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[Federal Register Volume 60, Number 240 (Thursday, December 14, 1995)]
[Notices]
[Pages 64185-64190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30493]

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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21587; No. 812-9156]

Safeco Life Insurance Company, et al.

December 7, 1995.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of Application for an Order under the Investment Company 
Act of 1940 (``1940 Act'').

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APPLICANTS: Safeco Life Insurance Company (``SAFECO'') and Separate 
Account SL (``Separate Account'').

RELEVANT 1940 ACT SECTION: Order requested under Section 26(b) of the 
1940 Act.\1\

    \1\Applicants represent that they will amend the application 
during the notice period to make this representation.
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SUMMARY OF APPLICATION: Applicants seek an order authorizing the 
substitution of shares of certain portfolios of the Variable Insurance 
Products Fund and the Variable Insurance Products Fund II (``VIP 
Trusts'') for shares of certain portfolios of The Hudson River Trust 
(``Hudson Trust'') currently held by the Separate Account.

FILING DATE: The application was filed on August 10, 1994, and amended 
on September 6, 1995.

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 December 27, 1995, 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 requester'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 5th 
Street, N.W., Washington, D.C. 20549. Applicants, c/o Leslie Harrison, 
Counsel, SAFECO Life Insurance Company, P.O. Box 34690, Seattle, 
Washington 98124-1690.

FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Assistant Special 
Counsel, or Brenda Sneed, Assistant Director, Division of Investment 
Management (Office of Insurance Products), 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. SAFECO is a stock life insurance company licensed to sell 
insurance and 

[[Page 64186]]
annuities in the District of Columbia and all states except New York. 
SAFECO is a wholly-owned subsidiary of SAFECO Corporation, a holding 
company.
    2. Separate Account. The Separate Account was established by SAFECO 
and registered under the 1940 Act as a unit investment trust for the 
purpose of funding certain flexible premium variable life insurance 
contracts (``Contracts''). The Contracts have been registered under the 
Securities Act of 1933.\2\ The Separate Account currently has fourteen 
Investment Divisions (``Investment Divisions''), each investing 
exclusively in the shares of a corresponding portfolio of the Hudson 
Trust or the VIP Trusts.

    \2\Applicants incorporate by reference the registration 
statement for the Contracts (File No. 33-10248).
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    3. The Hudson Trust. The Hudson Trust is registered under the 1940 
Act as an open-end management investment company. The Hudson Trust 
currently issues twelve series of shares of beneficial interest, each 
representing a separate investment portfolio. Each Hudson Trust 
portfolio is a separate open-end diversified management investment 
company. Shares of six of the twelve Hudson Trust portfolios\3\ 
currently are held by the Separate Account. Alliance Capital Management 
L.P. (``Alliance'') is the manager and investment adviser to the Hudson 
Trust portfolios. Alliance is an investment adviser registered under 
the Investment Advisers Act of 1940. Alliance, a publicly-traded 
Delaware limited partnership, is indirectly owned by Equitable Life 
Assurance Society of the United States (``Equitable''). Equico 
Securities, Inc. (``Equico''), a wholly-owned subsidiary of Equitable, 
is the principal underwriter of the Hudson Trust.

    \3\The Hudson Trust Portfolios in which the Separate Account 
invests include: the Common Stock, Money Market, Balanced, 
Aggressive Stock, High Yield, and Global Portfolios.
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    4. The VIP Trusts. The VIP Trusts are registered under the 1940 Act 
as open-end management investment companies. The VIP Trusts currently 
are issuing ten series of shares of beneficial interest, each 
representing a separate investment portfolio (``VIP Trust 
Portfolios''). Each VIP Portfolio is an open-end, diversified 
management investment company. Fidelity Management & Research Company 
(``FMR''), the manager of the VIP Trusts, is an investment adviser 
registered under the Investment Advisers Act of 1940. FMR is indirectly 
owned by FMR Corporation, a holding company for the Fidelity companies.
    5. The Contracts. The Contracts provide for minimum initial premium 
payments and additional subsequent payments. Net premium payments are 
allocated to the Investment Divisions and to the Guaranteed Interest 
Division, a part of SAFECO's General Account. Twelve transfers of 
Contract account value are permitted in a Contract year, without 
charge; thereafter, a maximum charge of $25 may be imposed for each 
additional transfer. The current transfer fee of $25 will be allocated 
equally among the Investment Divisions from which the requested amounts 
were transferred.
    a. Sales Loads. The Contracts provide for the deduction of: (1) a 
3% sales charge from each premium payment, and (2) a deferred sales 
charge (``Surrender Charge'') from Contract account value if the 
Contract is partially or fully surrendered in the first ten Contract 
years. The Surrender Charge is equal to the lesser of: (1) a percentage 
of the maximum premium for the Contract as follows:

