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File No. 812-14302 |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20459 |
FIRST AMENDED AND RESTATED APPLICATION FOR AN ORDER OF APPROVAL PURSUANT TO |
SECTION 26(c) OF THE INVESTMENT COMPANY ACT OF 1940 |
VOYA RETIREMENT INSURANCE AND ANNUITY COMPANY |
VARIABLE ANNUITY ACCOUNT B OF VOYA RETIREMENT INSURANCE AND ANNUITY |
COMPANY |
VARIABLE ANNUITY ACCOUNT I OF VOYA RETIREMENT INSURANCE AND ANNUITY |
COMPANY |
VOYA INSURANCE AND ANNUITY COMPANY |
SEPARATE ACCOUNT B OF VOYA INSURANCE AND ANNUITY COMPANY |
SEPARATE ACCOUNT EQ OF VOYA INSURANCE AND ANNUITY COMPANY |
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK |
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK SEPARATE ACCOUNT NY-B |
SECURITY LIFE OF DENVER INSURANCE COMPANY |
SECURITY LIFE SEPARATE ACCOUNT A1 |
SECURITY LIFE SEPARATE ACCOUNT S-A1 |
VOYA VARIABLE PORTFOLIOS, INC. |
Communications, Notice, and Order to: |
J. Neil McMurdie |
Senior Counsel |
Voya Financial Legal Services |
One Orange Way, C2N |
Windsor, CT 06095 |
1-860-580-2824 |
October 27, 2014 |
Exhibit Index on Page: 70 |
1 |
UNITED STATES OF AMERICA | ||
BEFORE THE | ||
SECURITIES AND EXCHANGE COMMISSION | ||
WASHINGTON, D.C. 20549 | ||
In the Matter of: | ) | |
) | ||
VOYA RETIREMENT INSURANCE AND ANNUITY COMPANY | ) | |
VARIABLE ANNUITY ACCOUNT B OF VOYA | ) | |
RETIREMENT INSURANCE AND ANNUITY COMPANY | ) | |
VARIABLE ANNUITY ACCOUNT I OF VOYA RETIREMENT | ) | |
INSURANCE AND ANNUITY COMPANY | ) | |
) | FIRST AMENDED AND | |
VOYA INSURANCE AND ANNUITY COMPANY | ) | RESTATED APPLICATION |
SEPARATE ACCOUNT B OF VOYA INSURANCE AND | ) | FOR AN ORDER OF |
ANNUITY COMPANY | ) | APPROVAL PURSUANT |
SEPARATE ACCOUNT EQ OF VOYA INSURANCE AND | ) | TO SECTION 26(c) OF THE |
ANNUITY COMPANY | ) | INVESTMENT COMPANY |
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK | ) | ACT OF 1940 |
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK | ) | |
SEPARATE ACCOUNT NY-B | ) | |
) | ||
SECURITY LIFE OF DENVER INSURANCE COMPANY | ) | |
SECURITY LIFE SEPARATE ACCOUNT A1 | ) | |
SECURITY LIFE SEPARATE ACCOUNT S-A1 | ) | |
) | ||
VOYA VARIABLE PORTFOLIOS, INC. | ) | |
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Investment Company Act of 1940 | ) | |
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File No. 812-14302 | ) | |
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I - THE APPLICATION | ||
Voya Retirement Insurance and Annuity Company, Voya Insurance and Annuity | ||
Company, ReliaStar Life Insurance Company of New York, and Security Life of Denver | ||
Insurance Company (each a “Company” and together, the “Companies”), Variable Annuity | ||
Account B of Voya Retirement Insurance and Annuity Company, Variable Annuity Account I of | ||
Voya Retirement Insurance and Annuity Company, Separate Account B of Voya Insurance and | ||
Annuity Company, Separate Account EQ of Voya Insurance and Annuity Company, ReliaStar | ||
Life Insurance Company of New York Separate Account NY-B, Security Life Separate Account | ||
A1, Security Life Separate Account S-A1 (each, an “Account” and together, the “Accounts”) and | ||
Voya Variable Portfolios, Inc., hereby submit this first amended and restated Application for an | ||
order of the Securities and Exchange Commission (the “Commission”), pursuant to Section | ||
26(c), formerly Section (b), of the Investment Company Act of 1940, as amended (the “1940 | ||
Act”). The Companies, the Accounts and Voya Variable Portfolios, Inc. are collectively referred | ||
to herein as the “Applicants.” | ||
The Applicants seek an order from the Commission permitting the substitution of | ||
securities issued by certain registered investment companies held by the Accounts, which | ||
securities support certain in force variable annuity contracts (collectively, the “Contracts”) issued | ||
by the Companies (the “Substitutions”). More particularly, the Applicants propose to substitute | ||
shares of certain series of Voya Variable Portfolios, Inc. (the “Replacement Funds”) for shares of | ||
certain registered investment companies currently held by subaccounts of the Accounts (the | ||
“Existing Funds”) as follows: | ||
Existing Fund | Replacement Fund | |
1 | ClearBridge Variable Large Cap Value | Voya Russell Large Cap Value Index |
Portfolio – Class I | Portfolio – Class I | |
2 | Fidelity VIP Equity-Income Portfolio – | Voya Russell Large Cap Value Index |
Initial Class | Portfolio – Class I | |
Fidelity VIP Equity-Income Portfolio – | Voya Russell Large Cap Value Index | |
Service 2 Class | Portfolio – Class S | |
3 | Invesco VI Core Equity Fund – Class I | Voya Russell Large Cap Index Portfolio – |
Class S | ||
4 | Invesco VI American Franchise Fund – | Voya Russell Large Cap Growth Index |
Class I | Portfolio – Class S | |
5 | Pioneer Equity Income VCT Portfolio – | Voya Russell Large Cap Value Index |
Class II | Portfolio – Class S | |
II - GENERAL DESCRIPTION OF THE APPLICANTS, THE FUNDS | ||
AND THE CONTRACTS | ||
A. | The Companies. Each of the Companies is an indirect, wholly owned subsidiary of | |
Voya Financial, Inc. (“VoyaTM ”), which until April 7, 2014, was known as ING U.S., Inc. In | ||
May, 2013, the common stock of Voya began trading on the New York Stock Exchange under | ||
the symbol “VOYA” and Voya completed its initial public offering of common stock. Voya is | ||
an affiliate of ING Groep N.V. (“ING”), a global financial institution active in the fields of | ||
3 |
insurance, banking and asset management. In 2009 ING announced the anticipated separation of | |
its global banking and insurance businesses, including the divestiture of Voya, which together | |
with its subsidiaries, including the Companies, constitute ING’s U.S.-based retirement, | |
investment management and insurance operations. As of September 9, 2014, ING’s ownership of | |
Voya was approximately 32%. Under an agreement with the European Commission, ING is | |
required to divest itself of 100% of Voya by the end of 2016. | |
1. | Voya Retirement Insurance and Annuity Company (“Voya Retirement”). Voya |
Retirement is a stock life insurance company organized under the laws of the State of | |
Connecticut in 1976 as Forward Life Insurance Company. Prior to September 1, 2014, Voya | |
Retirement was known as ING Life Insurance and Annuity Company. Through a December 31, | |
1976 merger, Voya Retirement’s operations include the business of Aetna Variable Annuity Life | |
Insurance Company (formerly known as Participating Annuity Life Insurance Company). Prior | |
to May 1, 2002, Voya Retirement was known as Aetna Life Insurance and Annuity Company | |
(“Aetna”). Through a December 31, 2005 merger, Voya Retirement’s operations include the | |
business of ING Insurance Company of America (“ING America”). Voya Retirement is | |
principally engaged in the business of issuing annuities. | |
Voya Retirement is the depositor of Variable Annuity Account B and Variable Annuity | |
Account I, separate accounts that are registered with the Commission as unit investment trusts. | |
2. | Voya Insurance and Annuity Company (“Voya Insurance”). Voya Insurance is |
an Iowa stock life insurance company which was originally organized in 1973 under the | |
insurance laws of Minnesota. Prior to September 1, 2014, Voya Insurance was known as ING | |
USA Annuity and Life Insurance Company. Prior to January 1, 2004, Voya Insurance was | |
known as Golden American Life Insurance Company (“Golden”). Through January 1, 2004 | |
mergers, Voya Insurance’s operations include the business of Equitable Life Insurance Company | |
of Iowa (“Equitable Life”), United Life and Annuity Insurance Company (“United Life and | |
Annuity”), and USG Annuity and Life Company. Voya Insurance is principally engaged in the | |
business of issuing annuities. | |
Voya Insurance is the depositor of Separate Account B and Separate Account EQ, | |
separate accounts that are registered with the Commission as unit investment trusts. | |
3. | ReliaStar Life Insurance Company of New York (“ReliaStar NY”). ReliaStar |
NY is a stock life insurance company which was incorporated under the laws of the State of New | |
York in 1917. Through an April 1, 2002 merger, ReliaStar NY’s operations include the business | |
of First Golden American Life Insurance Company of New York (“First Golden”). ReliaStar NY | |
is principally engaged in the business of issuing life insurance and annuities. | |
ReliaStar NY is the depositor of Separate Account NY-B, a separate account that is | |
registered with the Commission as a unit investment trust. | |
4. | Security Life of Denver Insurance Company (“Security Life”). Security Life is |
a stock life insurance company organized under the laws of the State of Colorado in 1929. | |
Through an October 1, 2004 merger, Security Life’s operations include the business of | |
Southland Life Insurance Company (“Southland”). Security Life is principally engaged in the | |
business of issuing life insurance and annuities. | |
4 |
Security Life is the depositor of Security Life Separate Account A1 and Security Life | ||
Separate Account S-A1, separate accounts that are registered with the Commission as a unit | ||
investment trusts. | ||
B. | The Accounts. Each of the Accounts is a segregated asset account of the Company that | |
is the depositor of such Account, and is registered under the 1940 Act as a unit investment trust. | ||
Each of the respective Accounts is used by the Company of which it is a part to support the | ||
Contracts that it issues. The following Accounts support Contracts that will be affected by the | ||
Substitutions.1 | ||
1. | Variable Annuity Account B of Voya Retirement Insurance and Annuity | |
Company (“Voya Retirement B”). Voya Retirement B (File No. 811-02512) was established by | ||
Aetna in 1976 as a continuation of the separate account established in 1974 in accordance with | ||
the laws of the State of Arkansas by Aetna Variable Annuity Life Insurance Company to support | ||
certain Contracts. Contracts described in the following registration statements will be affected | ||
by the Substitutions (File Nos. 033-34370 and 333-56297). | ||
2. | Variable Annuity Account I of Voya Retirement Insurance and Annuity | |
Company (“Voya Retirement I”). Voya Retirement I (formerly ING Variable Annuity Account | ||
I of ING Insurance Company of America) (File No. 811-08582) was established by ING | ||
America (then known as Aetna Insurance Company of America) in 1994 in accordance with the | ||
laws of the State of Connecticut to support the certain Contracts. The Contract described in the | ||
following registration statement will be affected by the Substitutions (File Nos. 333-130825). | ||
3. | Separate Account B of Voya Insurance and Annuity Company (“Voya | |
Insurance B”). Voya Insurance B (File No. 811-05626) was established by Golden in 1988 in | ||
accordance with the laws of the State of Minnesota to support certain Contracts. Contracts | ||
described in the following registration statements will be affected by the Substitutions (File Nos. | ||
333-133944, 333-101481, 333-70600, 333-57218, 333-33914, 333-30180, 333-28769, 333- | ||
28755, 333-28679, 033-59261, 333-63692, 333-90516, 333-66757 and 033-23351). | ||
4. | Separate Account EQ of Voya Insurance and Annuity Company (“Voya | |
Insurance EQ”). Voya Insurance EQ (formerly Equitable Life Insurance Company of Iowa | ||
Separate Account A) (File No. 811-08524) was established by Equitable Life in 1988 in | ||
accordance with the laws of the State of Iowa to support certain Contracts. The Contract | ||
described in the following registration statement will be affected by the Substitutions (File No. | ||
333-111686). | ||
5. | ReliaStar Life Insurance Company of New York Separate Account NY-B | |
(“ReliaStar NY-B”). ReliaStar NY-B (formerly Separate Account NY-B of First Golden | ||
American Life Insurance Company of New York) (File No. 811-07935) was established by First | ||
Golden in 1996 in accordance with the laws of the State of New York to support certain | ||
Contracts. Contracts described in the following registration statements will be affected by the | ||
Substitutions (File Nos. 333-85618, 333-139695, 333-115515 and 333-85326). | ||
________________________ | ||
1 Separate accounts that support variable annuity contracts that will not be affected by the Substitution are not | ||
identified herein. | ||
5 |
6. | Security Life Separate Account A1 (“Security Life A1”). Security Life A1 (File | |
No. 811-08196) was established by Security Life in 1993 in accordance with the laws of the | ||
State of Colorado to support certain Contracts. The Contract described in the following | ||
registration statement will be affected by the Substitutions (File No. 033-78444). | ||
7. | Security Life Separate Account S-A1 (“Security Life S-A1”). Security Life S- | |
A1 (formerly Southland Separate Account A1) (File No. 811-08976) was originally established | ||
by Southland in 1994 in accordance with the laws of the State of Texas to support certain | ||
Contracts. The Contract described in the following registration statement will be affected by the | ||
Substitutions (File No. 333-119439). | ||
Applicants, as authorized by Rule 0-4 under the 1940 Act, incorporate by reference each | ||
of the above-referenced files to the extent necessary to support and supplement the descriptions | ||
and representations set out in this Application. | ||
Each Account is administered and accounted for as part of the general business of the | ||
Company of which it is a part. The assets of each Account attributable to the Contracts issued | ||
through it are owned by each Company but are held separately from all other assets of that | ||
Company for the benefit of the owners of, and persons entitled to benefits under such Contracts. | ||
Pursuant to applicable state insurance law and to the extent provided in the Contracts, such assets | ||
are not chargeable with liabilities arising out of any other business that each Company may | ||
conduct. Income, if any, gains and losses, realized or unrealized, from each Account are credited | ||
to or charged against the assets of that Account without regard to other income, gains or losses of | ||
its Company or any of its other segregated asset accounts. Each Account is a “separate account” | ||
as defined by Rule 0-1(e) under the 1940 Act. | ||
Each Account is divided into subaccounts, each of which invests exclusively in shares of | ||
one registered open-end management investment company portfolio, which include the Existing | ||
Funds or another registered open-end management investment company. Each registered open- | ||
end management investment company portfolio has its own distinct investment objective(s) and | ||
policies. Income, gains and losses, realized or unrealized, of a portfolio are credited to or | ||
charged against the corresponding subaccount of each Account without regard to any other | ||
income, gains or losses of the applicable Company. To the extent provided in the Contracts, | ||
assets equal to the reserves and other contract liabilities with respect to an Account are not | ||
chargeable with liabilities arising out of any other business of the Company that is the depositor | ||
of the Account. | ||
Each of the prospectuses for the Contracts discloses that the issuing Company reserves | ||
the right, subject to Commission approval and compliance with applicable law, to substitute | ||
shares of another registered open-end management investment company for shares of a | ||
registered open-end management investment company held by a subaccount of an Account | ||
whenever the Company, in its judgment, determines that a portfolio no longer suits the purpose | ||
of the Contract. | ||
C. | The Replacement Funds. The Replacement Funds are series of Voya Variable | |
Portfolios, Inc. Effective May 1, 2014, Voya Variable Portfolios, Inc. changed its name from | ||
ING Variable Portfolios, Inc. in relation to the overall rebranding of Voya and its subsidiaries | ||
mentioned above. More information about each Replacement Fund’s fees and expenses, | ||
6 |
investment objective and policies and historical performance can be found in the Section IV B. | ||
below. | ||
Voya Variable Portfolios, Inc. (“Voya Variable Portfolios”). Voya Variable | ||
Portfolios, formerly known as Aetna Variable Portfolios, Inc., was organized as a Maryland | ||
Corporation in 1996. Voya Variable Portfolios is registered under the 1940 Act as an open-end | ||
management investment company (File No. 811-05173). It is a series registered open-end | ||
management investment company as defined by Rule 18f-2 under the 1940 Act, and a separate | ||
series of shares of beneficial interest is issued in connection with each series. Each series is | ||
currently offered by prospectuses dated May 1, 2014. Voya Variable Portfolios has registered | ||
these shares under the Securities Act of 1933 on Form N-1A (File No. 333-05173) which was | ||
last updated in an effective amendment to the registration statement filed on April 28, 2014.2 | ||
Voya Investments, LLC (“Voya Investments”), an Arizona limited liability company and | ||
an SEC registered investment adviser, serves as the investment adviser to each Replacement | ||
Fund. Voya Investments maintains its offices at 7337 East Doubletree Ranch Road, Scottsdale, | ||
Arizona 85258. Effective May 1, 2014, Voya Investments changed its name from ING | ||
Investments, LLC in relation to the overall rebranding of Voya and its subsidiaries mentioned | ||
above. | ||
Voya Investments, subject to the direction of Voya Variable Portfolios Board of | ||
Directors (the “Board”), has overall responsibility for the management of each Replacement | ||
Fund. Voya Investments provides or oversees all investment advisory and portfolio management | ||
services for each Replacement Fund and assists in managing and supervising all aspects of the | ||
general day-to-day business activities and operations of each Replacement Fund, including | ||
custodial, transfer agency, dividend disbursing, accounting, auditing, compliance and related | ||
services. Voya Investments delegates to a sub-adviser the responsibility for day-to-day | ||
management of the investments of each Replacement Fund, subject to the Voya Investment’s | ||
oversight. Voya Investments also recommends the appointment of additional or replacement | ||
sub-advisers to the Board. | ||
For its services, Voya Investments receives advisory fees from each Replacement Fund. | ||
This fee is calculated for each series based on a percentage of its average net assets. From this | ||
advisory fee Voya Investments pays the fees of all subadvisers. | ||
The following series of Voya Variable Portfolios will be used as Replacement Funds: | ||
a. | Voya Russell Large Cap Value Index Portfolio – Class I3 | |
b. | Voya Russell Large Cap Value Index Portfolio – Class S3 | |
c. | Voya Russell Large Cap Index Portfolio – Class I3 | |
d. | Voya Russell Large Cap Growth Index Portfolio – Class I3 | |
________________________ | ||
2 | Applicants, as authorized by Rule 0-4 under the 1940 Act, incorporate this file by reference to the extent | |
necessary to support and supplement the descriptions and representations set out in this Application. | ||
3 | As part of the overall rebranding of Voya and its subsidiaries, effective May 1, 2014, the Voya Russell Large | |
Cap Value Index Portfolio, the Voya Russell Large Cap Index Portfolio and the Voya Russell Large Cap Growth | ||
Index Portfolio changed names from the ING Russell Large Cap Value Index Portfolio, the ING Russell Large | ||
Cap Index Portfolio and the ING Russell Large Cap Growth Index Portfolio, respectively. | ||
7 |
D. | The Existing Funds. The funds to be replaced with a Replacement Fund are listed | |
below. More information about the Existing Funds’ fees and expenses, investment objective and | ||
policies and historical performance can be found in the Section IV B. below. | ||
1. | Legg Mason Partners Variable Equity Trust. The Legg Mason Partners | |
Variable Equity Trust is organized as a Maryland statutory trust and registered under the 1940 | ||
Act as a registered open-end management investment company (File No. 811-22128). It is a | ||
series registered open-end management investment company as defined by Rule 18f-2 under the | ||
1940 Act, and a separate series of shares of beneficial interest is issued in connection with each | ||
series. One such series, the ClearBridge Variable Large Cap Value Portfolio is currently offered | ||
by prospectus dated May 1, 2014. The Legg Mason Partners Variable Equity Trust is registered | ||
under the Securities Act of 1933 on Form N-1A (File No. 333-91278), which was last updated in | ||
an effective amendment to the registration statement filed on April 21, 2014.4 | ||
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the investment manager for the | ||
ClearBridge Variable Large Cap Value Portfolio. LMPFA is an investment adviser registered | ||
under the Advisers Act and maintains its offices at 620 Eighth Avenue, New York, New York | ||
10018. LMPFA provides administrative and certain oversight services to the ClearBridge | ||
Variable Large Cap Value Portfolio. | ||
ClearBridge Investments, LLC (“ClearBridge”), an affiliate of LMPFA, provides the day- | ||
to-day portfolio management of the ClearBridge Variable Large Cap Value Portfolio, except for | ||
the management of cash and short-term instruments. ClearBridge is an investment adviser | ||
registered under the Advisers Act. | ||
Western Asset Management Company (“Western Asset”) manages the ClearBridge | ||
Variable Large Cap Value Portfolio’s cash and short-term instruments. Western Asset is an | ||
affiliate of LMPFA and ClearBridge and an investment adviser registered under the Advisers | ||
Act. | ||
The ClearBridge Variable Large Cap Value Portfolio is designated as an Existing Fund in | ||
this Application. | ||
2. | Fidelity Variable Insurance Products Fund. The Variable Insurance Products | |
Fund is organized as a Massachusetts business trust and registered under the 1940 Act as an | ||
open-end management investment company (File No. 811-03329). It is a series registered open- | ||
end management investment company as defined by Rule 18f-2 under the 1940 Act, and a | ||
separate series of shares of beneficial interest is issued in connection with each series. Each | ||
series is currently offered by prospectus dated April 30, 2014. The Variable Insurance Products | ||
Fund is registered under the Securities Act of 1933 on Form N-1A (File No. 002-75010) which | ||
was last updated in effective amendments to the registration statements filed on April 21, 2014.5 | ||
Fidelity Management & Research Company (“FMR”) serves as the investment adviser | ||
for each of the Fidelity Variable Insurance Products Funds. FMR has overall responsibility for | ||
directing each Fidelity Variable Insurance Products Fund’s investments and is an investment | ||
_________________________ | ||
4 | Applicants, as authorized by Rule 0-4 under the 1940 Act, incorporate this file by reference to the extent | |
necessary to support and supplement the descriptions and representations set out in this Application. | ||
5 | Applicants, as authorized by Rule 0-4 under the 1940 Act, incorporate this file by reference to the extent | |
necessary to support and supplement the descriptions and representations set out in this Application. | ||
8 |
adviser registered under the Advisers Act. FMR maintains its offices at One Federal Street, | ||
Boston, Massachusetts 02110. | ||
FMR Co., Inc. (“FMRC”) serves as the sub-adviser for the Fidelity VIP Equity-Income | ||
Portfolio, with day-to-day responsibility for choosing investments for the Fidelity VIP Equity- | ||
Income Portfolio. FMRC is an affiliate of FMR and an investment adviser registered under the | ||
Advisers Act. | ||
The Fidelity VIP Equity-Income Portfolio is designated as an Existing Fund in this | ||
Application. | ||
3. | Invesco Variable Insurance Funds. Invesco Variable Insurance Funds is a | |
Delaware statutory trust and registered under the 1940 Act as an open-end management | ||
investment company (File No. 811-07452). It is a series registered open-end management | ||
investment company as defined by Rule 18f-2 under the 1940 Act, and a separate series of shares | ||
of beneficial interest is issued in connection with each series. Each affected series is currently | ||
offered by prospectus dated April 30, 2014. The Invesco Variable insurance Funds is registered | ||
