Pruco Life Insurance Company, et al;, 54621-54626 [2012-21773]
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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–30186; File No. 812–13990]
Pruco Life Insurance Company, et al;
Notice of Application
August 29, 2012.
Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’).
ACTION: Notice of application for an
order approving the substitution of
certain securities pursuant to Section
26(c) of the Investment Company Act of
1940, as amended (the ‘‘1940 Act’’ or
‘‘Act’’) and an order of exemption
pursuant to Section 17(b) of the Act
from Section 17(a) of the Act.
AGENCY:
Pruco Life Insurance
Company (‘‘Pruco Life’’), Pruco Life
Flexible Premium Variable Annuity
Account (‘‘Pruco Life Variable Annuity
Account’’), Pruco Life Insurance
Company of New Jersey (‘‘Pruco Life of
New Jersey’’), Pruco Life of New Jersey
Flexible Premium Variable Annuity
Account (‘‘PLNJ Variable Annuity
Account’’), Prudential Annuities Life
Assurance Corporation (‘‘Prudential
Annuities’’), Prudential Annuities Life
Assurance Corporation Variable
Account B (‘‘Variable Account B’’),
Allstate Life Insurance Company
(‘‘Allstate Life’’), Allstate Financial
Advisors Separate Account I (‘‘Separate
Account I’’), Allstate Life Insurance
Company of New York (‘‘Allstate New
York’’ and collectively with Pruco Life,
Pruco Life of New Jersey, Prudential
Annuities and Allstate Life, the
‘‘Insurance Companies’’), Allstate Life of
New York Separate Account A
(‘‘Separate Account A’’ and collectively
with Pruco Life Variable Annuity
Account, PLNJ Variable Annuity
Account, Variable Account B and
Separate Account I, the ‘‘Separate
Accounts’’), and Advanced Series Trust
(‘‘AST’’). The Insurance Companies and
the Separate Accounts are referred to
herein collectively as the ‘‘Substitution
Applicants.’’ Pruco Life, Pruco Life of
New Jersey and Prudential Annuities
are also referred to herein as the
‘‘Prudential Insurance Companies.’’ The
Prudential Insurance Companies, Pruco
Life Variable Annuity Account, PLNJ
Variable Annuity Account, Variable
Account B and AST are collectively
referred to as the ‘‘Section 17
Applicants.’’
SUMMARY OF APPLICATION: The
Substitution Applicants seek an order
pursuant to Section 26(c) of the 1940
Act, approving the substitution of shares
of the AST Franklin Templeton
Founding Funds Allocation Portfolio
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APPLICANTS:
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(the ‘‘Replacement Fund’’) for shares of
the Franklin Templeton VIP Founding
Funds Allocation Fund, a series of
Franklin Templeton Variable Insurance
Products Trust (‘‘Franklin Templeton
VIP Trust’’) (the ‘‘Existing Fund’’), held
by the Separate Accounts to fund
certain individual variable annuity
contracts (collectively, the ‘‘Contracts’’)
issued by the Insurance Companies. The
Section 17 Applicants seek an order
pursuant to Section 17(b) of the 1940
Act exempting them from Section 17(a)
of the Act to the extent necessary to
permit them to engage in certain in-kind
transactions in connection with the
substitution.
DATES: Filing Date: The application was
filed on December 9, 2011, and the
amended and restated application was
filed on August 23, 2012.
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 the
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 September 19, 2012,
and should be accompanied by proof of
service on the 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, SEC, 100 F Street
NE., Washington, DC 20549–1090.
Applicants: Pruco Life Insurance
Company, Pruco Life Flexible Premium
Variable Annuity Account, Pruco Life
Insurance Company of New Jersey and
Pruco Life of New Jersey Flexible
Premium Variable Annuity Account,
751 Broad Street, Newark, NJ 07102;
Prudential Annuities Life Assurance
Corporation and Prudential Annuities
Life Assurance Corporation Variable
Account B, One Corporate Drive,
Shelton, CT 06484; Advanced Series
Trust, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey
07102; Allstate Life Insurance Company
and Allstate Financial Advisors
Separate Account I, 3100 Sanders Road,
Northbrook, IL 60062; Allstate Life
Insurance Company of New York and
Allstate Life of New York Separate
Account A, 100 Motor Parkway, Suite
132, Hauppauge, New York 11788.
FOR FURTHER INFORMATION CONTACT:
Sally Samuel, Senior Counsel, or Joyce
M. Pickholz, Branch Chief, Office of
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Insurance Products, Division of
Investment Management, at (202) 551–
6795.
The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm, or by
calling (202) 551–8090.
SUPPLEMENTARY INFORMATION:
Applicants’ Representations
1. The Insurance Companies, on their
own behalf and on behalf of their
respective separate accounts, propose to
substitute shares of the Replacement
Fund for shares of the Existing Fund
held by the Separate Accounts to fund
the Contracts. The Separate Accounts
own only Class 4 shares of the Existing
Fund.
2. Pruco Life is the depositor and
sponsor of Pruco Life Variable Annuity
Account. Pruco Life of New Jersey is the
depositor and sponsor of PLNJ Variable
Annuity Account. Prudential Annuities
is the depositor and sponsor of Variable
Account B. Allstate Life is the depositor
and sponsor of Separate Account I.
Allstate New York is the depositor and
sponsor of Separate Account A.
3. On June 1, 2006, Allstate Life and
Allstate New York entered into an
agreement with Prudential Financial,
Inc. (‘‘Prudential Financial’’) and its
subsidiary, The Prudential Insurance
Company of North America
(‘‘Prudential’’), pursuant to which
Allstate Life and Allstate New York
sold, through a combination of
coinsurance and modified coinsurance
reinsurance, substantially all of their
variable annuity business. Allstate Life
and Allstate New York also have
entered into an administrative services
agreement pursuant to which Prudential
or an affiliate administers Separate
Account I and Separate Account A.
4. Each of Pruco Life Variable
Annuity Account, PLNJ Variable
Annuity Account, Variable Account B,
Separate Account 1 and Separate
Account A is a ‘‘separate account’’ as
defined by Rule 0–1(e) under the Act
and each is registered under the Act as
a unit investment trust for the purpose
of funding the Contracts. Security
interests under the Contracts have been
registered under the Securities Act of
1933. The application sets forth the
registration statement file numbers for
the Contracts and the Separate
Accounts.
5. AST and Franklin Templeton VIP
Trust are registered open-end
management investment companies of
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the series type (File Number 033–24962
and 033–23493, respectively).
6. Franklin Templeton Services, LLC
(‘‘Existing Fund Administrator’’) serves
as the administrator to the Existing
Fund. Prudential Investments LLC and
AST Investment Services, Inc. (together,
the ‘‘Investment Managers’’) serve as the
co-investment managers of the
Replacement Fund. Franklin Advisers,
Inc. (‘‘Franklin Advisers’’), Franklin
Mutual Advisers, LLC (‘‘Franklin
Mutual’’), and Templeton Global
Advisors Limited (‘‘Templeton Global’’)
serve as subadvisers to the Replacement
Fund and are affiliates of the Existing
Fund Administrator. Franklin Advisers,
Franklin Mutual, and Templeton Global
are collectively referred to as the ‘‘FT
Subadvisers.’’
7. The substitution will replace an
investment option (i.e., the Existing
Fund) administered by an entity (i.e.,
Franklin Templeton Services, LLC) that
is not affiliated with the Substitution
Applicants as of the date hereof (other
than by way of certain of the
Substitution Applicants owning more
than 5% of the shares of the Existing
Fund) with an investment option (i.e.,
the Replacement Fund) that is managed
by investment managers (i.e., Prudential
Investments LLC and AST Investment
Services, Inc.) that are affiliated with the
Prudential Insurance Companies. The
Investment Managers may hire and
replace unaffiliated subadvisers with
the approval of AST’s Board of Trustees.
Pursuant to an exemptive order issued
to a predecessor Prudential Financial
investment adviser, Inv. Co. Rel. No.