------------------------------------------------------------------------
                                                              Percentage
                        Contract year                         of maximum
                                                                premium 
------------------------------------------------------------------------
1 through 6.................................................        47.0
7...........................................................        37.0
8...........................................................        29.2
9...........................................................        18.8
10..........................................................         9.4
------------------------------------------------------------------------

or (2) an amount equal to (A) minus (B) where (A) is 27% of the premium 
payments received during the first Contract year up to the maximum 
premium for the Contract, plus 6% of all other premium payments 
received to the time of surrender, and (B) is the amount of any pro 
rata Surrender Charge previously made under the Contract. A request for 
a decrease in face amount of insurance is considered to be a partial 
surrender subject during the first ten contract years to the pro rata 
deduction of the Surrender Charge from contract account value. An 
increase in face amount followed by a decrease in face amount will be 
subject to the deduction of a Surrender Charge only on the amount of 
decrease below the original face amount of insurance.
    b. Right of Substitution. Under the Contracts, SAFECO has reserved 
the right to substitute shares of another mutual or portfolio within 
the Hudson Trust or the VIP Trusts if share of the Hudson Trust or the 
VIP Trusts (or any portfolio thereof) become unavailable for investment 
by the Separate Account, or if in SAFECO's judgment further investment 
in such shares becomes inappropriate in view of the purposes of the 
Contracts, subject to applicable state and federal securities laws.
    c. Administration. SAFECO has primary responsibility for all 
administration of the Contracts and the Separate Account. Currently, 
Financial Administrative Services, Inc. (``FAS'') (formerly, Fleet 
Administrative Services, Inc.) has been retained by SAFECO to provide 
administrative services to SAFECO and its contract owners. FAS is 
indirectly owned by Phoenix Home Life Mutual Insurance Company 
(``Phoenix Home Life'').\4\ Prior to September, 1994, SAFECO had 
retained Integrity Life Insurance Company (``Integrity''),\5\ the 
principal underwriter for the Hudson Trust, to provide such 
administrative services, including use of the Hudson Trust as the 
underlying funding vehicle for the Contracts.\6\ On September 30, 1991, 
the Distribution Agreement between the Hudson Trust and Integrity was 
terminated.\7\ Accordingly, investment in Hudson Trust Portfolios has 
been restricted to Contracts sold prior to September 30, 1991 (``Pre-
September 30 Contracts''). The Hudson Trust no longer is available as 
an investment option under Contracts sold after September 30, 1991 
(``Post-September 30 Contracts''). Consequently, the VIP Trusts were 
selected as investment alternatives for the variable life programs 
administered by Integrity.

    \4\On December 31, 1993, FAS was acquired from Fleet Financial 
Group by P.M. Holdings, Inc., a holding company owned by Phoenix 
Home Life.
    \5\On November 26, 1993, Integrity was acquired by ARM Financial 
Group, Inc., a financial services holding company, from The National 
Mutual Life Association of Australasia, Ltd. (``Australasia''), an 
Australian life insurance company. Prior to its acquisition in 1988 
by Australasia, Integrity had been a wholly-owned subsidiary of 
Equitable.
    \6\At that time, the Hudson Trust was managed by a SAFECO 
affiliate, which SAFECO believed would assure good service between 
the administrator and the fund manager.
    \7\Under its terms, the Distribution Agreement would continue in 
effect until September 30, 1991, and thereafter only if reapproved 
by a majority of independent Trustees of the Hudson Trust. The 
Trustees did not continue the Distribution Agreement after September 
30, 1991.
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    6. Proposed Transactions. Applicants now propose to substitute 
shares of five VIP Trusts Portfolios for shares of six Hudson Trust 
Portfolios (``Substitution''). The Portfolios and their investment 
objectives as stated in their respective prospectuses are as follows:
    a. Shares of the VIP Trusts Money Market Portfolio will be 
substituted for shares of the Hudson Trust Money Market Portfolio. The 
VIP Trusts Money Market Portfolio's investment objective is to seek as 
high a level of current income as is consistent with preserving 

