO and MetLife. In addition, 
Applicants represent that the Substitution will not impose any tax 
liability on Variable Contract owners. The Substitution will not cause 
the Variable Contract fees and charges currently paid by existing 
Variable Contract owners to be greater after the Substitution than 
before the Substitution. Neither NELICO nor MetLife will exercise any 
right it may have under the Variable Contracts to impose restrictions 
on transfers under the Variable Contracts for a period of at least 
thirty days following the Substitution.
    20. The Section 26 Applicants represent that the procedures to be 
implemented are sufficient to assure that each Variable Contract 
owner's cash values immediately after the Substitution shall be equal 
to the cash value immediately before the Substitution, and that the 
Substitution will not affect the value of the interests of those owners 
of other NELICO and MetLife variable contracts (other than the Variable 
Contracts) who currently have contract value allocated to any of the 
portfolios of the Zenith Fund or Metropolitan Series.
    21. For each period (not to exceed a fiscal quarter) during the 24 
months following the date of the Substitution, NELICO and MetLife will 
reimburse (on the last business day of any such period) any subaccount 
available through a Variable Contract and investing in the Replacement 
Portfolio such that the sum of the Replacement Portfolio operating 
expenses (taking into account expense waivers and reimbursements) 
together with subaccount expenses for such period on an annualized 
basis will not exceed the following limits (which equal, for each 
Variable Contract, the Substituted Portfolio operating expenses, 1.30%, 
together with any subaccount expenses for the fiscal year prior to the 
Substitution) for those Variable Contract owners who were Variable 
Contract owners on the date of the Substitution. \1\
---------------------------------------------------------------------------

    \1\ Subaccount expenses refer to those asset-based expenses that 
are deducted on a daily basis from subaccount assets, and either 
reflected in the calculation of the subaccount unit values (for 
``unitized'' Variable Contracts) or deducted as a percentage of a 
Variable Contract's share of subaccount assets (for ``non-unitized'' 
Variable Contracts). Examples of subaccount expenses may include the 
morality and expense risk charge or administrative charge.

[[Page 69077]]

------------------------------------------------------------------------
                                                            Expense cap
                    Variable contract                      (in percent)
------------------------------------------------------------------------
NELICO American Growth Series--Version I................            2.65
NELICO American Growth Series--Version II...............            2.70
NELICO American Forerunner Series.......................            2.30
NELICO Zenith Life One..................................            1.75
NELICO Zenith Flexible Life.............................            1.90
NELICO Zenith Variable Whole Life.......................            1.90
NELICO Zenith Survivorship Life.........................            2.05
NELICO Zenith Survivorship Life Plus....................            1.30
NELICO Zenith Gateway Series............................            1.30
NELICO Zenith Life......................................            1.65
NELICO Zenith Life Plus.................................            1.90
NELICO Zenith Life Executive 65.........................            1.90
NELICO Zenith Executive Advantage Plus..................            1.30
NELICO Zenith Executive Advantage 2000..................            1.30
NELICO Zenith Life Plus II..............................            1.90
MetLife Zenith Accumulator..............................            2.65
------------------------------------------------------------------------

    In addition, for those Variable Contract owners who owned a 
Variable Contract for which morality and expense risk charges are not 
subaccount expenses (i.e., NELICO Zenith Survivorship Life Plus, NELICO 
American Gateway Series, NELICO Zenith Executive Advantage Plus, or 
NELICO Zenith Executive Advantage 2000) on the date of the 
Substitution, NELICO will not increase current mortality and expense 
risk charges for a period of 24 months following the date of 
Substitution.
    22. Applicants represent that from the date the application is 
filed with the Commission to the date 30 days after the Effective Date, 
Variable Contract owners will have the right to make one transfer of 
contract value from the subaccounts invested in the Substituted 
Portfolio (before the Substitution) or the Replacement Portfolio (after 
the Substitution) to any other subaccount without charge and without 
that transfer counting toward the number permitted under the Variable 
Contract (regardless of whether during the accumulation period or the 
annuity period). Each Variable Contract owner has received a prospectus 
supplement and will, prior to the Effective Date, have received a 
prospectus for the Replacement Portfolio and a Pre-Substitution Notice 
(in the form of an additional prospectus supplement) regarding the 
Substitution.
    23. Variable Contract owners were notified of the initial 
application by means of a supplement to the prospectus for each of the 
Variable Contracts dated March 17, 2000 that disclosed that the Section 
26 Applicants intended to file the application and seek approval for 
the Substitution.
    24. Following the date on which this notice for the order requested 
by the Section 26 Applicants is published, but before the Effective 
Date, a notice (``Pre-Substitution Notice''), in the form of an 
additional supplement to the prospectuses for the Variable Contracts, 
will be mailed to Variable Contract owners setting forth the scheduled 
Effective Date and advising Variable Contract owners that contract 
values attributable to investments in the Substituted Portfolio will be 
transferred to the Replacement Portfolio, without charge and, when 
relevant, without counting toward the number of transfers permitted 
without charge, on the Effective Date. The Pre-Substitution Notice will 
state that, from the date the application was filed with the Commission 
through the date 30 days after the substitution, Variable Contract 
owners may make one transfer of contract value from the subaccount 
corresponding to the Substituted Portfolio (before the Substitution) or 
the Replacement Portfolio (after the Substitution) to any other 
subaccount without charge and without that transfer counting toward the 
number permitted without charge under the Variable Contract. In 
addition, within five days after the Substitution, any Variable 
Contract owners who were affected by the Substitution will sent a 
written notice informing them that the Substitution was carried out and 
advising them of their transfer rights (``Post-Substitution Notice'').

