[Federal Register Volume 59, Number 60 (Tuesday, March 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7287]
[[Page Unknown]]
[Federal Register: March 29, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20151; File No. 812-8666]
Metropolitan Life Insurance Co. et al.; Applications
March 22, 1994.
AGENCY: Securities and Exchange Commission (the ``Commission'' or the
``SEC'').
ACTION: Notice of application for order under the Investment Company
Act of 1940 (the ``1940 Act'').
-----------------------------------------------------------------------
APPLICANTS: Metropolitan Life Insurance Company (``MetLife''),
Metropolitan Tower Life Insurance Company (``MetTower'') (the ``Life
Insurance Companies''), Metropolitan Life Separate Account E (``MetLife
SA E''), Metropolitan Life Separate Account UL (``MetLife SA UL''), and
Metropolitan Tower Separate Account Two (``MetTower SA Two'') (the
``Separate Accounts'').
RELEVANT 1940 ACT SECTIONS: Order requested for approval under section
26(b) and exemptions pursuant to sections 6(c) and 17(b) from sections
17(a)(1) and 17(a)(2) in connection with the proposed substitution (the
``Substitution'').
SUMMARY OF APPLICATION: Applicants seek an order regarding the
Substitution of the Diversified Portfolio of the Metropolitan Series
Fund, Inc. (the ``Fund'') for the GNMA Portfolio and the Equity Income
Portfolio of the Fund held by the Separate Accounts to fund variable
annuity contracts and variable life insurance contracts issued by the
Life Insurance Companies.
FILING DATE: The application was filed on November 4, 1993.
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 SEC's Secretary and
serving the Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the SEC by 5:30 p.m. on
April 18, 1994, 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 SEC's
Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. Applicants, One Madison Avenue, New
York, NY 10010.
FOR FURTHER INFORMATION CONTACT:
Wendy Finck Friedlander, Senior Attorney or Michael V. Wible, Special
Counsel at (202) 272-2060, Office of Insurance Products (Division of
Investment Management).
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Commission's
Public Reference Branch.
Applicants' Representations
1. MetLife is a mutual life insurance company organized under New
York law. MetTower, a wholly-owned subsidiary of MetLife, is a stock
life insurance company organized under Delaware law.
2. The Fund, incorporated under Maryland law, is registered under
the 1940 Act as an open-end management investment company consisting of
nine separate series (``Portfolios''). The Portfolios include the
Equity Income Portfolio (``EIP''), the GNMA Portfolio (``GNMA''), the
Diversified Portfolio (``DP''), and six other Portfolios. Shares of
each Portfolio are registered under the Securities Act of 1933. MetLife
serves as the investment adviser to each series of the Fund. State
Street Research & Management Company, a wholly-owned subsidiary of
MetLife, acts as sub-investment adviser to the Diversified Portfolio,
the GNMA Portfolio and the Equity-Income Portfolio of the Fund.
3. MetLife is the depositor of MetLife SA E and MetLife SA UL.
MetTower is the depositor of MetTower SA Two. MetLife SA E consists of
16 investment divisions (``Divisions''), nine of which invest in shares
of a corresponding series of the Fund. MetLife SA UL and MetTower SA
Two each consist of eight Divisions that invest in shares of a
corresponding series of the Fund. Each Separate Account includes an
Equity Income Division and a Diversified Division; MetLife SA E also
includes a GNMA Division. Each Separate Account is registered under the
1940 Act as a unit investment trust.
4. MetLife SA E funds variable annuity contracts and MetLife SA UL
and MetTower SA Two fund variable life insurance contracts. Variable
life contracts are no longer offered by MetTower. The variable annuity
contracts which utilize the Equity Income Division and the GNMA
Division of MetLife SA E are no longer being offered by MetLife, and on
May 1, 1993, MetLife discontinued offering the Equity Income Division
in connection with its variable life contracts. Existing contracts are
currently invested in such Divisions.
