The Penn Mutual Life Insurance Company, et al.; Notice of Application, 39341-39349 [E8-15514]
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Federal Register / Vol. 73, No. 132 / Wednesday, July 9, 2008 / Notices
jlentini on PROD1PC65 with NOTICES
was developed to describe and make
available to the public information such
as methods that are acceptable to the
NRC staff for implementing specific
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techniques that the staff uses in
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Revision 2 of Regulatory Guide 10.3,
‘‘Guide for the Preparation of
Applications for Special Nuclear
Material Licenses for Less than Critical
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directs the reader to the type of
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evaluate an application for a specific
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and transfer of special nuclear material
(SNM) in less than ‘‘critical mass’’
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Federal Regulations (10 CFR part 70),
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This regulatory guide endorses the
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Volume 17, ‘‘Consolidated Guidance
about Materials Licenses: ProgramSpecific Guidance about Special
Nuclear Material of Less than Critical
Mass Licenses,’’ as a process that the
NRC staff finds acceptable for meeting
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II. Further Information
In January 2008, DG–0014 was
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the guide. No comments were received
and the public comment period closed
on April 18, 2008. Electronic copies of
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[FR Doc. E8–15544 Filed 7–8–08; 8:45 am]
BILLING CODE 7590–01–P
The Presidio Trust.
Revised Notice of Public
Meeting.
AGENCY:
ACTION:
In accordance with § 103(c)(6)
of the Presidio Trust Act, 16 U.S.C.
460bb note, Title I of Pub. L. 104–333,
110 Stat. 4097, as amended, and in
accordance with the Presidio Trust’s
bylaws, notice was given that a public
meeting of the Presidio Trust Board of
Directors would be held commencing
6:30 p.m. on Monday, July 14, 2008, at
the Officers’ Club, 50 Moraga Avenue,
Presidio of San Francisco, California.
The location of the public meeting has
changed. A public meeting of the
Presidio Trust Board of Directors will be
held commencing 6:30 p.m. on Monday,
July 14, 2008, at the Presidio Herbst
International Exhibition Hall, 385
Moraga Avenue, Presidio of San
Francisco, California. The Presidio Trust
was created by Congress in 1996 to
manage approximately eighty percent of
the former U.S. Army base known as the
Presidio, in San Francisco, California.
The agenda for the meeting has been
expanded. The purposes of this meeting
are to approve budgets for four projects,
to adopt a revised budget for Fiscal Year
2008, to receive public comment on the
draft Supplemental Environmental
Impact Statement for the Main Post, to
provide an Executive Director’s report,
and to receive public comment on other
matters in accordance with the Trust’s
Public Outreach Policy.
Time: The meeting will begin at 6:30
p.m. on Monday, July 14, 2008.
ADDRESSES: The meeting will be held at
the Presidio Herbst International
Exhibition Hall, 385 Moraga Avenue,
Presidio of San Francisco.
FOR FURTHER INFORMATION CONTACT:
Karen Cook, General Counsel, the
Presidio Trust, 34 Graham Street, P.O.
SUMMARY:
Fmt 4703
Dated: July 2, 2008.
Karen A. Cook,
General Counsel.
[FR Doc. E8–15582 Filed 7–8–08; 8:45 am]
BILLING CODE 4310–4R–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–28328; File No. 812–13401]
The Penn Mutual Life Insurance
Company, et al.; Notice of Application
Securities and Exchange
Commission (‘‘SEC’’ or the
‘‘Commission’’).
ACTION: Notice of application for an
order pursuant to Section 26(c) of the
Investment Company Act of 1940
(‘‘1940 Act’’), approving certain
substitutions of securities and for an
order of exemption pursuant to Section
17(b) of the 1940 Act.
AGENCY:
Revised Notice of Public Meeting
Frm 00064
Box 29052, San Francisco, California
94129–0052, Telephone: 415.561.5300.
July 2, 2008.
PRESIDIO TRUST
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39341
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The Penn Mutual Life
Insurance Company (‘‘Penn Mutual’’),
The Penn Insurance and Annuity
Company (‘‘PIA’’), Penn Mutual
Variable Annuity Account III (‘‘Variable
Annuity Account III’’), Penn Mutual
Variable Life Account I (‘‘Variable Life
Account I’’), and PIA Variable Annuity
Account I (‘‘Variable Annuity Account
I’’) (Variable Annuity Account III,
Variable Life Account I, and Variable
Annuity Account I are collectively
referred to as the ‘‘Separate Accounts’’
and, collectively with Penn Mutual and
PIA, the ‘‘Section 26 Applicants’’), Penn
Series Funds, Inc. (‘‘Penn Series’’ and
collectively with the Section 26
Applicants, the ‘‘Section 17
Applicants’’).
SUMMARY OF APPLICATION: The Section
26 Applicants request an order pursuant
to Section 26(c) of the 1940 Act,
approving the proposed substitution of
certain shares of diversified portfolios of
Penn Series, a registered investment
company that is an affiliate of the
Section 26 Applicants, for shares of
other investment portfolios of
underlying registered investment
companies unaffiliated with the Section
26 Applicants (the ‘‘Substitutions’’). The
registered investment companies
support variable annuity and variable
life insurance contracts issued by Penn
Mutual and its subsidiary, PIA. The
Section 17 Applicants also request an
order pursuant to Section 17(b) of the
1940 Act exempting them, to the extent
necessary, from Section 17(a) of the
APPLICANTS:
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Federal Register / Vol. 73, No. 132 / Wednesday, July 9, 2008 / Notices
1940 Act for the in-kind purchases and
sales of shares of the Replacement
Funds (as defined herein) in connection
with the Substitutions.
FILING DATE: The application was filed
on June 29, 2007, and amended on July
2, 2008.
HEARING OR NOTIFICATION OF HEARING: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the Secretary of
the Commission and serving Applicants
with a copy of the request, personally or
by mail. Hearing requests should be
received by the Commission by 5:30
p.m. on July 24, 2008, 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 who wish to be notified of a
hearing may request notification by
writing to the Secretary of the
Commission.
Secretary, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–1090.
Applicants, c/o Morgan, Lewis &
Bockius LLP, 1111 Pennsylvania
Avenue, NW., Washington, DC 20004,
Attn: Michael Berenson, Esq.
FOR FURTHER INFORMATION CONTACT:
Sonny Oh, Staff Attorney, or Zandra
Bailes, Branch Chief, Office of Insurance
Products, Division of Investment
Management at (202) 551–6795.
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained for a fee from the SEC’s
Public Reference Branch, 100 F Street,
NE., Room 1580, Washington, DC 20549
(tel. (202) 551–8090).
ADDRESSES:
jlentini on PROD1PC65 with NOTICES
Applicants’ Representations
1. Penn Mutual is a mutual life
insurance company organized in the
Commonwealth of Pennsylvania and
originally chartered in 1847. Penn
Mutual is a diversified financial services
company providing life insurance,
annuities, disability income insurance,
long-term care insurance, structured
settlements, retirement and other
products to individual and institutional
customers.
2. Penn Mutual established Variable
Annuity Account III on April 13, 1982.
Variable Annuity Account III is
registered under the 1940 Act as a unit
investment trust and is used to fund
variable annuity contracts issued by
Penn Mutual. Ten variable annuity
contracts funded by Variable Annuity
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Account III are affected by the
application.
3. Penn Mutual established Variable
Life Account I on January 27, 1987.
Variable Life Account I is registered
under the 1940 Act as a unit investment
trust and is used to fund variable life
insurance contracts issued by Penn
Mutual. Eight variable life insurance
contracts funded by Variable Life
Account I are affected by the
application.
4. PIA is a Delaware stock life
insurance company. It is a whollyowned subsidiary of Penn Mutual. PIA
established Variable Annuity Account I
on July 13, 1994. Variable Annuity
Account I is registered under the 1940
Act as a unit investment trust and is
used to fund variable annuity contracts
issued by PIA. One variable annuity
contract funded by Variable Annuity
Account I is affected by the application.
5. Penn Series is registered under the
1940 Act as an open-end management
investment company that offers shares
of diversified portfolios (each, a
‘‘Fund,’’ and collectively, the ‘‘Funds’’)
for variable annuity and variable life
insurance contracts (each, a ‘‘Contract,’’
and collectively, the ‘‘Contracts’’) issued
by Penn Mutual and its subsidiary, PIA.
Each of Penn Series’’ twenty-nine
separate Funds is a no-load mutual
fund. Shares of each Fund may be
purchased only by insurance companies
for the purpose of funding variable
annuity contracts and variable life
insurance policies and by qualified
pension plans. Penn Series was
established as a Maryland corporation
pursuant to Articles of Incorporation
dated April 21, 1982. Independence
Capital Management, Inc. (‘‘ICMI’’), a
wholly-owned subsidiary of Penn
Mutual, is a registered investment
adviser under the Investment Advisers
Act of 1940, as amended, and provides
investment management services to
each of the Funds. ICMI performs the
day-to-day investment management
services for nine of the Funds while the
other twenty have sub-advisers. Penn
Series and ICMI have ‘‘manager of
managers’’ exemptive relief which
permits one or more of the sub-advisers
to be replaced without a vote of contract
owners (the ‘‘Contract Owners’’).1 Penn
Mutual provides administrative and
corporate services to Penn Series
pursuant to an Administrative and
Corporate Services Agreement and
receives a fee from Penn Series for those
services.
1 Investment Company Act Release Nos. 24376
(Notice) and 24428 (Order) (April 4, 2000 and April
28, 2000, respectively) File No. 812–11896.
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6. Purchase payments under the
Contracts may be allocated to one or
more sub-accounts of the Separate
Accounts (the ‘‘Sub-Accounts’’).
Income, gains and losses, whether or not
realized, from assets allocated to the
Separate Accounts are, as provided in
the Contracts, credited to or charged
against the Separate Accounts without
regard to other income, gains or losses
of Penn Mutual or PIA, as applicable.
The assets maintained in the Separate
Accounts will not be charged with any
liabilities arising out of any other
business conducted by Penn Mutual or
PIA, as applicable. Nevertheless, all
obligations arising under the Contracts,
including the commitment to make
annuity payments or death benefit
payments, are general corporate
obligations of Penn Mutual or PIA.