22215 (Sept. 11, 1996), (the ‘‘MultiManager Order’’), the Investment
Managers are authorized to enter into
and amend sub-advisory agreements
without shareholder approval under
certain conditions. However,
Substitution Applicants and AST
represent that the Replacement Fund
will not change a subadviser, add a new
subadviser, or otherwise rely on the
Multi-Manager Order without first
obtaining shareholder approval of the
change in subadviser, the new
subadviser, or the Replacement Fund’s
ability to add or to replace a subadviser
in reliance on the Multi-Manager Order
at an AST shareholder meeting, the
record date for which shall be after the
proposed substitution has been effected.
In addition, prior to the substitution, the
Substitution Applicants state that each
Contract owner will have been provided
with the Replacement Fund prospectus
describing the existence, substance and
effect of the Multi-Manager order.
8. The Contracts are individual and
group flexible premium variable,
variable with fixed options and variable
with fixed and market value adjusted
fixed options contracts. The Contracts
permit the Insurance Companies to
substitute shares of one fund with
shares of another, including a fund of a
different registered investment
company. The prospectuses for the
Contracts and the Separate Accounts
contain disclosures of this right. The
Contracts which offer the Existing Fund
securities are registered in the Form N–
4 Registration Statements listed in
footnotes 1 through 5 of the application.
9. The Existing Fund is a ‘‘fund of
funds’’ meaning that it seeks to achieve
its investment goal by investing its
assets in a combination of Class 1 shares
of the Franklin Income Securities Fund
(‘‘Franklin Income’’) (331⁄3%), Mutual
Shares Securities Fund (‘‘Mutual
Shares’’) (331⁄3%), and Templeton
Growth Securities Fund (‘‘Templeton
Growth,’’ and collectively with Franklin
Income and Mutual Shares, the
‘‘Underlying FT Funds’’). Franklin
Income is managed by Franklin
Advisers, Mutual Shares is managed by
Franklin Mutual, and Templeton
Growth is managed by Templeton
Global. The Existing Fund makes equal
allocations to each of the Underlying FT
Funds on a fixed percentage basis.
Although the Replacement Fund will
not operate as a ‘‘fund of funds’’ like the
Existing Fund, its overall investment
strategy will be substantially identical to
that of the Existing Fund. Franklin
Income, Franklin Mutual, and
Templeton Global serve as subadvisers
to the Replacement Fund. Each FT
Subadviser handles the day-to-day
investment management of
approximately 331⁄3% of the
Replacement Fund’s assets based upon
the application of the specific
investment strategy that it uses in
connection with the corresponding
Underlying FT Fund. Like the Existing
Fund, the percentage of Replacement
Fund assets that is allocated to each
investment strategy will be monitored
and those allocations will be rebalanced
when they are more than 3% above or
below the goal of equal allocations to
each of the three investment strategies.
A comparison of the investing strategies
and risks of the Existing Fund and the
Replacement Fund is included in the
application. The following table
compares the fees and expenses of the
Existing Fund and the Replacement
Fund as of December 31, 2011.1
Existing fund
(Class 4)
Replacement
Fund
None ..............................................
0.35% .............................................
0.11% .............................................
0.65% .............................................
1.11% .............................................
¥0.01% .........................................
0.95%
None
0.16%
—
1.11%
¥0.03%
Total annual Fund operating expenses after fee waiver and/or expense reimbursement.
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Management fees ....................................................................................
Distribution and service (12b–1) fees .....................................................
Other Expenses .......................................................................................
Acquired fund fees and expenses ..........................................................
Total annual Fund operating expenses ..................................................
Fee waiver and/or expense reimbursement ...........................................
1.10% .............................................
1.08%
10. The Existing Fund does not pay a
management fee but as a shareholder in
the underlying funds, indirectly bears
its proportionate share of any
management fees and other expenses
paid by the underlying funds. The
management fees of each of the
underlying funds, based on each
underlying fund’s average net assets for
the fiscal year ended December 31,
2011, are: Franklin Income Securities
Fund: 0.45%; Mutual Shares Securities
Fund: 0.60%; and Templeton Growth
Securities Fund: 0.74%.
11. The Substitution Applicants state
that the substitutions are expected to
benefit Contract owners in a number of
ways. The Replacement Fund is a new
1 The Replacement Fund has no assets and has
not yet commenced operations as of the date hereof.
The estimated fees and expenses of the
Replacement Fund are, however, based in part on
assumed average daily net assets of approximately
$2.4 billion for the Replacement Fund (i.e., the
approximate amount of net assets that would have
been acquired from the Existing Fund had the
substitution been completed as of December 31,
2011) for the fiscal period ending December 31,
2012.
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series of AST, and thus the Replacement
Fund is part of the Prudential Annuity
family of funds. As such, the Insurance
Companies generally expect to learn of
any changes affecting the Replacement
Fund well in advance of their
effectiveness, thereby allowing the
Insurance Companies to use the most
efficient and least costly means to
administer such changes (e.g., by
including the changes in other routine
filings and planned mailings to contract
owners). The Insurance Companies
believe that Contract owners will benefit
from this streamlining as the Insurance
Companies enhance their
communication efforts to contract
owners and sales representatives
regarding investment options. Further,
since the Replacement Fund is part of
the Prudential Annuity family of funds,
the Investment Managers will provide
rigorous oversight and monitoring of the
Replacement Fund’s investment
performance and its compliance with
investment objectives, policies and
restrictions. In addition, the
Replacement Fund unlike the Existing
Fund is not a ‘‘fund of funds’’ and
therefore can generally operate with
more flexibility. As described in more
detail in the application, a portion of the
assets attributable to each of the three
investment strategies used in
connection with the Replacement Fund
will be invested in certain types of
derivatives and short-term instruments
to help maintain adequate portfolio
liquidity. Such investments will provide
for more effective and efficient fund
management and operation during times
of market volatility than the current
fund-of-funds structure. Further, the
Replacement Fund, as a series of AST,
will have access to the Prudential
Financial fund complex’s credit facility
which will also serve to potentially
create efficiencies and cause less
disruption to the orderly investment
management of the Replacement Fund
in times of market volatility and
increased redemption activity. The
Insurance Companies will also realize
the benefit of reduced production and
mailing expenses with respect to the
prospectus, given that the Replacement
Fund will be a series of AST with all
disclosures concerning the Replacement
Fund being included in the combined
AST prospectus. Contract owners will
benefit from consolidated and
consistent fund disclosure. The
Insurance Company Applicants believe
that the Replacement Fund represents
the best available match, consistent with
the goal of providing Contract owners
with a substitute investment option
offering a lower expense ratio than the
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expense ratio of the Existing Fund.
Further, Contract owners will be
allowed a free transfer out of the
Existing Fund (before the substitution)
or out of the Replacement Fund (after
the substitution) to any other
investment option available under the
applicable Contract; therefore any
Contract owner will be able, without
charge, to switch to another investment
option.
12. For these reasons and the reasons
discussed below, the Substitution
Applicants believe that substituting the
Replacement Fund for the Existing Fund
is appropriate and in the best interest of
Contract owners. Because the Existing
Fund does not have an investment
manager, it does not directly pay any
investment management fees. The
Existing Fund does, however, indirectly
pay investment management fees in
connection with its investments in the
Underlying FT Funds. In addition, as
shown in more detail in the application,
the estimated total operating expense
ratio for the Replacement Fund will be
lower than the net expense ratio for
Class 4 shares of the Existing Fund as
set forth in its current prospectus. There
will be no increase in Contract fees and
expenses, including mortality and
expense risk fees and administration
and distribution fees charged to the
Separate Accounts as a result of the
substitutions. The Substitution
Applicants believe that the Replacement
Fund has an investment objective,
policies and a risk profile that are
substantially the same as the Existing
Fund, thus making the Replacement
Fund an appropriate candidate as a
substitute. In addition, after the
substitutions, neither the Investment
Managers nor any of their affiliates will
receive compensation from the charges
to the Separate Accounts related to the
Contracts or from revenue sharing from
the Replacement Funds in excess of the
compensation currently received from
the administrator or distributors of the
Existing Fund.
