As filed with the Securities and Exchange Commission
on September 9, 1996
Registration Nos. 333-05173
811-7651
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 1 [X]
(Check appropriate box or boxes.)
AETNA VARIABLE PORTFOLIOS, INC.
_________________________________________________
(Exact name of registrant as specified in charter)
151 Farmington Avenue
Hartford, CT 06156-8962
________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (860) 273-7834
Susan Bryant, Esq.
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4C
Hartford, CT 06156-8962
(Name and Address of Agent For Service)
Copies to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Approximate Date of
Proposed Public Offering:
As soon as practicable after the effective date of this Filing.
Calculation of Registration Fee under the Securities Act of 1933:
$500 - Registrant is registering an indefinite number of securities under
the Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2.
==============================================================================
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
AETNA VARIABLE PORTFOLIOS, INC.
CROSS REFERENCE SHEET
(as required by Rule 404 (c))
<TABLE>
<CAPTION>
<S> <C> <C>
PART A
N-1A
- --------
Item No. Location
- -------- --------------------------
1. Cover Page........................... Cover Page
2. Synopsis............................. Not Applicable
3. Condensed Financial Information...... Not Applicable
4. General Description of Registrant.... Cover Page; The Fund;
Description of the Varia-
ble Portfolios; Investment
Strategies; Investment
Techniques; Investment
Restrictions
5. Management of the Fund............... Management of the Variable
Portfolios
6. Capital Stock and Other Securities... General Information; Sale
and Redemption of Shares;
Net Asset Value; Tax
Matters
7. Purchase of Securities Being Offered. The Fund; Net Asset
Value; Sale and
Redemption of Shares
8. Redemption or Repurchase............. Sale and Redemption of
Shares; Net Asset Value
9. Pending Legal Proceedings............ Not Applicable
PART B
10. Cover Page........................... Cover Page
11. Table of Contents.................... Table of Contents
12. General Information and History...... General Information
and History
13. Investment Objectives and Policies... Additional Investment Re-
strictions and Policies
of the Portfolios; De-
scription of Various
Securities and Investment
Techniques
14. Management of the Fund............... Directors and Officers
of the Fund
15. Control Persons and Principal Holders Control Persons and
of Securities...................... Principal Shareholders
16. Investment Advisory and Other The Investment Advisory
Services........................... Agreement; The Administra-
tive Services Agreement;
Independent Auditors;
Custodian
17. Brokerage Allocation and Other Brokerage Allocation and
Practices.......................... Trading Practices
18. Capital Stock and Other Securities... Description of Shares;
Voting Rights
19. Purchase, Redemption and Pricing of Net Asset Value; Sale
Securities Being Offered........... and Redemption of Shares
20. Tax Status........................... Tax Status
21. Underwriters......................... Principal Underwriter
22. Calculation of Performance Data..... Performance Information
23. Financial Statements................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
PART A
AETNA VARIABLE PORTFOLIOS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
AETNA VARIABLE GROWTH PORTFOLIO
AETNA VARIABLE SMALL COMPANY PORTFOLIO
AETNA VARIABLE INDEX PLUS PORTFOLIO
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO
PROSPECTUS DATED: September __, 1996
Aetna Variable Portfolios, Inc. (the "Fund") is an open-end management
investment company authorized to issue multiple series of shares, each
representing a diversified portfolio of investments (individually, a
"Portfolio" and collectively, the "Variable Portfolios"). The Fund currently
has four Portfolios authorized. The Fund's shares are offered only to
insurance companies to fund benefits under their variable annuity contracts
(VA Contracts) and variable life insurance policies (VLI Policies).
This Prospectus sets forth concisely the information that a prospective
contract holder or policy holder should know before directing an investment to
a Portfolio and should be read and kept for future reference. A Statement of
Additional Information ("Statement") dated September __, 1996 contains more
information about the Variable Portfolios. For a free copy of the Statement,
call 1-800-_______ or write to Aetna Variable Portfolios, Inc., at the address
listed above. The Statement has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated into this Prospectus by reference.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Fund in any jurisdiction in which such
sale, offer to sell, or solicitation may not be lawfully made.
INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY
CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS
REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED
BY THE INVESTOR.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND RETAIN FOR FUTURE
REFERENCE.
TABLE OF CONTENTS
PAGE
THE FUND
DESCRIPTION OF THE VARIABLE PORTFOLIOS
INVESTMENT TECHNIQUES
RISK FACTORS AND OTHER CONSIDERATIONS
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE VARIABLE PORTFOLIOS
SALE AND REDEMPTION OF SHARES
NET ASSET VALUE
GENERAL INFORMATION
PERFORMANCE
TAX MATTERS
APPENDIX A GLOSSARY OF INVESTMENT TERMS
APPENDIX B DESCRIPTION OF CORPORATE BOND RATINGS
GENERAL INFORMATION AND HISTORY
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE VARIABLE PORTFOLIOS
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
DIRECTORS AND OFFICERS OF THE FUND
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
THE INVESTMENT ADVISORY AGREEMENT
THE SUBADVISORY AGREEMENT
THE ADMINISTRATIVE SERVICES AGREEMENT
CUSTODIAN
INDEPENDENT AUDITORS
PRINCIPAL UNDERWRITER
BROKERAGE ALLOCATION AND TRADING POLICIES
DESCRIPTION OF SHARES
SALE AND REDEMPTION OF SHARES
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized four Portfolios, AETNA VARIABLE
GROWTH PORTFOLIO (Growth Portfolio) AETNA VARIABLE SMALL COMPANY PORTFOLIO
(Small Company Portfolio), AETNA VARIABLE INDEX PLUS PORTFOLIO (Index Plus
Portfolio) and AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO (Capital
Appreciation Portfolio). The Fund may authorize additional Portfolios in the
future. The Fund is intended to serve as one of the funding vehicles for VA
Contracts and VLI Policies to be offered through the separate accounts of
insurance companies. The insurance companies and not Participants are
shareholders of the Fund. See "General information."
The Fund does not foresee any disadvantages to the Participants in funding
both VA Contracts and VLI Policies through the Variable Portfolios or in
offering the Variable Portfolios through more than one insurance company. The
Fund's Board of Directors has agreed to monitor the Portfolios' activities to
identify any potentially material, irreconcilable conflicts and to take
appropriate action if necessary to resolve any conflicts which may arise.
DESCRIPTION OF THE VARIABLE PORTFOLIOS
Each Portfolio has an investment objective which is a fundamental policy and
may not be changed without the vote of a majority of the holders of that
Portfolio's outstanding shares. There can be no assurance that the Portfolios
will meet their investment objectives. Each Portfolio is subject to
investment policies and restrictions described in this Prospectus and in the
Statement, some of which are fundamental. No fundamental investment policy or
restriction may be changed without the approval of a majority of the
outstanding shares of that Portfolio. A glossary describing various
investment terms relating to securities that may be held by the Portfolios is
contained in Appendix A.