Accordingly, all of the assets of Penn
Mutual and PIA are available to meet
their respective obligations under the
Contracts.
7. Each of the Contracts permits
allocations of accumulation value to
available Sub-Accounts that invest in
specific investment portfolios of
underlying registered investment
companies (the ‘‘Mutual Funds’’). The
Section 26 Applicants note that after the
Substitutions, all of the Mutual Funds
available under the Contracts will be
Funds of Penn Series. Among the
currently available Mutual Funds are
portfolios of Neuberger Berman
Advisers Management Trust, Fidelity
Investments’ Variable Insurance
Products Fund, Fidelity Investments’
Variable Insurance Products Fund V,
Van Kampen’s The Universal
Institutional Funds, Inc., and Penn
Series. All of these companies are
registered under the 1940 Act as openend management investment
companies.
8. Each of the Contracts permits
transfers of accumulation value from
one Sub-Account to another SubAccount at any time subject to certain
restrictions. No sales charge applies to
such a transfer of accumulation value
among Sub-Accounts. Pursuant to the
approval of the Commission and the
insurance department of the
Commonwealth of Pennsylvania, each
of the Contracts reserves the right, upon
notice to Contract Owners, to substitute
shares of another mutual fund for shares
of a Mutual Fund held by a SubAccount.
9. The Section 26 Applicants propose
the Substitutions to increase the level of
fund management responsiveness
compared to the current structure,
which includes three unaffiliated
investment company complexes.
Currently, the Separate Accounts invest
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Federal Register / Vol. 73, No. 132 / Wednesday, July 9, 2008 / Notices
in unaffiliated investment companies
and changes due to investment
performance, style drift, or management
practice issues require substantial
systems, filing, and printing resources,
which slows the process to make
changes, if necessary. Assuming
Contract Owner approval, as discussed
below, and because Penn Series and
ICMI have ‘‘manager of managers’’
exemptive relief, the Section 26
Applicants assert that ICMI, as
investment adviser, will be able to act
more quickly and efficiently to protect
Contract Owners’ interests if the
investment strategy, management team
or performance of one or more of the
sub-advisers does not meet
expectations. The Replaced Funds (as
defined herein) do not have such relief.
In this regard, the Section 26 Applicants
agree not to change the corresponding
Replacement Fund’s sub-adviser (with
the exception of the Balanced Fund,
which does not have a sub-adviser)
without first obtaining Contract Owner
approval at a meeting whose record date
is after the Substitution is effective, of
either (a) the sub-adviser change or (b)
the ability of Penn Series and ICMI to
rely on the manager-of-managers relief
associated with the Replacement Fund.
10. The Replaced Funds involved in
the Substitutions include five separate
portfolios representing three investment
company complexes. Currently there are
21 Mutual Funds offered under each
Contract, and after the Substitutions,
there will be 29 Mutual Funds offered
under each Contract, all of which will
be portfolios of Penn Series.2 The
investment objective and policies of
each Replacement Fund will be the
same as or substantially similar to the
investment objective and policies of the
corresponding Replaced Fund. Another
benefit of the Substitutions is that
relieving the Separate Accounts of the
administrative burdens of interfacing
with three unaffiliated investment
company complexes is expected to
simplify compliance, accounting and
auditing and, generally, to allow Penn
Mutual to administer the Contracts more
efficiently.
11. The Substitutions will consist of
the proposed substitutions of shares of
the following Removed Portfolios with
shares of the corresponding
Replacement Portfolios:
(1) Shares of the Fidelity Investments’
Variable Insurance Products Fund
Equity-Income Portfolio will be replaced
with shares of the Penn Series Large
Core Value Fund, which has the
substantially similar investment
objective of total return by investing at
least 80% of its net assets in securities
of large capitalization companies.
(2) Shares of the Fidelity Investments’
Variable Insurance Products Fund
Growth Portfolio will be replaced with
shares of the Penn Series Large Core
Growth Fund, which has a substantially
39343
similar investment objective of capital
appreciation by investing in common
and preferred stocks of large
capitalization U.S. companies.
(3) Shares of the Fidelity Investments’
Variable Insurance Products Fund V
Asset Manager Portfolio will be replaced
with shares of the Penn Series Balanced
Fund, which has the substantially
similar investment objective of seeking
long term growth and current income by
utilizing a ‘‘fund of funds’’ strategy.
(4) Shares of the Neuberger Berman
Advisers Management Trust Balanced
Portfolio will be replaced with shares of
the Penn Series Balanced Fund, which
has the substantially similar investment
objective of seeking long term growth
and current income by utilizing a ‘‘fund
of funds’’ strategy.
(5) Shares of Van Kampen’s The
Universal Institutional Funds, Inc.
Emerging Markets Equity Portfolio will
be replaced with shares of the Penn
Series Emerging Markets Equity Fund,
which has the same investment
objective of capital appreciation by
investing primarily in equity securities
of issuers in emerging market countries.
12. For each Replaced Fund and each
Replacement Fund, the investment
objective, principal risks, investment
adviser, sub-adviser (if applicable), fee
structure, expenses for the fiscal year
ending December 31, 2007 and assets as
of December 31, 2007 are shown in the
tables that follow:
SUBSTITUTION 1
Replaced fund
Fund Name .......................................
Investment Objective ........................
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Principal Risks ..................................
Replacement fund
Variable Insurance Products Fund
Equity-Income Portfolio
Seeks reasonable income. The Fund will also consider the potential for capital appreciation. The
fund’s goal is to achieve a yield which exceeds
the composite yield on the securities comprising
the Standard & Poor’s 500SM Index (S&P 500).
Normally invests at least 80% of its assets in equity securities. Normally invests primarily in income-producing equity securities, which tends to
lead to investments in large cap ‘‘value’’ stocks.
Potentially invests in other types of equity securities and debt securities, including lower-quality
debt securities. Invests in domestic and foreign
issuers. Uses fundamental analysis of each
issuer’s financial condition and industry position
and market and economic conditions to select investments.
• Stock Market Volatility
• Interest Rate Changes
• Foreign Exposure
• Issuer-Specific Changes
• ‘‘Value’’ Investing
Penn Series Large Core Value Fund
Seeks total return. The Fund invests primarily in
value stocks of large capitalization companies.
Under normal conditions, the Fund invests at
least 80% of its net assets in securities of large
capitalization companies. For this Fund, large
capitalization companies are those companies
having market capitalizations equal to or greater
than the median capitalization of companies included in the Russell 1000 Value Index. The
Fund primarily invests in dividend-paying stocks.
The Fund may also invest in fixed income securities, such as convertible debt securities, of any
credit quality (including securities rated below investment grade), real estate investment trusts
and non-income producing stocks.
•
•
•
•
Stock Market Volatility
Interest Rate Changes
‘‘Value’’ Investing
Foreign Exposure
2 Contemporaneous with the proposed
Substitutions, 9 new Mutual Funds will be
available under each Contract.
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Federal Register / Vol. 73, No. 132 / Wednesday, July 9, 2008 / Notices
SUBSTITUTION 1—Continued
Replaced fund
Replacement fund
Significant Principal Risk Disparities
Adviser/Sub-adviser ..........................
Total Fund Asset Level as of 12/31/
07.
Total Amount of Replaced Fund Assets held by all Contract Owners.
Mgmt. Fee ........................................
Mgmt. Fee Schedule ........................
12b–1 Fee ........................................
Other Expenses ................................
Total Annual Operating Expenses ...
Fee Reduction ..................................
Net Total Annual Expenses ..............
None
Fidelity Management & Research Company
$10,948,929,549
ICMI/Eaton Vance Management
N/A
$194,949,289
N/A
0.46%
0.46%
N/A
0.09%
0.55%
0.01%
0.54%
0.46%
0.46%
N/A
0.27%
0.73%
0.19%
0.54%
SUBSTITUTION 2
Replaced fund
Fund Name .......................................
Investment Objective ........................
Principal Risks ..................................
Replacement fund
Variable Insurance Products Fund
Growth Portfolio
Seeks to achieve capital appreciation. Normally investing primarily in common stocks. Invests in
companies that the Adviser believes have aboveaverage growth potential (stocks of these companies are often called ‘‘growth’’ stocks). Invests in
domestic and foreign issuers. Uses fundamental
analysis of each issuer’s financial condition and
industry position and market and economic conditions to select investments.
•
•
•
•
Stock Market Volatility
Foreign Exposure
Issuer-Specific Changes
‘‘Growth’’ Investing
Significant Principal Risk Disparities
Adviser/Sub-adviser ..........................
Total Fund Asset Level as of 12/31/
07.
Total Amount of Replaced Fund Assets held by all Contract Owners.
Mgmt. Fee ........................................
Mgmt. Fee Schedule ........................
12b–1 Fee ........................................
Other Expenses ................................
Total Annual Operating Expenses ...
Fee Reduction ..................................
Net Total Annual Expenses ..............
Penn Series Large Core Growth Fund
Seeks to achieve long-term capital appreciation. Invests primarily in common and preferred stocks
of large capitalization U.S. companies. Under
normal conditions, the Fund invests at least 80%
of its net assets in securities of large capitalization companies. For this Fund, large capitalization companies are those with market capitalizations within the range of companies comprising
the Russell 1000 Growth Index at the time of purchase. The Fund invests principally in equity securities of large capitalization companies that
offer the potential for capital growth, with an emphasis on identifying companies that have the
prospect for improving sales and earnings growth
rates, enjoy a competitive advantage and have
effective management with a history of making
investments that are in the best interests of
shareholders.
• Stock Market Volatility
• Foreign Exposure
• ‘‘Growth’’ Investing
None
Fidelity Management & Research Company
$8,032,463,930
ICMI/Wells Capital Management Incorporated
N/A
$211,463,358
N/A
0.56%
0.56%
N/A
0.09%
0.65%
0.01%
0.64%
0.56%
0.56%
N/A
0.27%
0.83%
0.19%
0.64%
jlentini on PROD1PC65 with NOTICES
SUBSTITUTION 3
Replaced fund
Fund Name .......................................