under the Securities Act of 1933 on Form N-1A (File No. 033-57340) which was last updated in | ||
an effective amendment to the registration statement filed on April 24, 2014. 6 | ||
Invesco Advisers, Inc. serves as the investment adviser for each series of the Invesco | ||
Variable Insurance Funds. Invesco Advisers, Inc. is an investment adviser registered under the | ||
Advisers Act and maintains its offices at 1555 Peachtree Street, N.E., Atlanta, Georgia 30309. | ||
The Invesco VI Core Equity Fund and the Invesco VI American Franchise Fund are | ||
designated as Existing Funds in this Application. | ||
4. | Pioneer Variable Contracts Trust. The Pioneer Variable Contracts Trust is | |
organized as a Massachusetts trust and registered under the 1940 Act as an open-end | ||
management investment company (File No. 811-08786). It is a series registered open-end | ||
management investment company as defined by Rule 18f-2 under the 1940 Act, and a separate | ||
series of shares of beneficial interest is issued in connection with each series. Each affected | ||
series is currently offered by prospectus dated May 1, 2014. The Pioneer Variable Contracts | ||
Trust is registered under the Securities Act of 1933 on Form N-1A (File No. 033-84546) which | ||
was last updated in an effective amendment to the registration statement filed on April 30, 2014. | ||
7 | ||
Pioneer Investment Management, Inc. serves as the investment adviser for each series of | ||
the Pioneer Variable Contracts Trust. Pioneer Investment Management, Inc. is an investment | ||
adviser registered under the Advisers Act and maintains its offices at 60 State Street, Boston, | ||
Massachusetts 02109. | ||
The Pioneer Equity Income VCT Portfolio is designated as an Existing Fund in this | ||
Application. | ||
_______________________ | ||
6 | Applicants, as authorized by Rule 0-4 under the 1940 Act, incorporate this file by reference to the extent | |
necessary to support and supplement the descriptions and representations set out in this Application. | ||
7 | Applicants, as authorized by Rule 0-4 under the 1940 Act, incorporate this file by reference to the extent | |
necessary to support and supplement the descriptions and representations set out in this Application. | ||
9 |
E. | The Contracts. The terms and conditions, including charges and expenses, applicable to | |||
each Contract are described in the registration statements filed with the SEC for each.8 The | ||||
Contracts are issued as individual variable annuity contracts. As each Contract is structured, | ||||
owners of the Contract (each a “Contract Owner”) may select one or more of the investment | ||||
options available under the Contract by allocating premiums and transferring account value to | ||||
that subaccount of the relevant Account that corresponds to the investment option desired. | ||||
Thereafter, the account value of the Contract Owner will vary based on the investment | ||||
experience of the selected subaccount(s). Generally, a Contract Owner may, during the life of | ||||
each Contract, make unlimited transfers of account values among the subaccounts available | ||||
under the Contract, subject to any administrative and/or transfer fees applicable under the | ||||
Contracts and any limits related to frequent or disruptive transfers. | ||||
III - DESCRIPTION OF THE PROPOSED SUBSTITUTIONS | ||||
AND THE RELIEF REQUESTED | ||||
A. | Summary of the Proposed Substitutions. Subject to the approval of the Commission | |||
under Section 26(c) of the 1940 Act, Applicants propose, as set forth in the following chart, to | ||||
substitute shares of the Replacement Funds for those of the Existing Funds and transfer cash to | ||||
the Replacement Funds. | ||||
Existing Fund | Replacement Fund | Accounts Holding Existing | ||
Fund Assets | ||||
1 | ClearBridge Variable Large | Voya Russell Large Cap | Voya Insurance B, Voya | |
Cap Value Portfolio – Class I | Value Index Portfolio – | Insurance EQ, ReliaStar NY- | ||
Class I | B | |||
2 | Fidelity VIP Equity-Income | Voya Russell Large Cap | Voya Insurance B, Voya | |
Portfolio – Initial Class | Value Index Portfolio – | Insurance EQ, ReliaStar NY- | ||
Class I | B, Voya Retirement B, Voya | |||
Retirement I, Security Life | ||||
Fidelity VIP Equity-Income | Voya Russell Large Cap | S-A1 | ||
Portfolio – Service 2 Class | Value Index Portfolio – | |||
Class S | ||||
3 | Invesco VI Core Equity Fund | Voya Russell Large Cap | Security Life A1, Security | |
– Class I | Index Portfolio – Class S | Life S-A1 | ||
4 | Invesco VI American | Voya Russell Large Cap | Voya Insurance B, ReliaStar | |
Franchise Fund – Class I | Growth Index Portfolio – | NY-B | ||
Class S | ||||
5 | Pioneer Equity Income VCT | Voya Russell Large Cap | Voya Insurance B, ReliaStar | |
Portfolio – Class II | Value Index Portfolio – | NY-B | ||
Class S | ||||
No brokerage commissions, fees or other remuneration will be paid by any Existing | ||||
Fund, Replacement Fund or any Contract Owner in connection with the Substitutions. | ||||
With respect to the Existing Funds, the Applicants have determined that the investment | ||||
objectives and the investment policies of the Replacement Funds are similar to those of the | ||||
corresponding Existing Funds, or each Replacement Fund’s underlying portfolio construction | ||||
______________________ | ||||
8 | See Section II. B. above. | |||
10 |
and investment results are similar to those of the Existing Fund, and therefore the fundamental | ||
objectives, risk and performance expectations of those Contract Owners with interests in | ||
subaccounts of the Existing Funds (individually, an “Affected Contract Owner” and, collectively, | ||
“Affected Contract Owners”) will continue to be met after the Substitutions. | ||
Additionally, as is detailed below, the overall expenses of the Replacement Funds are less | ||
than those of the corresponding Existing Funds. Applicants believe that, because the | ||
Replacement Funds will be offered over a substantially larger asset base than the Existing | ||
Funds, there is a potential that Affected Contract Owners will, over time, realize the benefits | ||
from additional economies of scale with respect to the advisory fees. | ||
B. | Purposes of the Proposed Substitutions. The principal purposes of the Substitutions | |
are as follows: | ||
1. | Implement Business Plan. The Substitutions are another step in the Companies’ | |
overall business plan to make the Contracts more competitive (and thus more attractive to | ||
customers) and more efficient to administer and oversee. This plan involves providing funds | ||
available through the Contracts that meet certain performance, risk and pricing guidelines. | ||
2. | Influence. The Substitutions will replace unaffiliated funds with funds that are | |
advised and sub-advised by affiliates of the Companies. Additionally, the Replacement Funds | ||
will only be available through variable insurance products offered by the Companies or their | ||
affiliated insurance companies. Consequently, the Board of the Replacement Funds has greater | ||
sensitivity to the needs of Contract Owners. The Substitutions will provide the Companies with | ||
more influence over the administrative aspects of the funds offered through the Contracts. | ||
Influence is important because changes to the funds offered through the Contracts often | ||
result in costly, off-cycle communications and mailing to Contract Owners. These changes may | ||
include changes in fund management, changes in investment style and/or policies and changes | ||
resulting from economic conditions or regulatory events. Currently, if the Companies or their | ||
Contract Owners object to any such changes, the only recourse the Companies have is to propose | ||
substitution of another fund. Substitutions involve extensive review, regulatory approvals and | ||
significant time and expense. For affiliated funds, there is greater influence over the pace and | ||
timing of such changes. Additionally, issues involving poor performance, the inability of the | ||
sub-adviser to properly manage the fund’s assets and other matters affecting the qualification of | ||
a fund’s sub-adviser may be solved by the adviser removing the sub-adviser. Under the manager- | ||
of-managers exemptive relief granted to the certain ING fund families and relied upon by Voya | ||
Variable Portfolios, Inc.,9 a vote of the shareholders is not necessary to change a sub-adviser, | ||
except for changes involving certain affiliated sub-advisers. Notwithstanding, after the Effective | ||
Date of the Substitutions the Applicants agree not to change a Replacement Fund’s sub-adviser | ||
without first obtaining shareholder approval of either (1) the sub-adviser change or (2) the parties | ||
continued ability to rely on their manager-of-managers relief. | ||
The Companies believe that the Substitutions will enable them to exercise more influence | ||
over the management and administration of the funds offered through their Contracts, thereby | ||
reducing costs and customer confusion. The added influence will give each Company the ability | ||
_______________________ | ||
9 Investment Company Act of 1940 Release No. 30603 (July 22, 2013). | ||
11 |
to react more quickly to the changes and problems it encounters in its oversight of the funds | ||
which are available in its Contracts. | ||
3. | Reduction of Costs. The replacement of the Existing Funds, which are managed | |
by unaffiliated investment advisers, with the Replacement Funds which are managed by | ||
affiliated investment advisers will allow the Companies to reduce costs by consolidating | ||
administration of the Replacement Funds with its other funds. Changes by the Existing Funds | ||
now come unexpectedly and may require product amendments, regulatory filings and/or | ||
immediate notification to Contract Owners. Such changes can be better planned or anticipated | ||
for the Replacement Funds so that costs are reduced by including the changes with other routine | ||
regulatory filings and mailings regularly sent to Contract Owners. | ||
4. | Due Diligence. The Companies have an on-going fund due diligence process | |
through which they select, evaluate and monitor the funds available through the Contracts. This | ||
process contributes to the Companies’ ability to offer competitive products and services and | ||
assist their customers in meeting their financial goals. The Substitutions will allow the | ||
Companies to respond to expense, performance and management matters that they have | ||
identified in their due diligence review of the funds available through the Contracts. | ||
C. | Implementation. Applicants will affect the Substitutions as soon as practicable | |
following the issuance of the requested order. As of the effective date of the Substitutions | ||
(“Effective Date”), shares of the Existing Funds will be redeemed for cash. The Companies, on | ||
behalf of each Existing Fund subaccount of each relevant Account, will simultaneously place a | ||
redemption request with each Existing Fund and a purchase order with the corresponding | ||
Replacement Fund so that the purchase of Replacement Fund shares will be for the exact amount | ||
of the redemption proceeds. Thus, Contract values will remain fully invested at all times. The | ||
proceeds of such redemptions will then be used to purchase the appropriate number of shares of | ||
the applicable Replacement Fund. | ||
The Substitutions will take place at relative net asset value (in accordance with Rule 22c- | ||
1 under the 1940 Act) with no change in the amount of any Affected Contract Owner’s contract | ||
value, cash value, accumulation value, account value or death benefit or in dollar value of his or | ||
her investment in the applicable Accounts. No brokerage commissions, fees or other | ||
remuneration will be paid by either the Existing Funds or the Replacement Funds or by Affected | ||
Contract Owners in connection with the Substitutions. The transaction comprising the | ||
Substitutions will be consistent with the policies of each registered open-end management | ||
investment company involved and with the general purposes of the 1940 Act. | ||
Affected Contract Owners will not incur any fees or charges as a result of the | ||
Substitutions nor will their rights or the Companies’ obligations under the Contracts be altered in | ||
any way. The Companies or their affiliates will pay all expenses and transaction costs of the | ||
Substitutions, including legal and accounting expenses, any applicable brokerage expenses, and | ||
other fees and expenses. In addition, the Substitutions will not impose any tax liability on | ||
Affected Contract Owners. The Substitutions will not cause the Contract fees and charges | ||
currently being paid by Affected Contract Owners to be greater after the Substitutions than before | ||
the Substitutions. Also, as described more fully below, after notification of the Substitutions and | ||
for 30 days after the Effective Date, Affected Contract Owners may reallocate the subaccount | ||
value of the Existing Funds to any other investment option available under their Contract without | ||
incurring any administrative costs or allocation (transfer) charges. | ||
12 |
All Affected Contract Owners were notified of this Application by means of supplements | |
to the Contract prospectuses shortly after the date the Application was first filed with the | |
Commission. Among other information regarding the Substitutions, the supplements will inform | |
Affected Contract Owners that beginning on the date of the supplements the Companies will not | |
exercise any rights reserved by them under the Contracts to impose restrictions or fees on | |
transfers from an Existing Fund (other than restrictions related to frequent or disruptive transfers) | |
until at least 30 days after the Effective Date of the Substitutions. Following the date the order | |
requested by this Application is issued, but before the Effective Date, Affected Contract Owners | |
will receive a second supplement to the Contract prospectuses setting forth the Effective Date | |
and advising Affected Contract Owners of their right, if they so choose, at any time prior to the | |
Effective Date, to reallocate or withdraw accumulated value in the Existing Fund subaccounts | |
under their Contracts or otherwise terminate their interest therein in accordance with the terms | |
and conditions of their Contracts. If Affected Contract Owners reallocate account value prior to | |
the Effective Date or within 30 days after the Effective Date, there will be no charge for the | |
reallocation of accumulated value from the Existing Fund subaccounts and the reallocation will | |
not count as a transfer when imposing any applicable restriction or limit under the Contract on | |
transfers. The Companies will not exercise any right they may have under the Contracts to | |
impose additional restrictions or fees on transfers from an Existing Fund under the Contracts | |
(other than restrictions related to frequent or disruptive transfers) for a period of at least 30 days | |
following the Effective Date of the Substitutions. Additionally, all Affected Contract Owners | |
will be sent prospectuses of the applicable Replacement Funds before the Effective Date. | |
Within five (5) business days after the Effective Date, Affected Contract Owners will be | |
sent a written confirmation (“Post-Substitution Confirmation”) indicating that shares of the | |
Existing Funds have been redeemed and that the shares of the corresponding Replacement Fund | |
have been substituted. The Post-Substitution Confirmation will show how the allocation of the | |
Contract Owner’s account value before and immediately following the Substitutions have | |
changed as a result of the Substitutions and detail the transactions effected on behalf of the | |
respective Affected Contract Owner because of the Substitutions. | |
D. | Relief Requested. Applicants request that the Commission issue an order pursuant to |
Section 26(c) of the 1940 Act approving the Substitutions. | |
IV - APPLICANTS’ ANALYSIS IN SUPPORT OF REQUEST FOR AN ORDER | |
PURSUANT TO SECTION 26(c) OF THE 1940 ACT | |
A. | Relevant Statutory Provisions. Section 26(c) of the 1940 Act prohibits any depositor or |
trustee of a unit investment trust that invests exclusively in the securities of a single issuer from | |
substituting the securities of another issuer without the approval of the Commission. Section | |
26(c) provides that such approval shall be granted by order of the Commission, if the evidence | |
establishes that the substitution is consistent with the protection of investors and the purposes | |
fairly intended by the policy and provisions of the 1940 Act. | |
Section 26(c) was added to the 1940 Act by the Investment Company Amendments Act | |
of 1970 then as Section 26(b). Prior to enactment of the 1970 amendments, a depositor of a unit | |
investment trust could substitute new securities for those held by the trust by notifying the trust’s | |
security holders of the substitution within five days of the substitution. In 1966, the | |
Commission, concerned with the high sales charges then common to most unit investment trusts | |
13 |
and the disadvantageous position in which such charges placed investors who did not want to | |
remain invested in the substituted fund,10 recommended that Section 26 be amended to require | |
that a proposed substitution of the underlying investments of a trust receive prior Commission | |
approval.11 | |
Congress responded to the Commission’s concerns by enacting Section 26(b) to require | |
that the Commission approve all substitutions by the depositor of investments held by unit | |
investment trusts. The Senate Report on the bill explained the purpose of the amendment as | |
follows: | |
The proposed amendment recognizes that in case of the unit investment trust | |
holding the securities of a single issuer notification to shareholders does not | |
provide adequate protection since the only relief available to shareholders, if | |
dissatisfied, would be to redeem their shares. A shareholder who redeems and | |
reinvests the proceeds in another unit investment trust or in an open-end company | |
would under most circumstances be subject to a new sales load. The proposed | |
amendment would close this gap in shareholder protection by providing for | |
Commission approval of the substitution. The Commission would be required to | |
issue an order approving the substitution if it finds the substitution consistent with | |
the protection of investors and provisions of the 1940 Act.12 | |
The substitution of shares held by each Account, as described above, appears to involve a | |
substitution of securities within the meaning of Section 26(c) of the 1940 Act.13 Applicants | |
therefore request an order from the Commission pursuant to Section 26(c) approving the | |
Substitutions. | |
B. | Comparison of Fees and Expenses, Investment Objectives, Strategies and Risks, |
Expense Ratios and Total Return. At the time of the Substitutions the overall fees and | |
expenses of the Replacement Funds will be less than those assessed by the Existing Funds.14 | |
_________________________ | |
10 | In the years leading up to its 1966 recommendation, the Commission took the position that the substitution of |
portfolio securities of a unit investment trust constituted an offer of exchange under Section 11 of the 1940 Act | |
requiring prior Commission approval. The Commission proposed Section 26(b) in order to specifically address | |
substitutions by unit investment trusts that previously had been scrutinized under Section 11 of the 1940 Act. | |
See House Committee Interstate and Foreign Commerce, Report on the Securities and Exchange Commission on | |
Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d Sess. 337 | |
(1966). | |
11 | See id. |
12 | S. Rep. No. 184, 91st Cong. 1st Sess. 41 (1969), reprinted in 1970 U.S. Code Cong. & Admin. News 4897, 4936 |
(1970). | |
13 | While Section 26(b), by its terms, applies only to a unit investment trust holding the securities of one issuer, the |
Commission has interpreted Section 26(b) to apply to “a substitution of securities in any subaccount of a | |
registered separate account.” Adoption of Permanent Exemptions from Certain Provisions of the Investment | |
Company Act of 1940 for Registered Separate Accounts and Other Persons, Investment Company Act Rel. No. | |
12678 (Sept. 21, 1982) (emphasis added). | |
14 | For two years following the implementation of the Substitution described herein, the net annual expenses of each |
Replacement Fund will not exceed the net annual expenses of each corresponding Existing Fund as of August | |
31, 2014. To achieve this limitation, the Replacement Funds’ investment adviser will waive fees or reimburse | |
the Replacement Fund in certain amounts to maintain expenses at or below the limit. In addition, the Companies | |
will not increase the Contract fees and charges, including the asset based charges such as mortality and expense | |
risk charges deducted from the subaccounts, which would otherwise be assessed under the terms of the Contracts | |
for a period of at least two years following the Substitution. | |
14 |
Furthermore, each Replacement Fund has investment objectives and investment strategies | |
that are similar to those of the corresponding Existing Fund, or each Replacement Fund’s | |
underlying portfolio construction and investment results are similar to those of the corresponding | |
Existing Fund. Accordingly, the Applicants believe that the fundamental investment objectives, | |
risk and performance expectations of the Affected Contract Owners will continue to be met after | |
the Substitutions. | |
Applicants generally submit that the Substitutions meet the standards that the | |
Commission and its staff have applied to similar substitutions that have been approved in the | |
past.15 | |
Comparative information regarding fees and expenses (including management fee breakpoints),16 | |
investment objectives and strategies, expense ratios and total return for the proposed | |
Substitutions is as follows. | |
| |
________________________ | |
15 | See, e.g. Lincoln National Life Company, et al., (File No. 812-14063), Investment Company Act Release No. |
30517 (May 14, 2013)(Order); AXA Equitable Life Insurance Company, et al., (File No. 812-14036), Investment | |
Company Act Release No. 30405 (February 26, 2013)(Order); New York Life Insurance and Annuity | |
Corporation, et al., (File No. 812-13903), Investment Company Act Release No. 29947 (February 14, | |
2012)(Order); Allianz Life Insurance Company of North America, et al., (File No. 812-13821), Investment | |
Company Act Release No. 29716 (July 6, 2011)(Order); AXA Equitable Life Insurance Company, et al., (File | |
No. 812-13686), Investment Company Act Release No. 29372 (July 29, 2010)(Order); Nationwide Life | |
Insurance Company, et al., (File No. 812-13495), Investment Company Act Release No 28815 (July 8, | |
2009)(Order); Riversource Life Insurance Company, et al., (File No. 812-13492), Investment Company Act | |
Release No. 28575 (December 30, 2008)(Order); ING USA Annuity and Life Insurance Company, et al., (File | |
No. 812-13466), Investment Company Act Release No. 28285 (May 23, 2008) (Order); ING Life Insurance and | |
Annuity Company, et al., (File No. 812-13361), Investment Company Act Release No. 27885 (July 16, 2007) | |
(Order); ING Life Insurance and Annuity Company, et al., (File No. 812-13260), Investment Company Act | |
Release No. 27445 (August 15, 2006) (Order); ING USA Annuity and Life Insurance Company, et al., (File No. | |
812-13148), Investment Company Act Release No. 27052 (August 30, 2005) (Order); ING Life Insurance and | |
Annuity Company, et al., (File No. 812-13101), Investment Company Act Release No. 26711 (December 20, | |
2004) (Order); Security Life of Denver Insurance Company, et al., (File No. 812-11010), Investment Company | |
Act Release No. 23291 (June 29, 1998) (Order). | |
16 | The tables show the operating expenses for the Replacement Fund and the Existing Fund as a ratio of expenses |
to average daily net assets. The fees and expenses of the Replacement Fund and the Existing Fund are based on | |
net assets as of August 31, 2014. | |
15 |
1. | Voya Russell Large Cap Value Index Portfolio for the ClearBridge Variable | ||||||||
Large Cap Value Portfolio. | |||||||||