5. No deduction is made from purchase payments for the variable
annuity contracts to cover sales expenses; however, a deduction for
such expenses is made as a contingent deferred surrender charge for any
withdrawals occurring during the first seven years after the issuance
of certain variable annuity contracts. A deduction is made of up to two
per cent of premium payments under the variable life contracts of
MetLife to cover sales expenses. In addition, certain of the MetLife
variable life contracts are subject to a deduction of up to 1.5 per
cent of premium payments for MetLife's federal income taxes, which may
be deemed to be a sales load under the federal securities laws. Certain
of the variable life contracts of MetLife are also subject to a
contingent deferred surrender charge based on the specified face
amount, the death benefit option and the age of the insured for
contracts surrendered during the first fifteen contract years. A
deduction is made from premium payments to cover sales expenses for the
MetTower variable life contracts. The maximum deduction is 27 per cent
of premium payments in the first year and seven per cent thereafter.
6. Under the contracts, the owner may transfer all of his or her
accumulation units or cash value, as the case may be, to another
Division or the general account of the insurance company issuing the
contract. Under the variable annuity contracts of MetLife, twelve free
transfers may be made each calendar year. Under the variable life
contracts of MetLife, no charge is made for a transfer, but MetLife has
reserved the right to charge up to $25 for transfers in the future.
Under the variable life contracts of MetTower, six free transfers may
be made each calendar year.
7. Shareholders of each of the Portfolios of the Fund have approved
an amendment to the investment management agreements on behalf of each
Portfolio between the Fund and MetLife which eliminates a provision of
such agreements that obligated MetLife to pay the direct expenses of
the Fund. During 1992, the total expenses subsidized by MetLife were
$307,000 for DP, $109,000 for EIP and $109,000 for GNMA.\1\ It is
MetLife's present intention to voluntarily pay, through 1994, certain
expenses of any Portfolio whose ratio of operating expenses (excluding
the investment management fee and taxes) to average net assets of the
Portfolio is greater than a certain percentage (0.25% in the cases of
DP, EIP, and GNMA). Applicants estimate that the elimination of the
mandatory subsidy will result in an increased cost per share of $.07
for EIP, $.06 for GNMA and $.02 for DP if the Substitution is not
effected.\2\
---------------------------------------------------------------------------
\1\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
\2\As of December 31, 1992, the net asset value per share of DP
was $13.58, of EIP was $11.17 and of GNMA was $10.61. Applicants
represent that, during the Notice Period, the application will be
amended to reflect these representations.
---------------------------------------------------------------------------
8. As of May 1, 1993, MetTower and MetLife ceased making available
under their respective contracts the Equity Income Division of MetTower
SA Two and MetLife SA UL, respectively. MetLife ceased making available
the Equity Income and GNMA Divisions of MetLife SA E in connection with
its variable annuity contracts on May 1, 1990. Consequently, no
purchase payments or premium payments may be allocated to these
Divisions nor may accumulation units or cash values be transferred from
the general account or any other Division to the Divisions. Applicants
represent that EIP an GNMA therefore are likely to decrease in size
over time and become less efficient as investment vehicles. Also, the
continued reduction in size will mean that the expenses of these
Portfolios will have a greater effect over time on the net asset value
per share of each Portfolio, particularly now that the mandatory
subsidy by MetLife has been eliminated.
9, Applicants propose to substitute the shares of DP for shares of
EIP and GNMA currently held in the respective Equity Income Division of
the Separate Accounts and in the GNMA Division of MetLife SA E. On
August 4, 1993, the board of directors of the Fund, including a
majority of those directors who are not ``interested persons'' as
defined in the 1940 Act, approved in principle the Substitution.
Applicants propose to effect the Substitution by June 1, 1994.\3\
Immediately following the Substitution, Applicants will treat, as a
single Division of each Separate Account, the pre-existing Diversified
Division invested in the shares of DP and the former Equity Income and
GNMA Divisions then invested in shares of DP. Applicants will reflect
this treatment in the disclosure documents for the Separate Accounts
and the Form N-SAR annual reports filed by the Separate Accounts.