[[Page 64187]]
capital and providing liquidity by investing only in high quality U.S. 
dollar denominated money market securities of domestic and foreign 
issuers. The Hudson Trust Money Market Portfolio's investment objective 
is to obtain a high level of current income, preserve its assets and 
maintain liquidity by investing primarily in high quality U.S. dollar 
denominated money market instruments.
    b. Shares of the VIP Trusts Growth Portfolio will be substituted 
for shares of: (1) The Hudson Trust Common Stock Portfolio; and (2) the 
Hudson Trust Aggressive Stock Portfolio. The VIP Trusts Growth 
Portfolio's investment objective is to achieve capital appreciation by 
investing in common stocks, as well as bonds, preferred stocks, and 
high-yielding, lower-rated debt securities and foreign securities. The 
Hudson Trust Common Stock Portfolio's investment objective is to 
achieve long-term growth of its capital and increased income by 
investing primarily in common stocks and other equity-type instruments. 
The Hudson Trust Aggressive Stock Portfolio's investment objective is 
to achieve long-term growth of capital by investing primarily in common 
stocks and other equity-type securities issued by quality small and 
intermediate sized companies with strong growth prospects and in 
covered options on those securities.
    c. Shares of the VIP Trusts Asset Manager Portfolio will be 
substituted for shares of the Hudson Trust Balanced Portfolio. The VIP 
Trusts Asset Manager Portfolio's investment objective is to seek high 
total return with reduced risk over the long-term by allocating its 
assets among domestic and foreign stocks, bonds and short-term, fixed-
income instruments. The Hudson Trust Balanced Portfolio's investment 
objective is to achieve a high return through both appreciation of 
capital and current income by investing in a diversified portfolio of 
publicly traded equity and debt securities and short-term money market 
instruments.
    d. Shares of the VIP Trusts High Yield Portfolio will be 
substituted for shares of the Hudson Trust High Yield Portfolio. The 
VIP Trusts High Yield Portfolio's investment objective is to seek a 
high level of current income by investing primarily in high-yielding, 
lower-rated, fixed income securities, while also considering growth of 
capital. The Hudson Trust High Yield Portfolio's investment objective 
is to achieve high return by maximizing current income and, to the 
extent consistent with that objective, capital appreciation by 
investing primarily in a diversified mix of high yield, fixed income 
securities involving greater volatility of price and risk of principal 
and income than high quality fixed income securities. The medium and 
lower quality debt securities in which the High Yield Portfolio may 
invest are known as ``junk bonds.''
    e. Shares of the VIP Trusts Overseas Portfolio will be substituted 
for shares of the Hudson Trust Global Portfolio. The VIP Trusts 
Overseas Portfolio's investment objective is to seek long-term growth 
of capital primarily through investments in foreign securities. The 
Hudson Trust Global Portfolio's investment objective is to achieve 
long-term growth of capital by investing primarily in equity securities 
of non-United States companies as well as United States issuers.
    Applicants assert that the investment objectives and policies of 
each of the VIP Trusts Portfolios which are to be substituted and the 
Hudson Trust Portfolios to be substituted are similar, except for the 
Hudson Trust Aggressive Stock Portfolio and the VIP Trusts Growth 
Portfolio. Applicants represent that the VIP Trusts Growth Portfolio's 
investments are all permissible investments of the Hudson Trust 
Aggressive Stock Portfolio. However, the Aggressive Stock Portfolio 
permits certain additional investments\8\ that are not allowed under 
the investment policy of the Growth Portfolio. Nevertheless, Applicants 
submit that Contract owners are seeking long-term growth when they 
invest in either the Growth Portfolio or the Aggressive Stock 
Portfolio, that this goal can be achieved by investment in either 
Portfolio, and that the differences between investment policies are 
non-material to achievement of these investment goals.

