Ohio National Life Insurance Company, et al.; Notice of Application

[Federal Register Volume 64, Number 177 (Tuesday, September 14, 1999)]
[Notices]
[Pages 49827-49829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23888]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23998; No. 812-11512]


Ohio National Life Insurance Company, et al.; Notice of 
Application

September 8, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to Section 26(b) of 
the Investment Company Act of 1940 (the ``Act'').

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SUMMARY OF APPLICATION: Applicants seek an order approving the 
substitution of: (a) Shares of Small Cap Growth Portfolio of Ohio 
National Fund, Inc. (``ON Small Cap Growth Portfolio'') for shares of 
Montgomery Variable Series: Small Cap Opportunities Fund (``Montgomery 
Small Cap Fund''); and (b) shares of Lazard Retirement Emerging Markets 
Portfolio (``Lazard Emerging Markets Portfolio'') for shares of 
Montgomery Variable Series: Emerging Markets Fund (``Montgomery 
Emerging Markets Fund'').

APPLICANTS: The Ohio National Life Insurance Company (``Ohio 
National''), Ohio National Variable Account A (``Variable Account A''), 
Ohio National Life Assurance Corporation (``ONLAC''), and Ohio National 
Variable Account R (``Variable Account R'').

FILING DATES: The application was filed on February 17, 1999, and 
amended and restated on July 26, 1999, and August 27, 1999.

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 no later then 5:30 p.m. on September 29, 1999, and should be 
accompanied by proof of service on Applicants, in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of the writer's interest, the reason for the 
request and the issues contested. Persons 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, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, Ohio National Life 
Insurance Company, One Financial Way, Cincinnati, Ohio 45242.

FOR FURTHER INFORMATION CONTACT: Paul G. Cellupica, Senior Counsel, or 
Kevin M. Kirchoff, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application is available for a fee from the 
Public Reference Branch of the Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel (202) 942-8090).

Applicants' Representations

    1. Ohio National was organized as a stock company under the laws of 
Ohio in 1909. It issues annuities in 47 states, the District of 
Columbia and Puerto Rico. ONLAC, a wholly-owned subsidiary of Ohio 
National, is a stock life insurance company organized under the laws of 
Ohio in 1979.
    2. Variable Account A was established in 1969 by Ohio National as a 
separate account under Ohio law for the purpose of funding variable 
annuity contracts issued by Ohio National. Five of the variable annuity 
contracts are affected by the application (``VA Contracts''). Variable 
Account R was established in 1985 for the purpose of funding variable 
life insurance contracts issued by ONLAC. One of the variable life 
insurance contracts is affected by this application (``VLI Contract,'' 
collectively with the VA Contracts, the ``Contracts''). Variable 
Account A and Variable Account R are registered as unit investment 
trusts under the Act.
    3. Purchase payments for the Contracts are allocated to one or more 
subaccounts of Variable Account A or Variable Account R 
(``Subaccounts''). The Contracts permit allocations of accumulation 
value to up to 10 of the available Subaccounts that invest in specific 
investment portfolios (``Portfolios'') of Underlying mutual funds 
(``Underlying Funds'').
    4. The Contracts permit transfers of accumulation value from one 
Subaccount to another at any time prior to annuitization. No sales 
charge applies to a transfer of accumulation value among the 
Subaccounts. For three of the VA Contracts, the first transfer in any 
calendar month is free; each additional transfer in a calendar month is 
subject to a $10 charge. For the two remaining VA Contracts and the VLI 
Contract, the first four transfers during each contract year are free; 
each additional transfer is subject to a $3 charge. Although there 
currently is no limit on the number of transfers that may be made, the 
Contracts permit Ohio National or ONLAC, as applicable, to limit the 
number, frequency, method or amount of transfers. Transfers from any 
Subaccount on any one day may be