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Replacement fund
Variable Insurance Products Fund V
Asset Manager Portfolio
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Penn Series Balanced Fund
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Federal Register / Vol. 73, No. 132 / Wednesday, July 9, 2008 / Notices
39345
SUBSTITUTION 3—Continued
Replaced fund
Replacement fund
Investment Objective ........................
Seeks to obtain high total return with reduced risk
over the long term by allocating its assets among
stocks, bonds, and short-term instruments. Allocates the fund’s assets among stocks, bonds,
and short-term and money market instruments.
Maintains a neutral mix over time of 50% of assets in stocks, 40% of assets in bonds, and 10%
of assets in short-term and money market instruments. Adjusts allocation among asset classes
gradually within the following ranges: stock class
(30%–70%), bond class (20%–60%), and shortterm/money market class (0%–50%). Invests in
domestic and foreign issuers. Analyzes an issuer
using fundamental and/or quantitative factors and
evaluating each security’s current price relative to
estimated long-term value to select investments.
Principal Risks ..................................
•
•
•
•
Seeks long-term growth and current income using a
‘‘fund-of-funds’’ strategy. The Fund invests in a
combination of other Penn Series Funds (each,
an ‘‘underlying fund’’ and, together, the ‘‘underlying funds’’) in accordance with its target asset
allocation. These underlying funds invest their assets directly in equity, fixed income, money market and other securities in accordance with their
own investment objectives and policies. The underlying funds are managed using both indexed
and active management strategies. The Fund intends to invest primarily in a combination of underlying funds; however, the Fund may invest directly in equity and fixed income securities and
cash equivalents, including money market securities. Under normal circumstances, the Fund will
invest 50%–70% of its assets in stock and other
equity underlying funds, 30%–50% of its assets
in bond and other fixed income funds, and 0%–
20% of its assets in money market funds. The
Fund’s allocation strategy is designed to provide
a mix of the growth opportunities of stock investing with the income opportunities of bonds and
other fixed income securities. The Fund’s underlying equity fund allocation will primarily track the
performance of the large capitalization company
portion of the U.S. stock market. The Fund’s underlying fixed income fund allocation will be invested primarily in a broad range of investment
grade fixed income securities (although up to
10% of the underlying fund may be invested in
non-investment grade securities), and is intended
to provide results consistent with the broad U.S.
fixed income market.
• Stock Market Volatility
• Asset Allocation
• Interest Rate Changes
• Underlying Funds
Significant Principal Risk Disparities
Penn Series Balanced Fund utilizes a fund-of-funds investment strategy. Accordingly, the Fund is subject
to the risks of the underlying funds (Penn Series Index 500 Fund, Penn Series Quality Bond Fund and
Penn Series Money Market Fund).
These risks include those associated with both equity and fixed income investing (e.g. stock market volatility and interest rate changes) that are similar to those of the Replaced Fund. The Fund is also subject to
asset allocation risk, which is the risk that the selection of underlying funds and the amount of assets allocated to the selected underlying funds will cause the Fund to underperform other funds with a similar investment objective.
Adviser ..............................................
Total Fund Asset Level as of 12/31/
07.
Total Amount of Replaced Fund Assets held by all Contract Owners.
Mgmt. Fee ........................................
Mgmt. Fee Schedule ........................
12b–1 Fee ........................................
Acquired Fund Fees and Expenses
Other Expenses ................................
Total Annual Operating Expenses ...
Fee Reduction ..................................
Net Total Annual Expenses ..............
Fidelity Management & Research Company
$1,911,400,918
ICMI
N/A
$31,940,165
N/A
0.51%
0.51%
N/A
N/A
0.12%
0.63%
0.00%
0.63%
0.00%
0.00%
N/A
0.45%
0.22%
0.67%
0.05%
0.62%
Stock Market Volatility
Interest Rate Changes
Foreign Exposure
Prepayment
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SUBSTITUTION 4
Replaced fund
Fund Name .......................................
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Replacement fund
Neuberger Berman Advisers Management Trust
Balanced Portfolio
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Penn Series Balanced Fund
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SUBSTITUTION 4—Continued
Replaced fund
Replacement fund
Investment Objective ........................
The Fund seeks growth of capital and reasonable
current income without undue risk to principal. To
pursue these goals, the Fund allocates its assets
between stocks—primarily those of mid-capitalization companies, which it defines as those with
a total market capitalization within the market
capitalization range of the Russell Midcap
Index—and in investment grade bonds and other
debt securities from U.S. government and corporate issuers. The Portfolio Managers normally
allocates anywhere from 50% to 70% of its net
assets to stock investments, with the balance allocated to debt securities (at least 25%) and operating cash.
Principal Risks ..................................
• Stock and Bond Market Volatility
• Interest Rate Changes
• Mid-Capitalization Company Risk
Seeks long-term growth and current income by
using a ‘‘fund-of-funds’’ strategy. The Fund invests in a combination of other Penn Series
Funds (each, an ‘‘underlying fund’’ and, together,
the ‘‘underlying funds’’) in accordance with its target asset allocation. These underlying funds invest their assets directly in equity, fixed income,
money market and other securities in accordance
with their own investment objectives and policies.
The underlying funds are managed using both indexed and active management strategies. The
Fund intends to invest primarily in a combination
of underlying funds; however, the Fund may invest directly in equity and fixed income securities
and cash equivalents, including money market
securities. Under normal circumstances, the Fund
will invest 50%–70% of its assets in stock and
other equity underlying funds, 30%–50% of its
assets in bond and other fixed income funds, and
0%–20% of its assets in money market funds.
The Fund’s allocation strategy is designed to provide a mix of the growth opportunities of stock investing with the income opportunities of bonds
and other fixed income securities. The Fund’s underlying equity fund allocation will primarily track
the performance of the large capitalization company portion of the U.S. stock market. The
Fund’s underlying fixed income fund allocation
will be invested primarily in a broad range of investment grade fixed income securities (although
up to 10% of the underlying fund may be invested in non-investment grade securities), and
is intended to provide results consistent with the
broad U.S. fixed income market.
• Stock Market Volatility
• Asset Allocation
• Interest Rate Changes
• Underlying Funds
Significant Principal Risk Disparities
Penn Series Balanced Fund utilizes a fund-of-funds investment strategy. Accordingly, the Fund is subject
to the risks of the underlying funds (Penn Series Index 500 Fund, Penn Series Quality Bond Fund and
Penn Series Money Market Fund). These risks include those associated with both equity and fixed income investing (e.g., stock market volatility and interest rate changes) that are similar to those of the Replaced Fund. The Fund is also subject to asset allocation risk, which is the risk that the selection of underlying funds and the amount of assets allocated to the selected underlying funds will cause the Fund to
underperform other funds with a similar investment objective.
Adviser/Subadviser ...........................
Neuberger Berman Management Inc./Neuberger
Berman, LLC
$78,363,158
ICMI
$49,790,470
N/A
0.85% (includes both investment advisory and administrative services)
First $250 million 0.55%
From $250 million to $500 million 0.525%
From $500 to $750 million 0.50%
From $750 million to $1 billion 0.475%
From $1 billion to $1.5 billion 0.45%
From $1.5 billion to $4 billion 0.425%
More than $4 billion 0.40%
N/A
N/A
0.32%
1.17%
—
1.17%
0.00%
Total Fund Asset Level as of 12/31/
07.
Total Amount of Replaced Fund Assets Held by all Contract Owners.
Mgmt. Fee ........................................
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Mgmt. Fee Schedule ........................
12b–1 Fee ........................................
Acquired Fund Fees and Expenses
Other Expenses ................................
Total Annual Operating Expenses ...
Fee Reduction ..................................
Net Total Annual Expenses ..............
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N/A
0.00%
N/A
0.45%
0.22%
0.67%
0.05%
0.62%
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SUBSTITUTION 5
Replaced fund
Fund Name .......................................
Investment Objective ........................
Replacement fund
The Universal Institutional Funds, Inc.
Emerging Markets Equity Portfolio
Seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of
issuers in emerging market countries. Seeks to
maximize returns by investing in growth-oriented
equity securities in emerging markets. Combines
top-down country allocation with bottom-up stock
selection. Investment selection criteria include attractive growth characteristics, reasonable valuations and company managements with strong
shareholder value orientation. Invests at least
80% of the Portfolio’s assets in equity securities
located in emerging market countries.
Penn Series Emerging Markets Equity Fund
Seeks to achieve capital appreciation. Under normal circumstances, at least 80% of the Fund’s
assets will be invested in equity securities located in emerging market countries. For this
Fund, an issuer is considered to be located in an
emerging market country if, at the time of investment: (i) Its principal securities trading market is
in an emerging market country, (ii) alone or on a
consolidated basis it derives 50% or more of its
annual revenue from goods produced, sales
made or services performed in emerging market
countries, or (iii) it is organized under the laws of,
or has a principal office in, an emerging market
country. The Fund invests primarily in equity securities, including common and preferred stocks,
convertible securities, rights and warrants to purchase common stock, and depositary receipts.
• Stock Market Volatility
• Foreign Exposure
• Emerging Markets
• Small Cap
• Currency
Principal Risks ..................................
• Stock Market Volatility
• Foreign Exposure
• Emerging Markets
Significant Principal Risk Disparities
Small cap companies may be more vulnerable to adverse business or economic events than larger, more
established companies.
Investing in currency involves the risk that currencies will decline in value relative to the U.S. dollar, or in
the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged.
Adviser/Subadviser ...........................
Morgan Stanley Investment Management Inc./Morgan Stanley Investment Management Company
$1,673,500,000
ICMI/Van Kampen Asset Management
$135,575,219
N/A
1.21%
First $500 million 1.25%
From $500 million to $1 billion 1.20%
From $1 billion to $2.5 billion 1.15%
More than $2.5 billion 1.00%
N/A
0.37%
0.02%
1.60%
0.00%
1.60%
1.18%
1.18%
Total Fund Asset Level as of 12/31/
07.
Total Amount of Replaced Fund Assets Held by all Contract Owners.
Mgmt. Fee ........................................