a. | Fees and Expenses. The comparative fees and expenses for each fund in this | ||||||||
proposed substitution as of August 31, 2014, are as follows: | |||||||||
Total | Net | ||||||||
Management | Distribution | Administrative | Other | Annual | Expense | Annual | |||
Fees | (12b-1) Fees | Service Fee | Expenses | Expenses | Waivers | Expenses | |||
Replacement Fund | |||||||||
· Voya Russell Large | |||||||||
Cap Value Index | |||||||||
Portfolio – Class I | 0.45% | None | 0.10% | 0.04% | 0.60%* | 0.10% | 0.50% | ||
Existing Fund | |||||||||
· ClearBridge Variable | |||||||||
Large Cap Value | |||||||||
Portfolio – Class I | 0.65% | None | None | 0.08% | 0.73% | None | 0.73% | ||
*Includes 0.01% of acquired fund fees and expenses. | |||||||||
b. Breakpoint Information. The comparative management fee breakpoint | |||||||||
information for each fund in this proposed substitution is as follows: | |||||||||
Existing Fund | Replacement Fund | ||||||||
ClearBridge Variable Large Cap Value | Voya Russell Large Cap Value Index | ||||||||
Portfolio | Portfolio | ||||||||
Total Net Expenses: 0.73% - Class I | Total Net Expenses: 0.50% - Class I | ||||||||
Management Fee: 0.65% | Management Fee: 0.45% | ||||||||
Management Fee Breakpoints | Management Fee Breakpoints | ||||||||
0.65% | First $350 million | 0.45% | First $250 million | ||||||
0.55% | Next $150 million | 0.35% | Next $250 million | ||||||
0.525% | Next $250 million | 0.30% | Thereafter | ||||||
0.50% | Next $250 million | ||||||||
0.45% | Over $1 billion | ||||||||
c. | Investment Objectives, Strategies and Risks. | ||||||||
Existing Fund | Replacement Fund | ||||||||
ClearBridge Variable Large Cap Value | Voya Russell Large Cap Value Index | ||||||||
Portfolio | Portfolio | ||||||||
Investment Objective – | Investment Objective – | ||||||||
The fund seeks long-term growth of capital as its | The Portfolio seeks investment results (before | ||||||||
primary investment objective. Current income is | fees and expenses) that correspond to the total | ||||||||
a secondary objective. | return (which includes capital appreciation and | ||||||||
income) of the Russell Top 200® Value Index | |||||||||
16 |
(“Index”). | |
Principal Investment Strategies – | Principal Investment Strategies – |
Under normal circumstances, the fund invests at | Under normal market conditions, the Portfolio |
least 80% of its net assets, plus borrowings for | invests at least 80% of its net assets (plus |
investment purposes, if any, in equity securities, | borrowings for investment purposes) in equity |
or other investments with similar economic | securities of companies, which are at the time of |
characteristics, of companies with large market | purchase, included in the Index; convertible |
capitalizations. | securities that are convertible into stocks |
included in the Index; other derivatives whose | |
economic returns are, by design, closely | |
equivalent to the returns of the Index or its | |
components; and exchange-traded funds. The | |
Portfolio will provide shareholders with at least | |
60 days’ prior notice of any change in this | |
investment policy. Under normal market | |
conditions, the Portfolio invests all, or | |
substantially all of its assets in these securities. | |
The Portfolio may invest in other investment | |
companies to the extent permitted under the | |
Investment Company Act of 1940, as amended, | |
and the rules, regulations, and exemptive orders | |
thereunder (“1940 Act”). | |
The Portfolio currently invests principally in | |
common stocks and employs a “passive | |
management” approach designed to track the | |
performance of the Index. | |
The Index is an unmanaged index that measures | |
the performance of the especially large cap | |
segment of the U.S. equities universe | |
represented by stocks in the largest 200 by | |
market cap that exhibit value characteristics. The | |
Index includes those Russell Top 200® Index | |
companies that exhibit value characteristics, | |
including lower price-to-book ratios and lower | |
forecasted growth values. As of December 31, | |
2013, the smallest company in the Index had a | |
market capitalization of $3 billion and the largest | |
company had a market capitalization of $500.7 | |
billion. As of February 28, 2014, a portion of the | |
Index was concentrated in the financials sector | |
and portions of the Index were focused in the | |
energy sector (including the oil, gas, and | |
consumable fuels industry) and the health care | |
sector. | |
17 |
The Portfolio may not always hold all of the | |
same securities as the Index. The Portfolio may | |
also invest in stock index futures and other | |
derivatives as a substitute for the sale or | |
purchase of securities in the Index and to provide | |
equity exposure to the Portfolio’s cash position. | |
Although the Portfolio attempts to track, as | |
closely as possible, the performance of the | |
Index, the Portfolio does not always perform | |
exactly like the Index. Unlike the Index, the | |
Portfolio has operating expenses and transaction | |
costs and therefore has a performance | |
disadvantage versus the Index. | |
The sub-adviser (“Sub-Adviser”) may sell a | |
security when the security’s percentage | |
weighting in the Index is reduced, when the | |
security is removed from the Index, or for other | |
reasons. | |
The Portfolio may lend portfolio securities on a | |
short-term or long-term basis, up to 33 1 /3 % of | |
its total assets. | |
Principal Risks – | Principal Risks – |
Risk is inherent in all investing. There is no | An investor could lose money on an investment |
assurance that the fund will meet its investment | in the Portfolio. Any of the following risks, |
objective. The value of an investment in the | among others, could affect Portfolio |
fund, as well as the amount of return an investor | performance or cause the Portfolio to lose |
receives on their investment, may fluctuate | money or to underperform market averages of |
significantly. An investor may lose part or all of | other funds. |
their investment in the fund or their investment | |
may not perform as well as other similar | Company. The price of a given company’s |
investments. The fund may take temporary | stock could decline or underperform for many |
defensive positions; in such a case, the fund will | reasons including, among others, poor |
not be pursuing its principal investment | management, financial problems, or business |
strategies. The following is a summary | challenges. If a company declares bankruptcy or |
description of certain risks of investing in the | becomes insolvent, its stock could become |
fund. | worthless. |
Stock market and equity securities risk. The | Concentration. To the extent that the |
securities markets are volatile and the market | Portfolio’s index “concentrates,” as that term is |
prices of the fund’s securities may decline | defined in the 1940 Act, in the securities of a |
generally. Securities fluctuate in price based on | particular industry or group of industries or a |
changes in a company’s financial condition and | single country or region, the Portfolio will |
overall market and economic conditions. If the | concentrate its investments to approximately the |
market prices of the securities owned by the fund | same extent as the Index. As a result, the |
fall, the value of an investment in the fund will | Portfolio may be subject to greater market |
18 |
decline. | fluctuation than a fund which has securities |
representing a broader range of investment | |
Recent market events risk. The global financial | alternatives. If securities in which the Portfolio |
crisis that began in 2008 has caused a significant | concentrates fall out of favor, the Portfolio could |
decline in the value and liquidity of many | underperform funds that have greater |
securities and unprecedented volatility in the | diversification. |
markets. In response to the crisis, the U.S. | |
government and the Federal Reserve, as well as | Convertible Securities. Convertible securities |
certain foreign governments and their central | are securities that are convertible into or |
banks have taken steps to support financial | exercisable for common stocks at a stated price |
markets, including by keeping interest rates at | or rate. Convertible securities are subject to the |
historically low levels. More recently, the | usual risks associated with debt securities, such |
Federal Reserve has reduced its market support | as interest rate and credit risk. In addition, |
activities. Further reduction or withdrawal of this | because convertible securities react to changes in |
support, failure of efforts in response to the | the value of the stocks into which they convert, |
crisis, or investor perception that such efforts are | they are subject to market risk. |
not succeeding could negatively affect financial | |
markets generally as well as result in higher | Credit. Prices of bonds and other debt |
interest rates, increase market volatility and | instruments can fall if the issuer’s actual or |
reduce the value and liquidity of certain | perceived financial health deteriorates, whether |
securities. | because of broad economic or issuer-specific |
reasons. In certain cases, the issuer could be late | |
This environment could make identifying | in paying interest or principal, or could fail to |
investment risks and opportunities especially | pay altogether. |
difficult for the subadviser, and whether or not | |
the fund invests in securities of issuers located in | Derivative Instruments. Derivative |
or with significant exposure to countries | instruments are subject to a number of risks, |
experiencing economic and financial difficulties, | including the risk of changes in the market price |
the value and liquidity of the fund’s investments | of the underlying securities, credit risk with |
may be negatively affected. In addition, policy | respect to the counterparty, risk of loss due to |
and legislative changes in the United States and | changes in interest rates and liquidity risk. The |
in other countries are affecting many aspects of | use of certain derivatives may also have a |
financial regulation. The impact of these changes | leveraging effect which may increase the |
on the markets, and the practical implications for | volatility of the Portfolio and reduce its returns. |
market participants, may not be fully known for | Derivatives may not perform as expected, so the |
some time. | Portfolio may not realize the intended benefits. |
When used for hedging, the change in value of a | |
Issuer risk. The value of a security can go up or | derivative may not correlate as expected with the |
down more than the market as a whole and can | currency, security or other risk being hedged. In |
perform differently from the value of the market | addition, given their complexity, derivatives |
as a whole, often due to disappointing earnings | expose the Portfolio to the risk of improper |
reports by the issuer, unsuccessful products or | valuation. |
services, loss of major customers, major | |
litigation against the issuer or changes in | Focused Investing. To the extent that the |
government regulations affecting the issuer or | Portfolio invests a substantial portion of its |
the competitive environment. The fund may | assets in a particular industry, sector, market |
experience a substantial or complete loss on an | segment, or geographical area, its investments |
individual security. Historically, the prices of | will be sensitive to developments in that |
19 |
securities of small and medium capitalization | industry, sector, market segment, or |
companies have generally gone up or down more | geographical area. The Portfolio assumes the |
than those of large capitalization companies, | risk that changing economic conditions; |
although even large capitalization companies | changing political or regulatory conditions; or |
may fall out of favor with investors. | natural and other disasters affecting the |
particular industry, sector, market segment, or | |
Large capitalization company risk. Large | geographical area in which the Portfolio focuses |
capitalization companies may fall out of favor | its investments could have a significant impact |
with investors. | on its investment performance and could |
ultimately cause the Portfolio to underperform, | |
Liquidity risk. Some assets held by the fund | or be more volatile than, other funds that invest |
may be impossible or difficult to sell, | more broadly. |
particularly during times of market turmoil. | |
These illiquid assets may also be difficult to | Index Strategy. The index selected may |
value. If the fund is forced to sell an illiquid | underperform the overall market and the |
asset to meet redemption requests or other cash | Portfolio might fail to track its target index. The |
needs, the fund may be forced to sell at a loss. | correlation between the Portfolio and index |
performance may be affected by the Portfolio’s | |
Portfolio selection risk. The value of an | expenses and the timing of purchases and |
investment may decrease if the subadviser’s | redemptions of the Portfolio’s shares. The |
judgment about the attractiveness or value of or | Portfolio’s actual holdings might not match the |
market trends affecting a particular security, | Index and the Portfolio’s effective exposure to |
industry, sector or region, or about market | index securities at any given time may not equal |
movements is incorrect. | 100%. |
Value investing risk. The value approach to | Interest Rate. With bonds and other fixed rate |
investing involves the risk that stocks may | debt instruments, a rise in interest rates generally |
remain undervalued. Value stocks may | causes values to fall; conversely, values |
underperform the overall equity market while the | generally rise as interest rates fall. The higher |
market concentrates on growth stocks. Although | the credit quality of the instrument, and the |
the fund will not concentrate its investments in | longer its maturity or duration, the more |
any one industry or industry group, it may, like | sensitive it is likely to be to interest rate risk. In |
many value funds, weight its investments toward | the case of inverse securities, the interest rate |
certain industries, thus increasing its exposure to | generally will decrease when the market rate of |
factors adversely affecting issuers within those | interest to which the inverse security is indexed |
industries. | increases. As of the date of this Prospectus, |
interest rates in the United States are at or near | |
Risk of increase in expenses. An investor’s | historic lows, which may increase the Portfolio’s |
actual costs of investing in the fund may be | exposure to risks associated with rising interest |
higher than the expenses shown in “Annual fund | rates. Rising interest rates could have |
operating expenses” for a variety of reasons. For | unpredictable effects on the markets and may |
example, expense ratios may be higher than | expose fixed-income and related markets to |
those shown if a fee limitation is changed or | heightened volatility. For fixed-income |
terminated or if average net assets decrease. Net | securities, an increase in interest rates may lead |
assets are more likely to decrease and fund | to increased redemptions and increased portfolio |
expense ratios are more likely to increase when | turnover, which could reduce liquidity for |
markets are volatile. | certain Portfolio investments, adversely affect |
values, and increase a Portfolio’s costs. If dealer | |
20 |
capacity in fixed-income markets is insufficient | |
for market conditions, it may further inhibit | |
liquidity and increase volatility in the fixed | |
income markets. | |
Liquidity. If a security is illiquid, the Portfolio | |
might be unable to sell the security at a time | |
when the Portfolio’s manager might wish to sell, | |
and the security could have the effect of | |
decreasing the overall level of the Portfolio’s | |
liquidity. Further, the lack of an established | |
secondary market may make it more difficult to | |
value illiquid securities, which could vary from | |
the amount the Portfolio could realize upon | |
disposition. The Portfolio may make investments | |
that become less liquid in response to market | |
developments or adverse investor perception. | |
The Portfolio could lose money if it cannot sell a | |
security at the time and price that would be most | |
beneficial to the Portfolio. | |
Market. Stock prices may be volatile and are | |
affected by the real or perceived impacts of such | |
factors as economic conditions and political | |
events. Stock markets tend to be cyclical, with | |
periods when stock prices generally rise and | |
periods when stock prices generally decline. Any | |
given stock market segment may remain out of | |
favor with investors for a short or long period of | |
time, and stocks as an asset class may | |
underperform bonds or other asset classes during | |
some periods. Additionally, legislative, | |
regulatory or tax policies or developments in | |
these areas may adversely impact the investment | |
techniques available to a manager, add to | |
Portfolio costs and impair the ability of the | |
Portfolio to achieve its investment objectives. | |
Other Investment Companies. The main risk | |
of investing in other investment companies, | |
including exchange-traded funds, is the risk that | |
the value of the securities underlying a registered | |
open-end management investment company | |
might decrease. Because the Portfolio may | |
invest in other investment companies, an | |
investor will pay a proportionate share of the | |
expenses of those other investment companies | |
(including management fees, administration fees, | |
21 |
and custodial fees) in addition to the expenses of |
the Portfolio. |
Securities Lending. Securities lending |
involves two primary risks: “investment risk” |
and “borrower default risk.” Investment risk is |
the risk that the Portfolio will lose money from |
the investment of the cash collateral received |
from the borrower. Borrower default risk is the |
risk that the Portfolio will lose money due to the |
failure of a borrower to return a borrowed |
security in a timely manner. |
Value Investing. Securities that appear to be |
undervalued may never appreciate to the extent |
expected. Further, because the prices of value- |
oriented securities tend to correlate more closely |
with economic cycles than growth-oriented |
securities, they generally are more sensitive to |
changing economic conditions, such as changes |
in interest rates, corporate earnings and |
industrial production. |
d. Comparison. The Applicants believe that while the Existing Fund and the |
Replacement Fund are slightly different from each other in the way they characterize their |
objective, principal investment strategies, benchmarks and risks, fundamentally each is primarily |
a large cap value equity portfolio that exhibits a high correlation to the other with similar |
weighted average holdings from a Morningstar style box perspective, risks and investment |
results. Each falls within the Morningstar Large Value style box. The differences between the |
Existing Fund and the Replacement Fund are not necessarily larger than one would expect to be |
exhibited by two portfolios with the same benchmarks, principal investment strategies, and |
naming conventions, as there is significant investment flexibility within those constraints. |
The Existing Fund’s investment objective is long-term growth of capital and the secondary |
objective is current income, and the Replacement Fund seeks to track the Russell Top 200 Value |
Index. Under normal circumstances, the Existing Fund invests at least 80% of its net assets, plus |
borrowings for investment purposes, if any, in equity securities, or other investments with similar |
economic characteristics, of companies with large market capitalizations. The Replacement |
Fund seeks investment results (before fees and expenses) that correspond to the total return |
(which includes capital appreciation and income) of the Russell Top 200® Value Index |
(“Index”). Under normal market conditions, the Replacement Fund invests at least 80% of its |
net assets in equity securities of companies, which are at the time of purchase, included in the |
Index. The Index is an unmanaged index that measures the performance of the especially large |
cap segment of the U.S. equities universe represented by stocks in the largest 200 by market cap |
that exhibit value characteristics. The Replacement Fund currently invests principally in common |
stocks and employs a “passive management” approach designed to track the performance of the |
Index. |
22 |
With respect to the Existing Fund’s and Replacement Fund’s primary and/or secondary | ||||||
investment objectives, each shares some combination of long-term capital appreciation and | ||||||
current/reasonable income language. The Replacement Fund, as an index fund, does not | ||||||
specifically state either capital appreciation or income in its objective but rather focuses on an | ||||||
index replication due to its passive nature. The passive index it is replicating, however, seeks to | ||||||
generate long-term capital appreciation and also delivers current/reasonable income. In fact, as | ||||||
of August 31, 2014, the current yield on the performance benchmark for the Replacement Fund, | ||||||
the Russell Top 200 Value Index, was 2.27%, higher than the current yield of the performance | ||||||
benchmark for the Existing Fund, the Russell 1000 Value Index, which was 2.17%. | ||||||
Furthermore, while the listed principal investment strategies of the Existing Fund and the | ||||||
Replacement Fund differ in language and breadth, at their core each is required to invest in more | ||||||
than 80% equity securities of a large cap, primarily income producing companies. Although the | ||||||
Replacement Fund seeks to replicate an index, as noted above, the index is consists of equity | ||||||
securities of a large cap and income producing companies. Over 95% of the underlying | ||||||
securities in the index the Replacement Fund seeks to replicate (both by names and by asset | ||||||
weight) pay a dividend. | ||||||
While the Existing Fund and the Replacing Fund are benchmarked to a different index, there is | ||||||
very high overlap in the construction and the returns of those differing indices. The companies | ||||||
that make up the Replacement Fund’s Russell Top 200 Value Index benchmark comprise 69% of | ||||||
the Existing Fund’s Russell 1000 Value Index benchmark. | ||||||
Even though the overlap of these benchmarks is not 100%, there is a high correlation in the | ||||||
returns of these benchmarks over time. Over the past five years there is no less than a 98% | ||||||
correlation in the returns between the Existing Fund’s benchmark and the Replacement Fund’s | ||||||
benchmark. This means that the returns tend to move nearly in lockstep with each other, and this | ||||||
has a similar effect on the actual returns of the Existing Fund and the Replacement Fund. As | ||||||
shown in the performance tables below, the Replacement Portfolio has exhibited similar or better | ||||||
performance to the Existing Portfolio at a meaningfully lower expense ratio. | ||||||
To summarize, while the Existing Fund and the Replacement Fund are slightly different from | ||||||
each other in the way they characterize their objective, principal investment strategies, | ||||||
benchmarks and risks, fundamentally each is primarily a large cap value equity portfolio that | ||||||
exhibits a high correlation to the other such that each Affected Contract Owner’s fundamental | ||||||
investment objectives and risk and return expectations will continue to be met after the | ||||||
Substitution. | ||||||
e. Expense Ratios and Total Return. The net expense ratios and total return | ||||||
figures for each fund in this proposed substitution as of August 31, 2014, are as follows: | ||||||
Net Expense | (Inception Date) | |||||
Ratio | 1 Year | 3 Years | 5 Years | 10 Years | Since Inception | |
Replacement Fund | ||||||
· Voya Russell Large Cap | (05/01/2009) | |||||
Value Index Portfolio – | ||||||
Class I | 0.50% | 22.89% | 20.72% | 14.96% | N/A | 17.61% |
23 |
Existing Fund | ||||||
· ClearBridge Variable | (02/17/1998) | |||||
Large Cap Value Portfolio | ||||||
– Class I | 0.73% | 23.19% | 21.01% | 16.04% | 8.26% | 7.07% |
The Replacement Fund has slightly underperformed the Existing Fund over the one, three and |