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limited to 1% of the previous day's total net assets of the Portfolio 
if Ohio National, ONLAC or the Underlying Fund believe that the 
Portfolio might otherwise be damaged.
    5. Applicants propose the following substitutions: (a) The 
substitution of shares of ON Small Cap Growth Portfolio for shares of 
Montgomery Small Cap Fund and (b) the substitution of shares of Lazard 
Emerging Markets Portfolio for shares of Montgomery Emerging Markets 
Fund.
    6. Montgomery Small Cap Fund is a separate investment portfolio of 
The Montgomery Funds III (``Montgomery Funds''), an open-end management 
investment company registered under the Act, and is currently an 
investment option under three of the VA Contracts. Montgomery Small Cap 
Fund is managed by Montgomery Asset Management, LLC (``Montgomery''), a 
subsidiary of Commerzbank AG.
    7. Montgomery Small Cap Fund's investment objective is to seek 
capital appreciation by investing primarily in equity securities, 
usually common stock, of domestic companies having market 
capitalizations of less than $1 billion. The expense ratio of 
Montgomery Small Cap Fund for 1998 was 1.50%. Absent voluntary fee 
waivers by Montgomery, that expense ratio would have been 3.71%. Absent 
voluntary fee waivers by Montgomery, that expense ratio would have been 
3.71%. The total return of Montgomery Small Cap Fund (exclusive of 
Contract or Subaccount charges) was -7.20% for the period since its 
inception on May 1, 1998, through December 31, 1998.
    8. Montgomery and Montgomery Funds intend to cease offering shares 
of Montgomery Small Cap Fund due to the small amount of assets and the 
corresponding absence of economies of scale. Montgomery has indicated 
that the small size of Montgomery Small Cap Fund makes it difficult to 
manage successfully and makes it difficult to comply with 
diversification requirements applicable to variable insurance products 
under the Internal Revenue Code of 1986, as amended, and to mutual 
funds under the Act. On May 1, 1999, Ohio National and ONLAC ceased 
permitting allocations by new contractowners of accumulation value to 
the Subaccounts that invest in Montgomery Small Cap Fund.
    9. ON Small Cap Growth Portfolio is another investment option 
currently available under the VA Contracts which also offer Montgomery 
Small Cap Fund. The investment adviser of ON Small Cap Growth Portfolio 
is Ohio National Investments, Inc. The sub-adviser that manages the 
investments of ON Small Cap Growth Portfolio is Robertson Stephens 
Investment Management, L.P.
    10. The investment objective of ON Small Cap Growth Portfolio is 
capital appreciation. ON Small Cap Growth Portfolio invests in an 
actively managed portfolio of equity securities, principally common 
stocks, of companies that in the opinion of its sub-adviser have the 
potential, based on superior products or services, operating 
characteristics, and financing capabilities, for more rapid growth than 
the over-all economy. Up to 30% of its assets may be invested in 
foreign securities. The expense ratio of ON Small Cap Growth Portfolio 
for 1998 was 1.30%. The total return of ON Small Cap Growth Portfolio 
(exclusive of Contract or Subaccount charges) was 4.62% for the period 
since its inception on May 1, 1998, through December 31, 1998.
    11. Montgomery Emerging Markets Fund (collectively with Montgomery 
Small Cap Fund, the ``Eliminated Portfolios'') is a separate investment 
portfolio of Montgomery Funds and is currently an investment option 
under the Contracts. Montgomery Emerging Markets Fund is managed by 
Montgomery.
    12. Montgomery Emerging Markets Fund's investment objective is to 
seek capital appreciation by investing primarily in equity securities 