AETNA VARIABLE GROWTH PORTFOLIO
INVESTMENT OBJECTIVE. The Growth Portfolio seeks growth of capital through
investment in a diversified portfolio of common stocks and securities
convertible into common stocks believed to offer growth potential.
INVESTMENT POLICY. The Growth Portfolio will normally invest at least 65% of
its total assets in common stocks which have potential for capital growth. It
may also invest in convertible and non-convertible preferred stocks.
Additionally, the Growth Portfolio may lend portfolio securities, buy and sell
put and call options, and stock index futures and options. The Growth
Portfolio may also enter into repurchase agreements, invest up to 25% of its
assets in foreign securities, engage in currency hedging and purchase
securities on a when-issued, delayed delivery or forward commitment basis. The
Growth Portfolio will not invest more than 15% of the total value of its
assets in high risk, high-yield securities or "junk bonds".
AETNA VARIABLE SMALL COMPANY PORTFOLIO
INVESTMENT OBJECTIVE. The Small Company Portfolio seeks growth of capital
primarily through investment in a diversified portfolio of common stocks and
securities convertible into common stocks of companies with smaller market
capitalizations.
INVESTMENT POLICY. The Small Company Portfolio will normally invest at least
65% of its total assets in the common stock of companies with equity market
capitalizations at the time of purchase of $1 billion or less. The Small
Company Portfolio may also invest in convertible and non-convertible preferred
stocks.
Additionally, the Small Company Portfolio may lend portfolio securities, buy
and sell put and call options and stock index futures and options. The Small
Company Portfolio may also enter into repurchase agreements, invest up to 25%
of its assets in foreign securities, engage in currency hedging and purchase
securities on a when-issued, delayed delivery or forward commitment basis. The
Small Company Portfolio will not invest more than 15% of the total value of
its assets in high risk, high-yield securities or "junk bonds".
AETNA VARIABLE INDEX PLUS PORTFOLIO
INVESTMENT OBJECTIVE. The Index Plus Portfolio will attempt to outperform the
total return performance of publicly traded common stocks represented by the
S&P 500 Composite Stock Price Index ("S&P 500"), a stock market index composed
of 500 common stocks selected by the Standard & Poor's Corporation.
INVESTMENT POLICY. The Portfolio will attempt to be fully invested in common
stocks. Under normal circumstances, the Portfolio will invest at least 90% of
its assets in common stocks represented in the S&P 500. Inclusion of a stock
in the S&P 500 in no way implies an opinion by Standard & Poor's Corporation
as to the stock's attractiveness as an investment. The Portfolio is neither
sponsored by nor affiliated with Standard & Poor's Corporation. AN INVESTMENT
IN THE PORTFOLIO INVOLVES RISKS SIMILAR TO THOSE OF INVESTING IN COMMON STOCKS
GENERALLY. As the Portfolio invests primarily in common stocks, the Portfolio
is subject to market risk - i.e. the possibility that common stock prices will
decline over short or even extended periods. The U.S. stock market tends to
be cyclical, with periods when stock prices generally rise and periods when
prices generally decline.
Under normal circumstances, the Portfolio will generally include approximately
400 stocks included in the S&P 500. The Portfolio intends, under normal
circumstances, to exclude common stocks which are not part of the S&P 500 and
to exclude Aetna, Inc. common stock.
The weightings of stocks in the S&P 500 are based on each stock's relative
total market capitalization, that is, its market price per share multiplied by
the number of common shares outstanding. The investment adviser will attempt
to outperform the investment results of the S&P 500 by creating a portfolio
that has similar market risk characteristics to the S&P 500, but will use a
disciplined analysis to identify those stocks having the greatest likelihood
of either outperforming or underperforming the market.
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO
INVESTMENT OBJECTIVE. The Capital Appreciation Portfolio seeks growth of
capital primarily through investment in a diversified portfolio of common
stocks and securities convertible into common stock. The Portfolio will use a
value-oriented approach in an attempt to outperform the total return
performance of publicly traded common stocks represented by the S&P 500.
INVESTMENT POLICY. The Portfolio will normally invest at least 65% of the
Portfolio's net assets in common stocks.
The Portfolio may also purchase securities aside from common stocks. The value
of all non-common stock investments may normally represent no more than 35% of
the Portfolio's total assets.
The Portfolio may lend portfolio securities, invest up to 25% of its assets in
foreign securities, buy and sell put and call options on stock indices and on
individual stocks, purchase futures contracts, options contracts (including
options on futures contracts), equity index participations and index
participation contracts, engage in currency hedging and purchase securities on
a when-issued, delayed delivery or forward commitment basis.
INVESTMENT TECHNIQUES
The Variable Portfolios may use the following investment techniques (see
Appendix A for the definition of certain terms used below):
BORROWING. Each Portfolio may borrow money from banks, but only for temporary
or emergency purposes in an amount up to 5% of the value of the Portfolio's
total assets (including the amount borrowed), valued at the lesser of cost or
market, less liabilities (not including the amount borrowed), at the time the
borrowing is made.
The Variable Portfolios do not intend to borrow for leveraging purposes. They
have the authority to do so, but only if, after the borrowing, the value of
the Portfolio's net assets, including proceeds from the borrowings, is equal
to at least 300% of all outstanding borrowings. Leveraging can increase the
volatility of a Portfolio since it exaggerates the effects of changes in the
value of the securities purchased with the borrowed funds.
SECURITIES LENDING. A Portfolio may lend its portfolio securities; however,
the value of the loaned securities (together with all other assets that are
loaned, including those subject to repurchase agreements) may not exceed
one-third of the Portfolio's total assets. A Portfolio will not lend portfolio
securities to affiliates. Though fully collateralized, lending portfolio
securities involves certain risks, including the possibility that the
Portfolio may incur costs in liquidating the collateral or a loss if the
collateral declines in value. In the event of a disparity between the value
of the loaned security and the collateral, there is the additional risk that
the borrower may fail to return the securities or provide additional
collateral.
REPURCHASE AGREEMENTS. Under a repurchase agreement, a Portfolio may acquire a
debt instrument for a relatively short period subject to an obligation by the
seller to repurchase and by the Portfolio to resell the instrument at a fixed
price and time.
The Variable Portfolios may enter into repurchase agreements with domestic
banks and broker-dealers. Such agreements, although fully collateralized,
involve the risk that the seller of the securities may fail to repurchase
them. In that event, a Portfolio may incur costs in liquidating the collateral
or a loss if the collateral declines in value. If the default on the part of
the seller is due to insolvency and the seller initiates bankruptcy
proceedings, the ability of a Portfolio to liquidate the collateral may be
delayed or limited.
The Board of Directors has established credit standards for repurchase
transactions entered into by the Variable Portfolios.