five-year periods. The Replacement Fund will, however, allow shareholders to benefit from a |
significantly lower net expense ratio. Although differences in risks and investment objectives |
and strategies exist, the Applicants believe that these differences do not introduce Contract |
Owners to materially greater risks than before the Substitution. |
f. Post Substitution Net Assets. The estimated net assets of the Voya Russell |
Large Cap Value Index Portfolio – Class I immediately following the proposed substitution will |
be approximately $63,616,470. This is based on estimated net assets of the Replacement Fund |
immediately before the substitution ($51,723,771) plus the corresponding Existing Fund’s actual |
net assets invested in the Accounts as of August 31, 2014 ($11,892,699). |
|
24 |
2. | Voya Russell Large Cap Value Index Portfolio for Fidelity VIP Equity-Income | ||||||||
Portfolio. | |||||||||
a. | Fees and Expenses. The comparative fees and expenses for each fund in this | ||||||||
proposed substitution as of August 31, 2014, are as follows: | |||||||||
Total | Net | ||||||||
Management | Distribution | Administrative | Other | Annual | Expense | Annual | |||
Fees | (12b-1) Fees | Service Fee | Expenses | Expenses | Waivers | Expenses | |||
Replacement Fund | |||||||||
· Voya Russell Large | |||||||||
Cap Value Index | |||||||||
Portfolio – Class I | 0.45% | None | 0.10% | 0.04% | 0.60%* | 0.10% | 0.50% | ||
Existing Fund | |||||||||
· Fidelity VIP Equity- | |||||||||
Income Portfolio – | |||||||||
Initial Class | 0.45% | None | None | 0.10% | 0.57%** | None | 0.57% | ||
Replacement Fund | |||||||||
· Voya Russell Large | |||||||||
Cap Value Index | |||||||||
Portfolio – Class S | 0.45% | 0.25% | 0.10% | 0.04% | 0.85%* | 0.10% | 0.75% | ||
Existing Fund | |||||||||
· Fidelity VIP Equity- | |||||||||
Income Portfolio – | |||||||||
Service 2 Class | 0.45% | 0.25% | None | 0.10% | 0.82%** | None | 0.82% | ||
*Includes 0.01% of acquired fund fees and expenses. | |||||||||
** Includes 0.02% of acquired fund fees and expenses. | |||||||||
b. | Breakpoint Information. The comparative management fee breakpoint | ||||||||
information for each fund in this proposed substitution is as follows: | |||||||||
Existing Fund | Replacement Fund | ||||||||
Fidelity VIP Equity-Income Portfolio | Voya Russell Large Cap Value Index | ||||||||
Total Net Expenses: 0.57% - Initial Class | Portfolio | ||||||||
0.82% - Service 2 Class | Total Net Expenses: | 0.50% - Class I | |||||||
0.75% - Class S | |||||||||
Management Fee: 0.45% | |||||||||
Management Fee: 0.45% | |||||||||
Management Fee Breakpoints for both classes | Management Fee Breakpoints for both classes | ||||||||
of shares | of shares | ||||||||
0.2559% | Group Fee Rate* | 0.45% | First $250 million | ||||||
0.20% | Individual Fund Fee Rate | 0.35% | Next $250 million | ||||||
0.4559% | Management Fee Rate (sum of | 0.30% | Thereafter | ||||||
above) | |||||||||
25 |
* Fidelity calculates a "Group Fee Rate." The group fee | |
rate is based on the monthly average net assets of all of | |
the registered investment companies with which FMR | |
has management contracts. The Group Fee Rate of | |
0.2559% corresponds to AUM up to $1,374 billion. | |
c. Investment Objectives, Strategies and Risks. | |
Existing Fund | Replacement Fund |
Fidelity VIP Equity-Income Portfolio | Voya Russell Large Cap Value Index |
Portfolio | |
Investment Objective – | |
Investment Objective – | |
The fund seeks reasonable income. The fund will | |
also consider the potential for capital | The Portfolio seeks investment results (before |
appreciation. The fund's goal is to achieve a | fees and expenses) that correspond to the total |
yield which exceeds the composite yield on the | return (which includes capital appreciation and |
securities comprising the S&P 500® Index. | income) of the Russell Top 200® Value Index |
(“Index”). | |
Principal Investment Strategies – | Principal Investment Strategies – |
Normally invests at least 80% of assets in equity | Under normal market conditions, the Portfolio |
securities. | invests at least 80% of its net assets (plus |
borrowings for investment purposes) in equity | |
Normally invests primarily in income-producing | securities of companies, which are at the time of |
equity securities, which tends to lead to | purchase, included in the Index; convertible |
investments in large cap "value" stocks. | securities that are convertible into stocks |
included in the Index; other derivatives whose | |
Potentially invests in other types of equity | economic returns are, by design, closely |
securities and debt securities, including lower- | equivalent to the returns of the Index or its |
quality debt securities. | components; and exchange-traded funds. The |
Portfolio will provide shareholders with at least | |
Invests in domestic and foreign issuers. | 60 days’ prior notice of any change in this |
investment policy. Under normal market | |
Uses fundamental analysis of factors such as | conditions, the Portfolio invests all, or |
each issuer's financial condition and industry | substantially all of its assets in these securities. |
position, as well as market and economic | |
conditions, to select investments. | The Portfolio may invest in other investment |
companies to the extent permitted under the | |
Potentially uses using covered call options as | Investment Company Act of 1940, as amended, |
tools in managing the fund's assets. | and the rules, regulations, and exemptive orders |
thereunder (“1940 Act”). | |
The Portfolio currently invests principally in | |
common stocks and employs a “passive | |
management” approach designed to track the | |
performance of the Index. | |
26 |
The Index is an unmanaged index that measures | |
the performance of the especially large cap | |
segment of the U.S. equities universe | |
represented by stocks in the largest 200 by | |
market cap that exhibit value characteristics. The | |
Index includes those Russell Top 200® Index | |
companies that exhibit value characteristics, | |
including lower price-to-book ratios and lower | |
forecasted growth values. As of December 31, | |
2013, the smallest company in the Index had a | |
market capitalization of $3 billion and the largest | |
company had a market capitalization of $500.7 | |
billion. As of February 28, 2014, a portion of the | |
Index was concentrated in the financials sector | |
and portions of the Index were focused in the | |
energy sector (including the oil, gas, and | |
consumable fuels industry) and the health care | |
sector. | |
The Portfolio may not always hold all of the | |
same securities as the Index. The Portfolio may | |
also invest in stock index futures and other | |
derivatives as a substitute for the sale or | |
purchase of securities in the Index and to provide | |
equity exposure to the Portfolio’s cash position. | |
Although the Portfolio attempts to track, as | |
closely as possible, the performance of the | |
Index, the Portfolio does not always perform | |
exactly like the Index. Unlike the Index, the | |
Portfolio has operating expenses and transaction | |
costs and therefore has a performance | |
disadvantage versus the Index. | |
The sub-adviser (“Sub-Adviser”) may sell a | |
security when the security’s percentage | |
weighting in the Index is reduced, when the | |
security is removed from the Index, or for other | |
reasons. | |
The Portfolio may lend portfolio securities on a | |
short-term or long-term basis, up to 33 1 /3 % of | |
its total assets. | |
Principal Risks – | Principal Risks – |
Stock Market Volatility. Stock markets are | An investor could lose money on an investment |
volatile and can decline significantly in response | in the Portfolio. Any of the following risks, |
to adverse issuer, political, regulatory, market, or | among others, could affect Portfolio |
27 |
economic developments. Different parts of the | performance or cause the Portfolio to lose |
market, including different market sectors, and | money or to underperform market averages of |
different types of securities can react differently | other funds. |
to these developments. | |
Company. The price of a given company’s | |
Interest Rate Changes. Interest rate increases | stock could decline or underperform for many |
can cause the price of a debt security to decrease. | reasons including, among others, poor |
management, financial problems, or business | |
Foreign Exposure. Foreign markets can be | challenges. If a company declares bankruptcy or |
more volatile than the U.S. market due to | becomes insolvent, its stock could become |
increased risks of adverse issuer, political, | worthless. |
regulatory, market, or economic developments | |
and can perform differently from the U.S. | Concentration. To the extent that the |
market. | Portfolio’s index “concentrates,” as that term is |
defined in the 1940 Act, in the securities of a | |
Issuer-Specific Changes. The value of an | particular industry or group of industries or a |
individual security or particular type of security | single country or region, the Portfolio will |
can be more volatile than, and can perform | concentrate its investments to approximately the |
differently from, the market as a whole. Lower- | same extent as the Index. As a result, the |
quality debt securities (those of less than | Portfolio may be subject to greater market |
investment-grade quality, also referred to as high | fluctuation than a fund which has securities |
yield debt securities) and certain types of other | representing a broader range of investment |
securities involve greater risk of default or price | alternatives. If securities in which the Portfolio |
changes due to changes in the credit quality of | concentrates fall out of favor, the Portfolio could |
the issuer. The value of lower-quality debt | underperform funds that have greater |
securities and certain types of other securities | diversification. |
can be more volatile due to increased sensitivity | |
to adverse issuer, political, regulatory, market, or | Convertible Securities. Convertible securities |
economic developments. | are securities that are convertible into or |
exercisable for common stocks at a stated price | |
"Value" Investing. "Value" stocks can perform | or rate. Convertible securities are subject to the |
differently from the market as a whole and other | usual risks associated with debt securities, such |
types of stocks and can continue to be | as interest rate and credit risk. In addition, |
undervalued by the market for long periods of | because convertible securities react to changes in |
time. | the value of the stocks into which they convert, |
they are subject to market risk. | |
An investor could lose money by investing in the | |
fund. | Credit. Prices of bonds and other debt |
instruments can fall if the issuer’s actual or | |
perceived financial health deteriorates, whether | |
because of broad economic or issuer-specific | |
reasons. In certain cases, the issuer could be late | |
in paying interest or principal, or could fail to | |
pay altogether. | |
Derivative Instruments. Derivative | |
instruments are subject to a number of risks, | |
including the risk of changes in the market price | |
28 |
of the underlying securities, credit risk with | |
respect to the counterparty, risk of loss due to | |
changes in interest rates and liquidity risk. The | |
use of certain derivatives may also have a | |
leveraging effect which may increase the | |
volatility of the Portfolio and reduce its returns. | |
Derivatives may not perform as expected, so the | |
Portfolio may not realize the intended benefits. | |
When used for hedging, the change in value of a | |
derivative may not correlate as expected with the | |
currency, security or other risk being hedged. In | |
addition, given their complexity, derivatives | |
expose the Portfolio to the risk of improper | |
valuation. | |
Focused Investing. To the extent that the | |
Portfolio invests a substantial portion of its | |
assets in a particular industry, sector, market | |
segment, or geographical area, its investments | |
will be sensitive to developments in that | |
industry, sector, market segment, or | |
geographical area. The Portfolio assumes the | |
risk that changing economic conditions; | |
changing political or regulatory conditions; or | |
natural and other disasters affecting the | |
particular industry, sector, market segment, or | |
geographical area in which the Portfolio focuses | |
its investments could have a significant impact | |
on its investment performance and could | |
ultimately cause the Portfolio to underperform, | |
or be more volatile than, other funds that invest | |
more broadly. | |
Index Strategy. The index selected may | |
underperform the overall market and the | |
Portfolio might fail to track its target index. The | |
correlation between the Portfolio and index | |
performance may be affected by the Portfolio’s | |
expenses and the timing of purchases and | |
redemptions of the Portfolio’s shares. The | |
Portfolio’s actual holdings might not match the | |
Index and the Portfolio’s effective exposure to | |
index securities at any given time may not equal | |
100%. | |
Interest Rate. With bonds and other fixed rate | |
debt instruments, a rise in interest rates generally | |
causes values to fall; conversely, values | |
29 |
generally rise as interest rates fall. The higher | |
the credit quality of the instrument, and the | |
longer its maturity or duration, the more | |
sensitive it is likely to be to interest rate risk. In | |
the case of inverse securities, the interest rate | |
generally will decrease when the market rate of | |
interest to which the inverse security is indexed | |
increases. As of the date of this Prospectus, | |
interest rates in the United States are at or near | |
historic lows, which may increase the Portfolio’s | |
exposure to risks associated with rising interest | |
rates. Rising interest rates could have | |
unpredictable effects on the markets and may | |
expose fixed-income and related markets to | |
heightened volatility. For fixed-income | |
securities, an increase in interest rates may lead | |
to increased redemptions and increased portfolio | |
turnover, which could reduce liquidity for | |
certain Portfolio investments, adversely affect | |
values, and increase a Portfolio’s costs. If dealer | |
capacity in fixed-income markets is insufficient | |
for market conditions, it may further inhibit | |
liquidity and increase volatility in the fixed | |
income markets. | |
Liquidity. If a security is illiquid, the Portfolio | |
might be unable to sell the security at a time | |
when the Portfolio’s manager might wish to sell, | |
and the security could have the effect of | |
decreasing the overall level of the Portfolio’s | |
liquidity. Further, the lack of an established | |
secondary market may make it more difficult to | |
value illiquid securities, which could vary from | |
the amount the Portfolio could realize upon | |
disposition. The Portfolio may make investments | |
that become less liquid in response to market | |
developments or adverse investor perception. | |
The Portfolio could lose money if it cannot sell a | |
security at the time and price that would be most | |
beneficial to the Portfolio. | |
Market. Stock prices may be volatile and are | |
affected by the real or perceived impacts of such | |
factors as economic conditions and political | |
events. Stock markets tend to be cyclical, with | |
periods when stock prices generally rise and | |
periods when stock prices generally decline. Any | |
given stock market segment may remain out of | |
30 |
favor with investors for a short or long period of | |
time, and stocks as an asset class may | |
underperform bonds or other asset classes during | |
some periods. Additionally, legislative, | |
regulatory or tax policies or developments in | |
these areas may adversely impact the investment | |
techniques available to a manager, add to | |
Portfolio costs and impair the ability of the | |
Portfolio to achieve its investment objectives. | |
Other Investment Companies. The main risk | |
of investing in other investment companies, | |
including exchange-traded funds, is the risk that | |
the value of the securities underlying a registered | |
open-end management investment company | |
might decrease. Because the Portfolio may | |
invest in other investment companies, an | |
investor will pay a proportionate share of the | |
expenses of those other investment companies | |
(including management fees, administration fees, | |
and custodial fees) in addition to the expenses of | |
the Portfolio. | |
Securities Lending. Securities lending | |
involves two primary risks: “investment risk” | |
and “borrower default risk.” Investment risk is | |
the risk that the Portfolio will lose money from | |
the investment of the cash collateral received | |
from the borrower. Borrower default risk is the | |
risk that the Portfolio will lose money due to the | |
failure of a borrower to return a borrowed | |
security in a timely manner. | |
Value Investing. Securities that appear to be | |
undervalued may never appreciate to the extent | |
expected. Further, because the prices of value- | |
oriented securities tend to correlate more closely | |
with economic cycles than growth-oriented | |
securities, they generally are more sensitive to | |
changing economic conditions, such as changes | |
in interest rates, corporate earnings and | |
industrial production. | |
31 |
d. Comparison. The Applicants believe that while the Existing Fund and the |
Replacement Fund are slightly different from each other in the way they characterize their |
objective, principal investment strategies, benchmarks and risks, fundamentally each is primarily |
a large cap value equity portfolio that exhibits a high correlation to the other with similar |
weighted average holdings from a Morningstar style box perspective, risks and investment |
results. Each falls within the Morningstar Large Value style box. The differences between the |
Existing Fund and the Replacement Fund are not necessarily larger than one would expect to be |
exhibited by two portfolios with the same benchmarks, principal investment strategies, and |
naming conventions, as there is significant investment flexibility within those constraints. |
The Existing Fund’s investment objective is to seek reasonable income, and will also consider |
the potential for capital appreciation. The Existing Fund normally invests at least 80% of assets |
in equity securities, primarily in income-producing equity securities, which tends to lead to |
investments in large cap "value" stocks. The Replacement Fund seeks investment results (before |
fees and expenses) that correspond to the total return (which includes capital appreciation and |
income) of the Russell Top 200® Value Index (“Index”). Under normal market conditions, the |
Replacement Fund invests at least 80% of its net assets in equity securities of companies, which |
are at the time of purchase, included in the Index. The Index is an unmanaged index that |
measures the performance of the especially large cap segment of the U.S. equities universe |
represented by stocks in the largest 200 by market cap that exhibit value characteristics. The |
Replacement Fund currently invests principally in common stocks and employs a “passive |
management” approach designed to track the performance of the Index. |
With respect to the Existing Fund’s and Replacement Fund’s primary and/or secondary |
investment objectives, each shares some combination of long-term capital appreciation and |
current/reasonable income language. The Replacement Fund, as an index fund, does not |
specifically state either capital appreciation or income in its objective but rather focuses on an |
index replication due to its passive nature. The passive index it is replicating, however, seeks to |
generate long-term capital appreciation and also delivers current/reasonable income. In fact, as |
of August 31, 2014, the current yield on the performance benchmark for the Replacement Fund, |
the Russell Top 200 Value Index, was 2.27%, higher than the current yield of the performance |
benchmark for the Existing Fund, the Russell 3000 Value Index, which was 2.15%. |
Furthermore, while the listed principal investment strategies of the Existing Fund and the |
Replacement Fund differ in language and breadth, at their core each is required to invest in more |
than 80% equity securities of a large cap, primarily income producing companies. Although the |
Replacement Fund seeks to replicate an index, as noted above, the index is consists of equity |
securities of a large cap and income producing companies. Over 95% of the underlying |
securities in the index the Replacement Fund seeks to replicate (both by names and by asset |
weight) pay a dividend. |
While the Existing Fund and the Replacing Fund are benchmarked to a different index, there is |
very high overlap in the construction and the returns of those differing indices. The companies |
that make up the Replacement Fund’s Russell Top 200 Value Index benchmark comprise 64% of |
the Existing Fund’s Russell 3000 Value Index benchmark. |
Even though the overlap of these benchmarks is not 100%, there is a high correlation in the |
returns of these benchmarks over time. Over the past five years there is no less than a 98% |
32 |
correlation in the returns between the Existing Fund’s benchmark and the Replacement Fund’s | ||||||
benchmark. This means that the returns tend to move nearly in lockstep with each other, and this | ||||||
has a similar effect on the actual returns of the Existing Fund and the Replacement Fund. As | ||||||
shown in the performance tables below, the Replacement Portfolio has exhibited similar or better | ||||||
performance to the Existing Portfolio at a meaningfully lower expense ratio. | ||||||
To summarize, while the Existing Fund and the Replacement Fund are slightly different from | ||||||
each other in the way they characterize their objective, principal investment strategies, | ||||||
benchmarks and risks, fundamentally each is primarily a large cap value equity portfolio that | ||||||
exhibits a high correlation to the other such that each Affected Contract Owner’s fundamental | ||||||
investment objectives and risk and return expectations will continue to be met after the | ||||||
Substitution. | ||||||
e. | Expense Ratios and Total Return. The net expense ratios and total return | |||||
figures for each fund in this proposed substitution as of August 31, 2014, are as follows: | ||||||
Net Expense | (Inception Date) | |||||
Ratio | 1 Year | 3 Years | 5 Years | 10 Years | Since Inception | |
Replacement Fund | ||||||
· Voya Russell Large Cap | (05/01/2009) | |||||
Value Index Portfolio – | ||||||
Class I | 0.50% | 22.89% | 20.72% | 14.96% | N/A | 17.61% |
Existing Fund | ||||||
· Fidelity VIP Equity- | (10/09/1986) | |||||
Income Portfolio – Initial | ||||||
Class | 0.57% | 20.13% | 19.07% | 15.43% | 7.28% | 9.51% |
Replacement Fund | ||||||
· Voya Russell Large Cap | (05/01/2009) | |||||
Value Index Portfolio – | ||||||
Class S | 0.75% | 22.62% | 20.44% | 14.68% | N/A | 17.35% |
Existing Fund | ||||||
· Fidelity VIP Equity- | (01/12/2000) | |||||
Income Portfolio – Service | ||||||
2 Class | 0.82% | 19.87% | 18.79% | 15.15% | 7.02% | 5.68% |
f. | Post Substitution Net Assets. The estimated net assets of the Voya Russell | |||||
Large Cap Value Index Portfolio – Class I immediately following the proposed substitution will | ||||||
be approximately $102,560,030. This is based on estimated net assets of the Replacement Fund | ||||||
immediately before the substitution ($51,723,771) plus the corresponding Existing Fund’s actual | ||||||
net assets invested in the Accounts as of August 31, 2014 ($50,836,259). | ||||||
The estimated net assets of the Voya Russell Large Cap Value Index Portfolio – Class S | ||||||
immediately following the proposed substitution will be approximately $309,764,378. This is | ||||||
based on estimated net assets of the Replacement Fund immediately before the substitution | ||||||
($140,739,513) plus the corresponding Existing Fund’s actual net assets invested in the Accounts | ||||||
as of August 31, 2014 ($169,024,865). | ||||||
33 |
3. | Voya Russell Large Cap Index Portfolio for the Invesco VI Core Equity Fund. | |||||||||
a. | Fees and Expenses. The comparative fees and expenses for each fund in this | |||||||||
proposed substitution as of August 31, 2014, are as follows: | ||||||||||
Total | Net | |||||||||