13. By a supplement to the
prospectuses for the Contracts and the
Separate Accounts each Insurance
Company has notified all owners of the
Contracts affected by the substitutions
of its intention to take the necessary
actions, including seeking the order
requested by the application, to
substitute shares of the funds as
described herein. The supplement
advised Contract owners that from the
date of the supplement until the date of
the proposed substitution, owners are
permitted to make one transfer of
Contract value (or annuity unit
exchange) out of the Existing Fund subaccount to one or more other sub-
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accounts without the transfer (or
exchange) being treated as one of a
limited number of permitted transfers
(or exchanges) permitted without a
transfer charge. The supplement
informed Contract owners that the
Insurance Company will not exercise
any rights reserved under any Contract
to impose additional restrictions on
transfers until at least 30 days after the
proposed substitution. The supplement
also informed Contract owners that for
at least 30 days following the proposed
substitution, the Insurance Companies
will permit Contract owners affected by
the substitution to make one transfer of
Contract value (or annuity unit
exchange) out of the Replacement Fund
sub-account to one or more other subaccounts without the transfer (or
exchange) being treated as one of a
limited number of permitted transfers
(or exchanges) or a limited number of
transfers (or exchanges) permitted
without a transfer charge.
14. The proposed substitution will
take place at relative net asset value
with no change in the amount of any
Contract owner’s Contract value or
death benefit or in the dollar value of
his or her investment in the Separate
Accounts.
15. The substitution will be effected
by a combination of in-kind and cash
transactions. It is anticipated that the
majority of the transactions will be
effected in-kind, with the remainder
being effected in cash. With respect to
in-kind transactions, it is intended that,
after receipt of the Insurance
Companies’ redemption request, the
Existing Fund will redeem shares it
holds in the FT Underlying Funds,
which request will be fulfilled by the FT
Underlying Funds primarily in the form
of underlying securities. The Existing
Fund will then fulfill the Insurance
Companies’ redemption request with
these in-kind securities received from
the FT Underlying Funds. These in-kind
securities will then be contributed to the
Replacement Fund to purchase shares of
that Fund. All in-kind redemptions from
the Existing Fund of which any of the
Substitution 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). To the
extent that the redemption request
cannot be completed wholly through inkind securities, the remainder of the
substitution will be effected through the
Insurance Companies’ redeeming shares
of the Existing Fund for cash and using
the cash to purchase shares of the
Replacement Fund.
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16. Contract owners will not incur
any fees or charges as a result of the
proposed substitution, nor will their
rights or Insurance Company’s
obligations under the Contracts be
altered in any way. All expenses
incurred in connection with the
proposed substitution, including
brokerage, legal, accounting, and other
fees and expenses, will be paid by the
Insurance Companies. In addition, the
proposed substitution will not impose
any tax liability on Contract owners.
The proposed substitution will not
cause the Contract fees and charges
currently being paid by existing
Contract owners to be greater after the
proposed substitution than before the
proposed substitution. No fees will be
charged on the transfers made at the
time of the proposed substitution
because the proposed substitution will
not be treated as a transfer for the
purpose of assessing transfer charges or
for determining the number of
remaining permissible transfers in a
Contract year.
17. In addition to the prospectus
supplements distributed to owners of
Contracts, within five business days
after the proposed substitution is
completed, Contract owners will be sent
a written notice informing them that the
substitution was carried out and that
they may make one transfer of any
Contract value invested in the
Replacement Fund sub-account on the
date of the notice to one or more other
sub-accounts available under their
Contract at no cost and without regard
to the usual limit on the frequency of
transfers among sub-accounts or from
the variable account options to the fixed
account options. The notice will also
reiterate that (other than with respect to
‘‘market timing’’ activity) the Insurance
Companies will not exercise any rights
reserved by it under the Contracts to
impose additional restrictions on
transfers or to impose any charges on
transfers until at least 30 days after the
proposed substitution. The Insurance
Companies will also send each Contract
owner a current prospectus for the
Replacement Fund to the extent that
they have not previously received a
copy. Each Insurance Company also is
seeking approval of the proposed
substitution from any state insurance
regulators whose approval may be
necessary or appropriate.
Legal Analysis and Conditions:
Section 26(c) Relief:
1. The Substitution Applicants
request that the Commission issue an
order pursuant to Section 26(c) of the
Act approving the proposed
substitution. Section 26(c) of the Act
requires the depositor of a registered
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unit investment trust holding the
securities of a single issuer to obtain
Commission approval before
substituting the securities held by the
trust.
2. The Contracts permit the applicable
Insurance Company, subject to
compliance with applicable law, to
substitute shares of another investment
company for shares of an investment
company held by a sub-account of the
Separate Accounts. The prospectuses for
the Contracts and the Separate Accounts
contain disclosure of this right. The
Replacement Fund is anticipated to
have a lower total expense ratio than the
Existing Fund. The Insurance
Companies believe that it is in the best
interests of the Contract owners to
substitute the Replacement Fund for the
Existing Fund. The Substitution
Applicants believe that the FT
Subadvisers will, over the long term, be
positioned to provide at least
comparable performance to that of the
Existing Fund through their equal
investments in the Underlying FT
Funds because the Underlying FT
Funds are managed by the same entities.
3. The proposed substitution is not of
the type that Section 26(c) was designed
to prevent. Unlike traditional unit
investment trusts where a depositor
could only substitute an investment
security in a manner which
permanently affected all the investors in
the trust, the Contracts provide each
Contract owner with the right to
exercise his or her own judgment and
transfer Contract or cash values into
other sub-accounts. Moreover, the
Contracts will offer Contract owners the
opportunity to transfer amounts out of
the affected sub-accounts into any of the
remaining sub-accounts without cost or
other disadvantage. The proposed
substitution, therefore, will not result in
the type of costly forced redemption
which Section 26(c) was designed to
prevent. The proposed substitution also
is unlike the type of substitution which
Section 26(c) was designed to prevent in
that by purchasing a Contract, Contract
owners select much more than a
particular investment company in
which to invest their account values.
They also select the specific type of
insurance coverage offered by an
insurance company under their Contract
as well as numerous other rights and
privileges set forth in the Contract.
4. The Substitution Applicants and
AST agree that for the two year period
commencing on the date of the
substitution the total annual Fund
operating expenses of the Replacement
Fund (net of reimbursement and
waivers) will be capped at a level equal
to the Existing Fund’s total annual Fund
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operating expenses (net of
reimbursement and waivers) of 1.10% of
average daily net assets. In addition, the
Substitution Applicants and AST have
agreed to permanently cap the
management fee of the Replacement
Fund at .95% of average daily net assets.
5. The Substitution Applicants submit
that the proposed substitution meets the
standards set forth in Section 26(c) and
assert that the replacement of the
Existing Fund with the Replacement
Fund is consistent with the protection
of investors and the purposes fairly
intended by the policy and provisions of
the 1940 Act.
Section 17(b) Relief:
1. The Section 17 Applicants request
an order under Section 17(b) of the Act
exempting them from the provisions of
Section 17(a) to the extent necessary to
permit the Prudential Insurance
Companies to carry out the proposed
substitution as described herein.
2. Section 17(a)(1) of the 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 Act generally prohibits
the persons described above, acting as
principals, from knowingly purchasing
any security or other property from the
registered company.
3. Because shares held by a separate
account of an insurance company are
legally owned by the insurance
company, the Prudential Insurance
Companies and their affiliates
collectively own of record substantially
all of the shares of each of the various
series of AST (and will also own such
with respect to the Replacement Fund
upon its commencement of operations).
Therefore, AST and each of its
respective series could be deemed to be
under the control of the Prudential
Insurance Companies for purposes of
the Act, notwithstanding the fact that
Contract owners may be considered the
beneficial owners of those shares held
in the Separate Accounts for certain
purposes. If AST and each of its
respective series are deemed to be under
the control of the Prudential Insurance
Companies for purposes of the Act, then
each Prudential Insurance Company
could be deemed to be an affiliated
person of AST and each of its respective
series within the meaning of Section
2(a)(3) of the Act. Likewise if the
Prudential Insurance Companies are
deemed to control AST and each of its
respective series for purposes of the Act,
then AST and each of its respective
series, could be deemed to be affiliated
persons of the Prudential Insurance
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tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices
Companies within the meaning of
Section 2(a)(3) of the Act. Regardless of
whether or not the Prudential Insurance
Companies are considered to control
AST and each of its respective series
within the meaning of Section 2(a)(9) of
the Act, because the Prudential
Insurance Companies own of record
more than 5% of the shares of each
series of AST, the Prudential Insurance
Companies could be deemed to be
affiliated persons of AST and each of its
respective series within the meaning of
Section 2(a)(3) of the Act.