    \8\The Aggressive Stock Portfolio may invest in foreign 
securities, write covered call options, purchase call and put 
options on individual equity securities, security indexes and 
foreign currencies, and purchase and sell stock index and foreign 
currency future investments and options thereon.
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    7. Additional Investments Options. In addition to the five VIP 
Trusts Portfolios which are to be substituted for the six Hudson Trust 
Portfolios, Contract owners will be able to invest in the five 
additional VIP Trusts Portfolios:
    a. Investment Grade Bond Portfolio, which seeks high current income 
by investing primarily in fixed-income obligations of all types by 
investing at least 65% of its total assets in investment-grade, fixed 
income securities, such as bonds, notes and debentures.
    b. Asset Manager Growth Portfolio, which seeks to maximize total 
return over the long term by allocating its assets among three classes, 
or types of investments: (1) stock class, consisting of equity 
securities of all types; (2) bond class, including all varieties of 
fixed-income instruments with maturities of more than three years; (3) 
short-term class, including all types of short-term instruments with 
remaining maturities of three years of less. Applicants state that the 
difference between this Portfolio and the VIP Trusts Asset Manager 
Portfolio is the percentage allocation to these three classes of 
investment.
    c. Equity Income Portfolio, which seeks reasonable income by 
investing primarily in income producing equity securities. The 
Portfolio normally invests at least 65% of its total assets in these 
securities.
    d. Index 500 Portfolio, which seeks to match the total return of 
the S&P 500 while keeping expenses low. The Portfolio normally invests 
at least 80% (65% if Portfolio assets are below $20 million) of its 
assets in equity securities of companies that comprise the S&P 500.
    e. Contrafund Portfolio, which seeks capital appreciation by 
investing in companies that are believed to be undervalued due to an 
overly pessimistic appraisal by the public.
    8. Advisory Fees--Hudson Trust Portfolios. Advisory fees are 
payable by the Hudson Trust Portfolios at the following annual 
percentages of values of each Portfolio's average daily net assets:

------------------------------------------------------------------------
                                             Daily average net assets   
                                        --------------------------------
                                           First                        
               Portfolio                    $350    Next $400  Over $750
                                          million    million    million 
                                         (percent)  (percent)  (percent)
------------------------------------------------------------------------
a. Money market........................                                 
b. Balanced............................      .400       .375       .350 
c. Common Stock........................                                 
d. Aggressive Stock....................      .500       .475       .450 
e. High Yield..........................                                 
f. Global..............................      .550       .525       .500 
------------------------------------------------------------------------

    9. Management Fees--VIP Trust Portfolios. The management fee for 
each VIP Trusts Portfolio (excluding the Money Market Portfolio) is 
calculated by adding a group fee rate to an individual fund fee rate, 
and multiplying the result by each Portfolio's average net assets. The 
group fee rate is based on the average net assets of all the mutual 
funds advised by FMR and can not exceed certain maximum rates. The 
Management fee for the Money market Portfolio is calculated by 
multiplying the sum of 

[[Page 64188]]
three components (group fee rate, which drops as total assets under 
management increase, individual fee rate and an income component)\9\ by 
the fund's average net assets.

    \9\The income component is 6% of gross income in excess of 5% 
yield and can not rise above 0.24% of the average net assets.

------------------------------------------------------------------------
                                                    For  12/            
                                         Maximum     31/94    Individual
               Portfolio                group fee  group fee   fee rate 
                                           rate       rate     (percent)
                                        (percent)  (percent)            
------------------------------------------------------------------------
Money Market..........................      0.37      0.1563      0.03  
Growth\10\............................      0.52      0.3191      0.30  
Asset Manger\11\......................      0.52      0.3191      0.40  
High Income...........................      0.37      0.1563      0.45  
Overseas..............................      0.52      0.3191      0.45  
------------------------------------------------------------------------
\10\FMR has directed certain portfolio trades of the Growth Portfolio to
  brokers who paid a portion of the Portfolio's expenses. For the period
  ending December 31, 1994, the Portfolio's expenses were reduced by    
  $204,452.                                                             
\11\FMR directed certain portfolio trades to brokers who paid a portion 
  of the Asset Manager Portfolio's expenses. For the period ended       
  December 31, 1994, the expenses of the Asset Manager Portfolio were   
  reduced by $131,585 under this arrangement.                           