Mgmt. Fee Schedule ........................
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12b–1 Fee ........................................
Other Expenses ................................
Acquired Fund Fees and Expenses
Total Annual Operating Expenses ...
Fee Reduction ..................................
Net Total Annual Expenses ..............
13. The Section 26 Applicants
represent that the Substitutions will
take place at the Replaced Funds’
relative net asset values determined on
the date of the Substitutions in
accordance with Section 22 of the 1940
Act and Rule 22c-1 thereunder with no
change in the total value of amounts
held under a Contract for a Contract
Owner in all Sub-Accounts of the
Separate Account (the ‘‘Account
Value’’) or death benefit or in the dollar
value of his or her investment in any of
the Sub-Accounts. Accordingly, there
will be no financial impact on any
Contract Owner. The Substitutions will
generally be effected by having each of
the Sub-Accounts that invests in the
Replaced Funds redeem its shares at the
net asset value calculated on the date of
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N/A
N/A
0.40%
0.02%
1.60%
0.00%
1.60%
the Substitutions and purchase shares of
the respective Replacement Funds at the
net asset value calculated on the same
date.
14. Alternatively, a Replaced Fund
may redeem the interest ‘‘in-kind,’’ for
example, if it determines that a cash
redemption might adversely affect its
shareholders. In that case, the
Substitutions will be effected by the
Sub-Account contributing all the
securities it receives from the Replaced
Fund for an amount of Replacement
Fund shares equal to the fair market
value of the securities contributed. All
in-kind redemptions from a Replaced
Fund of which any of the Section 26
Applicants is an affiliated person will
be effected in accordance with the
conditions set forth in the Commission’s
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no-action letter issued to Signature
Financial Group, Inc. (available
December 28, 1999). In-kind purchases
of shares of a Replacement Fund will be
conducted as described in Section VI of
the application.
15. The Section 26 Applicants state
that the Substitutions will be described
in a supplement to the prospectuses for
the Contracts (‘‘Supplements’’) filed
with the Commission and mailed to
Contract Owners. The Supplements will
provide Contract Owners with notice of
the Substitutions and describe the
reasons for engaging in the
Substitutions. The Supplements will
also inform Contract Owners with assets
allocated to a Sub-Account investing in
the Replaced Funds that no additional
amount may be invested in the Replaced
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Funds on or after the date of the
Substitutions. In addition, the
Supplements will inform affected
Contract Owners that they will have the
opportunity to reallocate Account Value
once (as described below):
• Prior to the Substitutions, from each
Sub-Account investing in a Replaced
Fund, and
• for 30 days after the Substitutions,
from each Sub-Account investing in a
Replacement Fund to Sub-Accounts
investing in other Mutual Funds
available under the respective Contracts,
without diminishing the number of free
transfers that may be made in a given
contract year and without the
imposition of any transfer charge or
limitations, other than any applicable
limitations in place to deter potentially
harmful excessive trading or limitations
on the number of transfers to or from the
fixed accounts available with the
variable annuity contracts. To the extent
a Contract Owner has Account Value
allocated to more than one Sub-Account
investing in a Replaced Fund, the
Contract Owner will be permitted one
reallocation from each Sub-Account. If a
Contract Owner reallocates on the same
day from all affected Sub-Accounts to
which the Contract Owner has Account
Value allocated, they will have
exhausted the number of permitted
reallocations.
16. Within five days after a
Substitution, Penn Mutual and PIA will
send their affected Contract Owners
written confirmation that a Substitution
has occurred. The prospectuses for the
Contracts, as revised by the
Supplements, will reflect the
Substitutions. Each Contract Owner will
be provided with a prospectus for the
Replacement Funds before the
Substitutions.
17. Penn Mutual and PIA assert that
they will pay all expenses and
transaction costs of the Substitutions,
including all legal, accounting and
brokerage expenses relating to the
Substitutions. No costs will be borne by
Contract Owners. Affected Contract
Owners will not incur any fees or
charges as a result of the Substitutions,
nor will their rights or the obligations of
the Section 26 Applicants under the
Contracts be altered in any way. The
Substitutions will not cause the fees and
charges under the Contracts currently
being paid by Contract Owners to be
greater after the Substitutions than
before the Substitutions. The
Substitutions will have no adverse tax
consequences on Contract Owners and
will in no way alter the tax benefits to
Contract Owners. Further, the
Substitutions will in no way alter any of
the life insurance or annuity benefits
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available to Contract Owners under the
Contracts.
18. The Section 26 Applicants believe
that their request satisfies the standards
for relief pursuant to Section 26(c) of the
1940 Act, as set forth below, because the
affected Contract Owners will have:
(1) Account Value allocated to a SubAccount invested in a Replacement
Fund with an investment objective and
policies that are the same or
substantially similar to the investment
objective and policies of the Replaced
Fund; and
(2) Replacement Funds whose current
total annual expenses are equal to or
lower than those of the Replaced Funds
for their 2007 fiscal year. In addition,
the Section 26 Applicants represent that
with respect to Contract Owners on the
date of the proposed Substitutions, Penn
Mutual and PIA, as applicable, will
reimburse, on the last business day of
each fiscal quarter during the two years
following the date of the proposed
Substitutions, the Sub-Accounts
investing in the applicable Replacement
Fund such that the sum of the
Replacements Fund’s net operating
expense ratio (taking into account any
expense waivers or reimbursements)
and Sub-Account expense ratio (assetbased fees and charges deducted on a
daily basis from Sub-Account assets and
reflected in the calculation of SubAccount unit value) for such period will
not exceed, on an annualized basis, the
sum of the corresponding Replaced
Fund’s net operating expense ratio
(taking into account any expense
waivers or reimbursements) and SubAccount expense ratio for fiscal year
2007.
Applicants’ Legal Analysis
15. Section 26(c) of the 1940 Act
makes it unlawful for any depositor or
trustee of a registered unit investment
trust holding the security of a single
issuer to substitute another security for
such security unless the Commission
approves the substitution. The
Commission will approve such a
substitution if the evidence establishes
that it is consistent with the protection
of investors and the purposes fairly
intended by the policy and provisions of
the 1940 Act.
2. The Section 26 Applicants assert
that the purposes, terms and conditions
of the Substitutions are consistent with
the principles and purposes of Section
26(c) and do not entail any of the abuses
that Section 26(c) is designed to
prevent. The Section 26 Applicants
have reserved the right to make such a
substitution under the Contracts and
this reserved right is disclosed in each
Contract’s prospectus.
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3. The Section 26 Applicants argue
that substitutions have been common
where the substituted fund has
investment objectives and policies that
are similar to those of the eliminated
fund, and current expenses that are
similar to or lower than those of the
eliminated fund. The Section 26
Applicants note that in all cases, the
investment objectives and policies of
the Replacement Funds are sufficiently
similar to those of the corresponding
Replaced Funds that affected Contract
Owners will have reasonable continuity
in investment expectations.
Accordingly, the Section 26 Applicants
conclude that the Replacement Funds
are appropriate investment vehicles for
those affected Contract Owners who
have Account Value allocated to the
Replaced Funds.
4. The Section 26 Applicants argue
that because of the foregoing
representations and conditions, the
Substitutions will not result in the type
of costly forced redemption that Section
26(c) was intended to guard against and
are consistent with the protection of
investors and the purposes fairly
intended by the 1940 Act.
5. Section 17(a)(1) of the 1940 Act, in
relevant part, prohibits any affiliated
person of a registered investment
company, or any affiliated person of
such person, acting as principal, from
knowingly selling any security or other
property to that company. Section
17(a)(2) of the 1940 Act generally
prohibits the persons described above,
acting as principal, from knowingly
purchasing any security or other
property from the registered company.
6. Section 17(b) of the 1940 Act
provides that the Commission may,
upon application, grant an order
exempting any transaction from the
prohibitions of Section 17(a) if the
evidence establishes that: (1) The terms
of the proposed transaction, including
the consideration to be paid or received,
are reasonable and fair and do not
involve overreaching on the part of any
person concerned; (2) the proposed
transaction is consistent with the policy
of each registered investment company
concerned, as recited in its registration
statement and records filed under the
1940 Act; and (3) the proposed
transaction is consistent with the
general purposes of the 1940 Act.
7. Accordingly, the Section 17
Applicants are seeking relief, to the
extent necessary, from Section 17(a) for
the in-kind purchases and sales of
Replacement Fund Shares.
8. The Section 17 Applicants submit
that the terms of the proposed in-kind
purchases of shares of the Replacement
Funds by the Separate Accounts,
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including the consideration to be paid
and received, as described in this
Application, are reasonable and fair and
do not involve overreaching on the part
of any person concerned. The Section
17 Applicants also submit that the
proposed in-kind purchases by the
Separate Accounts are consistent with
the policies of Penn Mutual and PIA
and the individual Replacement Funds.
Finally, the Section 17 Applicants
submit that the proposed Substitutions
are consistent with the general purposes
of the 1940 Act.
9. To the extent that the Separate
Accounts’ in-kind purchases of
Replacement Fund shares are deemed to
involve principal transactions between
entities which are affiliates of affiliates,
the Section 17 Applicants maintain that
the terms of the proposed in-kind
purchase transactions, including the
consideration to be paid and received by
each Replacement Fund involved, are
reasonable, fair and do not involve
overreaching. In addition, although not
applicable, the Section 17 Applicants
represent that the in-kind transactions
will conform with all of the conditions
enumerated in Rule 17a–7, except that
the consideration paid for the securities
being purchased or sold may not be
entirely cash.
10. 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 Contract Owner’s
Account Value or death benefit or in the
dollar value of his or her investment in
any Sub-Account. Contract Owners will
not suffer any adverse tax consequences
as a result of the Substitutions. The fees
and charges under the Contracts will not
increase because of the Substitutions.