Notwithstanding the foregoing, because
the Prudential Insurance Companies
and the Investment Managers are under
the common control of Prudential
Financial, the Prudential Insurance
Companies could be deemed to be
affiliated persons of an affiliated person
(i.e., the Investment Managers) of a
registered investment company (i.e.,
AST and each of its respective series)
for purposes of Section 17(a) of the Act.
Because the substitution may be
effected, in whole or in part, by means
of in-kind redemptions of shares of the
Existing Fund and in-kind purchases of
shares of the Replacement Fund, the
substitution may be deemed to involve
one or more purchases or sales of
securities or property between affiliated
persons. The proposed transactions
could be deemed to involve the transfer
of portfolio securities held by the
Underlying FT Funds through the
Existing Fund to the Prudential
Insurance Companies and the
simultaneous purchase by the
Prudential Insurance Companies of
shares of the Replacement Fund using
such portfolio securities as
consideration. As a practical matter, the
custodian for the Replacement Fund
will receive such transferred assets from
the custodians for the Existing Fund and
Underlying FT Funds. Accordingly, as
the Prudential Insurance Companies
and the Existing Fund, and the
Prudential Insurance Companies and
the Replacement Fund, could be viewed
as first-tier or second-tier affiliates of
one another under Section 2(a)(3) of the
Act, it is conceivable that this aspect of
the substitutions could be viewed as
being prohibited by Section 17(a) of the
Act. As a result, the Section 17
Applicants have determined that it is
prudent to seek relief from Section 17(a)
in the context of this application for the
in-kind purchases of Replacement Fund
shares by the Prudential Insurance
Companies and the in-kind sales of
Replacement Fund shares to the
Prudential Insurance Companies.
4. The Section 17 Applicants submit
that for all the reasons stated in the
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19:14 Sep 04, 2012
Jkt 226001
application, the terms of the proposed
in-kind purchases of shares of the
Replacement Fund by the Prudential
Insurance Companies, 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 Prudential Insurance
Companies of Replacement Fund shares
are consistent with the policies of AST
and the Replacement Fund as recited in
their current registration statements and
reports filed under the Act. Finally, the
Section 17 Applicants submit that the
proposed substitution is consistent with
the general purposes of the Act. To the
extent that the in-kind purchases by the
Prudential Insurance Companies of the
Replacement Fund’s shares are deemed
to involve principal transactions among
first-tier or second-tier affiliates for
purposes of Section 17(a) of the Act, the
procedures described below should be
sufficient to assure that the terms of the
proposed transactions are reasonable
and fair to all participants. 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 fund involved, are reasonable, fair
and do not involve overreaching
principally because the transactions will
conform with all but one of the
conditions enumerated in Rule 17a–7.
The one condition of Rule 17a–7 that
the Section 17 Applicants will not
comply with is the condition requiring
that the transaction be a purchase or
sale for no consideration other than cash
payment against prompt delivery of a
security for which market quotations are
readily available. The proposed
transactions will take place at relative
net asset value in conformity with the
requirements of Section 22(c) of the Act
and Rule 22c–1 thereunder with no
change in the amount of any Contract
owner’s contract value or death benefit
or in the dollar value of his or her
investment in any of the Separate
Accounts. Contract owners will not
suffer any adverse tax consequences as
a result of the substitution. The fees and
charges under the Contracts will not
increase because of the substitution.
Even though the Separate Accounts, the
Prudential Insurance Companies, and
AST 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 in connection
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
54625
with an investment company by its
affiliated persons. The Section 17
Applicants assert that where, as here,
they or the relevant investment
company would comply with all but
one of the conditions of the Rule as
described above, the Commission
should consider the extent to which
they would meet these or other similar
conditions and issue an order if the
protections of the Rule would be
provided in substance.
5. The board of AST has adopted
procedures, as required by paragraph
(e)(1) of Rule 17a–7 under the Act,
pursuant to which the Replacement
Fund may purchase and sell securities
to and from its affiliates. The board of
AST will conduct its review of the
transactions in the same manner that it
normally would follow in accordance
with Rule 17a–7 under the Act. The
Section 17 Applicants will carry out the
proposed Prudential Insurance
Companies’ in-kind purchases in
conformity with all of the conditions of
Rule 17a–7 and AST’s procedures
thereunder, except that the
consideration paid for the securities
being purchased or sold may not be
entirely cash. Nevertheless, the
circumstances surrounding the
proposed substitution will be such as to
offer the same degree of protection to
the Replacement Fund from
overreaching that Rule 17a–7 provides
to it generally in connection with its
purchase and sale of securities under
that Rule in the ordinary course of its
business. In particular, the Prudential
Insurance Companies (or any of their
affiliates) cannot effect the proposed
transactions at a price that is
disadvantageous to the Replacement
Fund. Although the transactions may
not be entirely for cash, 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 fund involved valued
in accordance with the procedures
disclosed in its respective investment
company registration statement and as
required by Rule 22c–1 under the Act.
No brokerage commission, fee, or other
remuneration will be paid to any party
in connection with the proposed in-kind
purchase transactions.
6. The sale of shares of the
Replacement Fund for investment
securities, as contemplated by the
proposed Prudential Insurance
Companies’ in-kind purchases, is
consistent with the investment policies
and restrictions of the Replacement
Fund because (1) the shares are sold at
their net asset value, (2) each of the FT
Subadvisers also serves as the
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54626
Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices
investment manager for the relevant
Underlying FT Fund, (3) each of the FT
Subadvisers will implement the same
investment strategy for the Replacement
Fund that it uses to manage the
corresponding Underlying FT Fund, and
(4) the assets of the Replacement Fund
will be equally divided among the three
relevant investment strategies in exactly
the same manner as the Existing Fund
equally divides its assets among the
three Underlying FT Funds. The
portfolio securities are of the type and
quality that the Replacement Fund
would have acquired with the proceeds
from the sale of shares of the Existing
Fund had the shares of the Existing
Fund been sold for cash. To assure that
this condition is met, as applicable, the
Investment Managers and the
subadvisers for the Replacement Fund
will examine the portfolio securities
being offered to the Replacement Fund
and accept only those securities as
consideration for shares that it would
have acquired for each such fund in a
cash transaction.
Conclusion:
For the reasons and upon the facts set
forth above and in the application, the
Substitution Applicants and the Section
17 Applicants believe that the requested
orders meet the standards set forth in
Section 26(c) of the Act and Section
17(b) of the Act, respectively, and
should therefore, be granted.
BILLING CODE 8011–01–P
tkelley on DSK3SPTVN1PROD with NOTICES
[FR Doc. 2012–21910 Filed 8–31–12; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
I. Introduction
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 Thursday, September 6, 2012 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)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
On May 29, 2012, the Chicago Board
Options Exchange, Incorporated
(‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend CBOE Rule 12.3 to propose
universal spread margin rules. The
proposed rule change was published for
comment in the Federal Register on
June 7, 2012.3 The Commission received
no comment letters on the proposed rule
change. This order approves the
proposed rule change.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 67086 (May
31, 2012), 77 FR 33802.
2 17
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II. Description of the Proposal
An option spread is typically
characterized by the simultaneous
holding of a long and short option of the
same type (put or call) where both
options involve the same security or
instrument, but have different exercise
prices and/or expirations. To be eligible
for spread margin treatment, the long
option may not expire before the short
option. These long put/short put or long
call/short call spreads are known as
two-legged spreads.