    10. Sub-Advisory Agreements--VIP Trusts Portfolios. FMR, the 
manager of the VIP Trusts, has entered into various sub-advisory 
agreements for research, investment advice and portfolio management 
services. FMR has entered into sub-advisory agreements with Fidelity 
Management & Research (UK), Inc. (``FMR UK'') and Fidelity Management & 
Research (Far East), Inc. (``FMR Far East'') on behalf of the VIP 
Trusts High Income and Asset Manager Portfolios. FMR also has entered 
into sub-advisory agreements with FMR U.K., FMR Far East and Fidelity 
International Investment Advisers (``FIIA'') on behalf of the VIP 
Trusts Overseas Portfolio; FIIA, in turn, has entered into a sub-
advisory agreement with its wholly-owned subsidiary Fidelity 
International Investment Advisors (U.K.) Limited (``FIIAL UK''). FMR 
has entered into a sub-advisory agreement with FMR Texas, Inc. (``FMR 
Texas'') on behalf of the VIP Trusts Money Market Portfolio. Under 
these sub-advisory agreements, FMR pays the fees of FMR UK, FMR Far 
East, FMR Texas and FIIA. FIIA, in turn, pays the fees of FIIAL UK.
    a. For providing investment advice and research services, the sub-
advisors are compensated as follows: (1) FMR pays FMR U.K. and FMR Far 
East fees equal to 110% and 105%, respectively, of their costs; (2) FMR 
pays FIIA 30% of its monthly management fee with respect to the average 
market value of investments held by the fund for which FIIA has 
provided FMR with investment advice; and (3) FIIA pays FIIAL UK a fee 
equal to 100% of its costs.
    b. For providing investment management services, the sub-advisors 
are compensated as follows: (1) FMR pays FMR UK, FMR Far East and FIIA 
50% of FMR's monthly management fee with respect to the fund's average 
net assets managed by the sub-advisor on a discretionary basis; (2) 
FIIA pays FIIAL UK 100% of its costs; and (3) FMR pays FMR Texas a fee 
equal to 50% of the management fee payable to FMR under its management 
contract with the Money Market Portfolio.
    11. The following table indicates the amount of assets that were 
invested in Hudson River Trust Portfolios at the year ended December 
31:

----------------------------------------------------------------------------------------------------------------
                                                  As of  12/   As of  12/   As of  12/   As of  12/   As of  12/
                                                    31/94        31/93        31/92        31/91        31/90   
----------------------------------------------------------------------------------------------------------------
Total Contracts................................        2,785        1,655          765          357          237
Invested in Hudson Trust.......................          308                                                    
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                                        Assets  12/31/  Assets  12/31/  Assets  12/31/  Assets  12/  Assets  12/
               Portfolio                      94              93              92           31/91        31/90   
----------------------------------------------------------------------------------------------------------------
Common Stock..........................      $1,011,187      $1,114,766      $1,053,292     $992,549     $437,830
Money Market..........................         376,959         427,557          69,058      145,332       34,025
Balanced..............................          60,865          97,035         108,132       59,470       13,598
Aggressive............................          68,285         108,403         176,348      141,097       13,361
High Yield............................          21,162         293,199         275,997       11,819       10,003
Global................................         154,454         113,683          32,276       25,518        7,377
----------------------------------------------------------------------------------------------------------------

Proposed Transactions

    1. Transactions to implement the proposed Substitution of shares of 
five VIP Trusts Portfolios for shares of six Hudson Trust Portfolios 
will take place both at the Separate Account level and at the 
underlying Fund level.
    a. Separate Account Level. At the Separate Account level, the 
Substitution will result in a transfer of Contract account values from 
one Separate Account Division to another. On the day of the 
Substitution, SAFECO will determine the Contract account values held in 
the Investment Divisions which invest in the Hudson Trust Portfolios, 
redeem those units of interest, purchase units of the Investment 
Division which invests in the corresponding VIP Trusts Portfolio and 
credit those units to the Contract. Contract account value will be 
identical immediately before and after the Substitution. The number of 
units held in the Contract, however, may vary to reflect the difference 
in unit values of the various Investment Divisions. All unit values 
will be valued at the next computed value in a manner consistent with 
Rule 22c-1 under the 1940 Act.
    b. Fund Level. On the day of the Substitution, all shares held by 
the Separate Account in the Hudson Trust will be redeemed and, 
contemporaneously, an amount equal to the cash proceeds of the 
redemption will be used to purchase shares of the corresponding VIP 
Trusts Portfolios.\12\ All shares will be purchased and redeemed at 
prices based on the current net asset values per share next computed 
after receipt of the redemption request and in a manner consistent with 
Rule 22c-1 under the 1940 Act.