Management | Distribution | Administrative | Other | Annual | Expense | Annual | ||||
Fees | (12b-1) Fees | Service Fee | Expenses | Expenses | Waivers | Expenses | ||||
Replacement Fund | ||||||||||
· Voya Russell Large | ||||||||||
Cap Index Portfolio – | ||||||||||
Class S | 0.25% | 0.25% | 0.10% | 0.03% | 0.64%* | 0.01% | 0.63% | |||
Existing Fund | ||||||||||
· Invesco VI Core | ||||||||||
Equity Fund – Class I | 0.61% | None | None | 0.29% | 0.92%** | 0.02% | 0.90% | |||
*Includes 0.01% of acquired fund fees and expenses. | ||||||||||
**Includes 0.02% of acquired fund fees and expenses. | ||||||||||
b. | Breakpoint Information. The comparative management fee breakpoint | |||||||||
information for each fund in this proposed substitution is as follows: | ||||||||||
Existing Fund | Replacement Fund | |||||||||
Invesco VI Core Equity Fund | Voya Russell Large Cap Index Portfolio | |||||||||
Total Net Expenses: 0.90% - Class I | Total Net Expenses: 0.63% - Class S | |||||||||
Management Fee: 0.61% | Management Fee: 0.25% | |||||||||
Management Fee Breakpoints | Management Fee Breakpoints | |||||||||
0.65% | First $250 million | 0.25% | First $1 billion | |||||||
0.60% | Over $250 million | 0.23% | Next$1 billion | |||||||
0.21% | Thereafter | |||||||||
c. | Investment Objectives, Strategies and Risks. | |||||||||
Existing Fund | Replacement Fund | |||||||||
Invesco VI Core Equity Fund | Voya Russell Large Cap Index Portfolio | |||||||||
Investment Objective – | Investment Objective – | |||||||||
The Fund’s investment objective is long-term | The Portfolio seeks investment results (before | |||||||||
growth of capital. | fees and expenses) that correspond to the total | |||||||||
return (which includes capital appreciation and | ||||||||||
income) of the Russell Top 200® Index | ||||||||||
(“Index”). | ||||||||||
Principal Investment Strategies – | Principal Investment Strategies – | |||||||||
34 |
The portfolio management team seeks to | Under normal market conditions, the Portfolio |
construct a portfolio of issuers that have high or | invests at least 80% of its net assets (plus |
improving return on invested capital (ROIC), | borrowings for investment purposes) in equity |
quality management, a strong competitive | securities of companies, which are at the time of |
position and which are trading at compelling | purchase, included in the Index; convertible |
valuations. The Fund invests, under normal | securities that are convertible into stocks |
circumstances, at least 80% of its net assets (plus | included in the Index; other derivatives whose |
any borrowings for investment purposes) in | economic returns are, by design, closely |
equity securities and in derivatives and other | equivalent to the returns of the Index or its |
instruments that have economic characteristics | components; and exchange-traded funds. The |
similar to such securities. The Fund invests | Portfolio will provide shareholders with at least |
primarily in equity securities. The principal type | 60 days’ prior notice of any change in this |
of equity securities in which the Fund invests is | investment policy. Under normal market |
common stock. The Fund may invest in the | conditions, the Portfolio invests all, or |
securities of issuers of all capitalization sizes; | substantially all of its assets in these securities. |
however, a substantial number of the issuers in | |
which the Fund invests are large-capitalization | The Portfolio may invest in other investment |
issuers. | companies to the extent permitted under the |
Investment Company Act of 1940, as amended, | |
The Fund may invest up to 25% of its net assets | and the rules, regulations, and exemptive orders |
in foreign securities, which includes foreign debt | thereunder (“1940 Act”). |
and foreign equity securities. | |
The Portfolio currently invests principally in | |
The Fund employs a risk management strategy | common stocks and employs a “passive |
to help minimize loss of capital and reduce | management” approach designed to track the |
excessive volatility. Pursuant to this strategy, the | performance of the Index. |
Fund generally invests a substantial amount of | |
its assets in cash and cash equivalents. As a | The Index is an unmanaged index that measures |
result, the Fund may not achieve its investment | the performance of the 200 largest companies in |
objective. | the Russell 1000® Index, which together |
represent approximately 69% of the total market | |
The Fund can invest in derivative instruments, | capitalization of the Russell 1000® Index. As of |
including futures contracts and forward foreign | December 31, 2013 the smallest company in the |
currency contracts. | Index had a market capitalization of $3 billion |
and the largest company had a market | |
The Fund can use futures contracts, including | capitalization of $500.7 billion. As of February |
index futures, to gain exposure to the broad | 28, 2014, portions of the Index were focused in |
market by equitizing cash and as a hedge against | the information technology sector and the |
downside risk. | financials sector. |
The Fund can use forward foreign currency | The Portfolio may not always hold all of the |
contracts to hedge against adverse movements in | same securities as the Index. The Portfolio may |
the foreign currencies in which portfolio | also invest in stock index futures and other |
securities are denominated. | derivatives as a substitute for the sale or |
purchase of securities in the Index and to provide | |
In selecting securities for the Fund, the portfolio | equity exposure to the Portfolio’s cash position. |
managers conduct fundamental research of | Although the Portfolio attempts to track, as |
issuers to gain a thorough understanding of their | closely as possible, the performance of the |
35 |
business prospects, appreciation potential and | Index, the Portfolio does not always perform |
ROIC. The process they use to identify potential | exactly like the Index. Unlike the Index, the |
investments for the Fund includes three phases: | Portfolio has operating expenses and transaction |
financial analysis, business analysis and | costs and therefore has a performance |
valuation analysis. Financial analysis evaluates | disadvantage versus the Index. |
an issuer’s capital allocation, and provides vital | |
insight into historical and potential ROIC which | The sub-adviser (“Sub-Adviser”) may sell a |
is a key indicator of business quality and caliber | security when the security’s percentage |
of management. Business analysis allows the | weighting in the Index is reduced, when the |
team to determine an issuer’s competitive | security is removed from the Index, or for other |
positioning by identifying key drivers of the | reasons. |
issuer, understanding industry challenges and | |
evaluating the sustainability of competitive | The Portfolio may lend portfolio securities on a |
advantages. Both the financial and business | short-term or long-term basis, up to 33 1 /3 % of |
analyses serve as a basis to construct valuation | its total assets |
models that help estimate an issuer’s value. The | |
portfolio managers use three primary valuation | |
techniques: discounted cash flow, traditional | |
valuation multiples and net asset value. At the | |
conclusion of their research process, the | |
portfolio managers will generally invest in an | |
issuer when they have determined it potentially | |
has high or improving ROIC, quality | |
management, a strong competitive position and | |
is trading at an attractive valuation. | |
The portfolio managers consider selling a | |
security when it exceeds the target price, has not | |
shown a demonstrable improvement in | |
fundamentals or a more compelling investment | |
opportunity exists. | |
Principal Risks – | Principal Risks – |
As with any registered open-end management | An investor could lose money on an investment |
investment company investment, loss of money | in the Portfolio. Any of the following risks, |
is a risk of investing. An investment in the Fund | among others, could affect Portfolio |
is not a deposit in a bank and is not insured or | performance or cause the Portfolio to lose |
guaranteed by the Federal Deposit Insurance | money or to underperform market averages of |
Corporation or any other governmental agency. | other funds. |
The risks associated with an investment in the | |
Fund can increase during times of significant | Company. The price of a given company’s |
market volatility. The principal risks of investing | stock could decline or underperform for many |
in the Fund are: | reasons including, among others, poor |
management, financial problems, or business | |
Cash/Cash Equivalents Risk. Holding cash or | challenges. If a company declares bankruptcy or |
cash equivalents may negatively affect | becomes insolvent, its stock could become |
performance. | worthless. |
36 |
Debt Securities Risk. The Fund may invest in | Convertible Securities. Convertible securities |
debt securities that are affected by changing | are securities that are convertible into or |
interest rates and changes in their effective | exercisable for common stocks at a stated price |
maturities and credit quality. | or rate. Convertible securities are subject to the |
usual risks associated with debt securities, such | |
Derivatives Risk. The value of a derivative | as interest rate and credit risk. In addition, |
instrument depends largely on (and is derived | because convertible securities react to changes in |
from) the value of an underlying security, | the value of the stocks into which they convert, |
currency, commodity, interest rate, index, or | they are subject to market risk. |
other asset (each referred to as an underlying | |
asset). In addition to risks relating to the | Credit. Prices of bonds and other debt |
underlying assets, the use of derivatives may | instruments can fall if the issuer’s actual or |
include other, possibly greater, risks, including | perceived financial health deteriorates, whether |
counterparty, leverage and liquidity risks. | because of broad economic or issuer-specific |
Counterparty risk is the risk that the counterparty | reasons. In certain cases, the issuer could be late |
to the derivative contract will default on its | in paying interest or principal, or could fail to |
obligation to pay the Fund the amount owed or | pay altogether. |
otherwise perform under the derivative contract. | |
Derivatives create leverage risk because they do | Derivative Instruments. Derivative |
not require payment up front equal to the | instruments are subject to a number of risks, |
economic exposure created by owning the | including the risk of changes in the market price |
derivative. As a result, an adverse change in the | of the underlying securities, credit risk with |
value of the underlying asset could result in the | respect to the counterparty, risk of loss due to |
Fund sustaining a loss that is substantially | changes in interest rates and liquidity risk. The |
greater than the amount invested in the | use of certain derivatives may also have a |
derivative, which may make the Fund’s returns | leveraging effect which may increase the |
more volatile and increase the risk of loss. | volatility of the Portfolio and reduce its returns. |
Derivative instruments may also be less liquid | Derivatives may not perform as expected, so the |
than more traditional investments and the Fund | Portfolio may not realize the intended benefits. |
may be unable to sell or close out its derivative | When used for hedging, the change in value of a |
positions at a desirable time or price. This risk | derivative may not correlate as expected with the |
may be more acute under adverse market | currency, security or other risk being hedged. In |
conditions, during which the Fund may be most | addition, given their complexity, derivatives |
in need of liquidating its derivative positions. | expose the Portfolio to the risk of improper |
Derivatives may also be harder to value, less tax | valuation. |
efficient and subject to changing government | |
regulation that could impact the Fund’s ability to | Focused Investing. To the extent that the |
use certain derivatives or their cost. Also, | Portfolio invests a substantial portion of its |
derivatives used for hedging or to gain or limit | assets in a particular industry, sector, market |
exposure to a particular market segment may not | segment, or geographical area, its investments |
provide the expected benefits, particularly during | will be sensitive to developments in that |
adverse market conditions. | industry, sector, market segment, or |
geographical area. The Portfolio assumes the | |
Foreign Securities Risk. The Fund’s foreign | risk that changing economic conditions; |
investments may be affected by changes in a | changing political or regulatory conditions; or |
foreign country’s exchange rates, political and | natural and other disasters affecting the |
social instability, changes in economic or | particular industry, sector, market segment, or |
37 |
taxation policies, difficulties when enforcing | geographical area in which the Portfolio focuses |
obligations, decreased liquidity, and increased | its investments could have a significant impact |
volatility. Foreign companies may be subject to | on its investment performance and could |
less regulation resulting in less publicly available | ultimately cause the Portfolio to underperform, |
information about the companies. | or be more volatile than, other funds that invest |
more broadly. | |
Management Risk. The investment techniques | |
and risk analysis used by the Fund’s portfolio | Index Strategy. The index selected may |
managers may not produce the desired results. | underperform the overall market and the |
Portfolio might fail to track its target index. The | |
Market Risk. The prices of and the income | correlation between the Portfolio and index |
generated by the Fund’s securities may decline | performance may be affected by the Portfolio’s |
in response to, among other things, investor | expenses and the timing of purchases and |
sentiment, general economic and market | redemptions of the Portfolio’s shares. The |
conditions, regional or global instability, and | Portfolio’s actual holdings might not match the |
currency and interest rate fluctuations. | Index and the Portfolio’s effective exposure to |
index securities at any given time may not equal | |
Small- and Mid-Capitalization Risks. Stocks | 100%. |
of small- and mid-sized companies tend to be | |
more vulnerable to adverse developments and | |
may have little or no operating history or track | Interest Rate. With bonds and other fixed rate |
record of success, and limited product lines, | debt instruments, a rise in interest rates generally |
markets, management and financial resources. | causes values to fall; conversely, values |
The securities of small- and mid-sized | generally rise as interest rates fall. The higher |
companies may be more volatile due to less | the credit quality of the instrument, and the |
market interest and less publicly available | longer its maturity or duration, the more |
information about the issuer. They also may be | sensitive it is likely to be to interest rate risk. In |
illiquid or restricted as to resale, or may trade | the case of inverse securities, the interest rate |
less frequently and in smaller volumes, all of | generally will decrease when the market rate of |
which may cause difficulty when establishing or | interest to which the inverse security is indexed |
closing a position at a desirable price. | decreases. As of the date of this Prospectus, |
interest rates in the United States are at or near | |
historic lows, which may increase the Portfolio’s | |
exposure to risks associated with rising interest | |
rates. Rising interest rates could have | |
unpredictable effects on the markets and may | |
expose fixed-income and related markets to | |
heightened volatility. For fixed-income | |
securities, an increase in interest rates may lead | |
to increased redemptions and increased portfolio | |
turnover, which could reduce liquidity for | |
certain Portfolio investments, adversely affect | |
values, and increase a Portfolio’s costs. If dealer | |
capacity in fixed-income markets is insufficient | |
for market conditions, it may further inhibit | |
liquidity and increase volatility in the fixed | |
income markets. | |
38 |
Liquidity. If a security is illiquid, the Portfolio | |
might be unable to sell the security at a time | |
when the Portfolio’s manager might wish to sell, | |
and the security could have the effect of | |
decreasing the overall level of the Portfolio’s | |
liquidity. Further, the lack of an established | |
secondary market may make it more difficult to | |
value illiquid securities, which could vary from | |
the amount the Portfolio could realize upon | |
disposition. The Portfolio may make investments | |
that become less liquid in response to market | |
developments or adverse investor perception. | |
The Portfolio could lose money if it cannot sell a | |
security at the time and price that would be most | |
beneficial to the Portfolio. | |
Market. Stock prices may be volatile and are | |
affected by the real or perceived impacts of such | |
factors as economic conditions and political | |
events. Stock markets tend to be cyclical, with | |
periods when stock prices generally rise and | |
periods when stock prices generally decline. Any | |
given stock market segment may remain out of | |
favor with investors for a short or long period of | |
time, and stocks as an asset class may | |
underperform bonds or other asset classes during | |
some periods. Additionally, legislative, | |
regulatory or tax policies or developments in | |
these areas may adversely impact the investment | |
techniques available to a manager, add to | |
Portfolio costs and impair the ability of the | |
Portfolio to achieve its investment objectives. | |
Other Investment Companies. The main risk | |
of investing in other investment companies, | |
including exchange-traded funds, is the risk that | |
the value of the securities underlying a registered | |
open-end management investment company | |
might decrease. Because the Portfolio may | |
invest in other investment companies, an | |
investor will pay a proportionate share of the | |
expenses of those other investment companies | |
(including management fees, administration fees, | |
and custodial fees) in addition to the expenses of | |
the Portfolio. | |
Securities Lending. Securities lending | |
39 |
involves two primary risks: “investment risk” |
and “borrower default risk.” Investment risk is |
the risk that the Portfolio will lose money from |
the investment of the cash collateral received |
from the borrower. Borrower default risk is the |
risk that the Portfolio will lose money due to the |
failure of a borrower to return a borrowed |
security in a timely manner. |
d. Comparison. The Applicants believe that the Existing Fund and the |
Replacement Fund have similar investment objectives and similar policies and risks. |
The Existing Fund’s investment objective is long-term growth of capital. The portfolio |
management team seeks to construct a portfolio of issuers that have high or improving return on |
invested capital (ROIC), quality management, a strong competitive position and which are |
trading at compelling valuations. The Fund invests, under normal circumstances, at least 80% of |
its net assets (plus any borrowings for investment purposes) in equity securities and in |
derivatives and other instruments that have economic characteristics similar to such securities. |
The Replacement Fund seeks investment results (before fees and expenses) that correspond to |
the total return (which includes capital appreciation and income) of the Russell Top 200® Index |
(“Index”). Under normal market conditions, the Replacement Fund invests at least 80% of its net |
assets (plus borrowings for investment purposes) in equity securities of companies, which are at |
the time of purchase, included in the Index. The Replacement Fund currently invests principally |
in common stocks and employs a “passive management” approach designed to track the |
performance of the Index. The Index is an unmanaged index that measures the performance of |
the 200 largest companies in the Russell 1000® Index, which together represent approximately |
69% of the total market capitalization of the Russell 1000® Index |
The Replacement Fund will offer investors exposure to similar types of stocks. Both Portfolios |
are classified in the Large Blend category by Morningstar. Both Portfolios have exhibited |
similar risk statistics. The three-year standard deviation for the Existing Fund is 11.97% and |
12.19% for the Replacement Fund. Based on Morningstar analysis of the underlying holdings, |
the Replacement Fund tends to invest in larger companies with higher market capitalizations. |
Even though the Existing Fund uses a more active strategy, the substitution is appropriate. The |
three-year correlation coefficient as of August 31, 2014, between the Existing Fund and |
Replacement Fund is 0.95, representing a very strong positive relationship in returns. This means |
that as the Existing Fund moved up or down by a given amount, the Replacement Fund moved in |
the same direction by a very similar amount. |
The Replacement Fund has outperformed the Existing Fund over common time periods. The |
Replacement Fund will also allow shareholders to benefit from a significantly lower net expense |
ratio. Although differences in risks and investment objectives and strategies exist, the |
Applicants believe that these differences do not introduce Contract Owners to materially greater |
risks than before the Substitution. |
40 |
e. | Expense Ratios and Total Return. The net expense ratios and total return | ||||||
figures for each fund in this proposed substitution as of August 31, 2014, are as follows: | |||||||
Net Expense | (Inception Date) | ||||||
Ratio | 1 Year | 3 Years | 5 Years | 10 Years | Since Inception | ||
Replacement Fund | (03/10/2008) | ||||||
· Voya Russell Large Cap | |||||||
Index Portfolio – Class S | 0.63% | 24.66% | 19.96% | 15.77% | N/A | 8.59% | |
Existing Fund | (05/02/1994) | ||||||
· Invesco VI Core Equity | |||||||
Fund – Class I | 0.90% | 21.81% | 17.28% | 14.14% | 8.58% | 8.73% | |
f. | Post Substitution Net Assets. The estimated net assets of the Voya Russell | ||||||
Large Cap Index Portfolio – Class S immediately following the proposed substitution will be | |||||||
approximately $592,345,009. This is based on estimated net assets of the Replacement Fund | |||||||
immediately before the substitution ($591,952,582) plus the corresponding Existing Fund’s | |||||||
actual net assets invested in the Accounts as of August 31, 2014 ($392,427). | |||||||
| |||||||
41 |
4. | Voya Russell Large Cap Growth Index Portfolio for the Invesco VI American | |||||||
Franchise Fund. | ||||||||
a. Fees and Expenses. The comparative fees and expenses for each fund in this | ||||||||
proposed substitution are, or will be prior to implementation of the Substitution, as follows: | ||||||||
Total Annual Expenses |
Net Annual Expenses | |||||||
Management Fees |
Distribution (12b-1) Fees |
Administrative Service Fee |
Other Expenses |
Expense Waivers | ||||
Replacement Fund | ||||||||
· Voya Russell Large | ||||||||
Cap Growth Index | ||||||||
Portfolio – Class S | 0.40% | 0.25% | 0.10% | 0.03% | 0.78% | 0.10% | 0.68%17 | |
Existing Fund | ||||||||
· Invesco VI American | ||||||||
Franchise Fund – | ||||||||
Class I | 0.67% | None | None | 0.29% | 0.96% | None | 0.96%17 |
b. | Breakpoint Information. The comparative management fee breakpoint | ||
information for each fund in this proposed substitution is as follows: | |||
Existing Fund | Replacement Fund | ||
Invesco VI American Franchise Fund | Voya Russell Large Cap Growth Index | ||
Total Net Expenses: 0.96% - Class I | Portfolio | ||
Total Net Expenses: 0.68% - Class S | |||
Management Fee: 0.67% | |||
Management Fee: 0.40% | |||
Management Fee Breakpoints | Management Fee Breakpoints | ||
0.695% | First $250 million | 0.40% | First $500 million |
0.67% | Next $250 million | 0.38% | Next $500 million |
0.645% | Next $500 million | 0.36% | Thereafter |
0.62% | Next $550 million | ||
0.60% | Next $3.45 billion | ||
0.595% | Next $250 million | ||
0.57% | Next $2.25 billion | ||
0.545% | Next $2.5 billion | ||
0.52% | Over $10 billion | ||