ASSET-BACKED SECURITIES. Each Portfolio may purchase securities collateralized
by a specified pool of assets, including, but not limited to, credit card
receivables, automobile loans, home equity loans, mobile home loans, or
recreational vehicle loans. These securities are subject to prepayment risk.
In periods of declining interest rates, reinvestment of prepayment proceeds
would be made at lower and less attractive interest rates.
ZERO COUPON AND PAY-IN-KIND BONDS. Each Portfolio may invest in zero coupon
securities and pay-in-kind bonds. Zero coupon securities are debt securities
that pay no cash income but are sold at substantial discounts to their value
at maturity. Some zero coupon securities call for the commencement of regular
interest payments at a deferred date. Pay-in-kind bonds pay all or a portion
of their interest in the form of additional debt or equity securities. Zero
coupon securities and pay-in-kind bonds are subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying instruments with similar maturities; the value of zero coupon
securities and pay-in-kind bonds appreciate more during periods of declining
interest rates and depreciate more during periods of rising interest rates.
BANK OBLIGATIONS. Each Portfolio may invest in obligations (including
banker's acceptances, commercial paper, bank notes, time deposits and
certificates of deposit) issued by domestic or foreign banks, provided the
issuing bank has a minimum of $5 billion in assets and a primary capital ratio
of at least 4.25%.
OPTIONS, FUTURES AND OTHER DERIVATIVE INSTRUMENTS. A derivative is a
financial instrument, the value of which is "derived" from the performance of
an underlying asset (such as a security or index of securities). In addition
to futures and options, derivatives include, but are not limited to, forward
contracts, swaps, structured notes, and collateralized mortgage obligations
("CMOs").
A Portfolio may engage in various strategies using derivatives including
managing its exposure to changing interest rates, securities prices and
currency exchange rates (collectively known as hedging strategies), or
increasing its investment return. For purposes other than hedging, a
Portfolio will invest no more than 5% of its total assets in derivatives which
at the time of purchase are considered by management to involve high risk to
the Portfolio. These would include inverse floaters, interest-only and
principal-only securities.
Each Portfolio may write (sell) covered call options and purchase put options
and may purchase call and write (sell) put options including options on
securities, indices and futures. There is no limit on the amount of a
Portfolio's total assets that may be subject to call options; however, writing
a put option requires the segregation of liquid assets to cover the contract.
A Portfolio will not write a put option if it will require more than 50% of
the Portfolio's net assets to be segregated to cover the put obligation nor
will it write a put option if after it is written more than 3% of the
Portfolio's assets would consist of put options.
As with all derivatives, the use of call options involves certain risks which
are described in detail under "Risk Factors and Other Considerations" and in
the Statement. In that there is no limit on the amount of a Portfolio's total
assets that may be subject to call options, these risks may be heightened
should a Portfolio choose to engage extensively in such transactions.
Investments in futures contracts and related options with respect to foreign
currencies, fixed income securities and foreign stock indices may also be made
by a Portfolio. Although these investments are primarily made to hedge
against price fluctuations, in some cases, a Portfolio may buy a futures
contract for the purpose of increasing its exposure in a particular asset
class or market segment, which strategy may be considered speculative. This
strategy is typically used to better manage portfolio transaction costs. With
respect to futures contracts or related options that may be entered into for
speculative purposes, the aggregate initial margin for futures contracts and
premiums for options will not exceed 5% of a Portfolio's net assets, after
taking into account realized profits and unrealized losses on such futures
contracts.
A Portfolio may invest in forward contracts on foreign currency ("forward
exchange contracts"). These contracts may involve "cross-hedging," a
technique in which a Portfolio hedges with currencies which differ from the
currency in which the underlying asset is denominated.
A Portfolio may also invest in interest rate swap transactions. Interest rate
swaps are subject to credit risks (if the other party fails to meet its
obligations) and also interest rate risks, because a Portfolio could be
obligated to pay more under its swap agreements than it receives under them as
a result of interest rate changes.
U.S. GOVERNMENT DERIVATIVES. Each Portfolio may purchase separately traded
principal and interest components of certain U.S. Government securities
("STRIPS"). In addition, a Portfolio may acquire custodial receipts that
represent ownership in a U.S. Government security's future interest or
principal payments. These securities are known by such exotic names as TIGRS
and CATS and may be issued at a discount to face value. They are generally
more volatile than normal fixed income securities because interest payments
are accrued rather than paid out in regular installments.
SUPRANATIONAL AGENCIES. Each Portfolio may invest up to 10% of its net assets
in securities of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the "World Bank"),
which was chartered to finance development projects in developing member
countries; the European Community, which is a twelve-nation organization
engaged in cooperative economic activities; the European Coal and Steel
Community, which is an economic union of various European nations' steel and
coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.
Securities of supranational agencies are not considered government securities
and are not supported directly or indirectly by the U.S. Government.
ILLIQUID AND RESTRICTED SECURITIES. Each Portfolio may invest up to 15% of its
total assets in illiquid securities (except up to 10%, under normal
circumstances, with respect to the Index Plus Portfolio). Illiquid securities
are securities that are not readily marketable or cannot be disposed of
promptly within seven days and in the ordinary course of business without
taking a materially reduced price. In addition, a Portfolio may invest in
securities that are subject to legal or contractual restrictions on resale,
including securities purchased under Rule 144A and Section 4(2) of the
Securities Act of 1933.
Because of the absence of a trading market for illiquid and certain restricted
securities, it may take longer to liquidate these securities than it would
unrestricted, liquid securities. A Portfolio may realize less than the amount
originally paid by the Portfolio for the security. The Board of Directors has
established a policy to monitor the liquidity of such securities.
CASH OR CASH EQUIVALENTS. Each Portfolio reserves the right to depart from its
investment objectives temporarily by investing up to 100% of its assets in
cash or cash equivalents for defense against potential market declines and to
accommodate cash flows from the purchase and sale of Portfolio shares.
OTHER INVESTMENTS. Each Portfolio may use other investment techniques,
including "when-issued" and "delayed-delivery securities" and variable rate
instruments. These techniques are described in Appendix A and the Statement.
RISK FACTORS AND OTHER CONSIDERATIONS
GENERAL CONSIDERATIONS. The different types of securities purchased and
investment techniques used by a Portfolio involve varying amounts of risk.
For example, equity securities are subject to a decline in the stock market or
in the value of the issuer, and preferred stocks have price risk and some
interest rate and credit risk. The value of debt securities may be affected by
changes in general interest rates and in the creditworthiness of the issuer.