    \12\SAFECO, on behalf of the Separate Account, will make a 
request for redemption of all Hudson Trust shares. Due to the time 
needed to process the redemption request, a delay in payment of the 
cash redemption proceeds is anticipated. Thus, SAFECO will advance 
an amount in cash equivalent to the redemption proceeds amount, 
which will be used to purchase VIP Trusts Portfolio shares. Contract 
account values which were held in Hudson Trust Portfolios will 
remain fully vested. Subsequently, the Hudson Trust will pay the 
cash redemption proceeds to SAFECO. No cash will be distributed to 
Contract owners unless, incidently, a Contract owner requests a 
surrender.
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    2. Applicants represent that Contract owners invested in the Hudson 
Trust have been sent a Supplement to the Hudson Trust Prospectus which 

[[Page 64189]]
explains the proposed Substitution, the anticipated change in SAFECO's 
administrative support system, and the right to elect to transfer 
Contract account value to the VIP Trusts. Applicants further represent 
that a notice has been sent to Contract owners informing them of the 
new administrator and the new administrative system. If the Commission 
issues an order regarding the proposed Substitution, a second notice, 
accompanied by a current prospectus for the VIP Trusts, will be sent to 
Contract owners informing them of the Commission's order and the 
proposed date of the Substitution. A third notice will be mailed to 
each affected Contract owner within five days after the Substitution 
has been effected confirming that the Substitution has been completed 
and reflecting the transfer of Contract account values from the Hudson 
Trust Investment Divisions to the VIP Trusts Investment Divisions. 
Affected Contract owners will have a period of 30-days after the date 
of the mailing of the third notice and confirmation of Substitution to 
exercise the right to make a one-time transfer of Contract account 
values to any other Division, including the Guaranteed Interest 
Division, without charge and without the transfer counting as one of 
the free transfers permitted in a Contract year.
    3. All administrative or other transaction costs, except brokerage 
costs, will be borne by SAFECO. The proposed Substitution will not 
result in adverse tax consequences to Contract owners, the Separate 
Account or SAFECO. The Substitution will not result in a change in 
Contract provisions or alter SAFECO's contractual obligations under the 
Contracts.

Applicants' Legal Analysis

    1. The Applicants request that the Commission issue an order under 
Section 26(b) of the 1940 Act to the extent necessary to permit the 
substitution of shares of the VIP Trusts Portfolios for the shares of 
the Hudson Trust Portfolios currently held by the Separate Account.\13\ 
Thereafter, the VIP Trusts Portfolios will be eligible funding vehicles 
for the Contracts, including the Pre-September 30 Contracts.

    \13\Applicants state that to the extent that any aspect of the 
Substitution may be deemed to require approval under Section 11 of 
the 1940 Act, they intend to rely on the exemptive provisions of 
Rule 11a-2 under the 1940 Act.
---------------------------------------------------------------------------

    2. Section 26(b) of the 1940 Act prohibits a depositor or trustee 
of a registered unit investment trust holding the securities of a 
single issuer from substituting another security for such security 
unless the Commission approves the substitution, finding that it is 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    3. SAFECO represents that the Substitution is in the best interests 
of Contract owners. The Hudson Trust is the only permitted investment 
option for SAFECO's approximately 308 Pre-September 30 Contracts, which 
are expected to decrease in the ordinary course of events and, 
therefore, become more costly and less efficient to administer.\14\

    \14\Overhead expenses associated with maintaining investments in 
the Hudson Trust include costs for determining and maintaining the 
daily unit values, preparation and mailing to Contract owners of 
annual and semi-annual reports, proxy statements and other mailings, 
preparation of performance information, maintenance of bank 
accounts, reconciliations and other accounting and banking costs 
associated with the underlying fund.
---------------------------------------------------------------------------