11. Even though they may not rely on
Rule 17a–7, the Section 17 Applicants
believe that the Rule’s conditions
outline the type of safeguards that result
in transactions that are fair and
reasonable to registered investment
company participants and preclude
overreaching. Nevertheless, the
circumstances surrounding the
proposed Substitutions will be such as
to offer the same degree of protection to
each Replacement Fund from
overreaching that Rule 17a–7 provides
to them generally in connection with
their purchase and sale of securities
under that Rule in the ordinary course
of their business. In particular, Penn
Mutual and PIA (or any of their
affiliates) cannot effect the proposed
transactions at a price that is
disadvantageous to any of the
Replacement Funds. Moreover, although
the transactions may not be entirely for
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cash, the Section 17 Applicants assert
that each will be effected based upon (1)
the independent market price of the
portfolio securities valued as specified
in paragraph (b) of Rule 17a–7, and (2)
the net asset value per share of each
Replacement Fund involved valued in
accordance with the procedures
disclosed in its registration statement
and as required by Rule 22c–1 under the
1940 Act. No brokerage commission,
fee, or other remuneration will be paid
to any party in connection with the
proposed transactions.
12. The Section 17 Applicants also
argue that the sale of shares of
Replacement Funds for investment
securities, as contemplated by the
proposed in-kind transactions, is
consistent with the investment policy
and restrictions of the Replacement
Funds because (1) the shares are sold at
their net asset value, and (2) the
portfolio securities are of the type and
quality that the Replacement Funds
would each have acquired with the
proceeds from share sales had the shares
been sold for cash. To assure that the
second of these conditions is met, the
adviser or sub-adviser, as applicable of
a Replacement Fund will undertake to
examine the portfolio securities being
offered to each Replacement Fund and
accept only those securities as
consideration for shares that it would
have acquired for each such fund in a
cash transaction.
13. The Section 17 Applicants also
assert that the proposed in-kind
transactions are consistent with the
general purposes of the 1940 Act as
stated in the Findings and Declaration
of Policy in Section 1 of the 1940 Act
and do not present any of the conditions
or abuses that the 1940 Act was
designed to prevent.
SECURITIES AND EXCHANGE
COMMISSION
Conclusion:
Dated: July 2, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–15480 Filed 7–8–08; 8:45 am]
For the reasons set forth in the
application, the Applicants each
respectfully request that the
Commission issue an order of approval
pursuant to Section 26(c) of the 1940
Act and an order of exemption pursuant
to Section 17(b) of the 1940 Act.
For the Commission, by the Division
of Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–15514 Filed 7–8–08; 8:45 am]
BILLING CODE 8010–01–P
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Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on July 10, 2008 at 2 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(5), (7), (9)(B), and (10)
and 17 CFR 200.402(a)(5), (7), 9(ii) and
(10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Atkins, as duty officer,
voted to consider the items listed for the
Closed Meeting in closed session.
The subject matter of the Closed
Meeting scheduled for July 10, 2008 will
be:
Formal orders of investigation;
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings of an
enforcement nature;
Amicus consideration; and
Other matters related to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact: The Office of the Secretary at
(202) 551–5400.
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release Nos. 33–8941; 34–58097; File No.
4–560]
Roundtable on Fair Value Accounting
Standards
Securities and Exchange
Commission.
ACTION: Notice of roundtable discussion;
request for comment.
AGENCY:
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[Federal Register Volume 73, Number 132 (Wednesday, July 9, 2008)]
[Notices]
[Pages 39341-39349]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-15514]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-28328; File No. 812-13401]
The Penn Mutual Life Insurance Company, et al.; Notice of
Application
July 2, 2008.
AGENCY: Securities and Exchange Commission (``SEC'' or the
``Commission'').
ACTION: Notice of application for an order pursuant to Section 26(c) of
the Investment Company Act of 1940 (``1940 Act''), approving certain
substitutions of securities and for an order of exemption pursuant to
Section 17(b) of the 1940 Act.
-----------------------------------------------------------------------
Applicants: The Penn Mutual Life Insurance Company (``Penn Mutual''),
The Penn Insurance and Annuity Company (``PIA''), Penn Mutual Variable
Annuity Account III (``Variable Annuity Account III''), Penn Mutual
Variable Life Account I (``Variable Life Account I''), and PIA Variable
Annuity Account I (``Variable Annuity Account I'') (Variable Annuity
Account III, Variable Life Account I, and Variable Annuity Account I
are collectively referred to as the ``Separate Accounts'' and,
collectively with Penn Mutual and PIA, the ``Section 26 Applicants''),
Penn Series Funds, Inc. (``Penn Series'' and collectively with the
Section 26 Applicants, the ``Section 17 Applicants'').
Summary of Application: The Section 26 Applicants request an order
pursuant to Section 26(c) of the 1940 Act, approving the proposed
substitution of certain shares of diversified portfolios of Penn
Series, a registered investment company that is an affiliate of the
Section 26 Applicants, for shares of other investment portfolios of
underlying registered investment companies unaffiliated with the
Section 26 Applicants (the ``Substitutions''). The registered
investment companies support variable annuity and variable life
insurance contracts issued by Penn Mutual and its subsidiary, PIA. The
Section 17 Applicants also request an order pursuant to Section 17(b)
of the 1940 Act exempting them, to the extent necessary, from Section
17(a) of the
[[Page 39342]]
1940 Act for the in-kind purchases and sales of shares of the
Replacement Funds (as defined herein) in connection with the
Substitutions.
Filing Date: The application was filed on June 29, 2007, and amended on
July 2, 2008.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on July 24, 2008, 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 who wish to be notified of a hearing may
request notification by writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090. Applicants, c/o Morgan, Lewis & Bockius
LLP, 1111 Pennsylvania Avenue, NW., Washington, DC 20004, Attn: Michael
Berenson, Esq.
FOR FURTHER INFORMATION CONTACT: Sonny Oh, Staff Attorney, or Zandra
Bailes, Branch Chief, Office of Insurance Products, Division of
Investment Management at (202) 551-6795.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 100 F Street, NE., Room 1580,
Washington, DC 20549 (tel. (202) 551-8090).
Applicants' Representations
1. Penn Mutual is a mutual life insurance company organized in the
Commonwealth of Pennsylvania and originally chartered in 1847. Penn
Mutual is a diversified financial services company providing life
insurance, annuities, disability income insurance, long-term care
insurance, structured settlements, retirement and other products to
individual and institutional customers.
2. Penn Mutual established Variable Annuity Account III on April
13, 1982. Variable Annuity Account III is registered under the 1940 Act
as a unit investment trust and is used to fund variable annuity
contracts issued by Penn Mutual. Ten variable annuity contracts funded
by Variable Annuity Account III are affected by the application.
3. Penn Mutual established Variable Life Account I on January 27,
1987. Variable Life Account I is registered under the 1940 Act as a
unit investment trust and is used to fund variable life insurance
contracts issued by Penn Mutual. Eight variable life insurance
contracts funded by Variable Life Account I are affected by the
application.
4. PIA is a Delaware stock life insurance company. It is a wholly-
owned subsidiary of Penn Mutual. PIA established Variable Annuity
Account I on July 13, 1994. Variable Annuity Account I is registered
under the 1940 Act as a unit investment trust and is used to fund
variable annuity contracts issued by PIA. One variable annuity contract
funded by Variable Annuity Account I is affected by the application.
5. Penn Series is registered under the 1940 Act as an open-end
management investment company that offers shares of diversified
portfolios (each, a ``Fund,'' and collectively, the ``Funds'') for
variable annuity and variable life insurance contracts (each, a
``Contract,'' and collectively, the ``Contracts'') issued by Penn
Mutual and its subsidiary, PIA. Each of Penn Series'' twenty-nine
separate Funds is a no-load mutual fund. Shares of each Fund may be
purchased only by insurance companies for the purpose of funding
variable annuity contracts and variable life insurance policies and by
qualified pension plans. Penn Series was established as a Maryland
corporation pursuant to Articles of Incorporation dated April 21, 1982.
Independence Capital Management, Inc. (``ICMI''), a wholly-owned
subsidiary of Penn Mutual, is a registered investment adviser under the
Investment Advisers Act of 1940, as amended, and provides investment
management services to each of the Funds. ICMI performs the day-to-day
investment management services for nine of the Funds while the other
twenty have sub-advisers. Penn Series and ICMI have ``manager of
managers'' exemptive relief which permits one or more of the sub-
advisers to be replaced without a vote of contract owners (the
``Contract Owners'').\1\ Penn Mutual provides administrative and
corporate services to Penn Series pursuant to an Administrative and
Corporate Services Agreement and receives a fee from Penn Series for
those services.
---------------------------------------------------------------------------
\1\ Investment Company Act Release Nos. 24376 (Notice) and 24428
(Order) (April 4, 2000 and April 28, 2000, respectively) File No.
812-11896.
---------------------------------------------------------------------------
6. Purchase payments under the Contracts may be allocated to one or
more sub-accounts of the Separate Accounts (the ``Sub-Accounts'').
Income, gains and losses, whether or not realized, from assets
allocated to the Separate Accounts are, as provided in the Contracts,
credited to or charged against the Separate Accounts without regard to
other income, gains or losses of Penn Mutual or PIA, as applicable. The
assets maintained in the Separate Accounts will not be charged with any
liabilities arising out of any other business conducted by Penn Mutual
or PIA, as applicable. Nevertheless, all obligations arising under the
Contracts, including the commitment to make annuity payments or death
benefit payments, are general corporate obligations of Penn Mutual or
PIA. Accordingly, all of the assets of Penn Mutual and PIA are
available to meet their respective obligations under the Contracts.
7. Each of the Contracts permits allocations of accumulation value
to available Sub-Accounts that invest in specific investment portfolios
of underlying registered investment companies (the ``Mutual Funds'').
The Section 26 Applicants note that after the Substitutions, all of the
Mutual Funds available under the Contracts will be Funds of Penn
Series. Among the currently available Mutual Funds are portfolios of
Neuberger Berman Advisers Management Trust, Fidelity Investments'
Variable Insurance Products Fund, Fidelity Investments' Variable
Insurance Products Fund V, Van Kampen's The Universal Institutional
Funds, Inc., and Penn Series. All of these companies are registered
under the 1940 Act as open-end management investment companies.