---------------------------------------------------------------------------
\3\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
---------------------------------------------------------------------------
10. Applicants have reserved the right, without contract owners'
consent, to invest the assets of a Division of a Separate Account in
securities other than the shares of a particular Portfolio as a
substitute for Portfolio shares already purchased or to be purchased in
the future. The reservation of right is subject to compliance with
applicable law, including prior approval by the insurance authorities
of New York and Delaware, and any required Commission approval.
Applicants will not consummate the Substitution prior to receiving such
approvals.
Applicants' Legal Analysis and Conditions
1. Section 26(b) of the 1940 Act prohibits the depositor of a
registered unit investment trust holding the security of a single
issuer from substituting another security for such security unless the
Commission has approved the substitution. The subaccounts of a
registered separate account are treated as separate investment
companies in connection with substitution transactions. Section 26(b)
provides that the Commission will approve a substitution if it is
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
2. Section 17(a) (1) and (2) of the 1940 Act prohibits an
affiliated person of a registered investment company from selling or
purchasing a security from the registered investment company. The
transfer of accumulation units and cash values from the Equity Income
and GNMA Divisions to the Diversified Division of the Separate Accounts
could be deemed to involve a purchase and sale between the Divisions,
each of which is an affiliated person of the other. The Equity Income
and GNMA Divisions could each be said to be selling its portfolio
shares of EIP and GNMA to the Diversified Division in return for
accumulation units or interests of the Diversified Division.
Conversely, the Diversified Division of a Separate Account, as
affiliated person of the Equity Income and GNMA Divisions of the same
Separate Account, could be said to be purchasing from an EIP or GNMA
Division shares of EIP or GNMA owned by such Division.
Section 17(b) provides that the Commission may grant an application
exempting a proposed transaction provided the terms of the proposed
transaction are reasonable and fair and do not involve overreaching on
the part of any person concerned; the transaction is consistent with
the policy of each registered investment company concerned; and the
transaction is consistent with the general purposes of the 1940 Act.
3. Section 6(c) of the 1940 Act permits the Commission to exempt
any person or transaction from any provision of the 1940 Act if and to
the extent that such exemption is necessary or appropriate in the
public interest and consistent with the protection of investors fairly
intended by the policy and provisions of the 1940 Act.
Applicants submit that the Substitution would meet these
requirements for the reasons set forth below.
4. Applicants assert that the investment objectives of EIP, GNMA
and DP, although not identical, are nevertheless compatible. The
primary investment objective of the EIP is a high level of current
income and, secondarily, long-term growth of capital by investing
primarily in common stocks offering above-average dividend yields and
in equity and debt securities convertible into or carrying the right to
acquire common stocks. The primary investment objective of GNMA is a
high level of current income while attempting to preserve liquidity and
safety of principal by investing in mortgage-related securities,
predominantly those issued by the Government National Mortgage
Association. The primary investment objective of the DP is a high total
return while attempting to limit investment risk and preserve capital
by investing in equity securities, fixed income debt securities, or
short-term money market instruments, or any combination thereof.
5. Applicants assert that the equity securities and debt securities
in which DP invests are not inconsistent with the investment objectives
of EIP and GNMA. Also, there is no alternative Portfolio with the
characteristics of investing in the kinds of securities invested in by
EIP and GNMA. DP, EIP and GNMA also have similar investment policies
and practices and identical attributes of organization and operation.
They also have identical investment management fees, and the same
subinvestment manager. As a result, Applicants represent that the
Substitution will not cause management fees and other expenses
currently being paid by contract owners to be greater after the
Substitution than before the Substitution. Also, all three Portfolios
sell shares to the Separate Accounts and redeem such shares at net
asset value without sales charge.
6. Applicants assert that the Substitution will not give rise to
any tax liability or to any adverse tax consequences for contract
owners, insureds, annuitants or beneficiaries. Applicants have a
current opinion of tax counsel that the tax effect of the Substitution
will be the same as the tax effect of a transfer from the Equity Income
or GNMA Division to the Diversified Division of a Separate Account.