    4. Applicants represent that the Contract provides for both 
guaranteed rates of insurance and current rates of insurance. Under the 
Contract, the current rates of insurance cannot exceed the guaranteed 
rate and usually is less. Applicants represent that state insurance 
laws require SAFECO to establish current rates of insurance that 
reasonably anticipate future expenses. Accordingly, SAFECO periodically 
restates its rates of insurance to take into account all expenses 
incurred in its insurance business. To the extent that expenses 
reasonable can be reduced, all Contract owners will benefit to the 
extent to improve current insurance rates. Conversely, insurance rates 
may increase if expenses increase.
    5. Applicants further represent that the additional support 
provided by the Manager of the VIP Trusts of life insurance companies 
and their separate accounts (``Participating Companies'') by way of 
fund information is helpful in the sales process and to existing 
Contract owners as they periodically review their investment decisions. 
Applicants submit that this support will benefit Contract owners by 
helping SAFECO enhance Contract size in this product line and keep 
costs down.
    6. Applicants represent that the Hudson Trust no longer is 
available to new Participating Companies and to new Contract owners of 
existing Participating Companies, including SAFECO. As a result, the 
Hudson Trust is not an investment alternative for SAFECO's Contract 
owners. SAFECO submits that a substitution of the VIP Trust Portfolios 
for the corresponding Hudson Trust Portfolios would provide more 
investment opportunities for its Contract owners because the VIP Trusts 
continuously offer their shares to Participating Companies with an 
expanding asset base and distribution outlets.
    7. Applicants represent that currently, six Hudson Trust Portfolios 
are available under the Contracts. Applicants further represent that 
ten VIP Trusts Portfolios are available under the non-Hudson Trust 
Contracts. The VIP Trusts are intended to fund variable life insurance 
and variable annuity contracts offered by Participating Companies. 
Currently, there are in excess of 40 Participating Companies that have 
elected to use the VIP Trusts as funding vehicles for their variable 
contracts. Applicants submit that this is a significant distribution 
outlet for VIP Trusts shares which will result in an expanding asset 
base for the VIP Trusts and a concomitant reduction in the per share 
management fees and other expenses and, thus, greater economies of 
scale.
    8. Applicants represent that a comparison of the relative asset 
sizes of the Hudson Trust and the comparable VIP Trusts Portfolios for 
the year ended December 31, 1994, indicates that in all cases, except 
for the Hudson Trust Common Stock Portfolio (which commenced operations 
on June 16, 1975) compared with the VIP Trusts Growth Portfolio (which 
commenced operations on October 9, 1986), the corresponding VIP Trusts 
Portfolio has a larger asset base.
    9. Applicants further represent that a comparison of expense ratios 
for the period ended December 31, 1994, shows that there has been a 
steady decline in expense ratios of all Portfolios. The VIP Trusts 
Portfolios have shown a greater decrease; however, on average, the 
Hudson Trust Portfolios have lower expense ratios.
    10. Applicants assert that the performance of the VIP Trusts 
Portfolios is comparable to or better than the comparable Hudson Trust 
Portfolios. For example, a comparison of the five year average total 
return shows that the VIP Trusts Portfolios exceed the total return for 
the corresponding Hudson Trust Portfolios in four of the six 
Portfolios: (a) VIP Trusts Money Market Portfolio (5.09%) compared to 
Hudson Trust Money Market Portfolio (4.98%); (b) VIP Trusts Asset 
Manager Portfolio (10.71%) compared to Hudson Trust Balanced Portfolio 
(7.29%); (c) VIP Trusts Growth Portfolio (10.88%) compared to Hudson 
Trust Common Stock Portfolio (9.82%); and (d) VIP Trusts High Income 
Portfolio (14.01%) compared to Hudson Trust High Yield Portfolio 
(10.60%). With respect to the 