Since the inception of the Exchange,
the margin requirements for two-legged
spreads have been specified in CBOE
margin rules.4 The margin requirement
for a two-legged spread that is eligible
for spread margin treatment is its
maximum risk based on the intrinsic
values of the options, exclusive of any
net option premiums paid or received
when the positions were established.5
For example, consider the following
equity option spread:
Long 1 XYZ May2011 60 call
Short 1 XYZ May2011 50 call
Dated: August 30, 2012.
Elizabeth M. Murphy,
Secretary.
August 29, 2012.
SECURITIES AND EXCHANGE
COMMISSION
Jkt 226001
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.
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Approving a
Proposed Rule Change Relating to
Spread Margin Rules
[FR Doc. 2012–21773 Filed 9–4–12; 8:45 am]
19:14 Sep 04, 2012
Institution and settlement of injunctive
actions;
Institution and settlement of administrative
proceedings; and
Other matters relating to enforcement
proceedings.
[Release No. 34–67752; File No. SR–CBOE–
2012–043]
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
VerDate Mar<15>2010
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Walter, as duty officer,
voted to consider the items listed for the
Closed Meeting in a closed session.
The subject matter of the Closed
Meeting scheduled for Thursday,
September 6, 2012 will be:
The maximum potential loss (i.e., risk)
for this particular spread would be a
scenario where the price of the
underlying stock (XYZ) is $60 or higher.
If the market price of XYZ is $60, the
May2011 60 call would have an
intrinsic value of zero, because the right
to buy at $60 when XYZ can be
purchased in the market for $60 has no
intrinsic value. The May2011 50 call
would have an intrinsic value of $10
because of the $10 advantage gained by
being able to buy at $50 when it costs
$60 to purchase XYZ in the market.
Because each option contract controls
100 shares of the underlying stock, the
intrinsic value, which was calculated on
a per share basis, is multiplied by 100,
resulting in an aggregate intrinsic value
of $1,000 for the May2011 50 call.6
However, because the May2011 50 call
is short, the $1,000 intrinsic value is a
loss, because it represents the cost to
close (i.e., buy-back) the short option. At
an assumed XYZ market price of $60,
netting the intrinsic values of the
options results in a loss of $1,000
(¥$1,000 + $0).7 Therefore, the
4 CBOE Rules Chapter 12; CBOE Rule
12.3(c)(5)(C)(4).
5 Any net credit received for establishing a spread
may be applied to the margin requirement, if any.
In the case of a spread that is established for a net
debit, the net debit must be paid for in full.
6 The result would be multiplied by the number
of contracts when more than a one-by-one contract
spread is involved.
7 At an assumed market price of $50, both the
May2011 50 call and May2011 60 call would have
no intrinsic value. Thus, there is no risk (provided
any net debit is paid for in full) at an assumed
market price of $50.
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]]>Agencies
[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Notices]
[Pages 54621-54626]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21773]
[[Page 54621]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-30186; File No. 812-13990]
Pruco Life Insurance Company, et al; Notice of Application
August 29, 2012.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order approving the substitution
of certain securities pursuant to Section 26(c) of the Investment
Company Act of 1940, as amended (the ``1940 Act'' or ``Act'') and an
order of exemption pursuant to Section 17(b) of the Act from Section
17(a) of the Act.
-----------------------------------------------------------------------
Applicants: Pruco Life Insurance Company (``Pruco Life''), Pruco Life
Flexible Premium Variable Annuity Account (``Pruco Life Variable
Annuity Account''), Pruco Life Insurance Company of New Jersey (``Pruco
Life of New Jersey''), Pruco Life of New Jersey Flexible Premium
Variable Annuity Account (``PLNJ Variable Annuity Account''),
Prudential Annuities Life Assurance Corporation (``Prudential
Annuities''), Prudential Annuities Life Assurance Corporation Variable
Account B (``Variable Account B''), Allstate Life Insurance Company
(``Allstate Life''), Allstate Financial Advisors Separate Account I
(``Separate Account I''), Allstate Life Insurance Company of New York
(``Allstate New York'' and collectively with Pruco Life, Pruco Life of
New Jersey, Prudential Annuities and Allstate Life, the ``Insurance
Companies''), Allstate Life of New York Separate Account A (``Separate
Account A'' and collectively with Pruco Life Variable Annuity Account,
PLNJ Variable Annuity Account, Variable Account B and Separate Account
I, the ``Separate Accounts''), and Advanced Series Trust (``AST''). The
Insurance Companies and the Separate Accounts are referred to herein
collectively as the ``Substitution Applicants.'' Pruco Life, Pruco Life
of New Jersey and Prudential Annuities are also referred to herein as
the ``Prudential Insurance Companies.'' The Prudential Insurance
Companies, Pruco Life Variable Annuity Account, PLNJ Variable Annuity
Account, Variable Account B and AST are collectively referred to as the
``Section 17 Applicants.''
Summary of Application: The Substitution Applicants seek an order
pursuant to Section 26(c) of the 1940 Act, approving the substitution
of shares of the AST Franklin Templeton Founding Funds Allocation
Portfolio (the ``Replacement Fund'') for shares of the Franklin
Templeton VIP Founding Funds Allocation Fund, a series of Franklin
Templeton Variable Insurance Products Trust (``Franklin Templeton VIP
Trust'') (the ``Existing Fund''), held by the Separate Accounts to fund
certain individual variable annuity contracts (collectively, the
``Contracts'') issued by the Insurance Companies. The Section 17
Applicants seek an order pursuant to Section 17(b) of the 1940 Act
exempting them from Section 17(a) of the Act to the extent necessary to
permit them to engage in certain in-kind transactions in connection
with the substitution.
DATES: Filing Date: The application was filed on December 9, 2011, and
the amended and restated application was filed on August 23, 2012.
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 the 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 September 19, 2012, and should be
accompanied by proof of service on the 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, SEC, 100 F Street NE., Washington, DC 20549-1090.
Applicants: Pruco Life Insurance Company, Pruco Life Flexible Premium
Variable Annuity Account, Pruco Life Insurance Company of New Jersey
and Pruco Life of New Jersey Flexible Premium Variable Annuity Account,
751 Broad Street, Newark, NJ 07102; Prudential Annuities Life Assurance
Corporation and Prudential Annuities Life Assurance Corporation
Variable Account B, One Corporate Drive, Shelton, CT 06484; Advanced
Series Trust, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102; Allstate Life Insurance Company and Allstate Financial
Advisors Separate Account I, 3100 Sanders Road, Northbrook, IL 60062;
Allstate Life Insurance Company of New York and Allstate Life of New
York Separate Account A, 100 Motor Parkway, Suite 132, Hauppauge, New
York 11788.
FOR FURTHER INFORMATION CONTACT: Sally Samuel, Senior Counsel, or Joyce
M. Pickholz, 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 via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at https://www.sec.gov/search/search.htm, or by calling (202) 551-8090.
Applicants' Representations
1. The Insurance Companies, on their own behalf and on behalf of
their respective separate accounts, propose to substitute shares of the
Replacement Fund for shares of the Existing Fund held by the Separate
Accounts to fund the Contracts. The Separate Accounts own only Class 4
shares of the Existing Fund.
2. Pruco Life is the depositor and sponsor of Pruco Life Variable
Annuity Account. Pruco Life of New Jersey is the depositor and sponsor
of PLNJ Variable Annuity Account. Prudential Annuities is the depositor
and sponsor of Variable Account B. Allstate Life is the depositor and
sponsor of Separate Account I. Allstate New York is the depositor and
sponsor of Separate Account A.
3. On June 1, 2006, Allstate Life and Allstate New York entered
into an agreement with Prudential Financial, Inc. (``Prudential
Financial'') and its subsidiary, The Prudential Insurance Company of
North America (``Prudential''), pursuant to which Allstate Life and
Allstate New York sold, through a combination of coinsurance and
modified coinsurance reinsurance, substantially all of their variable
annuity business. Allstate Life and Allstate New York also have entered
into an administrative services agreement pursuant to which Prudential
or an affiliate administers Separate Account I and Separate Account A.