Applicant's Legal Analysis

    1. Section 26(b) of the 1940 Act prohibits any depositor or trustee 
of a unit investment trust that invests exclusively in the securities 
of a single issuer from substituting the securities of another issuer 
without the approval of the Commission. Section 26(b) provides that 
such approval shall be granted by order of the Commission, if the 
evidence establishes that the substitution is consistent with the 
protection of investors and the purposes of the 1940 Act.
    2. Section 26(b) was intended to provide for Commission scrutiny of 
proposed substitutions which could, in effect, force shareholders 
dissatisfied with the substitute security to redeem their shares, 
thereby possibly incurring a loss of the sales load deducted from 
initial purchase payments, an additional sales load upon reinvestment 
of the proceeds of redemption, or both. The section was designed to 
forestall the ability of a depositor to present holders of interest in 
a unit investment trust with situations in which a holder's only choice 
would be to continue an investment in an unsuitable underlying 
security, or to elect a costly and, in effect, forced redemption. The 
Section 26 Applicants assert that the Substitution meets the standards 
set forth in section 26(b) and that, if implemented, the Substitution 
would not raise any of the aforementioned concerns that Congress 
intended to address when the 1940 Act was amended to include this 
provision.
    3. Applicants assert that the replacement of the Substituted 
Portfolio with the Replacement Portfolio is consistent with the 
protection of Variable Contract owners and the purposes fairly intended 
by the policy and provisions of the 1940 Act and, thus, meets the 
standards necessary to support an order pursuant to section 26(b) of 
the 1940 Act. Applicants also assert that the investment objectives and 
policies of the Replacement Portfolio are sufficiently similar to those 
of the Substituted Portfolio so that Variable Contract owners will have 
reasonable continuity in investment and risk expectations. In addition, 
Applicants assert that the types of investment advisory and 
administrative services provided to the Replacement Portfolio are 
comparable to the types of investment advisory and administrative 
services provided to the Substituted Portfolio.
    4. Applicants state that the Substitution is part of efforts by 
NELICO

[[Page 69078]]