Debt securities with longer maturities (for example, over ten years) are
generally more affected by changes in interest rates and provide less price
stability than securities with short term maturities (for example, one to ten
years). Also, on each debt security, the risk of principal and interest
default is greater with higher-yielding, lower-grade securities. High risk,
high-yield securities may provide a higher return but with added risk. In
addition, foreign securities have currency risk. Some of the risks involved in
the securities acquired by the Variable Portfolios are discussed in this
section. Additional discussion is contained above under "Investment
Techniques" and in the Statement.
PORTFOLIO TURNOVER. Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold in
the aggregate during the year. Although the Variable Portfolios do not
purchase securities with the intention of profiting from short-term trading,
each Portfolio may buy and sell securities when the investment adviser or
subadviser believes such action is advisable. It is anticipated that the
average annual turnover rate of each of the Portfolios may exceed 125%.
Turnover rates in excess of 125% may result in higher transaction costs (which
are borne directly by the respective Portfolio) and a possible increase in
short-term capital gains (or losses). See "Tax Status" in the Statement.
FOREIGN SECURITIES. Investments in securities of foreign issuers or
securities denominated in foreign currencies involve risks not present in
domestic markets. Such risks include: currency fluctuations and related
currency conversion costs; less liquidity; price or income volatility; less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies; possible difficulty in obtaining and enforcing judgments
against foreign entities; adverse foreign political and economic developments;
different accounting procedures and auditing standards; the possible
imposition of withholding taxes on interest income payable on securities; the
possible seizure or nationalization of foreign assets; the possible
establishment of exchange controls or other foreign laws or restrictions which
might adversely affect the payment and transferability of principal, interest
and dividends on securities; higher transaction costs; possible settlement
delays; and less publicly available information about foreign issuers.
DEPOSITARY RECEIPTS. The Variable Portfolios can invest in both sponsored and
unsponsored depositary receipts. Unsponsored depositary receipts, which are
typically traded in the over-the-counter market, may be less liquid than
sponsored depositary receipts and therefore may involve more risk. In
addition, there may be less information available about issuers of unsponsored
depositary receipts.
The Variable Portfolios will generally acquire American Depositary Receipts
("ADRs") which are dollar denominated, although their market price is subject
to fluctuations of the foreign currency in which the underlying securities are
denominated. All depositary receipts will be considered foreign securities
for purposes of a Portfolio's investment limitation concerning investment in
foreign securities. See Appendix A and the Statement for more information.
HIGH RISK, HIGH-YIELD SECURITIES. A Portfolio may invest in high risk,
high-yield securities, often called "junk bonds". These securities tend to
offer higher yields than investment-grade bonds because of the additional
risks associated with them. These risks include: a lack of liquidity; an
unpredictable secondary market; a greater likelihood of default; increased
sensitivity to difficult economic and corporate developments; call provisions
which may adversely affect investment returns; and loss of the entire
principal and interest. Although junk bonds are high risk investments, the
investment adviser may purchase these securities if they are thought to offer
good value. This may happen if, for example, the rating agencies have, in the
investment adviser's opinion, misclassified the bonds or overlooked the
potential for the issuer's enhanced creditworthiness.
DERIVATIVES. The Variable Portfolios may use derivative instruments as
described above under "Investment Techniques - Options, Futures and Other
Derivative Instruments." Derivatives can be volatile investments and involve
certain risks. A Portfolio may be unable to limit its losses by closing a
position due to lack of a liquid market or similar factors. Losses may also
occur if there is not a perfect correlation between the value of futures or
forward contracts and the related securities. The use of futures may involve a
high degree of leverage because of low margin requirements. As a result, small
price movements in futures contracts may result in immediate and potentially
unlimited gains or losses to a Portfolio. Leverage may exaggerate losses of
principal. The amount of gains or losses on investments in futures contracts
depends on the investment adviser's ability to predict correctly the direction
of stock prices, interest rates and other economic factors.
The use of forward exchange contracts may reduce the gain that would otherwise
result from a change in the relationship between the U.S. dollar and a foreign
currency. In an attempt to limit their risk in forward exchange contracts, the
Variable Portfolios limit their exposure to the amount of their respective
assets denominated in the foreign currency being cross-hedged. Cross-hedging
entails a risk of loss on both the value of the security that is the basis of
the hedge and the currency contract that was used in the hedge. These risks
are described in greater detail in the Statement.
VARIABLE RATE INSTRUMENTS, WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS.
When-issued, delayed-delivery and variable rate instruments may be subject to
liquidity risks and risks of loss of principal due to market fluctuations.
Liquid assets in an amount at least equal to the Portfolio's commitments to
purchase securities on a when-issued or delayed-delivery basis will be
segregated at the Portfolio's custodian. For more information about these
securities, see Appendix A and the Statement.
SMALL CAPITALIZATION COMPANIES. The Variable Portfolios may invest in small
capitalization companies. These companies may be in an early developmental
stage or older companies entering a new stage of growth due to management
changes, new technology, products or markets. The securities of small
capitalization companies may also be undervalued due to poor economic
conditions, market decline or actual or anticipated unfavorable developments
affecting the issuer of the security or its industry.
Securities of small capitalization companies tend to offer greater potential
for growth than securities of larger, more established issuers but there are
additional risks associated with them. These risks include: limited
marketability; more abrupt or erratic market movements than securities of
larger capitalization companies; and less publicly available information about
the issuer. In addition, these companies may be dependent on relatively few
products or services, have limited financial resources and lack of management
depth, and may have less of a track record or historical pattern of
performance.
INVESTMENT RESTRICTIONS
In addition to the restrictions discussed under "Investment Techniques," a
Portfolio will not invest more than 25% of its total assets in securities
issued by companies principally engaged in any one industry. For purposes of
this restrictions, finance companies will be classified as separate industries
according to the end users of their services, such as automobile finance,
computer finance and consumer finance. The 25% limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Additionally, a Portfolio will not invest more than 5% of its total assets in
the securities of any one issuer (excluding securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities) or purchase more than
10% of the outstanding voting securities of any one issuer. These latter
restrictions apply only to 75% of a Portfolio's total assets. See the
Statement for additional investment restrictions.
MANAGEMENT OF THE VARIABLE PORTFOLIOS
DIRECTORS. The operations of each Portfolio are managed under the direction
of the Board of Directors ("Directors"). The Directors set broad policies for
the Fund and each Portfolio. Information about the Directors is found in the
Statement.
INVESTMENT ADVISER. Aetna Life Insurance and Annuity Company ("ALIAC"), serves
as the investment adviser for each of the Variable Portfolios. ALIAC is a
Connecticut insurance corporation with its principal offices at 151 Farmington
Avenue, Hartford, Connecticut 06156, and is registered with the SEC as an
investment adviser. As of June 30, 1996, ALIAC managed over $22 billion in
assets. ALIAC is an indirect wholly-owned subsidiary of Aetna Retirement
Services, Inc., which is in turn an indirect wholly-owned subsidiary of Aetna
Inc.