8. Each of the Contracts permits transfers of accumulation value
from one Sub-Account to another Sub-Account at any time subject to
certain restrictions. No sales charge applies to such a transfer of
accumulation value among Sub-Accounts. Pursuant to the approval of the
Commission and the insurance department of the Commonwealth of
Pennsylvania, each of the Contracts reserves the right, upon notice to
Contract Owners, to substitute shares of another mutual fund for shares
of a Mutual Fund held by a Sub-Account.
9. The Section 26 Applicants propose the Substitutions to increase
the level of fund management responsiveness compared to the current
structure, which includes three unaffiliated investment company
complexes. Currently, the Separate Accounts invest
[[Page 39343]]
in unaffiliated investment companies and changes due to investment
performance, style drift, or management practice issues require
substantial systems, filing, and printing resources, which slows the
process to make changes, if necessary. Assuming Contract Owner
approval, as discussed below, and because Penn Series and ICMI have
``manager of managers'' exemptive relief, the Section 26 Applicants
assert that ICMI, as investment adviser, will be able to act more
quickly and efficiently to protect Contract Owners' interests if the
investment strategy, management team or performance of one or more of
the sub-advisers does not meet expectations. The Replaced Funds (as
defined herein) do not have such relief. In this regard, the Section 26
Applicants agree not to change the corresponding Replacement Fund's
sub-adviser (with the exception of the Balanced Fund, which does not
have a sub-adviser) without first obtaining Contract Owner approval at
a meeting whose record date is after the Substitution is effective, of
either (a) the sub-adviser change or (b) the ability of Penn Series and
ICMI to rely on the manager-of-managers relief associated with the
Replacement Fund.
10. The Replaced Funds involved in the Substitutions include five
separate portfolios representing three investment company complexes.
Currently there are 21 Mutual Funds offered under each Contract, and
after the Substitutions, there will be 29 Mutual Funds offered under
each Contract, all of which will be portfolios of Penn Series.\2\ The
investment objective and policies of each Replacement Fund will be the
same as or substantially similar to the investment objective and
policies of the corresponding Replaced Fund. Another benefit of the
Substitutions is that relieving the Separate Accounts of the
administrative burdens of interfacing with three unaffiliated
investment company complexes is expected to simplify compliance,
accounting and auditing and, generally, to allow Penn Mutual to
administer the Contracts more efficiently.
---------------------------------------------------------------------------
\2\ Contemporaneous with the proposed Substitutions, 9 new
Mutual Funds will be available under each Contract.
---------------------------------------------------------------------------
11. The Substitutions will consist of the proposed substitutions of
shares of the following Removed Portfolios with shares of the
corresponding Replacement Portfolios:
(1) Shares of the Fidelity Investments' Variable Insurance Products
Fund Equity-Income Portfolio will be replaced with shares of the Penn
Series Large Core Value Fund, which has the substantially similar
investment objective of total return by investing at least 80% of its
net assets in securities of large capitalization companies.
(2) Shares of the Fidelity Investments' Variable Insurance Products
Fund Growth Portfolio will be replaced with shares of the Penn Series
Large Core Growth Fund, which has a substantially similar investment
objective of capital appreciation by investing in common and preferred
stocks of large capitalization U.S. companies.
(3) Shares of the Fidelity Investments' Variable Insurance Products
Fund V Asset Manager Portfolio will be replaced with shares of the Penn
Series Balanced Fund, which has the substantially similar investment
objective of seeking long term growth and current income by utilizing a
``fund of funds'' strategy.
(4) Shares of the Neuberger Berman Advisers Management Trust
Balanced Portfolio will be replaced with shares of the Penn Series
Balanced Fund, which has the substantially similar investment objective
of seeking long term growth and current income by utilizing a ``fund of
funds'' strategy.
(5) Shares of Van Kampen's The Universal Institutional Funds, Inc.
Emerging Markets Equity Portfolio will be replaced with shares of the
Penn Series Emerging Markets Equity Fund, which has the same investment
objective of capital appreciation by investing primarily in equity
securities of issuers in emerging market countries.
12. For each Replaced Fund and each Replacement Fund, the
investment objective, principal risks, investment adviser, sub-adviser
(if applicable), fee structure, expenses for the fiscal year ending
December 31, 2007 and assets as of December 31, 2007 are shown in the
tables that follow:
Substitution 1
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Replaced fund Replacement fund
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Fund Name.......................... Variable Insurance Products Fund Penn Series Large Core Value Fund
Equity-Income Portfolio
Investment Objective............... Seeks reasonable income. The Fund will also consider the Seeks total return. The Fund invests primarily in value
potential for capital appreciation. The fund's goal is stocks of large capitalization companies. Under normal
to achieve a yield which exceeds the composite yield on conditions, the Fund invests at least 80% of its net
the securities comprising the Standard & Poor's 500\SM\ assets in securities of large capitalization companies.
Index (S&P 500[supreg]). Normally invests at least 80% For this Fund, large capitalization companies are those
of its assets in equity securities. Normally invests companies having market capitalizations equal to or
primarily in income-producing equity securities, which greater than the median capitalization of companies
tends to lead to investments in large cap ``value'' included in the Russell 1000 Value Index. The Fund
stocks. Potentially invests in other types of equity primarily invests in dividend-paying stocks. The Fund
securities and debt securities, including lower-quality may also invest in fixed income securities, such as
debt securities. Invests in domestic and foreign convertible debt securities, of any credit quality
issuers. Uses fundamental analysis of each issuer's (including securities rated below investment grade),
financial condition and industry position and market and real estate investment trusts and non-income producing
economic conditions to select investments. stocks.
Principal Risks.................... Stock Market Volatility Stock Market Volatility
Interest Rate Changes Interest Rate Changes
Foreign Exposure ``Value'' Investing
Issuer-Specific Changes Foreign Exposure
``Value'' Investing
--------------------------------------------------------------------------------------------------------------------
[[Page 39344]]
Significant Principal Risk None
Disparities.
--------------------------------------------------------------------------------------------------------------------
Adviser/Sub-adviser................ Fidelity Management & Research Company ICMI/Eaton Vance Management
Total Fund Asset Level as of 12/31/ $10,948,929,549 N/A
07.
Total Amount of Replaced Fund $194,949,289 N/A
Assets held by all Contract Owners.
Mgmt. Fee.......................... 0.46% 0.46%
Mgmt. Fee Schedule................. 0.46% 0.46%
12b-1 Fee.......................... N/A N/A
Other Expenses..................... 0.09% 0.27%
Total Annual Operating Expenses.... 0.55% 0.73%
Fee Reduction...................... 0.01% 0.19%
Net Total Annual Expenses.......... 0.54% 0.54%
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Substitution 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Replaced fund Replacement fund
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fund Name.......................... Variable Insurance Products Fund Penn Series Large Core Growth Fund
Growth Portfolio
Investment Objective............... Seeks to achieve capital appreciation. Normally investing Seeks to achieve long-term capital appreciation. Invests
primarily in common stocks. Invests in companies that primarily in common and preferred stocks of large
the Adviser believes have above-average growth potential capitalization U.S. companies. Under normal conditions,
(stocks of these companies are often called ``growth'' the Fund invests at least 80% of its net assets in
stocks). Invests in domestic and foreign issuers. Uses securities of large capitalization companies. For this
fundamental analysis of each issuer's financial Fund, large capitalization companies are those with
condition and industry position and market and economic market capitalizations within the range of companies
conditions to select investments. comprising the Russell 1000 Growth Index at the time of
purchase. The Fund invests principally in equity
securities of large capitalization companies that offer
the potential for capital growth, with an emphasis on
identifying companies that have the prospect for
improving sales and earnings growth rates, enjoy a
competitive advantage and have effective management
with a history of making investments that are in the
best interests of shareholders.
Principal Risks.................... Stock Market Volatility Stock Market Volatility
Foreign Exposure Foreign Exposure
Issuer-Specific Changes ``Growth'' Investing
``Growth'' Investing
--------------------------------------------------------------------------------------------------------------------
Significant Principal Risk None
Disparities.
--------------------------------------------------------------------------------------------------------------------
Adviser/Sub-adviser................ Fidelity Management & Research Company ICMI/Wells Capital Management Incorporated
Total Fund Asset Level as of 12/31/ $8,032,463,930 N/A
07.
Total Amount of Replaced Fund $211,463,358 N/A
Assets held by all Contract Owners.
Mgmt. Fee.......................... 0.56% 0.56%
Mgmt. Fee Schedule................. 0.56% 0.56%
12b-1 Fee.......................... N/A N/A
Other Expenses..................... 0.09% 0.27%
Total Annual Operating Expenses.... 0.65% 0.83%
Fee Reduction...................... 0.01% 0.19%
Net Total Annual Expenses.......... 0.64% 0.64%
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Substitution 3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Replaced fund Replacement fund
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fund Name.......................... Variable Insurance Products Fund V Penn Series Balanced Fund
Asset Manager Portfolio
[[Page 39345]]
Investment Objective............... Seeks to obtain high total return with reduced risk over Seeks long-term growth and current income using a ``fund-
the long term by allocating its assets among stocks, of-funds'' strategy. The Fund invests in a combination
bonds, and short-term instruments. Allocates the fund's of other Penn Series Funds (each, an ``underlying
assets among stocks, bonds, and short-term and money fund'' and, together, the ``underlying funds'') in
market instruments. Maintains a neutral mix over time of accordance with its target asset allocation. These
50% of assets in stocks, 40% of assets in bonds, and 10% underlying funds invest their assets directly in
of assets in short-term and money market instruments. equity, fixed income, money market and other securities
Adjusts allocation among asset classes gradually within in accordance with their own investment objectives and
the following ranges: stock class (30%-70%), bond class policies. The underlying funds are managed using both
(20%-60%), and short-term/money market class (0%-50%). indexed and active management strategies. The Fund
Invests in domestic and foreign issuers. Analyzes an intends to invest primarily in a combination of
issuer using fundamental and/or quantitative factors and underlying funds; however, the Fund may invest directly
evaluating each security's current price relative to in equity and fixed income securities and cash
estimated long-term value to select investments. equivalents, including money market securities. Under
normal circumstances, the Fund will invest 50%-70% of
its assets in stock and other equity underlying funds,
30%-50% of its assets in bond and other fixed income
funds, and 0%-20% of its assets in money market funds.