and MetLife to make their Variable Contracts more efficient to 
administer and oversee and, thus, more cost-efficient and attractive to 
customers. The Applicants assert that replacing the Substituted 
Portfolio with the Replacement Portfolio (in essence, combining 
Variable Contract owner assets attributable to an international 
investment option into one mutual fund) is appropriate and in the best 
interests of Variable Contract owners. Applicants assert that the 
proposed Substitution will provide Variable Contract owners with (i) an 
underlying portfolio having lower expense ratios with the expectation 
that, after the Substitution, the ratios will remain lower, (ii) a 
portfolio subadvised by Putnam, which has achieved competitive 
historical portfolio performance in other international funds and is 
experienced in managing international funds, and (iii) a portfolio with 
good prospects for growth.
    5. Section 17(a)(1) and (a)(2) of the 1940 Act generally prohibit 
any affiliated person of a registered investment company, or any 
affiliated person of an affiliated person, from selling any security or 
other property to such registered investment company and from 
purchasing any security or other property from such registered 
investment company. NELICO and MetLife anticipate that, to the extent 
Putnam determines at that time that portfolio holdings of the 
Substituted Portfolio would be suitable investments for the Replacement 
Portfolio in the overall context of such portfolios's investment 
objectives and policies and consistent with its management of the 
Replacement Portfolio, the Substitution will be done by redeeming 
shares of the Substituted Portfolio in-kind rather than in cash and 
then using those assets to purchase shares of the Replacement 
Portfolio. 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 and the sale of property to a 
registered investment company by NELICO and MetLife, each an affiliated 
person of those investment companies. The Substitution, therefore, may 
be deemed to involve one or more purchases or sales of securities or 
property between affiliates. The Section 17(b) Applicants request that 
the Commission issue an order pursuant to section 17(b) of the 1940 Act 
exempting the Substitution from the provisions of section 17(a) to the 
extent necessary to permit the Substitution effected, in part, by means 
of in-kind redemptions and purchases of shares, and also by means of 
in-kind transactions.
    6. Section 17(b) of the Act authorizes the Commission may, upon 
application, exempt a proposed transaction from the prohibitions of 
Section 17(a) if the evidence establishes that:
    (i) The terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned;
    (ii) The proposed transaction is consistent with the policy of each 
registered investment company concerned, as recited in its registration 
statement and records filed under the 1940 Act; and
    (iii) The proposed transaction is consistent with the general 
purposes of the 1940 Act.
    7. NELICO and MetLife assert that the terms under which the in-kind 
redemptions and purchases will be affected are reasonable and fair and 
do not involve overreaching on the part of any person. Applicants state 
that the use of in-kind redemptions of such subaccounts is intended to 
reduce costs and thereby benefit Variable Contract owners. The 
transactions will not cause Variable Contract owner interests to be 
diluted. The proposed transactions will take place at relative net 
asset value in conformity with the requirements of Section 22(c) of the 
1940 Act and Rule 22c-1 thereunder with no change in the amount of any 
Variable Contract owner's contract value or death benefit or in the 
dollar value of his or her investment in any of the Separate Accounts.
    8. Applicants represent that the in-kind redemptions and purchases 
will be transacted in a manner consistent with the policies of both the 
Substituted Portfolio and the Replacement Portfolio, as recited in 
their registration statements. Putnam will review the securities 
holdings of the Substituted Portfolio and determine which portfolio 
holdings of the Substituted Portfolio would be suitable investments for 
the Replacement Portfolio in the overall context of such Portfolio's 
investment objectives and policies and consistent with the management 
of the Replacement Portfolio.
    9. Applicants assert that the Substitution, as described herein, is 
consistent with the general purposes of the 1940 Act. The proposed 
transactions do not present any of the conditions or abuses that the 
1940 Act was designed to prevent. Securities to be paid out as 
redemption proceeds and subsequently contributed to the Replacement 
Portfolio to effect the contemplated in-kind purchases of shares will 
be valued based on the normal valuation procedures of the redeeming 
Substituted Portfolio and purchasing Replacement Portfolio.

Applicants' Conditions

    For purposes of the approval sought pursuant to Section 26(b) of 
the 1940 Act, the Substitution described in this amendment and restated 
application will not be completed, unless all of the following 
conditions are met.
    1. The Commission shall have issued an order (i) approving the 
Substitution under Section 26(b) of the 1940 Act, and (ii) exempting 
any in-kind redemptions and purchases from the provisions of section 
17(a) of the 1940 Act as necessary to carry out the transactions 
described in this amended and restated application.
    2. Each Variable Contract owner will have been sent (i) a copy of 
the effective prospectus relating to the Replacement Portfolio and any 
necessary amendments to the prospectuses relating to the Variable 
Contracts, (ii) as soon as reasonably possible after the notice for the 
order has been published and prior to the Effective Date, a Pre-
Substitution Notice describing the terms of the Substitution and the 
rights of the Variable Contract owners in connection with the 
Substitution, and (iii) if affected by the Substitution, a Post-
Substitution Notice within five days after the Substitution informing 
them that the Substitution was carried out and advising them of their 
transfer rights.
    3. NELICO and MetLife shall have satisfied themselves that (i) the 
Variable Contracts allow the substitution of portfolios in the manner 
contemplated by the Substitution and related transactions described in 
the application, (ii) the transactions can be consummated as described 
in the amended and restated application under applicable insurance 
laws, and (iii) that any applicable regulatory requirements in each 
jurisdiction where the Variable Contracts are qualified for sale, have 
been complied with to the extent necessary to complete the transaction.

Conclusion

    Applicants assert that, for the reasons stated above, the requested 
order approving the Substitution and exempting in-kind redemptions 
should be granted.

[[Page 69079]]

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29178 Filed 11-19-00; 8:45 am]
BILLING CODE 8010-01-M
```