4. Each of Pruco Life Variable Annuity Account, PLNJ Variable
Annuity Account, Variable Account B, Separate Account 1 and Separate
Account A is a ``separate account'' as defined by Rule 0-1(e) under the
Act and each is registered under the Act as a unit investment trust for
the purpose of funding the Contracts. Security interests under the
Contracts have been registered under the Securities Act of 1933. The
application sets forth the registration statement file numbers for the
Contracts and the Separate Accounts.
5. AST and Franklin Templeton VIP Trust are registered open-end
management investment companies of
[[Page 54622]]
the series type (File Number 033-24962 and 033-23493, respectively).
6. Franklin Templeton Services, LLC (``Existing Fund
Administrator'') serves as the administrator to the Existing Fund.
Prudential Investments LLC and AST Investment Services, Inc. (together,
the ``Investment Managers'') serve as the co-investment managers of the
Replacement Fund. Franklin Advisers, Inc. (``Franklin Advisers''),
Franklin Mutual Advisers, LLC (``Franklin Mutual''), and Templeton
Global Advisors Limited (``Templeton Global'') serve as subadvisers to
the Replacement Fund and are affiliates of the Existing Fund
Administrator. Franklin Advisers, Franklin Mutual, and Templeton Global
are collectively referred to as the ``FT Subadvisers.''
7. The substitution will replace an investment option (i.e., the
Existing Fund) administered by an entity (i.e., Franklin Templeton
Services, LLC) that is not affiliated with the Substitution Applicants
as of the date hereof (other than by way of certain of the Substitution
Applicants owning more than 5% of the shares of the Existing Fund) with
an investment option (i.e., the Replacement Fund) that is managed by
investment managers (i.e., Prudential Investments LLC and AST
Investment Services, Inc.) that are affiliated with the Prudential
Insurance Companies. The Investment Managers may hire and replace
unaffiliated subadvisers with the approval of AST's Board of Trustees.
Pursuant to an exemptive order issued to a predecessor Prudential
Financial investment adviser, Inv. Co. Rel. No. 22215 (Sept. 11, 1996),
(the ``Multi-Manager Order''), the Investment Managers are authorized
to enter into and amend sub-advisory agreements without shareholder
approval under certain conditions. However, Substitution Applicants and
AST represent that the Replacement Fund will not change a subadviser,
add a new subadviser, or otherwise rely on the Multi-Manager Order
without first obtaining shareholder approval of the change in
subadviser, the new subadviser, or the Replacement Fund's ability to
add or to replace a subadviser in reliance on the Multi-Manager Order
at an AST shareholder meeting, the record date for which shall be after
the proposed substitution has been effected. In addition, prior to the
substitution, the Substitution Applicants state that each Contract
owner will have been provided with the Replacement Fund prospectus
describing the existence, substance and effect of the Multi-Manager
order.
8. The Contracts are individual and group flexible premium
variable, variable with fixed options and variable with fixed and
market value adjusted fixed options contracts. The Contracts permit the
Insurance Companies to substitute shares of one fund with shares of
another, including a fund of a different registered investment company.
The prospectuses for the Contracts and the Separate Accounts contain
disclosures of this right. The Contracts which offer the Existing Fund
securities are registered in the Form N-4 Registration Statements
listed in footnotes 1 through 5 of the application.
9. The Existing Fund is a ``fund of funds'' meaning that it seeks
to achieve its investment goal by investing its assets in a combination
of Class 1 shares of the Franklin Income Securities Fund (``Franklin
Income'') (33\1/3\%), Mutual Shares Securities Fund (``Mutual Shares'')
(33\1/3\%), and Templeton Growth Securities Fund (``Templeton Growth,''
and collectively with Franklin Income and Mutual Shares, the
``Underlying FT Funds''). Franklin Income is managed by Franklin
Advisers, Mutual Shares is managed by Franklin Mutual, and Templeton
Growth is managed by Templeton Global. The Existing Fund makes equal
allocations to each of the Underlying FT Funds on a fixed percentage
basis. Although the Replacement Fund will not operate as a ``fund of
funds'' like the Existing Fund, its overall investment strategy will be
substantially identical to that of the Existing Fund. Franklin Income,
Franklin Mutual, and Templeton Global serve as subadvisers to the
Replacement Fund. Each FT Subadviser handles the day-to-day investment
management of approximately 33\1/3\% of the Replacement Fund's assets
based upon the application of the specific investment strategy that it
uses in connection with the corresponding Underlying FT Fund. Like the
Existing Fund, the percentage of Replacement Fund assets that is
allocated to each investment strategy will be monitored and those
allocations will be rebalanced when they are more than 3% above or
below the goal of equal allocations to each of the three investment
strategies. A comparison of the investing strategies and risks of the
Existing Fund and the Replacement Fund is included in the application.
The following table compares the fees and expenses of the Existing Fund
and the Replacement Fund as of December 31, 2011.\1\
---------------------------------------------------------------------------
\1\ The Replacement Fund has no assets and has not yet commenced
operations as of the date hereof. The estimated fees and expenses of
the Replacement Fund are, however, based in part on assumed average
daily net assets of approximately $2.4 billion for the Replacement
Fund (i.e., the approximate amount of net assets that would have
been acquired from the Existing Fund had the substitution been
completed as of December 31, 2011) for the fiscal period ending
December 31, 2012.
------------------------------------------------------------------------
Existing fund
(Class 4) Replacement Fund
------------------------------------------------------------------------
Management fees................. None.............. 0.95%
Distribution and service (12b-1) 0.35%............. None
fees.
Other Expenses.................. 0.11%............. 0.16%
Acquired fund fees and expenses. 0.65%............. --
Total annual Fund operating 1.11%............. 1.11%
expenses.
Fee waiver and/or expense -0.01%............ -0.03%
reimbursement.
---------------------------------------
Total annual Fund operating 1.10%............. 1.08%
expenses after fee waiver
and/or expense
reimbursement.
------------------------------------------------------------------------
10. The Existing Fund does not pay a management fee but as a
shareholder in the underlying funds, indirectly bears its proportionate
share of any management fees and other expenses paid by the underlying
funds. The management fees of each of the underlying funds, based on
each underlying fund's average net assets for the fiscal year ended
December 31, 2011, are: Franklin Income Securities Fund: 0.45%; Mutual
Shares Securities Fund: 0.60%; and Templeton Growth Securities Fund:
0.74%.
11. The Substitution Applicants state that the substitutions are
expected to benefit Contract owners in a number of ways. The
Replacement Fund is a new
[[Page 54623]]
series of AST, and thus the Replacement Fund is part of the Prudential
Annuity family of funds. As such, the Insurance Companies generally
expect to learn of any changes affecting the Replacement Fund well in
advance of their effectiveness, thereby allowing the Insurance
Companies to use the most efficient and least costly means to
administer such changes (e.g., by including the changes in other
routine filings and planned mailings to contract owners). The Insurance
Companies believe that Contract owners will benefit from this
streamlining as the Insurance Companies enhance their communication
efforts to contract owners and sales representatives regarding
investment options. Further, since the Replacement Fund is part of the
Prudential Annuity family of funds, the Investment Managers will
provide rigorous oversight and monitoring of the Replacement Fund's
investment performance and its compliance with investment objectives,
policies and restrictions. In addition, the Replacement Fund unlike the
Existing Fund is not a ``fund of funds'' and therefore can generally
operate with more flexibility. As described in more detail in the
application, a portion of the assets attributable to each of the three
investment strategies used in connection with the Replacement Fund will
be invested in certain types of derivatives and short-term instruments
to help maintain adequate portfolio liquidity. Such investments will
provide for more effective and efficient fund management and operation
during times of market volatility than the current fund-of-funds
structure. Further, the Replacement Fund, as a series of AST, will have
access to the Prudential Financial fund complex's credit facility which
will also serve to potentially create efficiencies and cause less
disruption to the orderly investment management of the Replacement Fund
in times of market volatility and increased redemption activity. The
Insurance Companies will also realize the benefit of reduced production
and mailing expenses with respect to the prospectus, given that the
Replacement Fund will be a series of AST with all disclosures
concerning the Replacement Fund being included in the combined AST
prospectus. Contract owners will benefit from consolidated and
consistent fund disclosure. The Insurance Company Applicants believe
that the Replacement Fund represents the best available match,
consistent with the goal of providing Contract owners with a substitute
investment option offering a lower expense ratio than the expense ratio
of the Existing Fund. Further, Contract owners will be allowed a free
transfer out of the Existing Fund (before the substitution) or out of
the Replacement Fund (after the substitution) to any other investment
option available under the applicable Contract; therefore any Contract
owner will be able, without charge, to switch to another investment
option.