The Fund's allocation strategy is designed to provide a
mix of the growth opportunities of stock investing with
the income opportunities of bonds and other fixed
income securities. The Fund's underlying equity fund
allocation will primarily track the performance of the
large capitalization company portion of the U.S. stock
market. The Fund's underlying fixed income fund
allocation will be invested primarily in a broad range
of investment grade fixed income securities (although
up to 10% of the underlying fund may be invested in non-
investment grade securities), and is intended to
provide results consistent with the broad U.S. fixed
income market.
Principal Risks.................... Stock Market Volatility Stock Market Volatility
Interest Rate Changes Asset Allocation
Foreign Exposure Interest Rate Changes
Prepayment Underlying Funds
--------------------------------------------------------------------------------------------------------------------
Significant Principal Risk Penn Series Balanced Fund utilizes a fund-of-funds investment strategy. Accordingly, the Fund is subject to the
Disparities. risks of the underlying funds (Penn Series Index 500 Fund, Penn Series Quality Bond Fund and Penn Series Money
Market Fund).
These risks include those associated with both equity and fixed income investing (e.g. stock market volatility and
interest rate changes) that are similar to those of the Replaced Fund. The Fund is also subject to asset
allocation risk, which is the risk that the selection of underlying funds and the amount of assets allocated to
the selected underlying funds will cause the Fund to underperform other funds with a similar investment objective.
--------------------------------------------------------------------------------------------------------------------
Adviser............................ Fidelity Management & Research Company ICMI
Total Fund Asset Level as of 12/31/ $1,911,400,918 N/A
07.
Total Amount of Replaced Fund $31,940,165 N/A
Assets held by all Contract Owners.
Mgmt. Fee.......................... 0.51% 0.00%
Mgmt. Fee Schedule................. 0.51% 0.00%
12b-1 Fee.......................... N/A N/A
Acquired Fund Fees and Expenses.... N/A 0.45%
Other Expenses..................... 0.12% 0.22%
Total Annual Operating Expenses.... 0.63% 0.67%
Fee Reduction...................... 0.00% 0.05%
Net Total Annual Expenses.......... 0.63% 0.62%
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Substitution 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Replaced fund Replacement fund
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fund Name.......................... Neuberger Berman Advisers Management Trust Penn Series Balanced Fund
Balanced Portfolio
[[Page 39346]]
Investment Objective............... The Fund seeks growth of capital and reasonable current Seeks long-term growth and current income by using a
income without undue risk to principal. To pursue these ``fund-of-funds'' strategy. The Fund invests in a
goals, the Fund allocates its assets between stocks-- combination of other Penn Series Funds (each, an
primarily those of mid-capitalization companies, which ``underlying fund'' and, together, the ``underlying
it defines as those with a total market capitalization funds'') in accordance with its target asset
within the market capitalization range of the Russell allocation. These underlying funds invest their assets
Midcap Index--and in investment grade bonds and other directly in equity, fixed income, money market and
debt securities from U.S. government and corporate other securities in accordance with their own
issuers. The Portfolio Managers normally allocates investment objectives and policies. The underlying
anywhere from 50% to 70% of its net assets to stock funds are managed using both indexed and active
investments, with the balance allocated to debt management strategies. The Fund intends to invest
securities (at least 25%) and operating cash. primarily in a combination of underlying funds;
however, the Fund may invest directly in equity and
fixed income securities and cash equivalents, including
money market securities. Under normal circumstances,
the Fund will invest 50%-70% of its assets in stock and
other equity underlying funds, 30%-50% of its assets in
bond and other fixed income funds, and 0%-20% of its
assets in money market funds. The Fund's allocation
strategy is designed to provide a mix of the growth
opportunities of stock investing with the income
opportunities of bonds and other fixed income
securities. The Fund's underlying equity fund
allocation will primarily track the performance of the
large capitalization company portion of the U.S. stock
market. The Fund's underlying fixed income fund
allocation will be invested primarily in a broad range
of investment grade fixed income securities (although
up to 10% of the underlying fund may be invested in non-
investment grade securities), and is intended to
provide results consistent with the broad U.S. fixed
income market.
Principal Risks.................... Stock and Bond Market Volatility Stock Market Volatility
Interest Rate Changes Asset Allocation
Mid-Capitalization Company Risk Interest Rate Changes
Underlying Funds
--------------------------------------------------------------------------------------------------------------------
Significant Principal Risk Penn Series Balanced Fund utilizes a fund-of-funds investment strategy. Accordingly, the Fund is subject to the
Disparities. risks of the underlying funds (Penn Series Index 500 Fund, Penn Series Quality Bond Fund and Penn Series Money
Market Fund). These risks include those associated with both equity and fixed income investing (e.g., stock market
volatility and interest rate changes) that are similar to those of the Replaced Fund. The Fund is also subject to
asset allocation risk, which is the risk that the selection of underlying funds and the amount of assets allocated
to the selected underlying funds will cause the Fund to underperform other funds with a similar investment
objective.
--------------------------------------------------------------------------------------------------------------------
Adviser/Subadviser................. Neuberger Berman Management Inc./Neuberger Berman, LLC ICMI
Total Fund Asset Level as of 12/31/ $78,363,158 N/A
07.
Total Amount of Replaced Fund $49,790,470 N/A
Assets Held by all Contract Owners.
Mgmt. Fee.......................... 0.85% (includes both investment advisory and 0.00%
administrative services)
Mgmt. Fee Schedule................. First $250 million 0.55% 0.00%
From $250 million to $500 million 0.525%
From $500 to $750 million 0.50%
From $750 million to $1 billion 0.475%
From $1 billion to $1.5 billion 0.45%
From $1.5 billion to $4 billion 0.425%
More than $4 billion 0.40%
12b-1 Fee.......................... N/A N/A
Acquired Fund Fees and Expenses.... N/A 0.45%
Other Expenses..................... 0.32% 0.22%
Total Annual Operating Expenses.... 1.17% 0.67%
Fee Reduction...................... -- 0.05%
Net Total Annual Expenses.......... 1.17% 0.62%
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[[Page 39347]]
Substitution 5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Replaced fund Replacement fund
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fund Name.......................... The Universal Institutional Funds, Inc. Penn Series Emerging Markets Equity Fund
Emerging Markets Equity Portfolio
Investment Objective............... Seeks long-term capital appreciation by investing Seeks to achieve capital appreciation. Under normal
primarily in growth-oriented equity securities of circumstances, at least 80% of the Fund's assets will
issuers in emerging market countries. Seeks to maximize be invested in equity securities located in emerging
returns by investing in growth-oriented equity market countries. For this Fund, an issuer is
securities in emerging markets. Combines top-down considered to be located in an emerging market country
country allocation with bottom-up stock selection. if, at the time of investment: (i) Its principal
Investment selection criteria include attractive growth securities trading market is in an emerging market
characteristics, reasonable valuations and company country, (ii) alone or on a consolidated basis it
managements with strong shareholder value orientation. derives 50% or more of its annual revenue from goods
Invests at least 80% of the Portfolio's assets in equity produced, sales made or services performed in emerging
securities located in emerging market countries. market countries, or (iii) it is organized under the
laws of, or has a principal office in, an emerging
market country. The Fund invests primarily in equity
securities, including common and preferred stocks,
convertible securities, rights and warrants to purchase
common stock, and depositary receipts.
Principal Risks.................... Stock Market Volatility Stock Market Volatility
Foreign Exposure Foreign Exposure
Emerging Markets Emerging Markets
Small Cap
Currency
--------------------------------------------------------------------------------------------------------------------
Significant Principal Risk Small cap companies may be more vulnerable to adverse business or economic events than larger, more established
Disparities. companies.
Investing in currency involves the risk that currencies will decline in value relative to the U.S. dollar, or in
the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged.
--------------------------------------------------------------------------------------------------------------------
Adviser/Subadviser................. Morgan Stanley Investment Management Inc./Morgan Stanley ICMI/Van Kampen Asset Management
Investment Management Company
Total Fund Asset Level as of 12/31/ $1,673,500,000 N/A
07.
Total Amount of Replaced Fund $135,575,219 N/A
Assets Held by all Contract Owners.
Mgmt. Fee.......................... 1.21% 1.18%
Mgmt. Fee Schedule................. First $500 million 1.25% 1.18%
From $500 million to $1 billion 1.20%
From $1 billion to $2.5 billion 1.15%
More than $2.5 billion 1.00%
12b-1 Fee.......................... N/A N/A
Other Expenses..................... 0.37% 0.40%
Acquired Fund Fees and Expenses.... 0.02% 0.02%
Total Annual Operating Expenses.... 1.60% 1.60%
Fee Reduction...................... 0.00% 0.00%
Net Total Annual Expenses.......... 1.60% 1.60%
--------------------------------------------------------------------------------------------------------------------------------------------------------
13. The Section 26 Applicants represent that the Substitutions will
take place at the Replaced Funds' relative net asset values determined
on the date of the Substitutions in accordance with Section 22 of the
1940 Act and Rule 22c-1 thereunder with no change in the total value of
amounts held under a Contract for a Contract Owner in all Sub-Accounts
of the Separate Account (the ``Account Value'') or death benefit or in
the dollar value of his or her investment in any of the Sub-Accounts.
Accordingly, there will be no financial impact on any Contract Owner.
The Substitutions will generally be effected by having each of the Sub-
Accounts that invests in the Replaced Funds redeem its shares at the
net asset value calculated on the date of the Substitutions and
purchase shares of the respective Replacement Funds at the net asset
value calculated on the same date.
14. Alternatively, a Replaced Fund may redeem the interest ``in-
kind,'' for example, if it determines that a cash redemption might
adversely affect its shareholders. In that case, the Substitutions will
be effected by the Sub-Account contributing all the securities it
receives from the Replaced Fund for an amount of Replacement Fund
shares equal to the fair market value of the securities contributed.