Under the terms of the Investment Advisory Agreement between the Fund and
ALIAC with respect to each of the Portfolios, ALIAC, subject to the
supervision of the Directors, is obligated to manage and oversee the Fund's
day-to-day operations and to manage the investments of each Portfolio.
The Investment Advisory Agreement gives ALIAC broad latitude in selecting
securities for each Portfolio subject to the Directors' oversight. Under the
Investment Advisory Agreement, ALIAC may delegate to a subadviser its
functions in managing the investments of each Portfolio, subject to ALIAC's
oversight. The Investment Advisory Agreement allows ALIAC to place trades
through brokers of its choosing and to take into consideration the quality of
the brokers' services and execution, as well as services such as research,
providing equipment to the Fund, or paying Fund expenses, in setting the
amount of commissions paid to a broker. ALIAC will only use these commissions
for services and expenses to the extent authorized by applicable law and by
the rules and regulations of the SEC. ALIAC receives a monthly fee from each
Portfolio at an annual rate based on the average daily net assets of each
Portfolio as follows:
Portfolio Fee
_________ ___
Growth Portfolio 0.600%
Small Company Portfolio 0.750%
Index Plus Portfolio 0.350%
Capital Appreciation Portfolio 0.600%
Under the Investment Advisory Agreement, ALIAC has agreed to reduce its fee or
reimburse a Portfolio if the expenses borne by the Portfolio would exceed the
expense limitations of any jurisdiction in which the Portfolio's shares are
qualified for sale. ALIAC is not obligated to reimburse a Portfolio for any
expenses which exceed the amount of its advisory fee for that year. The
Investment Advisory Agreement also provides that ALIAC is responsible for all
of its own costs including costs of ALIAC's personnel required to carry out
its investment advisory duties.
SUBADVISER. ALIAC has engaged Aeltus Investment Management, Inc. ("Aeltus"),
organized in 1972 under the name Aetna Capital Management, Inc., as a
subadviser to each of the Variable Portfolios. Aeltus is a Connecticut
corporation located at 242 Trumbull Street, Hartford, Connecticut 06103-1205.
Aeltus is registered as an investment adviser with the SEC. As of June 30,
1996, Aeltus managed over $11 billion in assets. Aeltus is a part of the Aetna
organization, and is an indirect wholly-owned subsidiary of Aetna Retirement
Services, Inc., which is in turn an indirect wholly-owned subsidiary of Aetna
Inc. John Y. Kim currently serves as the President, Chief Executive Officer
and Chief Investment Officer of Aeltus. Under a Subadvisory Agreement with
ALIAC, Aeltus, subject to the supervision of ALIAC and the Directors, is
responsible for managing the assets of each respective Portfolio in accordance
with its investment objective and policies. Aeltus pays the salaries and other
related costs of personnel engaged in providing investment advice including
office space, facilities and equipment.
ALIAC has overall responsibility for monitoring the investment program
maintained by Aeltus for compliance with applicable laws and regulations and
the respective Portfolio's investment objective.
The Subadvisory Agreement gives Aeltus broad latitude in selecting securities
for each Portfolio subject to ALIAC's oversight. The Subadvisory Agreement
also allows Aeltus to place trades through brokers of its choosing and to take
into consideration the quality of the brokers' services and execution, as well
as services such as research and providing equipment or paying Fund expenses,
in setting the amount of commissions paid to a broker. The use of research
and expense reimbursements in determining and paying commissions is referred
to as "soft dollar" practices. Aeltus will only use soft dollars for services
and expenses to the extent authorized under the Investment Advisory Agreement,
but only as authorized by applicable law and the rules and regulations of the
SEC.
The Subadvisory Agreement provides that ALIAC will pay Aeltus a fee at an
annual rate up to 0.45% of the average daily net assets of each Portfolio.
This fee is not charged back to, or paid by, the Portfolios; it is paid by
ALIAC out of its own resources, including fees and charges it receives from or
in connection with each Portfolio.
The Subadvisory Agreement requires Aeltus to reduce its fee if ALIAC is
required to reduce its fee under the Investment Advisory Agreement. ALIAC has
agreed to reduce its fee or reimburse a Portfolio if the expenses borne by the
Portfolio would exceed the expense limitations of any jurisdiction in which
the Portfolio's shares are qualified for sale. ALIAC would not be obligated to
reimburse a Portfolio for any expenses which exceed the amount of its advisory
fee for that year. The Subadvisory Agreement obligates Aeltus to reduce its
fee by approximately 60% of the amount of ALIAC's fee reduction.
PORTFOLIO MANAGEMENT. The following individuals are primarily responsible for
the day-to-day management of the Portfolios, as indicated below. All of the
following individuals may also decide as a group what strategy may benefit all
of the Portfolios.
GROWTH PORTFOLIO AND CAPITAL APPRECIATION PORTFOLIO. Peter B. Canoni,
Managing Director, Aeltus. Mr. Canoni has been with the Aetna organization
since 1980 and has over 20 years of investment experience.
SMALL COMPANY PORTFOLIO. Thomas J. DiBella, Vice President, Aeltus. Before
joining Aeltus, Mr. DiBella was Investment Officer at Bethlehem Steel from
1989 to 1991. Mr. DiBella has over 10 years of investment experience.
INDEX PLUS PORTFOLIO. Geoffrey A. Brod, Vice President, Aeltus. Mr. Brod has
over 30 years of experience in quantitative applications and has over 9 years
of experience in equity investments. Mr. Brod has been with the Aetna
organization since 1966.
EXPENSES AND FUND ADMINISTRATION. Under an Administrative Services Agreement
with the Fund, ALIAC provides all administrative services necessary for the
Fund's operations and is responsible for the supervision of the Fund's other
service providers. ALIAC also assumes all ordinary recurring direct costs of
the Fund, such as custodian fees, directors fees, transfer agency costs and
accounting expenses. For the services provided under the Administrative
Services Agreement, ALIAC receives an annual fee, payable monthly, at a rate
of 0.15% of the average daily net assets of the Fund.
SALE AND REDEMPTION OF SHARES
Purchases and redemptions of shares may be made only by insurance companies
for their separate accounts at the direction of Participants. Please refer to
the prospectus for your contract or policy for information on how to direct
investments in or redemptions from a Portfolio and any fees that may apply.
Generally, insurance companies aggregate orders received from Participants
during the day and place an order to purchase or redeem the net number of
shares during the night. Orders are generally executed at the net asset value
per share ("NAV") determined at the end of the previous business day. The
Variable Portfolios reserve the right to suspend the offering of shares, or to
reject any specific purchase order. The Variable Portfolios may suspend
redemptions or postpone payments when the New York Stock Exchange is closed or
when trading is restricted for any reason (other than weekends or holidays) or
under emergency circumstances as determined by the SEC.