of companies in countries having economies and markets generally 
considered by the World Bank or the United Nations to be emerging or 
developing. The expense ratio of Montgomery Emerging Markets Fund for 
1998 was 1.75%. Absent voluntary deferral of fees and absorption of 
expenses by Montgomery, that expense ratio would have been 1.80%. The 
total return of Montgomery Emerging Markets Fund (exclusive of Contract 
or Subaccount charges) was -37.53% for the year ended December 31, 
1998, and the average annual total return since its inception on 
February 2, 1996, through December 31, 1998, was -13.15%.
    13. On May 1, 1999, Ohio National and ONLAC ceased permitting 
allocations by new contractowners of accumulation value to the 
Subaccounts that invest in Montgomery Emerging Markets Fund.
    14. Lazard Emerging Markets Portfolio (collectively with ON Small 
Cap Growth Portfolio, the ``Substitute Portfolios'') is a separate 
investment portfolio of Lazard Retirement Series, Inc., an open-end 
management investment company registered under the Act. The Lazard 
Emerging Markets Portfolio has been available under the Contracts since 
May 1, 1999. Lazard Emerging Markets Portfolio is managed by Lazard 
Asset Management (``Lazard''), a division of Lazard Freres & Co. LLC.
    15. Lazard Emerging Market Portfolio's investment objective is to 
seek capital appreciation. It invests primarily in equity securities of 
non-United States issuers located, or doing significant business, in 
emerging market countries that Lazard considers inexpensively priced 
relative to the return on total capital or equity. The expense ratio of 
Lazard Emerging Markets Portfolio for 1998 was 1.80%. Absent voluntary 
expense reductions, that expense ratio would have been 14.37%. The 
total return of Lazard Emerging Markets Portfolio for the year ended 
December 31, 1998 was -22.85%. Its average annual total return since 
its inception on November 4, 1997, through December 31, 1998, was 
-26.48%.
    16. Applicants represent that each substitution will take place at 
the relative asset values determined on the date of the substitution in 
accordance with Section 22 of the Act and Rule 22c-1 thereunder. There 
will be no financial impact to any contractowner. Each substitution 
will be effected by having each Subaccount that invests in the 
Eliminated Portfolio redeem its shares of the Eliminated Portfolio at 
the net asset value calculated on the date of the substitutions and 
purchase shares of the substitute Portfolio at net asset value on the 
same date.
    17. Immediately following the substitutions, Ohio National and 
ONLAC will combine: (a) The Montgomery Small Cap and ON Small Cap 
Growth Subaccounts that each hold shares of the ON Small Cap Growth 
Portfolio after the substitution; and (b) the Montgomery Emerging 
Markets and Lazard Emerging Markets Subaccounts that each hold shares 
of the Lazard Emerging Markets Portfolios after the substitution. Ohio 
National and ONLAC will reflect this treatment in disclosure documents 
for Variable Account A and Variable Account R, respectively, and in the 
financial statements and Form N-SAR annual report filed by Variable 
Account A and Variable Account R.
    18. Applicants represent that the proposed substitutions were 
described in supplements to the prospectus for the Contracts 
(``Stickers'') filed with the Commission and mailed to contractowners. 
The Stickers gave contractowners notice of the substitutions and 
describe the reasons for engaging in the substitutions. The Stickers 
also informed contractowners that no additional amounts may be 
allocated to the Subaccounts that invest in the Eliminated Portfolios 
on or after the date of substitution. In addition, the