12. For these reasons and the reasons discussed below, the
Substitution Applicants believe that substituting the Replacement Fund
for the Existing Fund is appropriate and in the best interest of
Contract owners. Because the Existing Fund does not have an investment
manager, it does not directly pay any investment management fees. The
Existing Fund does, however, indirectly pay investment management fees
in connection with its investments in the Underlying FT Funds. In
addition, as shown in more detail in the application, the estimated
total operating expense ratio for the Replacement Fund will be lower
than the net expense ratio for Class 4 shares of the Existing Fund as
set forth in its current prospectus. There will be no increase in
Contract fees and expenses, including mortality and expense risk fees
and administration and distribution fees charged to the Separate
Accounts as a result of the substitutions. The Substitution Applicants
believe that the Replacement Fund has an investment objective, policies
and a risk profile that are substantially the same as the Existing
Fund, thus making the Replacement Fund an appropriate candidate as a
substitute. In addition, after the substitutions, neither the
Investment Managers nor any of their affiliates will receive
compensation from the charges to the Separate Accounts related to the
Contracts or from revenue sharing from the Replacement Funds in excess
of the compensation currently received from the administrator or
distributors of the Existing Fund.
13. By a supplement to the prospectuses for the Contracts and the
Separate Accounts each Insurance Company has notified all owners of the
Contracts affected by the substitutions of its intention to take the
necessary actions, including seeking the order requested by the
application, to substitute shares of the funds as described herein. The
supplement advised Contract owners that from the date of the supplement
until the date of the proposed substitution, owners are permitted to
make one transfer of Contract value (or annuity unit exchange) out of
the Existing Fund sub-account to one or more other sub-accounts without
the transfer (or exchange) being treated as one of a limited number of
permitted transfers (or exchanges) permitted without a transfer charge.
The supplement informed Contract owners that the Insurance Company will
not exercise any rights reserved under any Contract to impose
additional restrictions on transfers until at least 30 days after the
proposed substitution. The supplement also informed Contract owners
that for at least 30 days following the proposed substitution, the
Insurance Companies will permit Contract owners affected by the
substitution to make one transfer of Contract value (or annuity unit
exchange) out of the Replacement Fund sub-account to one or more other
sub-accounts without the transfer (or exchange) being treated as one of
a limited number of permitted transfers (or exchanges) or a limited
number of transfers (or exchanges) permitted without a transfer charge.
14. The proposed substitution will take place at relative net asset
value with no change in the amount of any Contract owner's Contract
value or death benefit or in the dollar value of his or her investment
in the Separate Accounts.
15. The substitution will be effected by a combination of in-kind
and cash transactions. It is anticipated that the majority of the
transactions will be effected in-kind, with the remainder being
effected in cash. With respect to in-kind transactions, it is intended
that, after receipt of the Insurance Companies' redemption request, the
Existing Fund will redeem shares it holds in the FT Underlying Funds,
which request will be fulfilled by the FT Underlying Funds primarily in
the form of underlying securities. The Existing Fund will then fulfill
the Insurance Companies' redemption request with these in-kind
securities received from the FT Underlying Funds. These in-kind
securities will then be contributed to the Replacement Fund to purchase
shares of that Fund. All in-kind redemptions from the Existing Fund of
which any of the Substitution 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). To the extent that the redemption
request cannot be completed wholly through in-kind securities, the
remainder of the substitution will be effected through the Insurance
Companies' redeeming shares of the Existing Fund for cash and using the
cash to purchase shares of the Replacement Fund.
[[Page 54624]]
16. Contract owners will not incur any fees or charges as a result
of the proposed substitution, nor will their rights or Insurance
Company's obligations under the Contracts be altered in any way. All
expenses incurred in connection with the proposed substitution,
including brokerage, legal, accounting, and other fees and expenses,
will be paid by the Insurance Companies. In addition, the proposed
substitution will not impose any tax liability on Contract owners. The
proposed substitution will not cause the Contract fees and charges
currently being paid by existing Contract owners to be greater after
the proposed substitution than before the proposed substitution. No
fees will be charged on the transfers made at the time of the proposed
substitution because the proposed substitution will not be treated as a
transfer for the purpose of assessing transfer charges or for
determining the number of remaining permissible transfers in a Contract
year.
17. In addition to the prospectus supplements distributed to owners
of Contracts, within five business days after the proposed substitution
is completed, Contract owners will be sent a written notice informing
them that the substitution was carried out and that they may make one
transfer of any Contract value invested in the Replacement Fund sub-
account on the date of the notice to one or more other sub-accounts
available under their Contract at no cost and without regard to the
usual limit on the frequency of transfers among sub-accounts or from
the variable account options to the fixed account options. The notice
will also reiterate that (other than with respect to ``market timing''
activity) the Insurance Companies will not exercise any rights reserved
by it under the Contracts to impose additional restrictions on
transfers or to impose any charges on transfers until at least 30 days
after the proposed substitution. The Insurance Companies will also send
each Contract owner a current prospectus for the Replacement Fund to
the extent that they have not previously received a copy. Each
Insurance Company also is seeking approval of the proposed substitution
from any state insurance regulators whose approval may be necessary or
appropriate.
Legal Analysis and Conditions:
Section 26(c) Relief:
1. The Substitution Applicants request that the Commission issue an
order pursuant to Section 26(c) of the Act approving the proposed
substitution. Section 26(c) of the Act requires the depositor of a
registered unit investment trust holding the securities of a single
issuer to obtain Commission approval before substituting the securities
held by the trust.
2. The Contracts permit the applicable Insurance Company, subject
to compliance with applicable law, to substitute shares of another
investment company for shares of an investment company held by a sub-
account of the Separate Accounts. The prospectuses for the Contracts
and the Separate Accounts contain disclosure of this right. The
Replacement Fund is anticipated to have a lower total expense ratio
than the Existing Fund. The Insurance Companies believe that it is in
the best interests of the Contract owners to substitute the Replacement
Fund for the Existing Fund. The Substitution Applicants believe that
the FT Subadvisers will, over the long term, be positioned to provide
at least comparable performance to that of the Existing Fund through
their equal investments in the Underlying FT Funds because the
Underlying FT Funds are managed by the same entities.
3. The proposed substitution is not of the type that Section 26(c)
was designed to prevent. Unlike traditional unit investment trusts
where a depositor could only substitute an investment security in a
manner which permanently affected all the investors in the trust, the
Contracts provide each Contract owner with the right to exercise his or
her own judgment and transfer Contract or cash values into other sub-
accounts. Moreover, the Contracts will offer Contract owners the
opportunity to transfer amounts out of the affected sub-accounts into
any of the remaining sub-accounts without cost or other disadvantage.
The proposed substitution, therefore, will not result in the type of
costly forced redemption which Section 26(c) was designed to prevent.
The proposed substitution also is unlike the type of substitution which
Section 26(c) was designed to prevent in that by purchasing a Contract,
Contract owners select much more than a particular investment company
in which to invest their account values. They also select the specific
type of insurance coverage offered by an insurance company under their
Contract as well as numerous other rights and privileges set forth in
the Contract.
4. The Substitution Applicants and AST agree that for the two year
period commencing on the date of the substitution the total annual Fund
operating expenses of the Replacement Fund (net of reimbursement and
waivers) will be capped at a level equal to the Existing Fund's total
annual Fund operating expenses (net of reimbursement and waivers) of
1.10% of average daily net assets. In addition, the Substitution
Applicants and AST have agreed to permanently cap the management fee of
the Replacement Fund at .95% of average daily net assets.
5. The Substitution Applicants submit that the proposed
substitution meets the standards set forth in Section 26(c) and assert
that the replacement of the Existing Fund with the Replacement Fund is
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the 1940 Act.