NET ASSET VALUE
The NAV of each Portfolio is determined as of 4:15 p.m. New York time on each
day that the New York Stock Exchange is open for trading. Each Portfolio's NAV
is computed by taking the total value of a Portfolio's securities, plus any
cash or other assets (including dividends and interest accrued but not
collected) and subtracting all liabilities (including accrued expenses), and
dividing the total by the number of shares outstanding. Portfolio securities
are valued primarily by independent pricing services, based on market
quotations. Short-term debt instruments maturing in less than 60 days are
valued at amortized cost. Securities for which market quotations are not
readily available are valued at their fair value in such manner as may be
determined, from time to time, in good faith, by or under the authority of,
the Directors.
GENERAL INFORMATION
INCORPORATION. The Fund was incorporated under the laws of Maryland on June
4, 1996.
CAPITAL STOCK. The Fund is authorized to issue one billion shares of capital
stock, par value $0.001 per share. All shares are nonassessable, transferable
and redeemable. There are no preemptive rights.
SHAREHOLDER MEETINGS. The Fund is not required and does not intend to hold
annual shareholder meetings. The Fund's Articles of Incorporation provide for
meetings of shareholders to elect Directors at such times as may be determined
by the Directors or as required by the 1940 Act. If requested by the holders
of at least 10% of the Fund's outstanding shares, the Fund will hold a
shareholder meeting for the purpose of voting on the removal of one or more
Directors and will assist with communication concerning that shareholder
meeting.
VOTING RIGHTS. Each share of the Fund is entitled to one vote for each full
share and fractional votes for fractional shares. Separate votes are taken by
Portfolio only if the matter affects or requires the vote of only that
Portfolio. The insurance companies holding the shares in their separate
accounts will generally request voting instructions from the Participants and
generally must vote the shares in proportion to the voting instructions
received. Voting rights for VA Contracts and VLI Policies are discussed in
the prospectus for the applicable contract or policy.
PERFORMANCE
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average
annual total return of the Fund calculated on a compounded basis for specified
periods of time. Total return information will be calculated pursuant to
rules established by the SEC. In lieu of or in addition to total return
calculations, such information may include performance rankings and similar
information from independent organizations such as Lipper Analytical Services,
Inc., Morningstar, Business Week, Forbes or other industry publications.
The Fund calculates average annual total return by determining the redemption
value at the end of specified periods (assuming reinvestment of all dividends
and distributions) of a $1,000 investment in the Fund at the beginning of the
period, deducting the initial $1,000 investment, annualizing the increase or
decrease over the specified period and expressing the result as a percentage.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net
asset value per share can be expected to fluctuate over time, and accordingly,
upon redemption, shares may be worth more or less than their original cost.
PUBLIC FUND PERFORMANCE
The Small Company Portfolio is newly organized and does not yet have its own
performance record. However, the Portfolio has the same investment objective
and follows substantially the same investment strategies as a series of a
mutual fund ("public fund") whose shares are currently sold to the public and
managed by ALIAC and Aeltus.
Set forth below is the historical performance of the series of the public
fund. Investors should not consider the performance data of the series of the
public fund as an indication of the future performance of the Portfolio. The
performance figures shown below reflect the deduction of the historical fees
and expenses paid by the series of the public fund, and not those to be paid
by the Portfolio. The figures also do not reflect the deduction of any
insurance fees or charges which are imposed by the insurance company in
connection with its sale of the VA Contracts and VLI Policies. Investors
should refer to the separate account prospectuses describing the VA Contracts
and VLI Policies for information pertaining to these insurance fees and
charges. The insurance separate account fees will have a detrimental effect
on the performance of the Portfolio. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the Portfolio to calculate its own performance.
The following table shows average annualized total returns for the time
periods shown for the series of the public fund, as well as a comparison with
the Russell 2000 Growth Index, a small cap stock benchmark.
<TABLE>
<CAPTION>
<S> <C> <C>
1 YEAR SINCE INCEPTION
SMALL COMPANY PORTFOLIO
Aetna Series Fund, Inc. -
Aetna Small Company Growth Fund 31.41% 22.16%
Russell 2000 Growth Index 23.89% 14.16%
</TABLE>
Results shown are through the period ended June 30, 1996. The inception date
is January 1, 1994.
PRIVATE ACCOUNT PERFORMANCE
The Index Plus, Capital Appreciation and Growth Portfolios are newly organized
and do not yet have their own performance records. However, each of these
Portfolios has investment objectives, policies and strategies which are
substantially similar to those employed by Aeltus with respect to certain
Private Accounts.
Thus, the performance information derived from these Private Accounts is
deemed relevant to the investor. The performance of the Portfolios may vary
from the Private Account composite information because each Portfolio will be
actively managed and its investments will vary from time to time and will not
be identical to the past portfolio investments of the Private Accounts.
Moreover, the Private Accounts are not registered under the Investment Company
Act of 1940 ("1940 Act") and therefore are not subject to certain investment
restrictions that are imposed by the 1940 Act, which, if imposed, could have
adversely affected the Private Accounts' performances.
The chart below shows hypothetical performance information derived from
historical composite performance of the Private Accounts included in the Index
Plus Composite, Capital Appreciation Composite and Growth Composite. The
hypothetical performance figures for the Portfolios represent the actual
performance results of the composites of comparable Private Accounts, adjusted
to reflect the deduction of the fees and expenses anticipated to be paid by
the Portfolios. The actual Private Account composite performance figures are
time-weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction of
investment advisory fees actually charged to the Private Accounts.
Investors should not consider the performance data of these Private Accounts
as an indication of the future performance of the respective Portfolios. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by the insurance company in connection with its sale of VA
Contracts and VLI Policies. Investors should refer to the separate account
prospectuses describing the VA Contracts and VLI Policies for information
pertaining to these insurance fees and charges. The insurance fees and
charges will have a detrimental effect on the performance of a Portfolio.
The following tables show hypothetical performance information derived from
private account composite performance reduced by anticipated Portfolio fees
and expenses, as well as comparisons with the S&P 500, an unmanaged index
generally considered to be representative of the stock market.
HYPOTHETICAL INVESTMENT PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
<S> <C> <C>
INDEX PLUS PORTFOLIO
1 YEAR SINCE INCEPTION
Index Plus Composite* 26.84% 15.58%
S&P 500 Stock Index 26.13% 15.36%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CAPITAL APPRECIATION PORTFOLIO
1 YEAR 5 YEARS SINCE INCEPTION
Capital Appreciation Composite 25.17% 19.33% 21.93%
S&P 500 Stock Index 26.13% 15.75% 17.99%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GROWTH PORTFOLIO
1 YEAR 5 YEARS 10 YEARS
Growth Composite 27.43% 15.46% 14.03%
S&P 500 Stock Index 26.13% 15.75% 13.76%
</TABLE>
*The Composite reflects the Aeltus "Quantitative Equity" Composite.