17 The fees and expenses of the Replacement Fund are those expected to be in effect on January 1, 2015. | |||
Management of the Replacement Fund, the ING Russell Large Cap Growth Index Portfolio, has proposed a | |||
reduction in the fund’s management fee and a corresponding change to the fund’s management fee breakpoint | |||
schedule. This proposal is scheduled to be presented to the fund’s Board of Directors for approval on or about | |||
November 19, 2014. If approved, which is fully expected, the management fee and the breakpoint schedule shown | |||
above will become effective January 1, 2015. The Fees and Expenses of the Replacement Fund are those that will | |||
be in place before this Substitution will be implemented. The fees and expenses of the Existing Fund are as of | |||
August 31, 2014. | |||
42 |
c. Investment Objectives, Strategies and Risks. | |
Existing Fund | Replacement Fund |
Invesco VI American Franchise Fund | Voya Russell Large Cap Growth Index |
Portfolio | |
Investment Objective – | |
The Fund’s investment objective is to seek | Investment Objective – |
capital growth. | The Portfolio seeks investment results (before |
fees and expenses) that correspond to the total | |
return (which includes capital appreciation and | |
income) of the Russell Top 200® Growth Index | |
(“Index”). | |
Principal Investment Strategies – | Principal Investment Strategies – |
The Fund invests, under normal circumstances, | Under normal market conditions, the Portfolio |
at least 80% of its net assets (plus any | invests at least 80% of its net assets (plus |
borrowings for investment purposes) in | borrowings for investment purposes) in equity |
securities of U.S. issuers. The Fund deems an | securities of companies, which are at the time of |
issuer to be a U.S. issuer if (i) its principal | purchase, included in the Index; convertible |
securities trading market (i.e., a U.S. stock | securities that are convertible into stocks |
exchange, NASDAQ or over-the-counter | included in the Index; other derivatives whose |
markets) is in the U.S.; (ii) alone or on a | economic returns are, by design, closely |
consolidated basis it derives 50% or more of its | equivalent to the returns of the Index or its |
annual revenue from either goods produced, | components; and exchange-traded funds. The |
sales made or services performed in the U.S.; or | Portfolio will provide shareholders with at least |
(iii) it is organized under the laws of, or has a | 60 days’ prior notice of any change in this |
principal office in the U.S. The Fund invests | investment policy. Under normal market |
primarily in equity securities of mid- and large- | conditions, the Portfolio invests all, or |
capitalization issuers. The principal type of | substantially all of its assets in these securities. |
equity security in which the Fund invests is | |
common stock. | The Portfolio may invest in other investment |
companies to the extent permitted under the | |
The Fund invests primarily in securities that are | Investment Company Act of 1940, as amended, |
considered by the Fund’s portfolio managers to | and the rules, regulations, and exemptive orders |
have potential for earnings or revenue growth. | thereunder (“1940 Act”). |
The Fund may invest up to 20% of its net assets | The Portfolio currently invests principally in |
in securities of foreign issuers. | common stocks and employs a “passive |
management” approach designed to track the | |
The Fund’s investment adviser, Invesco | performance of the Index. |
Advisers, Inc. (Invesco or the Adviser) uses a | |
bottom-up stock selection process designed to | The Index is an unmanaged index that measures |
seek alpha (return on investments in excess of | the performance of the especially large cap |
the Russell 1000® Growth Index), and as well as | segment of the U.S. equity universe represented |
a disciplined portfolio construction process | by stocks in the largest 200 by market cap that |
designed to manage risk. The Adviser uses a | exhibit growth characteristics. The Index |
holistic approach that closely examines company | includes Russell Top 200® Index companies |
fundamentals, including detailed modeling of a | with higher price-to-book ratios and higher |
43 |
company’s financial statements and discussions | forecasted growth values. As of December 31, |
with company management teams, suppliers, | 2013, the smallest company in the Index had a |
distributors, competitors and customers. The | market capitalization of $10.4 billion and the |
Adviser uses a variety of valuation techniques | largest company had a market capitalization of |
based on the company in question, the industry | $500.7 billion. As of February 28, 2014, a |
in which the company operates, the stage of the | portion of the Index was concentrated in the |
company’s business cycle, and other factors that | information technology sector and a portion of |
best reflect a company’s value. The Adviser | the Index was focused in the consumer |
seeks to invest in companies with attractive | discretionary sector. |
growth outlooks at compelling valuation levels, | |
including both stable and catalyst-driven growth | The Portfolio may not always hold all of the |
opportunities. | same securities as the Index. The Portfolio may |
also invest in stock index futures and other | |
The Adviser considers whether to sell a | derivatives as a substitute for the sale or |
particular security when a company hits the price | purchase of securities in the Index and to provide |
target, a company’s fundamentals deteriorate or | equity exposure to the Portfolio’s cash position. |
the catalysts for growth are no longer present or | Although the Portfolio attempts to track, as |
reflected in the stock price. | closely as possible, the performance of the |
Index, the Portfolio does not always perform | |
exactly like the Index. Unlike the Index, the | |
Portfolio has operating expenses and transaction | |
costs and therefore has a performance | |
disadvantage versus the Index. | |
The sub-adviser (“Sub-Adviser”) may sell a | |
security when the security’s percentage | |
weighting in the Index is reduced, when the | |
security is removed from the Index, or for other | |
reasons. | |
The Portfolio may lend portfolio securities on a | |
short-term or long-term basis, up to 33 1 /3 % of | |
its total assets. | |
Principal Risks – | Principal Risks – |
As with any registered open-end management | An investor could lose money on an investment |
investment company investment, loss of money | in the Portfolio. Any of the following risks, |
is a risk of investing. An investment in the Fund | among others, could affect Portfolio |
is not a deposit in a bank and is not insured or | performance or cause the Portfolio to lose |
guaranteed by the Federal Deposit Insurance | money or to underperform market averages of |
Corporation or any other government agency. | other funds. |
The risks associated with an investment in the | |
Fund can increase during times of significant | Company. The price of a given company’s |
market volatility. The principal risks of investing | stock could decline or underperform for many |
in the Fund are: | reasons including, among others, poor |
management, financial problems, or business | |
Equity Risk. Equity risk is the risk that the | challenges. If a company declares bankruptcy or |
44 |
value of securities held by the Fund will fall due | becomes insolvent, its stock could become |
to general market and economic conditions, | worthless. |
perceptions regarding the industries in which the | |
issuers of securities held by the Fund participate | Concentration. To the extent that the |
or factors relating to specific companies in | Portfolio’s index “concentrates,” as that term is |
which the Fund invests. For example, an adverse | defined in the 1940 Act, in the securities of a |
event, such as an unfavorable earnings report, | particular industry or group of industries or a |
may depress the value of securities held by the | single country or region, the Portfolio will |
Fund; the price of securities may be particularly | concentrate its investments to approximately the |
sensitive to general movements in the stock | same extent as the Index. As a result, the |
market; or a drop in the stock market may | Portfolio may be subject to greater market |
depress the price of most of all of the securities | fluctuation than a fund which has securities |
held by the Fund. In addition, securities of an | representing a broader range of investment |
issuer in the Fund’s portfolio may decline in | alternatives. If securities in which the Portfolio |
price if the issuer fails to make anticipated | concentrates fall out of favor, the Portfolio could |
dividend payments because, among other | underperform funds that have greater |
reasons, the issuer of the security experiences a | diversification. |
decline in its financial condition. | |
Convertible Securities. Convertible securities | |
Foreign Securities Risk. The Fund’s foreign | are securities that are convertible into or |
investments may be affected by changes in a | exercisable for common stocks at a stated price |
foreign country’s exchange rates, political and | or rate. Convertible securities are subject to the |
social instability, changes in economic or | usual risks associated with debt securities, such |
taxation policies, difficulties when enforcing | as interest rate and credit risk. In addition, |
obligations, decreased liquidity, and increased | because convertible securities react to changes in |
volatility. Foreign companies may be subject to | the value of the stocks into which they convert, |
less regulation resulting in less publicly available | they are subject to market risk. |
information about the companies. | |
Credit. Prices of bonds and other debt | |
Growth Investing Risk. Growth stocks tend to | instruments can fall if the issuer’s actual or |
be more expensive relative to their earnings or | perceived financial health deteriorates, whether |
assets compared with other types of stock. As a | because of broad economic or issuer-specific |
result they tend to be more sensitive to changes | reasons. In certain cases, the issuer could be late |
in their earnings and can be more volatile. | in paying interest or principal, or could fail to |
pay altogether. | |
Management Risk. The investment techniques | |
and risk analysis used by the Fund’s portfolio | Derivative Instruments. Derivative |
managers may not produce the desired results. | instruments are subject to a number of risks, |
including the risk of changes in the market price | |
Market Risk. The prices of and the income | of the underlying securities, credit risk with |
generated by the Fund’s securities may decline | respect to the counterparty, risk of loss due to |
in response to, among other things, investor | changes in interest rates and liquidity risk. The |
sentiment, general economic and market | use of certain derivatives may also have a |
conditions, regional or global instability, and | leveraging effect which may increase the |
currency and interest rate fluctuations. | volatility of the Portfolio and reduce its returns. |
Derivatives may not perform as expected, so the | |
Mid-Capitalization Risk. Stocks of mid-sized | Portfolio may not realize the intended benefits. |
companies tend to be more vulnerable to adverse | When used for hedging, the change in value of a |
45 |
developments and may have little or no | derivative may not correlate as expected with the |
operating history or track record of success, and | currency, security or other risk being hedged. In |
limited product lines, markets, management and | addition, given their complexity, derivatives |
financial resources. The securities of mid-sized | expose the Portfolio to the risk of improper |
companies may be more volatile due to less | valuation. |
market interest and less publicly available | |
information about the issuer. They also may be | Focused Investing. To the extent that the |
illiquid or restricted as to resale, or may trade | Portfolio invests a substantial portion of its |
less frequently and in smaller volumes, all of | assets in a particular industry, sector, market |
which may cause difficulty when establishing or | segment, or geographical area, its investments |
closing a position at a desirable price. | will be sensitive to developments in that |
industry, sector, market segment, or | |
geographical area. The Portfolio assumes the | |
risk that changing economic conditions; | |
changing political or regulatory conditions; or | |
natural and other disasters affecting the | |
particular industry, sector, market segment, or | |
geographical area in which the Portfolio focuses | |
its investments could have a significant impact | |
on its investment performance and could | |
ultimately cause the Portfolio to underperform, | |
or be more volatile than, other funds that invest | |
more broadly. | |
Growth Investing. Prices of growth stocks | |
typically reflect high expectations for future | |
company growth, and may fall quickly and | |
significantly if investors suspect that actual | |
growth may be less than expected. Growth | |
companies typically lack any dividends that | |
might cushion price declines. Growth stocks | |
tend to be more volatile than value stocks, and | |
may underperform the market as a whole over | |
any given time period. | |
Index Strategy. The index selected may | |
underperform the overall market and the | |
Portfolio might fail to track its target index. The | |
correlation between the Portfolio and index | |
performance may be affected by the Portfolio’s | |
expenses and the timing of purchases and | |
redemptions of the Portfolio’s shares. The | |
Portfolio’s actual holdings might not match the | |
Index and the Portfolio’s effective exposure to | |
index securities at any given time may not equal | |
100%. | |
Interest Rate. With bonds and other fixed rate | |
46 |
debt instruments, a rise in interest rates generally | |
causes values to fall; conversely, values | |
generally rise as interest rates fall. The higher | |
the credit quality of the instrument, and the | |
longer its maturity or duration, the more | |
sensitive it is likely to be to interest rate risk. In | |
the case of inverse securities, the interest rate | |
generally will decrease when the market rate of | |
interest to which the inverse security is indexed | |
increases. As of the date of this Prospectus, | |
interest rates in the United States are at or near | |
historic lows, which may increase the Portfolio’s | |
exposure to risks associated with rising interest | |
rates. Rising interest rates could have | |
unpredictable effects on the markets and may | |
expose fixed-income and related markets to | |
heightened volatility. For fixed-income | |
securities, an increase in interest rates may lead | |
to increased redemptions and increased portfolio | |
turnover, which could reduce liquidity for | |
certain Portfolio investments, adversely affect | |
values, and increase a Portfolio’s costs. If dealer | |
capacity in fixed-income markets is insufficient | |
for market conditions, it may further inhibit | |
liquidity and increase volatility in the fixed | |
income markets. | |
Liquidity. If a security is illiquid, the Portfolio | |
might be unable to sell the security at a time | |
when the Portfolio’s manager might wish to sell, | |
and the security could have the effect of | |
decreasing the overall level of the Portfolio’s | |
liquidity. Further, the lack of an established | |
secondary market may make it more difficult to | |
value illiquid securities, which could vary from | |
the amount the Portfolio could realize upon | |
disposition. The Portfolio may make investments | |
that become less liquid in response to market | |
developments or adverse investor perception. | |
The Portfolio could lose money if it cannot sell a | |
security at the time and price that would be most | |
beneficial to the Portfolio. | |
Market. Stock prices may be volatile and are | |
affected by the real or perceived impacts of such | |
factors as economic conditions and political | |
events. Stock markets tend to be cyclical, with | |
periods when stock prices generally rise and | |
periods when stock prices generally decline. Any | |
47 |
given stock market segment may remain out of |
favor with investors for a short or long period of |
time, and stocks as an asset class may |
underperform bonds or other asset classes during |
some periods. Additionally, legislative, |
regulatory or tax policies or developments in |
these areas may adversely impact the investment |
techniques available to a manager, add to |
Portfolio costs and impair the ability of the |
Portfolio to achieve its investment objectives. |
Other Investment Companies. The main risk |
of investing in other investment companies, |
including exchange-traded funds, is the risk that |
the value of the securities underlying a registered |
open-end management investment company |
might decrease. Because the Portfolio may |
invest in other investment companies, an |
investor will pay a proportionate share of the |
expenses of those other investment companies |
(including management fees, administration fees, |
and custodial fees) in addition to the expenses of |
the Portfolio. |
Securities Lending. Securities lending |
involves two primary risks: “investment risk” |
and “borrower default risk.” Investment risk is |
the risk that the Portfolio will lose money from |
the investment of the cash collateral received |
from the borrower. Borrower default risk is the |
risk that the Portfolio will lose money due to the |
failure of a borrower to return a borrowed |
security in a timely manner. |
d. Comparison. The Applicants believe that the Existing Fund and the Replacement |
Fund have similar investment objectives and similar policies and risks. |
The Existing Fund’s investment objective is to seek capital growth. The Existing Fund invests |
primarily in securities that are considered by the portfolio managers to have potential for |
earnings or revenue growth. The Existing Fund invests, under normal circumstances, at least |
80% of its net assets (plus any borrowings for investment purposes) in securities of U.S. issuers. |
The Replacement Fund seeks investment results (before fees and expenses) that correspond to |
the total return (which includes capital appreciation and income) of the Russell Top 200® Growth |
Index (“Index”). Under normal market conditions, the Replacement Fund invests at least 80% of |
its net assets (plus borrowings for investment purposes) in equity securities of companies, which |
are at the time of purchase, included in the Index. The Portfolio currently invests principally in |
common stocks and employs a “passive management” approach designed to track the |
performance of the Index. The Index is an unmanaged index that measures the performance of |
48 |
the especially large cap segment of the U.S. equity universe represented by stocks in the largest | ||||||
200 by market cap that exhibit growth characteristics. The Replacement Fund will offer | ||||||
investors exposure to similar types of stocks. Both Portfolios are classified in the Large Growth | ||||||
category by Morningstar. | ||||||
Even though the Existing Fund uses a more active strategy, the substitution is appropriate. The | ||||||
three-year correlation coefficient as of August 31, 2014, between the Existing Fund and | ||||||
Replacement Fund is 0.95, representing a very strong positive relationship in returns. This means | ||||||
that as the Existing Fund moved up or down by a given amount, the Replacement Fund moved in | ||||||
the same direction by a very similar amount. | ||||||
The Replacement Fund has outperformed the Existing Fund over the three-year time period, | ||||||
although it has underperformed over the one and five-year periods. The Replacement Fund will | ||||||
also allow shareholders to benefit from a significantly lower net expense ratio. Although | ||||||
differences in risks and investment objectives and strategies exist, the Applicants believe that | ||||||
these differences do not introduce Contract Owners to materially greater risks than before the | ||||||
Substitution. | ||||||
e. Expense Ratios and Total Return. The net expense ratios and total return | ||||||
figures for each fund in this proposed substitution as of August 31, 2014, are as follows: | ||||||
Net Expense Ratio |
1 Year | 3 Years | 5 Years | 10 Years | (Inception Date) Since Inception | |
Replacement Fund | ||||||
· Voya Russell Large Cap | (05/01/2009) | |||||
Growth Index Portfolio – | ||||||
Class S | 0.74% | 26.58% | 19.26% | 16.59% | N/A | 18.41%18 |
Existing Fund | (07/03/1995) | |||||
· Invesco VI American | ||||||
Franchise Fund – Class I | 0.96% | 27.40% | 17.95% | 17.40% | 9.07% | 9.33% |
f. Post Substitution Net Assets. The estimated net assets of the Voya Russell | ||||||
Large Cap Growth Index Portfolio – Class S immediately following the proposed substitution | ||||||
will be approximately $244,849,334. This is based on estimated net assets of the Replacement | ||||||
Fund immediately before the substitution ($227,476,865) plus the corresponding Existing Fund’s | ||||||
actual net assets invested in the Accounts as of August 31, 2014 ($17,372,469). | ||||||
___________________________ | ||||||
18 The expense ratio and performance information shown does not take into account the proposed reduction in the | ||||||
Replacement Fund’s management fee and breakpoint schedule. | ||||||
49 |
5. | Voya Russell Large Cap Value Index Portfolio for the Pioneer Equity Income | |||||||
VCT Portfolio. | ||||||||
a. Fees and Expenses. The comparative fees and expenses for each fund in this | ||||||||
proposed substitution as of August 31, 2014, are as follows: | ||||||||
Management Fees |
Distribution (12b-1) Fees |
Administrative Service Fee |
Other Expenses |
Total Annual Expenses |
Expense Waivers |
Net Annual Expenses | ||
Replacement Fund | ||||||||
· Voya Russell Large | ||||||||
Cap Value Index | ||||||||
Portfolio – Class S | 0.45% | 0.25% | 0.10% | 0.04% | 0.85%* | 0.10% | 0.75% | |
Existing Fund | ||||||||
· Pioneer Equity | ||||||||
Income VCT Portfolio | ||||||||
– Class II | 0.65% | 0.25% | None | 0.07% | 0.99%** | None | 0.99% | |
*Includes 0.01% of acquired fund fees and expenses, | ||||||||
** Includes 0.02% of acquired fund fees and expenses. |
b. | Breakpoint Information. The comparative management fee breakpoint | ||
information for each fund in this proposed substitution is as follows: | |||
Existing Fund | Replacement Fund | ||
Pioneer Equity Income VCT Portfolio | Voya Russell Large Cap Value Index | ||
Total Net Expenses: 0.99% - Class II | Portfolio | ||
Total Net Expenses: 0.75% - Class S | |||
Management Fee: 0.65% | |||
Management Fee: 0.45% | |||
Management Fee Breakpoints | Management Fee Breakpoints | ||
0.65% | First $1 billion | 0.45% | First $250 million |
0.60% | Over $1 billion | 0.35% | Next $250 million |
0.30% | Thereafter | ||
c. Investment Objectives, Strategies and Risks. | |||
Existing Fund | Replacement Fund | ||
Pioneer Equity Income VCT Portfolio | Voya Russell Large Cap Value Index | ||
Portfolio | |||
Investment Objective – | |||
Current income and long-term growth of capital | Investment Objective – | ||
from a portfolio consisting primarily of income | The Portfolio seeks investment results (before | ||
producing equity securities of U.S. corporations. | fees and expenses) that correspond to the total | ||
return (which includes capital appreciation and | |||
income) of the Russell Top 200® Value Index | |||
(“Index”). | |||
50 |
Principal Investment Strategies – | Principal Investment Strategies – |
Normally, the portfolio invests at least 80% of | Under normal market conditions, the Portfolio |
its total assets in income producing equity | invests at least 80% of its net assets (plus |
securities of U.S. issuers. The income producing | borrowings for investment purposes) in equity |
equity securities in which the portfolio may | securities of companies, which are at the time of |
invest include common stocks, preferred stocks, | purchase, included in the Index; convertible |
exchange-traded funds (ETFs) that invest | securities that are convertible into stocks |
primarily in equity securities and equity interests | included in the Index; other derivatives whose |
in real estate investment trusts (REITs). The | economic returns are, by design, closely |
remainder of the portfolio may be invested in | equivalent to the returns of the Index or its |