Section 17(b) Relief:
1. The Section 17 Applicants request an order under Section 17(b)
of the Act exempting them from the provisions of Section 17(a) to the
extent necessary to permit the Prudential Insurance Companies to carry
out the proposed substitution as described herein.
2. Section 17(a)(1) of the 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 Act
generally prohibits the persons described above, acting as principals,
from knowingly purchasing any security or other property from the
registered company.
3. Because shares held by a separate account of an insurance
company are legally owned by the insurance company, the Prudential
Insurance Companies and their affiliates collectively own of record
substantially all of the shares of each of the various series of AST
(and will also own such with respect to the Replacement Fund upon its
commencement of operations). Therefore, AST and each of its respective
series could be deemed to be under the control of the Prudential
Insurance Companies for purposes of the Act, notwithstanding the fact
that Contract owners may be considered the beneficial owners of those
shares held in the Separate Accounts for certain purposes. If AST and
each of its respective series are deemed to be under the control of the
Prudential Insurance Companies for purposes of the Act, then each
Prudential Insurance Company could be deemed to be an affiliated person
of AST and each of its respective series within the meaning of Section
2(a)(3) of the Act. Likewise if the Prudential Insurance Companies are
deemed to control AST and each of its respective series for purposes of
the Act, then AST and each of its respective series, could be deemed to
be affiliated persons of the Prudential Insurance
[[Page 54625]]
Companies within the meaning of Section 2(a)(3) of the Act. Regardless
of whether or not the Prudential Insurance Companies are considered to
control AST and each of its respective series within the meaning of
Section 2(a)(9) of the Act, because the Prudential Insurance Companies
own of record more than 5% of the shares of each series of AST, the
Prudential Insurance Companies could be deemed to be affiliated persons
of AST and each of its respective series within the meaning of Section
2(a)(3) of the Act. Notwithstanding the foregoing, because the
Prudential Insurance Companies and the Investment Managers are under
the common control of Prudential Financial, the Prudential Insurance
Companies could be deemed to be affiliated persons of an affiliated
person (i.e., the Investment Managers) of a registered investment
company (i.e., AST and each of its respective series) for purposes of
Section 17(a) of the Act. Because the substitution may be effected, in
whole or in part, by means of in-kind redemptions of shares of the
Existing Fund and in-kind purchases of shares of the Replacement Fund,
the substitution may be deemed to involve one or more purchases or
sales of securities or property between affiliated persons. The
proposed transactions could be deemed to involve the transfer of
portfolio securities held by the Underlying FT Funds through the
Existing Fund to the Prudential Insurance Companies and the
simultaneous purchase by the Prudential Insurance Companies of shares
of the Replacement Fund using such portfolio securities as
consideration. As a practical matter, the custodian for the Replacement
Fund will receive such transferred assets from the custodians for the
Existing Fund and Underlying FT Funds. Accordingly, as the Prudential
Insurance Companies and the Existing Fund, and the Prudential Insurance
Companies and the Replacement Fund, could be viewed as first-tier or
second-tier affiliates of one another under Section 2(a)(3) of the Act,
it is conceivable that this aspect of the substitutions could be viewed
as being prohibited by Section 17(a) of the Act. As a result, the
Section 17 Applicants have determined that it is prudent to seek relief
from Section 17(a) in the context of this application for the in-kind
purchases of Replacement Fund shares by the Prudential Insurance
Companies and the in-kind sales of Replacement Fund shares to the
Prudential Insurance Companies.
4. The Section 17 Applicants submit that for all the reasons stated
in the application, the terms of the proposed in-kind purchases of
shares of the Replacement Fund by the Prudential Insurance Companies,
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
Prudential Insurance Companies of Replacement Fund shares are
consistent with the policies of AST and the Replacement Fund as recited
in their current registration statements and reports filed under the
Act. Finally, the Section 17 Applicants submit that the proposed
substitution is consistent with the general purposes of the Act. To the
extent that the in-kind purchases by the Prudential Insurance Companies
of the Replacement Fund's shares are deemed to involve principal
transactions among first-tier or second-tier affiliates for purposes of
Section 17(a) of the Act, the procedures described below should be
sufficient to assure that the terms of the proposed transactions are
reasonable and fair to all participants. 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 fund
involved, are reasonable, fair and do not involve overreaching
principally because the transactions will conform with all but one of
the conditions enumerated in Rule 17a-7. The one condition of Rule 17a-
7 that the Section 17 Applicants will not comply with is the condition
requiring that the transaction be a purchase or sale for no
consideration other than cash payment against prompt delivery of a
security for which market quotations are readily available. The
proposed transactions will take place at relative net asset value in
conformity with the requirements of Section 22(c) of the Act and Rule
22c-1 thereunder with no change in the amount of any Contract owner's
contract value or death benefit or in the dollar value of his or her
investment in any of the Separate Accounts. Contract owners will not
suffer any adverse tax consequences as a result of the substitution.
The fees and charges under the Contracts will not increase because of
the substitution. Even though the Separate Accounts, the Prudential
Insurance Companies, and AST 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 in
connection with an investment company by its affiliated persons. The
Section 17 Applicants assert that where, as here, they or the relevant
investment company would comply with all but one of the conditions of
the Rule as described above, the Commission should consider the extent
to which they would meet these or other similar conditions and issue an
order if the protections of the Rule would be provided in substance.
5. The board of AST has adopted procedures, as required by
paragraph (e)(1) of Rule 17a-7 under the Act, pursuant to which the
Replacement Fund may purchase and sell securities to and from its
affiliates. The board of AST will conduct its review of the
transactions in the same manner that it normally would follow in
accordance with Rule 17a-7 under the Act. The Section 17 Applicants
will carry out the proposed Prudential Insurance Companies' in-kind
purchases in conformity with all of the conditions of Rule 17a-7 and
AST's procedures thereunder, except that the consideration paid for the
securities being purchased or sold may not be entirely cash.
Nevertheless, the circumstances surrounding the proposed substitution
will be such as to offer the same degree of protection to the
Replacement Fund from overreaching that Rule 17a-7 provides to it
generally in connection with its purchase and sale of securities under
that Rule in the ordinary course of its business. In particular, the
Prudential Insurance Companies (or any of their affiliates) cannot
effect the proposed transactions at a price that is disadvantageous to
the Replacement Fund. Although the transactions may not be entirely for
cash, 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 fund involved
valued in accordance with the procedures disclosed in its respective
investment company registration statement and as required by Rule 22c-1
under the Act. No brokerage commission, fee, or other remuneration will
be paid to any party in connection with the proposed in-kind purchase
transactions.
6. The sale of shares of the Replacement Fund for investment
securities, as contemplated by the proposed Prudential Insurance
Companies' in-kind purchases, is consistent with the investment
policies and restrictions of the Replacement Fund because (1) the
shares are sold at their net asset value, (2) each of the FT
Subadvisers also serves as the
[[Page 54626]]
investment manager for the relevant Underlying FT Fund, (3) each of the
FT Subadvisers will implement the same investment strategy for the
Replacement Fund that it uses to manage the corresponding Underlying FT
Fund, and (4) the assets of the Replacement Fund will be equally
divided among the three relevant investment strategies in exactly the
same manner as the Existing Fund equally divides its assets among the
three Underlying FT Funds. The portfolio securities are of the type and
quality that the Replacement Fund would have acquired with the proceeds
from the sale of shares of the Existing Fund had the shares of the
Existing Fund been sold for cash. To assure that this condition is met,
as applicable, the Investment Managers and the subadvisers for the
Replacement Fund will examine the portfolio securities being offered to
the Replacement Fund and accept only those securities as consideration
for shares that it would have acquired for each such fund in a cash
transaction.
Conclusion:
For the reasons and upon the facts set forth above and in the
application, the Substitution Applicants and the Section 17 Applicants
believe that the requested orders meet the standards set forth in
Section 26(c) of the Act and Section 17(b) of the Act, respectively,
and should therefore, be granted.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21773 Filed 9-4-12; 8:45 am]
BILLING CODE 8011-01-P