7. Applicants assert that the Substitution would be effected in a
manner consistent with the protection of contract owners. The Fund
disclosed the possibility of the Substitution in its prospectus dated
April 30, 1993. The Insurance Companies will mail to their respective
contract owners a supplement to their respective prospectuses
disclosing the proposed Substitution. Prior to the date the
Substitution is consummated, contract owners may transfer accumulation
units or cash values and reallocate purchase and premium payments to
any other Division of the respective Separate Account or the respective
general account pursuant to transfer rights under the contracts
(subject to any applicable charge or number of transfers per calendar
year limits). Following the Substitution and prior to August 1,
1994,\4\ contract owners that are invested in a Diversified Division
under a Contract as a result of the Substitution may transfer to any
other Division of the respective Separate Account without incurring any
applicable charge and without regard to any limits on the number of
transfers that may be made in a calendar year. After August 1, 1994,\5\
any transfers from the Diversified Division of a Separate Account to
another Division of that Separate Account or to the respective general
account will be subject to any applicable charges or limits.
---------------------------------------------------------------------------
\4\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
\5\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
---------------------------------------------------------------------------
8. Applicants will effect the Substitution by simultaneously
placing an order to redeem their shares of EIP and, in the case of
MetLife SA E, GNMA, and an order to purchase shares of DP. The net
asset values will calculated based on values determined as of the close
of business on the business day next preceding the transaction, which
day shall be within 24 hours of the date of the transaction. The Fund
will pay the redemption proceeds in cash or transfer the assets of EIP
and GNMA in kind to DP, or a combination of cash and in kind assets
depending upon the existing investments of EIP and GNMA and how
appropriate they are to DP at the time of transfer. Applicants have
been advised by the Fund that, prior to effecting the Substitution, the
Fund will take all actions necessary to comply with the requirements of
section 18(f) of the 1940 Act and Rule 18f-1 thereunder, as set forth
in its registration statement.\6\
---------------------------------------------------------------------------
\6\Applicants represent that, during the Notice Period, the
application will be amended to reflect this representation.
---------------------------------------------------------------------------
9. Applicants represent that they have been advised by the Fund
that the Fund's board of directors will instruct MetLife and State
Street Research and Management Company to monitor EIP and GNMA
portfolio assets, up to the effecting of the Substitution, with a view
toward maintaining portfolio assets consistent with EIP's and GNMA's
investment objective that are, to the extent practical, compatible with
DP's investment objective. To the extent that any EIP or GNMA portfolio
asset is not consistent with DP's investment objective, upon effecting
the Substitution, MetLife will bear the cost of DP's liquidating such
security.
10. Within five days after the Substitution, Applicants will mail
each contract owner a notice of the Substitution including a
specification of the shares indirectly owned by each owner affected by
the Substitution.
11. The Insurance Companies will bear the expenses attributable to
the Substitution.
12. Applicants assert that the interests of contract owners in the
EIP or GNMA Divisions will be no different, in economic reality,
immediately after the Substitution than before. The value of
accumulation units in the Diversified Division received by the owners
will be equivalent in value to the units or interests previously held
in the respective EIP or GNMA Divisions. Owners investing in the DP
will benefit from the economies of scale and administration of a single
Division of a Separate Account rather than two or more Divisions
investing in the same underlying Portfolios. Accordingly, Applicants
represent that the terms of the Substitution will be reasonable and
fair and not involve overreaching on the part of any person concerned.
Conclusion
Applicants assert that for the reasons and upon the facts set forth
above, the requested order approving the proposed Substitution under
section 26(b) is consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
Applicants further assert that exempting the applicants pursuant to
sections 6(c) and 17(b) from sections 17(a)(1) and 17(a)(2) in
connection with the proposed Substitution is appropriate because the
terms of the proposed transaction are reasonable and fair and do not
involve overreaching on the part of any person concerned; the
transaction is consistent with the policy of each investment company
concerned; the transaction is consistent with the purposes of the 1940
Act; and the exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7287 Filed 3-28-94; 8:45 am]
BILLING CODE 8010-01-M