debt securities, most of which are expected to be | components; and exchange-traded funds. The |
convertible into common stocks. The portfolio | Portfolio will provide shareholders with at least |
may invest in initial public offerings of equity | 60 days’ prior notice of any change in this |
securities. | investment policy. Under normal market |
conditions, the Portfolio invests all, or | |
The portfolio may invest up to 20% of its total | substantially all of its assets in these securities. |
assets in equity and debt securities of non-U.S. | |
issuers, including depositary receipts. The | The Portfolio may invest in other investment |
portfolio will not invest more than 5% of its total | companies to the extent permitted under the |
assets in the securities of emerging markets | Investment Company Act of 1940, as amended, |
issuers. | and the rules, regulations, and exemptive orders |
thereunder (“1940 Act”). | |
The portfolio may invest up to 20% of its net | |
assets in REITs. | The Portfolio currently invests principally in |
common stocks and employs a “passive | |
The portfolio also may invest in investment | management” approach designed to track the |
grade and below investment grade debt securities | performance of the Index. |
(known as “junk bonds”). | |
The Index is an unmanaged index that measures | |
The portfolio may, but is not required to, use | the performance of the especially large cap |
derivatives, such as stock index futures and | segment of the U.S. equities universe |
options. The portfolio may use derivatives for a | represented by stocks in the largest 200 by |
variety of purposes, including; in an attempt to | market cap that exhibit value characteristics. The |
hedge against adverse changes in the market | Index includes those Russell Top 200® Index |
price of securities, interest rates or currency | companies that exhibit value characteristics, |
exchange rates; as a substitute for purchasing or | including lower price-to-book ratios and lower |
selling securities; to attempt to increase the | forecasted growth values. As of December 31, |
portfolio's return as a non-hedging strategy that | 2013, the smallest company in the Index had a |
may be considered speculative; and to manage | market capitalization of $3 billion and the largest |
portfolio characteristics. The portfolio may | company had a market capitalization of $500.7 |
choose not to make use of derivatives for a | billion. As of February 28, 2014, a portion of the |
variety of reasons, and any use may be limited | Index was concentrated in the financials sector |
by applicable law and regulations. The portfolio | and portions of the Index were focused in the |
may also hold cash or other short-term | energy sector (including the oil, gas, and |
investments. | consumable fuels industry) and the health care |
sector. | |
The portfolio's investment adviser uses a value | |
51 |
approach to select the portfolio's investments to | The Portfolio may not always hold all of the |
buy and sell. The adviser seeks securities that are | same securities as the Index. The Portfolio may |
selling at substantial discounts to their | also invest in stock index futures and other |
underlying values and then holds these securities | derivatives as a substitute for the sale or |
until the market values reflect their intrinsic | purchase of securities in the Index and to provide |
values. The adviser evaluates a security’s | equity exposure to the Portfolio’s cash position. |
potential value, including the attractiveness of its | Although the Portfolio attempts to track, as |
market valuation, based on the company’s assets | closely as possible, the performance of the |
and prospects for earnings growth. The adviser | Index, the Portfolio does not always perform |
also considers a security’s potential to provide a | exactly like the Index. Unlike the Index, the |
reasonable amount of income. In making these | Portfolio has operating expenses and transaction |
assessments, the adviser employs fundamental | costs and therefore has a performance |
research and an evaluation of the issuer based on | disadvantage versus the Index. |
its financial statements and operations, | |
employing a bottom-up analytic style, which | The sub-adviser (“Sub-Adviser”) may sell a |
focuses on specific securities rather than on | security when the security’s percentage |
industries. The adviser generally sells a portfolio | weighting in the Index is reduced, when the |
security when it believes that the security’s | security is removed from the Index, or for other |
market value reflects its underlying value. | reasons. |
The Portfolio may lend portfolio securities on a | |
short-term or long-term basis, up to 33 1 /3 % of | |
its total assets. | |
Principal Risks – | Principal Risks – |
Investors could lose money on their investment | An investor could lose money on an investment |
in the portfolio. As with any registered open-end | in the Portfolio. Any of the following risks, |
management investment company, there is no | among others, could affect Portfolio |
guarantee that the portfolio will achieve its | performance or cause the Portfolio to lose |
objectives. | money or to underperform market averages of |
other funds. | |
Market risk. The values of securities held by | |
the portfolio may go up or down, sometimes | Company. The price of a given company’s |
rapidly or unpredictably, due to general market | stock could decline or underperform for many |
conditions, such as real or perceived adverse | reasons including, among others, poor |
economic, political, or regulatory conditions, | management, financial problems, or business |
inflation, changes in interest or currency rates, | challenges. If a company declares bankruptcy or |
lack of liquidity in the bond markets or adverse | becomes insolvent, its stock could become |
investor sentiment. Adverse market conditions | worthless. |
may be prolonged and may not have the same | |
impact on all types of securities. The values of | Concentration. To the extent that the |
securities may fall due to factors affecting a | Portfolio’s index “concentrates,” as that term is |
particular issuer, industry or the securities | defined in the 1940 Act, in the securities of a |
market as a whole. The stock market may | particular industry or group of industries or a |
perform poorly relative to other investments (this | single country or region, the Portfolio will |
risk may be greater in the short term). High | concentrate its investments to approximately the |
public debt in the U.S. and other countries | same extent as the Index. As a result, the |
52 |
creates ongoing and systemic market risks and | Portfolio may be subject to greater market |
policymaking uncertainty. The financial crisis | fluctuation than a fund which has securities |
that began in 2008 has caused a significant | representing a broader range of investment |
decline in the value and liquidity of many | alternatives. If securities in which the Portfolio |
securities worldwide. Governmental and non- | concentrates fall out of favor, the Portfolio could |
governmental issuers have defaulted on, or been | underperform funds that have greater |
forced to restructure, their debts, and many other | diversification. |
issuers have faced difficulties obtaining credit. | |
These market conditions may continue, worsen | Convertible Securities. Convertible securities |
or spread, including in the U.S., Europe and | are securities that are convertible into or |
beyond. Further defaults or restructurings by | exercisable for common stocks at a stated price |
governments and others of their debt could have | or rate. Convertible securities are subject to the |
additional adverse effects on economies, | usual risks associated with debt securities, such |
financial markets and asset valuations around the | as interest rate and credit risk. In addition, |
world. In response to the crisis, the U.S. and | because convertible securities react to changes in |
other governments and the Federal Reserve and | the value of the stocks into which they convert, |
certain foreign central banks have taken steps to | they are subject to market risk. |
support financial markets, including by keeping | |
interest rates at historically low levels. More | Credit. Prices of bonds and other debt |
recently, the Federal Reserve has reduced its | instruments can fall if the issuer’s actual or |
market support activities. Further reduction or | perceived financial health deteriorates, whether |
withdrawal of this support, failure of efforts in | because of broad economic or issuer-specific |
response to the crisis, or investor perception that | reasons. In certain cases, the issuer could be late |
these efforts are not succeeding could negatively | in paying interest or principal, or could fail to |
affect financial markets generally as well as | pay altogether. |
increase market volatility and reduce the value | |
and liquidity of certain securities. Whether or not | Derivative Instruments. Derivative |
the portfolio invests in securities of issuers | instruments are subject to a number of risks, |
located in or with significant exposure to | including the risk of changes in the market price |
countries experiencing economic and financial | of the underlying securities, credit risk with |
difficulties, the value and liquidity of the | respect to the counterparty, risk of loss due to |
portfolio’s investments may be negatively | changes in interest rates and liquidity risk. The |
affected. In addition, policy and legislative | use of certain derivatives may also have a |
changes in the U.S. and in other countries are | leveraging effect which may increase the |
affecting many aspects of financial regulation. | volatility of the Portfolio and reduce its returns. |
The impact of these changes on the markets, and | Derivatives may not perform as expected, so the |
the practical implications for market participants, | Portfolio may not realize the intended benefits. |
may not be fully known for some time. The | When used for hedging, the change in value of a |
portfolio may experience a substantial or | derivative may not correlate as expected with the |
complete loss on any individual security or | currency, security or other risk being hedged. In |
derivative position. | addition, given their complexity, derivatives |
expose the Portfolio to the risk of improper | |
Value style risk. The prices of securities the | valuation. |
adviser believes are undervalued may not | |
appreciate as expected or may go down. Value | Focused Investing. To the extent that the |
stocks may fall out of favor with investors and | Portfolio invests a substantial portion of its |
underperform the overall equity market. | assets in a particular industry, sector, market |
segment, or geographical area, its investments | |
53 |
Portfolio selection risk. The adviser's judgment | will be sensitive to developments in that |
about a particular security or issuer, or about the | industry, sector, market segment, or |
economy or a particular sector, region or market | geographical area. The Portfolio assumes the |
segment, or about an investment strategy, may | risk that changing economic conditions; |
prove to be incorrect. | changing political or regulatory conditions; or |
natural and other disasters affecting the | |
Risks of non-U.S. investments. Investing in | particular industry, sector, market segment, or |
non-U.S. issuers, or in U.S. issuers that have | geographical area in which the Portfolio focuses |
significant exposure to foreign markets, may | its investments could have a significant impact |
involve unique risks compared to investing in | on its investment performance and could |
securities of U.S. issuers. These risks are more | ultimately cause the Portfolio to underperform, |
pronounced for issuers in emerging markets or to | or be more volatile than, other funds that invest |
the extent that the portfolio invests significantly | more broadly. |
in one region or country. These risks may | |
include different financial reporting practices | Index Strategy. The index selected may |
and regulatory standards, less liquid trading | underperform the overall market and the |
markets, extreme price volatility, currency risks, | Portfolio might fail to track its target index. The |
changes in economic, political, regulatory and | correlation between the Portfolio and index |
social conditions, sustained economic | performance may be affected by the Portfolio’s |
downturns, financial instability, tax burdens, and | expenses and the timing of purchases and |
investment and repatriation restrictions. Lack of | redemptions of the Portfolio’s shares. The |
information and less market regulation also may | Portfolio’s actual holdings might not match the |
affect the value of these securities. Withholding | Index and the Portfolio’s effective exposure to |
and other non-U.S. taxes may decrease the | index securities at any given time may not equal |
portfolio’s return. Non-U.S. issuers may be | 100%. |
located in parts of the world that have | |
historically been prone to natural disasters. | Interest Rate. With bonds and other fixed rate |
Investing in depositary receipts is subject to | debt instruments, a rise in interest rates generally |
many of the same risks as investing directly in | causes values to fall; conversely, values |
non-U.S. issuers. Depositary receipts may | generally rise as interest rates fall. The higher |
involve higher expenses and may trade at a | the credit quality of the instrument, and the |
discount (or premium) to the underlying | longer its maturity or duration, the more |
security. | sensitive it is likely to be to interest rate risk. In |
the case of inverse securities, the interest rate | |
Risks of investments in REITs. Investments in | generally will decrease when the market rate of |
real estate securities are affected by economic | interest to which the inverse security is indexed |
conditions, interest rates, governmental actions | increases. As of the date of this Prospectus, |
and other factors. In addition, investing in REITs | interest rates in the United States are at or near |
involves unique risks. They are significantly | historic lows, which may increase the Portfolio’s |
affected by the market for real estate and are | exposure to risks associated with rising interest |
dependent upon management skills and cash | rates. Rising interest rates could have |
flow. REITs may have lower trading volumes | unpredictable effects on the markets and may |
and may be subject to more abrupt or erratic | expose fixed-income and related markets to |
price movements than the overall securities | heightened volatility. For fixed-income |
markets. Mortgage REITs are particularly | securities, an increase in interest rates may lead |
subject to interest rate and credit risks. In | to increased redemptions and increased portfolio |
addition to its own expenses, the portfolio will | turnover, which could reduce liquidity for |
indirectly bear its proportionate share of any | certain Portfolio investments, adversely affect |
54 |
management and other expenses paid by REITs | values, and increase a Portfolio’s costs. If dealer |
in which it invests. Many real estate companies, | capacity in fixed-income markets is insufficient |
including REITs, utilize leverage. | for market conditions, it may further inhibit |
liquidity and increase volatility in the fixed | |
Risks of convertible securities. The market | income markets. |
values of convertible securities tend to decline as | |
interest rates increase and, conversely, to | Liquidity. If a security is illiquid, the Portfolio |
increase as interest rates decline. A downturn in | might be unable to sell the security at a time |
equity markets may cause the price of | when the Portfolio’s manager might wish to sell, |
convertible securities to decrease relative to | and the security could have the effect of |
other fixed income securities. | decreasing the overall level of the Portfolio’s |
liquidity. Further, the lack of an established | |
Preferred stocks risk. Preferred stocks may pay | secondary market may make it more difficult to |
fixed or adjustable rates of return. Preferred | value illiquid securities, which could vary from |
stocks are subject to issuer-specific and market | the amount the Portfolio could realize upon |
risks applicable generally to equity securities. In | disposition. The Portfolio may make investments |
addition, a company’s preferred stocks generally | that become less liquid in response to market |
pay dividends only after the company makes | developments or adverse investor perception. |
required payments to holders of its bonds and | The Portfolio could lose money if it cannot sell a |
other debt. Thus, the value of preferred stocks | security at the time and price that would be most |
will usually react more strongly than bonds and | beneficial to the Portfolio. |
other debt to actual or perceived changes in the | |
company’s financial condition or prospects. The | Market. Stock prices may be volatile and are |
market value of preferred stocks generally | affected by the real or perceived impacts of such |
decreases when interest rates rise. Preferred | factors as economic conditions and political |
stocks of smaller companies may be more | events. Stock markets tend to be cyclical, with |
vulnerable to adverse developments than | periods when stock prices generally rise and |
preferred stocks of larger companies. | periods when stock prices generally decline. Any |
given stock market segment may remain out of | |
Debt securities risk. Factors that could | favor with investors for a short or long period of |
contribute to a decline in the market value of | time, and stocks as an asset class may |
debt securities in the portfolio include rising | underperform bonds or other asset classes during |
interest rates, if the issuer or other obligor of a | some periods. Additionally, legislative, |
security held by the portfolio fails to pay | regulatory or tax policies or developments in |
principal and/or interest, otherwise defaults or | these areas may adversely impact the investment |
has its credit rating downgraded or is perceived | techniques available to a manager, add to |
to be less creditworthy or the credit quality or | Portfolio costs and impair the ability of the |
value of any underlying assets declines. Junk | Portfolio to achieve its investment objectives. |
bonds involve greater risk of loss, are subject to | |
greater price volatility and are less liquid, | Other Investment Companies. The main risk |
especially during periods of economic | of investing in other investment companies, |
uncertainty or change, than higher quality debt | including exchange-traded funds, is the risk that |
securities; they may also be more difficult to | the value of the securities underlying a registered |
value. Junk bonds have a higher risk of default | open-end management investment company |
or are already in default and are considered | might decrease. Because the Portfolio may |
speculative. | invest in other investment companies, an |
investor will pay a proportionate share of the | |
High yield or “junk” bond risk. Debt securities | expenses of those other investment companies |
55 |
that are below investment grade, called “junk | (including management fees, administration fees, |
bonds,” are speculative, have a higher risk of | and custodial fees) in addition to the expenses of |
default or are already in default, tend to be less | the Portfolio. |
liquid and are more difficult to value than higher | |
grade securities. Junk bonds tend to be volatile | Securities Lending. Securities lending |
and more susceptible to adverse events and | involves two primary risks: “investment risk” |
negative sentiments. These risks are more | and “borrower default risk.” Investment risk is |
pronounced for securities that are already in | the risk that the Portfolio will lose money from |
default. | the investment of the cash collateral received |
from the borrower. Borrower default risk is the | |
Market segment risk. To the extent the | risk that the Portfolio will lose money due to the |
portfolio emphasizes, from time to time, | failure of a borrower to return a borrowed |
investments in a market segment, the portfolio | security in a timely manner. |
will be subject to a greater degree to the risks | |
particular to that segment, and may experience | Value Investing. Securities that appear to be |
greater market fluctuation than a portfolio | undervalued may never appreciate to the extent |
without the same focus. | expected. Further, because the prices of value- |
oriented securities tend to correlate more closely | |
Risks of investment in other funds. Investing | with economic cycles than growth-oriented |
in other investment companies, including | securities, they generally are more sensitive to |
exchange-traded funds (EFTs), subjects the | changing economic conditions, such as changes |
portfolio to the risks of investing in the | in interest rates, corporate earnings and |
underlying securities or assets held by those | industrial production. |
funds. When investing in another fund, the | |
portfolio will bear a pro rata portion of the | |
underlying fund’s expenses, in addition to its | |
own expenses. | |
Derivatives risk. Using stock index futures and | |
options and other derivatives can increase | |
portfolio losses and reduce opportunities for | |
gains when market prices, interest rates or the | |
derivative instruments themselves behave in a | |
way not anticipated by the portfolio. Using | |
derivatives may increase the volatility of the | |
portfolio's net asset value and may not provide | |
the result intended. Derivatives may have a | |
leveraging effect on the portfolio. Some | |
derivatives have the potential for unlimited loss, | |
regardless of the size of the portfolio’s initial | |
investment. Changes in a derivative’s value may | |
not correlate well with the referenced asset or | |
metric. The portfolio also may have to sell assets | |
at inopportune times to satisfy its obligations. | |
Derivatives may be difficult to sell, unwind or | |
value, and the counterparty may default on its | |
obligations to the portfolio. New regulations are | |
changing the derivatives markets. The | |
56 |
regulations may make using derivatives more |
costly, may limit their availability, or may |
otherwise adversely affect their value or |
performance. For derivatives that are required to |
be traded through a clearinghouse or exchange, |
the portfolio also will be exposed to the credit |
risk of the clearinghouse and the broker that |
submits trades for the portfolio. It is possible that |
certain derivatives that are required to be |
cleared, such as certain swap contracts, will not |
be accepted for clearing. In addition, regulated |
trading facilities for swap contracts are relatively |
new; they may not function as intended, which |
could impair the ability to enter into swap |
contracts. The extent and impact of the new |
regulations are not yet fully known and may not |
be for some time. |
Leveraging risk. The value of an investment |
may be more volatile and other risks tend to be |
compounded if the portfolio borrows or uses |
derivatives or other investments, such as ETFs, |
that have embedded leverage. Leverage |
generally magnifies the effect of any increase or |
decrease in the value of the portfolio's |
underlying assets or creates investment risk with |
respect to a larger pool of assets than the |
portfolio would otherwise have, potentially |
resulting in the loss of all assets. Engaging in |
such transactions may cause the portfolio to |
liquidate positions when it may not be |
advantageous to do so to satisfy its obligations or |
meet segregation requirements. |
Risks of initial public offerings. Companies |
involved in initial public offerings (IPOs) |
generally have limited operating histories, and |
prospects for future profitability are uncertain. |
Information about the companies may be |
available for very limited periods. The market |
for IPO issuers has been volatile, and share |
prices of newly public companies have |
fluctuated significantly over short periods of |
time. Further, stocks of newly-public companies |
may decline shortly after the IPO. There is no |
assurance that the portfolio will have access to |
IPOs. The purchase of IPO shares may involve |
high transaction costs. |
57 |
Expense risk. An investor’s actual costs of |
investing in the portfolio may be higher than the |