Results shown are through the period ended June 30, 1996. The inception dates
are October 1, 1991 for the Index Plus Composite, October 1, 1990 for the
Capital Appreciation Composite and January 1, 1983 for the Growth Composite.
TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), including requirements with respect to
diversification of assets, distribution of income and sources of income. As a
regulated investment company, a Portfolio generally will not be subject to tax
on its ordinary income and net realized capital gains.
Each Portfolio also intends to comply with the diversification requirements of
Section 817(h) of the Code for variable annuity contracts and variable life
insurance policies so that the VA Contract owners and VLI Policy owners should
not be subject to federal tax on distributions of dividends and income from a
Portfolio to the insurance company separate accounts. Contract owners and
policy owners should review the prospectus for their VA Contract or VLI Policy
for information regarding the tax consequences to them of purchasing a
contract or policy.
APPENDIX A
GLOSSARY OF INVESTMENT TERMS
BANKER'S ACCEPTANCE. A time draft drawn on and accepted by a bank,
customarily used by corporations as a means of financing payment for traded
goods. When a draft is accepted by a bank, the bank guarantees to pay the
face value of the debt at maturity.
CALL OPTION. The right to buy a security, currency or stock index at a stated
price, or strike price, within a fixed period. A call option will be
exercised if the market price rises above the strike price; if not, the option
expires worthless.
CERTIFICATES OF DEPOSIT. For large deposits not withdrawable on demand, banks
issue certificates of deposit ("CDs") as evidence of ownership. CDs are
usually negotiable and traded among investors such as mutual funds and banks.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). Mortgage-backed bonds that
separate mortgage pools into various classes or tranches in a predetermined,
specified order such as short-, medium-, and long-term portions.
COMMERCIAL PAPER. Unsecured short-term debt instruments issued by banks,
corporations or other borrowers with a maturity ranging from two to 270 days.
CONVERTIBLE SECURITIES. Corporate securities (usually bonds or preferred
stock) that can be exchanged for a set number of shares of another security,
usually common stock.
COVERED CALL OPTIONS. A call option backed by the securities underlying the
option. The owner of a security will normally sell covered call options to
collect premium income or to reduce price fluctuations of the security. A
covered call option limits the capital appreciation of the underlying
security.
EURODOLLARS. Eurodollars are U.S. dollars held in banks outside the United
States, mainly in Europe but also in other countries, and are commonly used
for the settlement of international transactions. There are many types of
Eurodollar securities including Eurodollar CDS and bonds; these securities are
not registered with the SEC. Certain Eurodollar deposits are not FDIC insured
and may be subject to future political and economic developments and
governmental restrictions.
DEPOSITARY RECEIPTS. Negotiable certificates evidencing ownership of shares
of a non-U.S. corporation, government, or foreign subsidiary of a U.S.
corporation. A U.S. bank typically issues depositary receipts, which are
backed by ordinary shares that remain on deposit with a custodian bank in the
issuer's home market. A depositary receipt can either be "sponsored" by the
issuing company or established without the involvement of the company, which
is referred to as "unsponsored."
FORWARD CONTRACTS. A purchase or sale of a specific quantity of a government
security, foreign currency, or other financial instrument at the current
price, with delivery and settlement at a specified future date.
FUTURES CONTRACTS. An agreement to buy or sell a specific amount of a
financial instrument at a particular price on a stipulated future date. A
futures contract obligates the buyer to purchase and the seller to sell,
unlike an option where one party can choose whether or not to exercise the
option.
HIGH RISK, HIGH-YIELD SECURITIES. Debt instruments rated BB or below by
Standard & Poor's Corporation or Ba or below by Moody's Investors Services
Inc., or securities of comparable ratings by other agencies or, if unrated,
considered by ALIAC to be of comparable quality. These securities are often
called "junk bonds" because of the greater possibility of default.
PREFERRED STOCK. Stock which has a preference over common stock, whether as
to payment of dividends or to assets on liquidation. It ordinarily pays a
fixed dividend.
PRIMARY CAPITAL RATIO. The ratio used to evaluate the creditworthiness of
foreign banks which is based on the ratio of total assets to the common and
preferred stock, loan loss reserves, minority interests and mandatory
convertibles.
PUT OPTION. The right to sell a security, currency or stock index at a stated
price, or strike price, within a fixed period. A put option will be exercised
if the market price falls below the strike price; if not, the option expires
worthless.
SWAP. An exchange of one security for another. A swap may be executed to
change the maturities of a bond portfolio or the quality of the issues in a
stock or bond portfolio.
U.S. GOVERNMENT SECURITIES. Securities issued by the U.S. Government and its
agencies.
Direct Obligations of the U.S. Government are:
TREASURY BILLS - issued with short maturities (one year or less) and
priced at a discount to face value. The income for investors is the
difference between the purchase price and the face value.
TREASURY NOTES - intermediate-term securities with maturities of between
one to ten years. Income to investors is paid in semiannual interest
payments.
TREASURY BONDS - long-term securities with maturities from ten years to up
to thirty years. Income is paid to investors on a semiannual basis.
In addition, U.S. Government Agencies issue debt securities to finance
activities for the U.S. Government. These agencies include among others the
Federal Home Loan Bank, Federal National Mortgage Association ("FNMA" or
"Fannie Mae"), Government National Mortgage Association ("GNMA" or "Ginnie
Mae"), Export-Import Bank and the Tennessee Valley Authority.
Not all agencies are backed by the full faith and credit of the United States;
for example the FNMA may borrow money from the U.S. Treasury only under
certain circumstances. There is no guarantee that the government will support
these types of securities and they therefore involve more risk than direct
government obligations.
VARIABLE RATE INSTRUMENTS. An instrument the terms of which provide for the
adjustment of its interest rate on set dates and which can reasonably be
expected to have a market value close to par value.
WARRANTS. A security, normally offered with bonds or preferred stock, that
entitles the holder to buy shares of stock at a prescribed price within a
named or stated period, or to perpetuity. The time period is usually longer
than that of a call option.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. When-issued is a transaction
that is made as of a current date, but conditioned on the actual issuance of a
security that is authorized but not yet issued. A delayed-delivery
transaction is one where both parties agree that the security will be
delivered and the transaction completed at a future date.
YANKEE BONDS. A dollar denominated bond issued in the United States by
foreign corporations and banks. Similarly, Yankee CDS are issued in the U.S.
by branches and agencies of foreign banks.
APPENDIX B
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates the issuer ranks in the lower end of its rating category.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, the bonds face major uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The ratings from "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
PART B
STATEMENT OF ADDITIONAL INFORMATION DATED:
September __, 1996
AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
FORM N-1A
PART B
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current prospectus for Aetna Variable Portfolios,
Inc. dated September __, 1996. A free prospectus is available upon request by
writing to Aetna Variable Portfolios, Inc. at the address listed above or
calling 1-800-___ - ____.