[[Page 49829]]

Stickers informed affected contractowners that they will have one 
opportunity to reallocate accumulation value:
    (a) Prior to the substitutions, from the Subaccounts investing in 
the Eliminated Portfolios; or
    (b) For 30 days after the substitutions, from the Subaccounts 
investing in the Substitute Funds, to Subaccounts investing in other 
Portfolios available under the Contracts, without the imposition of any 
transfer charge or limitation.
    19. A transfer out of the Subaccounts investing in the Eliminated 
Portfolios from the date of the notice through the date of the 
substitutions will not: (a) Be assessed a transfer fee; (b) count as a 
free transfer; or (c) be subject to any limitation relating to 
transfers that result in more than a reduction of an Underlying Fund's 
assets by 1% or more.
    20. Similarly, for a period of 30 days after the substitutions, a 
transfer out of a Subaccount that invests in a Substitute Portfolio of 
accumulation value moved to that Subaccount as a result of the 
substitutions will not: (a) Be assessed a transfer fee; (b) count as a 
free transfer; or (c) be subject to any limitation relating to 
transfers that result in more than a reduction of an Underlying Fund's 
assets by 1% or more.
    21. Applicants represent that the prospectuses for the Contracts 
reflect the substitutions. Each contractowner will have been provided 
prospectuses for the Substitute Portfolios before the substitutions. 
Within five days after the substitutions, Ohio National and ONLAC will 
send to contractowners written confirmation that the substitutions have 
occurred.
    22. Applicants represent that Ohio National and ONLAC will pay all 
fees and expenses of the substitutions, including legal, accounting, 
brokerage commissions and other fees and expenses; none will be borne 
by contractowners. Affected contractowners will not incur any fees or 
charges as a result of the substitutions, nor will their rights or the 
obligations of Ohio National or ONLAC under the Contracts be altered in 
any way. The proposed substitutions will not cause the fees and charges 
under the Contracts currently being paid by contractowners to be 
greater after the substitutions than before the substitutions.
    23. Applicants state that their request satisfies the standards for 
relief of Section 26(b) because:
    (a) The substitutions involve Portfolios with substantially similar 
investment objectives;
    (b) After each substitution, affected contractowners will be 
invested in a Portfolio whose performance has been better on a 
historical basis; and
    (c) After each substitution affected contractowners will be 
invested in a Portfolio whose expenses have been less on a historical 
basis.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to Section 26(b) of the Act 
approving the substitutions. Section 26(b) of the 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 Act.
    2. Applicants assert that the purposes, terms and conditions of the 
substitutions are consistent with the principles and purposes of 
section 26(b) and do not entail any of the abuses that section 26(b) is 
designed to prevent. Applicants represent that substitution is an 
appropriate solution to the unfavorable relative performance and higher 
relative expenses of the Portfolios to be eliminated. Applicants 
believe that each Substitute Portfolio will better serve contractowner 
interests because its performance has been significantly better than 
the performance of, and its expenses have been lower than the expenses 
of, the corresponding Eliminated Portfolio. Moreover, Ohio National and 
ONLAC have each reserved this right in the Contracts and disclosed this 
reserved right in the prospectuses for the Contracts.
    3. Applicants represent that the substitutions will not result in 
the type of costly forced redemption that section 26(b) was intended to 
guard against and, for the following reasons, are consistent with the 
protection of investors and the purposes fairly intended by the Act:
    (a) Each Substitute Portfolio has investment objectives, policies 
and restrictions substantially similar to those of the corresponding 
Eliminated Portfolio, and permits contractowners continuity of their 
investment objectives and expectations.
    (b) The costs of the substitutions will be borne by Ohio National 
and ONLAC and will not be borne by contractowners. No charges will be 
assessed to effect the substitutions.
    (c) The substitutions will, in all cases, be at net asset values of 
the respective shares, without the imposition of any transfer or 
similar charge and with no change in the amount of any contractowner's 
accumulation value.
    (d) The substitutions will not cause the fees and charges under the 
Contracts currently being paid by contractowners to be greater after 
the substitutions than before the substitutions.
    (e) The contractowners will be given notice prior to the 
substitutions and will have an opportunity to reallocate accumulation 
value among other available Subaccounts without the imposition of any 
transfer charge or limitation. No transfer:
    (i) From a Subaccount investing in an Eliminated Portfolio from the 
date of the notice through the date of the substitutions, or
    (ii) For 30 days after the substitutions, of accumulation value 
that had been transferred to a Subaccount that invests in a Substitute 
Portfolio as a result of the substitutions, will count as one of the 
limited number of transfers permitted in a contract year free of 
charge.
    (f) Within five days after the substitutions, Ohio National and 
ONLAC will send to contractowners written confirmation that the 
substitutions have occurred.
    (g) The substitutions will in no way alter the insurance benefits 
to contractowners or the contractual obligations of Ohio National or 
ONLAC.
    (h) The substitutions will in no way alter the tax benefits to 
contractowners.

Conclusion

    Applicants assert that, for the reasons summarized above, the 
requested order approving the substitutions should be granted.

    For the Commission, by the Division of Investment Management 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23888 Filed 9-13-99; 8:45 am]
BILLING CODE 8010-01-M