expenses shown in “Annual portfolio operating |
expenses” for a variety of reasons. For example, |
expense ratios may be higher than those shown if |
overall net assets decrease. Net assets are more |
likely to decrease and portfolio expense ratios |
are more likely to increase when markets are |
volatile. |
Please note that there are many other factors that |
could adversely affect an investor’s investment |
and that could prevent the portfolio from |
achieving its goals. |
An investment in the portfolio is not a bank |
deposit and is not insured or guaranteed by the |
Federal Deposit Insurance Corporation or any |
other government agency. |
d. Comparison. The Applicants believe that while the Existing Fund and the |
Replacement Fund are slightly different from each other in the way they characterize their |
objective, principal investment strategies, benchmarks and risks, fundamentally each is primarily |
a large cap value equity portfolio that exhibits a high correlation to the other with similar |
weighted average holdings from a Morningstar style box perspective, risks and investment |
results. Each falls within the Morningstar Large Value style box. The differences between the |
Existing Fund and the Replacement Fund are not necessarily larger than one would expect to be |
exhibited by two portfolios with the same benchmarks, principal investment strategies, and |
naming conventions, as there is significant investment flexibility within those constraints. |
The investment objective of the Existing Fund is current income and long-term growth of capital |
from a portfolio consisting primarily of income producing equity securities of U.S. corporations. |
Normally, the Existing Fund invests at least 80% of its total assets in income producing equity |
securities of U.S. issuers. The Portfolio seeks investment results (before fees and expenses) that |
correspond to the total return (which includes capital appreciation and income) of the Russell |
Top 200® Value Index (“Index”). Under normal market conditions, the Replacement Fund |
invests at least 80% of its net assets in equity securities of companies, which are at the time of |
purchase, included in the Index. The Replacement Fund currently invests principally in common |
stocks and employs a “passive management” approach designed to track the performance of the |
Index. The Index is an unmanaged index that measures the performance of the especially large |
cap segment of the U.S. equities universe represented by stocks in the largest 200 by market cap |
that exhibit value characteristics. |
With respect to the Existing Fund’s and Replacement Fund’s primary and/or secondary |
investment objectives, each shares some combination of long-term capital appreciation and |
current/reasonable income language. The Replacement Fund, as an index fund, does not |
58 |
specifically state either capital appreciation or income in its objective but rather focuses on an | ||||||
index replication due to its passive nature. The passive index it is replicating, however, seeks to | ||||||
generate long-term capital appreciation and also delivers current/reasonable income. In fact, as | ||||||
of August 31, 2014, the current yield on the performance benchmark for the Replacement Fund, | ||||||
the Russell Top 200 Value Index, was 2.27%, higher than the current yield of the performance | ||||||
benchmark for the Existing Fund, the Russell 1000 Value Index, which was 2.17%. | ||||||
Furthermore, while the listed principal investment strategies of the Existing Fund and the | ||||||
Replacement Fund differ in language and breadth, at their core each is required to invest in more | ||||||
than 80% equity securities of a large cap, primarily income producing companies. Although the | ||||||
Replacement Fund seeks to replicate an index, as noted above, the index is consists of equity | ||||||
securities of a large cap and income producing companies. Over 95% of the underlying | ||||||
securities in the index the Replacement Fund seeks to replicate (both by names and by asset | ||||||
weight) pay a dividend. | ||||||
While the Existing Fund and the Replacing Fund are benchmarked to a different index, there is | ||||||
very high overlap in the construction and the returns of those differing indices. The companies | ||||||
that make up the Replacement Fund’s Russell Top 200 Value Index benchmark comprise 69% of | ||||||
the Existing Fund’s Russell 1000 Value Index benchmark. | ||||||
Even though the overlap of these benchmarks is not 100%, there is a high correlation in the | ||||||
returns of these benchmarks over time. Over the past five years there is no less than a 98% | ||||||
correlation in the returns between the Existing Fund’s benchmark and the Replacement Fund’s | ||||||
benchmark. This means that the returns tend to move nearly in lockstep with each other, and this | ||||||
has a similar effect on the actual returns of the Existing Fund and the Replacement Fund. As | ||||||
shown in the performance tables below, the Replacement Portfolio has exhibited similar or better | ||||||
performance to the Existing Portfolio at a meaningfully lower expense ratio. | ||||||
To summarize, while the Existing Fund and the Replacement Fund are slightly different from | ||||||
each other in the way they characterize their objective, principal investment strategies, | ||||||
benchmarks and risks, fundamentally each is primarily a large cap value equity portfolio that | ||||||
exhibits a high correlation to the other such that each Affected Contract Owner’s fundamental | ||||||
investment objectives and risk and return expectations will continue to be met after the | ||||||
Substitution. | ||||||
e. Expense Ratios and Total Return. The net expense ratios and total return | ||||||
figures for each fund in this proposed substitution as of August 31, 2014, are as follows: | ||||||
Net Expense Ratio |
1 Year | 3 Years | 5 Years | 10 Years | (Inception Date) Since Inception | |
Replacement Fund | ||||||
· Voya Russell Large Cap | (05/01/2009) | |||||
Value Index Portfolio – | ||||||
Class S | 0.75% | 22.62% | 20.44% | 14.68% | N/A | 17.35% |
Existing Fund | (09/14/1999) | |||||
· Pioneer Equity Income | ||||||
VCT Portfolio – Class II | 0.99% | 20.63% | 16.90% | 16.01% | 8.12% | 6.20% |
59 |
f. Post Substitution Net Assets. The estimated net assets of the Voya Russell | |
Large Cap Value Index Portfolio – Class S immediately following the proposed substitution will | |
be approximately $157,005,554. This is based on estimated net assets of the Replacement Fund | |
immediately before the substitution ($140,739,513) plus the corresponding Existing Fund’s | |
actual net assets invested in the Accounts as of August 31, 2014 ($16,266,041). | |
C. | Consequence of the Substitutions. Applicants maintain that Contract Owners will be |
better served by the proposed Substitutions. Applicants anticipate that the replacement of the | |
Existing Fund will result in a Contract that is administered and managed more efficiently, and | |
one that is more competitive with other variable products in both wholesale and retail markets. | |
Each Replacement Fund will be managed according to a similar investment objective and | |
policies as the corresponding Existing Fund. Moreover, the overall expenses of each | |
Replacement Fund are less than those of the corresponding Existing Fund. | |
Applicants anticipate that Contract Owners will be at least as well off with the proposed | |
array of subaccounts to be offered after the proposed Substitutions as they have been with the | |
array of subaccounts offered before the Substitutions. The proposed Substitutions retain for | |
Contract Owners the investment flexibility which is a central feature of the Contracts. If the | |
proposed Substitutions are implemented, all Contract Owners will be permitted to allocate | |
purchase payments and transfer accumulated values and Contract values between and among the | |
remaining subaccounts as they could before the proposed Substitutions. | |
D. | Rights of Affected Contract Owners and Obligations of the Companies. Apart from |
the Substitutions, the rights of Affected Contract Owners and the obligations of the Companies | |
under the Contracts will not be altered by the Substitutions. Affected Contract Owners will not | |
incur any additional tax liability or any additional fees or expenses as a result of the | |
Substitutions. | |
The Substitutions will take place at relative net asset value (in accordance with Rule 22c-1 under | |
the 1940 Act) with no change in the amount of any Affected Contract Owner’s contract value, | |
cash value, accumulation value, account value or death benefit or in dollar value of his or her | |
investment in the Accounts. Affected Contract Owners will not incur any fees or charges as a | |
result of the Substitutions nor will their rights or the Companies’ obligations under the affected | |
Contracts be altered in any way. The Companies or their affiliates will pay all other expenses | |
incurred with the Substitutions, including legal, accounting, brokerage, and other fees and | |
expenses. In addition, the Substitutions will not impose any tax liability on Affected Contract | |
Owners. The Substitutions will not cause the affected Contract fees and charges currently being | |
paid by Affected Contract Owners to be greater after the Substitutions than before the | |
Substitutions. In addition, while the Companies do not anticipate increasing Contract fees and/or | |
charges paid by any current Contract Owners, the Companies have agreed not to increase the | |
Contract fees and charges currently being assessed by the Contracts for a period of at least two | |
years following the Substitutions. | |
60 |
E. | Contract Rights. Affected Contract Owners will have the right to surrender their |
affected Contracts or reallocate account value of an Existing Fund in accordance with the terms | |
and conditions of their Contract prior to (and after) the Effective Date. | |
As noted above, each Affected Contract Owner has received a copy of a Contract | |
prospectus supplement informing them of the Substitutions. Additionally, each Affected | |
Contract Owner will be sent (1) a second supplement setting forth the Effective Date and | |
advising them of their right to reconsider the Substitutions and, if they so choose, any time prior | |
to the Effective Date and for at least 30 days after the Effective Date, they may reallocate | |
account value under the affected Contract without charge or otherwise withdraw or terminate | |
their interest therein in accordance with the terms and conditions of their Contract; (2) the | |
applicable Replacement Fund prospectus prior to the Effective Date; and (3) within five business | |
days of the Effective Date, a Post-Substitution Confirmation. | |
F. | The Right to Substitute Shares. Each of the prospectuses for the Contracts discloses |
that the Companies reserve the right, subject to Commission approval and compliance with | |
applicable law, to substitute shares of another registered open-end management investment | |
company for shares of a registered open-end management investment company held by a | |
subaccount of an Account. | |
The Companies reserved this right of Substitutions both to protect themselves and their | |
Contract Owners in situations where either might be harmed or disadvantaged because of | |
circumstances involving the issuer of the shares held by one or more of its Accounts and to | |
afford the opportunity to replace such shares where to do so could benefit the Contract Owners | |
and Companies. | |
G. | The Substitutions are not the type of substitution which Section 26(c) was designed |
to prevent. Unlike a traditional unit investment trust where a depositor could only substitute an | |
investment security in a manner which permanently affected all the investors in trust, the | |
Contracts provide each Contract Owner with the right to exercise his or her own judgment and | |
transfer account values into other subaccounts. The number of available subaccounts varies from | |
Contract to Contract and ranges from 16 to 63, but the average number of available subaccounts | |
in all Contracts after the Substitutions will remain unchanged. Moreover, the Contracts will | |
offer Contract Owners the opportunity to transfer amounts out of the affected subaccounts into | |
any of the remaining subaccounts without cost or other disadvantage. The Substitutions, | |
therefore, will not result in the type of costly forced redemptions that Section 26(c) was designed | |
to prevent. | |
The Substitutions also are unlike the type of substitutions that Section 26(c) was designed | |
to prevent in that by purchasing a Contract, Contract Owners select much more than a particular | |
registered open-end management investment company in which to invest their account values. | |
They also select the specific type of death benefit and other optional benefits as well as | |
numerous other rights and privileges set forth in the Contracts. Contract Owners may also have | |
considered the Companies’ size, financial condition, type and its reputation for service in | |
selecting their Contract. These factors will not change as a result of the Substitutions. | |
61 |
H. | Separate Representations and Request for an Order. Applicants request an order of | |
the Commission pursuant to Section 26(c) of the 1940 Act approving the Substitutions by the | ||
Companies. Applicants submit that, for all the reasons stated above, the Substitutions are | ||
consistent with the protection of investors and the purposes fairly intended by the policy and | ||
provisions of the 1940 Act. | ||
V - CONDITIONS | ||
A. | Applicants agree to the following conditions regarding the Substitutions described in this | |
Application: | ||
1. | Each Replacement Fund has an investment objective and investment policies that | |
are similar to the investment objective and policies of the corresponding Existing Fund, or each | ||
Replacement Fund’s underlying portfolio construction and investment results are similar to those | ||
of the Existing Fund, so that the fundamental objectives, risk and performance expectations of | ||
the Affected Contract Owners can continue to be met; | ||
2. | In relation to the Substitution of involving the Voya Russell Large Cap Index | |
Portfolio, the fund’s Board of Directors has approved the reduced management fee and manage | ||
fee breakpoint schedule described herein to be effective before implementation of the | ||
Substitutions. | ||
3. | For two years following the implementation of the Substitutions, the net annual | |
expenses of each Replacement Fund will not exceed the net annual expenses of the | ||
corresponding Existing Fund as of August 31, 2014. To achieve this limitation, the Replacement | ||
Fund’s investment adviser will waive fees or reimburse the Replacement Fund in certain | ||
amounts to maintain expenses at or below the limit. Any adjustments will be made at least on a | ||
quarterly basis. In addition, the Companies will not increase the Contract fees and charges, | ||
including asset based charges such as mortality and expense risk charges deducted from the | ||
Subaccounts that would otherwise be assessed under the terms of the Contracts for a period of at | ||
least two years following the Substitutions; | ||
4. | Affected Contract Owners may reallocate amounts from an Existing Fund without | |
incurring a reallocation charge or limiting their number of future reallocations, or withdraw | ||
amounts under any Affected Contract or otherwise terminate their interest therein at any time | ||
prior to the Effective Date and for a period of at least 30 days following the Effective Date in | ||
accordance with the terms and conditions of such Contract. Any such reallocation will not count | ||
as a transfer when imposing any applicable restriction or limit under the Contract on transfers; | ||
5. | The Substitutions will be effected at the net asset value of the respective shares in | |
conformity with Section 22(c) of the 1940 Act and Rule 22c-1 thereunder, without the | ||
imposition of any transfer or similar charge by Applicants; | ||
6. | The Substitutions will take place at relative net asset value without change in the | |
amount or value of any Contract held by Affected Contract Owners. Affected Contract Owners | ||
will not incur any fees or charges as a result of the Substitutions, nor will their rights or the | ||
obligations of the Companies under such Contracts be altered in any way; | ||
62 |
7. | The Substitutions will be effected so that investment of securities will be |
consistent with the investment objectives, policies and diversification requirements of the | |
Replacement Funds. No brokerage commissions, fees or other remuneration will be paid by the | |
Existing Funds, Replacement Funds or Affected Contract Owners in connection with the | |
Substitutions; | |
8. | The Substitutions will not alter in any way the annuity, life or tax benefits |
afforded under the Contracts held by any Affected Contract Owner; | |
9. | Each Affected Contract Owner will have been sent a copy of (a) a Contract |
prospectus supplement informing shareholders of this Application; (b) a second supplement to | |
the Contract prospectus setting forth the Effective Date and advising Affected Contract Owners | |
of their right to reconsider the Substitutions and, if they so choose, any time prior to the Effective | |
Date and for 30 days thereafter, to reallocate or withdraw amounts under their affected Contract | |
or otherwise terminate their interest therein in accordance with the terms and conditions of their | |
Contract; and (c) a prospectus for the applicable Replacement Fund(s); | |
10. The Companies will send to the Affected Contract Owners within five (5) business | |
days of the Substitutions a written Post-Substitution Confirmation which will include the before | |
and after account values (which will not have changed as a result of the Substitutions) and detail | |
the transactions effected on behalf of the respective Affected Contract Owner with regard to the | |
Substitutions. With the Post-Substitution Confirmations the Companies will remind Affected | |
Contract Owners that they may reallocate amounts from the Replacement Funds without | |
incurring a reallocation charge or limiting their number of future reallocations for a least 30 days | |
following the Effective Date in accordance with the terms and conditions of their Contract; | |
11. The Companies or their affiliates will pay all expenses and transaction costs of the | |
Substitutions, including legal and accounting expenses, any applicable brokerage expenses, and | |
other fees and expenses. In addition, the Substitutions will not impose any tax liability on | |
Affected Contract Owners; | |
12. After the Effective Date of the Substitutions the Applicants agree not to change a | |
Replacement Fund’s sub-adviser without first obtaining shareholder approval of either (a) the | |
sub-adviser change or (b) the parties’ continued ability to rely on their manager-of-managers | |
exemptive order; and | |
13. The Substitutions will not be effected unless the Companies shall have satisfied | |
themselves, that (a) the Contracts allow the substitution of registered open-end management | |
investment company shares in the manner contemplated by the Substitutions and related | |
transactions described herein; (b) the transaction can be consummated as described in this | |
Application under applicable insurance laws; and (c) that any regulatory requirements in each | |
jurisdiction where the Contracts are qualified for sale, have been complied with to the extent | |
necessary to complete the transaction. | |
63 |
VII - PROCEDURAL MATTERS | |
A. | Pursuant Rule 0-2(f) under the 1940 Act, Applicants state that written or oral |
communications regarding this Application should be directed to individuals and addresses | |
specified on the cover of this Application. | |
B. | Applicants desire that the Commission issue the requested order pursuant to Rule 0-5 |
under the 1940 Act without conducting a hearing. | |
C. | Statements of Authorization and Verifications required by Rule 0-2(d) with respect to the |
filing of this Application by the respective Applicants are incorporated by reference through | |
Exhibits A. | |
D. | All requirements of the charter documents of each Applicant have been complied with in |
connection with the execution and filing of this Application and each person signing the | |
Application is fully authorized to do so. Copies of the applicable resolutions are incorporated | |
herein by reference through Exhibits B. | |
64 |
SIGNATURES | |
Pursuant to the requirements of the Investment Company Act of 1940, as amended, Applicants | |
have caused this first amended and restated Application to be duly signed on the 23rd day of | |
October, 2014. | |
Voya Retirement Insurance and Annuity Company and its Variable Annuity Account B | |
and its Variable Annuity Account I | |
By: | /s/Lisa S. Gilarde |
Name: | Lisa S. Gilarde |
Title: | Vice President |
Date: | October 23, 2014 |
65 |
SIGNATURES (continued) | |
Pursuant to the requirements of the Investment Company Act of 1940, as amended, Applicants | |
have caused this first amended and restated Application to be duly signed on the 23rd day of | |
October, 2014. | |
Voya Insurance and Annuity Company and its Separate Account B and its Separate | |
Account EQ | |
By: | /s/Christine E. Dugan |
Name: | Christine E. Dugan |
Title: | Vice President |
Date: | October 23, 2014 |
66 |
SIGNATURES (continued) | |
Pursuant to the requirements of the Investment Company Act of 1940, as amended, Applicants | |
have caused this first amended and restated Application to be duly signed on the 23rd day of | |
October, 2014. | |
ReliaStar Life Insurance Company of New York and its Separate Account NY-B | |
By: | /s/Christine E. Dugan |
Name: | Christine E. Dugan |
Title: | Vice President |
Date: | October 23, 2014 |
67 |
SIGNATURES (continued) | |
Pursuant to the requirements of the Investment Company Act of 1940, as amended, Applicants | |
have caused this first amended and restated Application to be duly signed on the 23rd day of | |
October, 2014. | |
Security Life of Denver Insurance Company and its Separate Account A1 and its Separate | |
Account S-A1 | |
By: | /s/Lisa S. Gilarde |
Name: | Lisa S. Gilarde |
Title: | Vice President |
Date: | October 23, 2014 |
68 |
SIGNATURES (continued) | ||
Pursuant to the requirements of the Investment Company Act of 1940, as amended, Applicants | ||
have caused this first amended and restated Application to be duly signed on the 27th day of | ||
October, 2014. | ||
Voya Variable Portfolios, Inc. | ||
By: | /s/Kimberly A. Anderson | |
Name: | Kimberly A. Anderson | |
Title: | Senior Vice President | |
Date: | October 27, 2014 | |
69 |
Exhibit Index | |
Exhibit | Description |
Exhibits A |
Authorizations and Verifications |
Exhibits B |
Resolutions |
70 |
EXHIBIT A |
The Authorizations and Verifications which this Exhibit A is attached, File No. 812-14302, and |
any and all amendments thereto were included as Exhibits A-1 through A-4 to the initial filing of |
the Exemptive Application on April 29, 2014. These Authorizations and Verifications remain in |
full force and effect and are hereby incorporated by reference. |
71 |
EXHIBIT B |
The Board Resolutions authorizing each Applicant to file the Exemptive Application to which |
this Exhibit B is attached, File No. 812-14032, and any and all amendments thereto were |
included as Exhibits B-1 through B-5 to the initial filing of the Exemptive Application on April |
29, 2014. These Resolutions remain in full force and effect and are hereby incorporated by |
reference. |
72 |
This ‘40-OIP/A’ Filing | Date | Other Filings | ||
---|---|---|---|---|
1/1/15 | ||||
11/19/14 | ||||
Filed as of: | 10/28/14 | |||
Filed on: | 10/27/14 | |||
10/23/14 | ||||
9/9/14 | ||||
9/1/14 | ||||
8/31/14 | ||||
5/1/14 | 485BPOS, 497, 497J | |||
4/30/14 | ||||
4/29/14 | 40-OIP | |||
4/28/14 | ||||
4/24/14 | ||||
4/21/14 | ||||
4/7/14 | ||||
2/28/14 | ||||
12/31/13 | 24F-2NT, NSAR-U | |||
7/22/13 | ||||
5/14/13 | ||||
2/26/13 | ||||
2/14/12 | ||||
7/6/11 | 497 | |||
7/29/10 | ||||
7/8/09 | ||||
12/30/08 | 485BPOS | |||
5/23/08 | ||||
7/16/07 | ||||
8/15/06 | ||||
12/31/05 | 24F-2NT, NSAR-U | |||
8/30/05 | ||||
12/20/04 | ||||
10/1/04 | N-4 | |||
1/1/04 | 8-K | |||
5/1/02 | 485BPOS, 497, 497J | |||
4/1/02 | N-4 | |||
6/29/98 | ||||
List all Filings |