All in-kind redemptions from a Replaced Fund of which any of the
Section 26 Applicants is an affiliated person will be effected in
accordance with the conditions set forth in the Commission's no-action
letter issued to Signature Financial Group, Inc. (available December
28, 1999). In-kind purchases of shares of a Replacement Fund will be
conducted as described in Section VI of the application.
15. The Section 26 Applicants state that the Substitutions will be
described in a supplement to the prospectuses for the Contracts
(``Supplements'') filed with the Commission and mailed to Contract
Owners. The Supplements will provide Contract Owners with notice of the
Substitutions and describe the reasons for engaging in the
Substitutions. The Supplements will also inform Contract Owners with
assets allocated to a Sub-Account investing in the Replaced Funds that
no additional amount may be invested in the Replaced
[[Page 39348]]
Funds on or after the date of the Substitutions. In addition, the
Supplements will inform affected Contract Owners that they will have
the opportunity to reallocate Account Value once (as described below):
Prior to the Substitutions, from each Sub-Account
investing in a Replaced Fund, and
for 30 days after the Substitutions, from each Sub-Account
investing in a Replacement Fund to Sub-Accounts investing in other
Mutual Funds available under the respective Contracts,
without diminishing the number of free transfers that may be made in a
given contract year and without the imposition of any transfer charge
or limitations, other than any applicable limitations in place to deter
potentially harmful excessive trading or limitations on the number of
transfers to or from the fixed accounts available with the variable
annuity contracts. To the extent a Contract Owner has Account Value
allocated to more than one Sub-Account investing in a Replaced Fund,
the Contract Owner will be permitted one reallocation from each Sub-
Account. If a Contract Owner reallocates on the same day from all
affected Sub-Accounts to which the Contract Owner has Account Value
allocated, they will have exhausted the number of permitted
reallocations.
16. Within five days after a Substitution, Penn Mutual and PIA will
send their affected Contract Owners written confirmation that a
Substitution has occurred. The prospectuses for the Contracts, as
revised by the Supplements, will reflect the Substitutions. Each
Contract Owner will be provided with a prospectus for the Replacement
Funds before the Substitutions.
17. Penn Mutual and PIA assert that they will pay all expenses and
transaction costs of the Substitutions, including all legal, accounting
and brokerage expenses relating to the Substitutions. No costs will be
borne by Contract Owners. Affected Contract Owners will not incur any
fees or charges as a result of the Substitutions, nor will their rights
or the obligations of the Section 26 Applicants under the Contracts be
altered in any way. The Substitutions will not cause the fees and
charges under the Contracts currently being paid by Contract Owners to
be greater after the Substitutions than before the Substitutions. The
Substitutions will have no adverse tax consequences on Contract Owners
and will in no way alter the tax benefits to Contract Owners. Further,
the Substitutions will in no way alter any of the life insurance or
annuity benefits available to Contract Owners under the Contracts.
18. The Section 26 Applicants believe that their request satisfies
the standards for relief pursuant to Section 26(c) of the 1940 Act, as
set forth below, because the affected Contract Owners will have:
(1) Account Value allocated to a Sub-Account invested in a
Replacement Fund with an investment objective and policies that are the
same or substantially similar to the investment objective and policies
of the Replaced Fund; and
(2) Replacement Funds whose current total annual expenses are equal
to or lower than those of the Replaced Funds for their 2007 fiscal
year. In addition, the Section 26 Applicants represent that with
respect to Contract Owners on the date of the proposed Substitutions,
Penn Mutual and PIA, as applicable, will reimburse, on the last
business day of each fiscal quarter during the two years following the
date of the proposed Substitutions, the Sub-Accounts investing in the
applicable Replacement Fund such that the sum of the Replacements
Fund's net operating expense ratio (taking into account any expense
waivers or reimbursements) and Sub-Account expense ratio (asset-based
fees and charges deducted on a daily basis from Sub-Account assets and
reflected in the calculation of Sub-Account unit value) for such period
will not exceed, on an annualized basis, the sum of the corresponding
Replaced Fund's net operating expense ratio (taking into account any
expense waivers or reimbursements) and Sub-Account expense ratio for
fiscal year 2007.
Applicants' Legal Analysis
15. Section 26(c) of the 1940 Act makes it unlawful for any
depositor or trustee of a registered unit investment trust holding the
security of a single issuer to substitute another security for such
security unless the Commission approves the substitution. The
Commission will approve such a substitution if the evidence establishes
that it is consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the 1940 Act.
2. The Section 26 Applicants assert that the purposes, terms and
conditions of the Substitutions are consistent with the principles and
purposes of Section 26(c) and do not entail any of the abuses that
Section 26(c) is designed to prevent. The Section 26 Applicants have
reserved the right to make such a substitution under the Contracts and
this reserved right is disclosed in each Contract's prospectus.
3. The Section 26 Applicants argue that substitutions have been
common where the substituted fund has investment objectives and
policies that are similar to those of the eliminated fund, and current
expenses that are similar to or lower than those of the eliminated
fund. The Section 26 Applicants note that in all cases, the investment
objectives and policies of the Replacement Funds are sufficiently
similar to those of the corresponding Replaced Funds that affected
Contract Owners will have reasonable continuity in investment
expectations. Accordingly, the Section 26 Applicants conclude that the
Replacement Funds are appropriate investment vehicles for those
affected Contract Owners who have Account Value allocated to the
Replaced Funds.
4. The Section 26 Applicants argue that because of the foregoing
representations and conditions, the Substitutions will not result in
the type of costly forced redemption that Section 26(c) was intended to
guard against and are consistent with the protection of investors and
the purposes fairly intended by the 1940 Act.
5. Section 17(a)(1) of the 1940 Act, in relevant part, prohibits
any affiliated person of a registered investment company, or any
affiliated person of such person, acting as principal, from knowingly
selling any security or other property to that company. Section
17(a)(2) of the 1940 Act generally prohibits the persons described
above, acting as principal, from knowingly purchasing any security or
other property from the registered company.
6. Section 17(b) of the 1940 Act provides that the Commission may,
upon application, grant an order exempting any transaction from the
prohibitions of Section 17(a) if the evidence establishes that: (1) The
terms of the proposed transaction, including the consideration to be
paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned; (2) the proposed
transaction is consistent with the policy of each registered investment
company concerned, as recited in its registration statement and records
filed under the 1940 Act; and (3) the proposed transaction is
consistent with the general purposes of the 1940 Act.
7. Accordingly, the Section 17 Applicants are seeking relief, to
the extent necessary, from Section 17(a) for the in-kind purchases and
sales of Replacement Fund Shares.
8. The Section 17 Applicants submit that the terms of the proposed
in-kind purchases of shares of the Replacement Funds by the Separate
Accounts,
[[Page 39349]]
including the consideration to be paid and received, as described in
this Application, are reasonable and fair and do not involve
overreaching on the part of any person concerned. The Section 17
Applicants also submit that the proposed in-kind purchases by the
Separate Accounts are consistent with the policies of Penn Mutual and
PIA and the individual Replacement Funds. Finally, the Section 17
Applicants submit that the proposed Substitutions are consistent with
the general purposes of the 1940 Act.
9. To the extent that the Separate Accounts' in-kind purchases of
Replacement Fund shares are deemed to involve principal transactions
between entities which are affiliates of affiliates, the Section 17
Applicants maintain that the terms of the proposed in-kind purchase
transactions, including the consideration to be paid and received by
each Replacement Fund involved, are reasonable, fair and do not involve
overreaching. In addition, although not applicable, the Section 17
Applicants represent that the in-kind transactions will conform with
all of the conditions enumerated in Rule 17a-7, except that the
consideration paid for the securities being purchased or sold may not
be entirely cash.
10. 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
Contract Owner's Account Value or death benefit or in the dollar value
of his or her investment in any Sub-Account. Contract Owners will not
suffer any adverse tax consequences as a result of the Substitutions.
The fees and charges under the Contracts will not increase because of
the Substitutions.
11. Even though they may not rely on Rule 17a-7, the Section 17
Applicants believe that the Rule's conditions outline the type of
safeguards that result in transactions that are fair and reasonable to
registered investment company participants and preclude overreaching.
Nevertheless, the circumstances surrounding the proposed Substitutions
will be such as to offer the same degree of protection to each
Replacement Fund from overreaching that Rule 17a-7 provides to them
generally in connection with their purchase and sale of securities
under that Rule in the ordinary course of their business. In
particular, Penn Mutual and PIA (or any of their affiliates) cannot
effect the proposed transactions at a price that is disadvantageous to
any of the Replacement Funds. Moreover, although the transactions may
not be entirely for cash, the Section 17 Applicants assert that each
will be effected based upon (1) the independent market price of the
portfolio securities valued as specified in paragraph (b) of Rule 17a-
7, and (2) the net asset value per share of each Replacement Fund
involved valued in accordance with the procedures disclosed in its
registration statement and as required by Rule 22c-1 under the 1940
Act. No brokerage commission, fee, or other remuneration will be paid
to any party in connection with the proposed transactions.
12. The Section 17 Applicants also argue that the sale of shares of
Replacement Funds for investment securities, as contemplated by the
proposed in-kind transactions, is consistent with the investment policy
and restrictions of the Replacement Funds because (1) the shares are
sold at their net asset value, and (2) the portfolio securities are of
the type and quality that the Replacement Funds would each have
acquired with the proceeds from share sales had the shares been sold
for cash. To assure that the second of these conditions is met, the
adviser or sub-adviser, as applicable of a Replacement Fund will
undertake to examine the portfolio securities being offered to each
Replacement Fund and accept only those securities as consideration for
shares that it would have acquired for each such fund in a cash
transaction.
13. The Section 17 Applicants also assert that the proposed in-kind
transactions are consistent with the general purposes of the 1940 Act
as stated in the Findings and Declaration of Policy in Section 1 of the
1940 Act and do not present any of the conditions or abuses that the
1940 Act was designed to prevent.
Conclusion:
For the reasons set forth in the application, the Applicants each
respectfully request that the Commission issue an order of approval
pursuant to Section 26(c) of the 1940 Act and an order of exemption
pursuant to Section 17(b) of the 1940 Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-15514 Filed 7-8-08; 8:45 am]
BILLING CODE 8010-01-P