[[Page 64190]]
other two Portfolios, the Hudson Trust Aggressive Stock Portfolio had 
an exceptional return of 86.87% in 1991, and in the other case the VIP 
Trusts Overseas Portfolio experienced a significant loss in 1992 
(10.72%) when compared to the Hudson Trust Global Portfolio's return 
(0.50%). Applicants note further that, as of December 31, 1994, the 
Hudson Trust Contract owners only had $68,285 in the Hudson Trust 
Aggressive Stock Portfolio and $154,454 in the Hudson Trust Overseas 
Portfolio. Applicants submit that this demonstrates that performance is 
comparable or better in the VIP Trusts Portfolios as compared to the 
Hudson Trust.
    11. Applicants state that the Substitution would permit a Contract 
owner to remain in the VIP Trusts Portfolios or transfer Contract 
account values to any other available Investment Division or to the 
Guaranteed Interest Division without cost and without such transfer 
counting as a transfer for purposes of assessing a transfer fee. 
Applicants represent that the notice of Substitution provided to 
Contract owners will inform them of their rights. Accordingly, 
Applicants submit that the terms of the proposed Substitution are 
consistent with the purpose underlying Section 26(b) of preventing 
investors from being forced to forfeit a sales load already deducted or 
perhaps to incur additional sales loads upon redemption and purchase of 
another investment company security.
    12. Applicants represent that the Substitution will not alter or 
affect the Contract. All the terms and conditions of the Contract are 
the same after the Substitution as before, including surrender and 
transfer rights. Applicants also represent that after the Substitution, 
insurance benefits to Contract owners and the contractual obligations 
of SAFECO are exactly the same as before the Substitution. Contract 
owners will continue to look to SAFEC with regard to their rights under 
the Contracts. Applicants further represent that no surrender, transfer 
or other charge will be imposed at the time of the Substitution or for 
the first transfer made during the 30 day period following mailing of 
the confirmation and notice.
    13. Applicants note that the Commission has approved a number of 
substitutions where contract owners assets were reinvested in large 
funds or investment portfolios in order to mitigate the adverse impact 
of operating expenses on very small asset bases. Such substitutions 
have been permitted even where the investment objectives, policies and 
restrictions of the two portfolios involved were not nearly as similar 
as in this application, including permitting the substitution of money 
market portfolio shares for the shares of zero coupon bond, real estate 
securities and bond portfolios. Further, the Commission also has 
permitted a substitution which represented a negotiated settlement of a 
dispute between the parties.
    14. Applicants submit that Section 26(b) was designed to forestall 
the ability of a depositor to present holders of interests in a unit 
investment trust with situations in which a holder's only choice would 
be to continue an investment in an unsuitable, unbargained for 
underlying security, or to elect a costly, and, in effect, forced 
redemption. Applicants submit that the proposed Substitution does not 
present this type of situation. Moreover, under the Contracts, each 
Contract owner now has the ability to make transfers among a range of 
underlying investments, and Contract owners will have an ever greater 
choice of investment options after the Substitution. Further, each 
Contract owner can make the proposed Substitution temporary, without 
cost or adverse tax consequences, by transferring the Contract account 
value to any other Investment Division.

Conditions

    Applicants consent to the following terms of and conditions to the 
issuance of an order granting the requested exemptions:
    1. All administrative or other costs of the transactions, except 
brokerage fees, relating to the Substitution will be borne by SAFECO. 
SAFECO will assume all expenses and transaction costs (including, among 
others, legal and accounting fees) relating to the Substitution in a 
manner that attributes all transaction costs to SAFECO.
    2. SAFECO will mail a notice to the affected Contract owners which 
will include a supplement to the Contract prospectus and a prospectus 
for the VIP Trusts. The notice and the supplement will describe the 
proposed Substitution.
    3. Upon effecting the Substitution, SAFECO will mail a notice and 
confirmation to each affected Contract owner informing the Contract 
owner that the Substitution has been completed and the Contract account 
value involved. Such confirmation and notice will be mailed to Contract 
owners within five (5) days after the Substitution.
    4. SAFECO will provide that, during a period of 30 days after the 
date of the mailing of the notice and confirmation of Substitution to 
affected Contract owners (the Free Transfer Period), the affected 
Contract owners will have the right to make a one-time transfer of 
Contract account values (at the value next computed after SAFECO 
receives the request for transfer) to any other Investment Division and 
to the Guaranteed Interest Division without charge and without the 
transfer counting as one of the free transfers permitted in a Contract 
year. Applicants represent that this 30-day period is sufficient time 
for Contract owners to determine if they wish to be invested in another 
Investment Division or the Guaranteed Interest Division.
    5. The Substitution will, in all cases, be at net asset value of 
the respective shares of the affected Portfolios. All transfers of 
Contract account values will be affected without the imposition of any 
transfer or other charge.
    6. The Substitution in no way will alter the insurance benefits to 
the Contract owners or the contractual obligations of SAFECO.
    7. The Substitution in no way will alter the tax benefits to 
Contract owners.
    8. Contract owners may choose to withdraw amounts credited to them 
following the Substitution under conditions that currently exist under 
the Contracts, subject to any applicable deferred sales charge.
    9. The Substitution is expected to confer certain economic benefits 
on Contract owners by virtue of the increase in investment options, a 
reduction in overall administrative costs thus helping to keep current 
cost of insurance rates from increasing, and because of increased 
support from the Manager of the VIP Trusts by way of consumer 
information.

Conclusion

    Applicants submit that, for the reasons and upon the facts set 
forth above, the exemptive relief requested under Section 26(b) of the 
1940 Act is consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act, 
and satisfies the purposes underlying Section 26(b) of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30493 Filed 12-13-95; 8:45 am]
BILLING CODE 8010-01-M
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