READ THE PROSPECTUS BEFORE YOU INVEST.
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE VARIABLE PORTFOLIOS
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
DIRECTORS AND OFFICERS OF THE FUND
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
THE INVESTMENT ADVISORY AGREEMENT
THE SUBADVISORY AGREEMENT
THE ADMINISTRATIVE SERVICES AGREEMENT
CUSTODIAN
INDEPENDENT AUDITORS
PRINCIPAL UNDERWRITER
BROKERAGE ALLOCATION AND TRADING POLICIES
DESCRIPTION OF SHARES
SALE AND REDEMPTION OF SHARES
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS
GENERAL INFORMATION AND HISTORY
Aetna Variable Portfolios, Inc. (the "Fund") was incorporated in 1996 in
Maryland. The Fund is an open-end management investment company. The Fund is
authorized to issue multiple series of shares, each representing a diversified
portfolio of investments with different investment objectives, policies and
restrictions (individually, a "Portfolio" and collectively, the "Variable
Portfolios"). The Fund currently has authorized four Portfolios: Aetna
Variable Growth Portfolio (Growth Portfolio); Aetna Variable Small Company
Portfolio (Small Company Portfolio); Aetna Variable Index Plus Portfolio
(Index Plus Portfolio); and Aetna Variable Capital Appreciation Portfolio
(Capital Appreciation Portfolio).
The investment objective and general investment policies of each Portfolio are
described in the Prospectus.
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE VARIABLE PORTFOLIOS
The investment policies and restrictions of the Variable Portfolios, set forth
below, are matters of fundamental policy for purposes of the Investment
Company Act of 1940 (the "1940 Act") and therefore cannot be changed, with
regard to a particular Portfolio, without the approval of a majority of the
outstanding voting securities of that Portfolio as defined by the 1940 Act.
This means the lesser of: (i) 67% of the shares of a Portfolio present at a
shareholders' meeting if the holders of more than 50% of the shares of that
Portfolio then outstanding are present in person or by proxy; or (ii) more
than 50% of the outstanding voting securities of a Portfolio.
As a matter of fundamental policy, none of the Variable Portfolios will:
(1) hold more than 5% of the value of its total assets in the securities
of any one issuer or hold more than 10% of the outstanding voting securities
of any one issuer. This restriction applies only to 75% of the value of a
Portfolio's total assets. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities are excluded from this
restriction;
(2) concentrate its investments in any one industry, except that a
Portfolio may invest up to 25% of its total assets in securities issued by
companies principally engaged in any one industry. For purposes of this
restriction, finance companies will be classified as separate industries
according to the end user of their services, such as automobile finance,
computer finance and consumer finance. This limitation will not, however,
apply to securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities;
(3) make loans, except that, to the extent appropriate under its
investment program, a Portfolio may (a) purchase bonds, debentures or other
debt securities, including short-term obligations; (b) enter into repurchase
transactions; and (c) lend portfolio securities provided that the value of
such loaned securities does not exceed one-third of the Portfolio's total
assets;
(4) issue any senior security (as defined in the 1940 Act), except that
(a) a Portfolio may enter into commitments to purchase securities in
accordance with that Portfolio's investment program, including reverse
repurchase agreements, delayed delivery and when-issued securities, which may
be considered the issuance of senior securities; (b) a Portfolio may engage in
transactions that may result in the issuance of a senior security to the
extent permitted under applicable regulations, interpretations of the 1940 Act
or an exemptive order; (c) a Portfolio may engage in short sales of securities
to the extent permitted in its investment program and other restrictions; (d)
the purchase or sale of futures contracts and related options shall not be
considered to involve the issuance of senior securities; and (e) subject to
fundamental restrictions, a Portfolio may borrow money as authorized by the
1940 Act;
(5) purchase real estate, interests in real estate or real estate limited
partnership interests except that to the extent appropriate under its
investment program, a Portfolio may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein;
(6) invest in commodity contracts, except that a Portfolio may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities; may enter into transactions in financial
and index futures contracts and related options; may engage in transactions on
a when-issued or forward commitment basis; and may enter into forward currency
contracts;
(7) borrow money, except that (a) a Portfolio may enter into certain
futures contracts and options related thereto; (b) a Portfolio may enter into
commitments to purchase securities in accordance with that Portfolio's
investment program, including delayed delivery and when-issued securities and
reverse repurchase agreements; (c) for temporary or emergency purposes, a
Portfolio may borrow money in amounts not exceeding 5% of the value of its
total assets at the time the loan is made; and (d) for purposes of leveraging,
a Portfolio may borrow money from banks (including its custodian bank) only
if, immediately after such borrowing, the value of that Portfolio's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all outstanding borrowings. If, at any time, the
value of that Portfolio's assets fails to meet the 300% asset coverage
requirement relative only to leveraging, that Portfolio will, within three
days (not including Sundays and holidays), reduce its borrowings to the extent
necessary to meet the 300% test; or
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by a Portfolio, that
Portfolio may be deemed to be an underwriter under the provisions of the
Securities Act of 1933 (the "1933 Act").
The Fund has also adopted certain other investment restrictions reflecting the
current investment practices of the Variable Portfolios which may be changed
by the Fund's Directors and without shareholder vote. Some of these
restrictions are described in the Prospectus. In addition, none of the
Portfolios will:
(1) make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will
not be applied to limit the use of options, futures contracts and related
options, in the manner otherwise permitted by the investment restrictions,
policies and investment programs of each Portfolio, as described here and in
the prospectus;
(2) invest more than 25% of its total assets in securities or obligations
of foreign issuers, including marketable securities of, or guaranteed by,
foreign governments (or any instrumentality or subdivision thereof). A
Portfolio will invest in securities or obligations of foreign banks only if
such banks have a minimum of $5 billion in assets and a primary capital ratio
of at least 4.25%.
(3) invest in companies for the purpose of exercising control or
management;
(4) purchase the securities of any other investment company, except as
permitted under the 1940 Act;
(5) purchase interests in oil, gas or other mineral exploration programs;
however, this limitation will not prohibit the acquisition of securities of
companies engaged in the production or transmission of oil, gas, or other
minerals; or
(6) invest more than 25% of the total value of its assets in high risk,
high-yield securities or "junk bonds" (securities rated BB/Ba or lower by
Standard & Poor's Corporation or Moody's Investors Service, Inc., or if
unrated, considered by the investment adviser to be of comparable quality).
(7) invest more than 15% of its total assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or cannot
be disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Such securities include, but are
not limited to time deposits and repurchase agreements with maturities longer
than seven days. Securities that may be resold under Rule 144A or securities
offered pursuant to Section 4(2) of the 1933 Act, as amended, shall not be
deemed illiquid solely by reason of being unregistered. The investment adviser
shall determine whether a particular security is deemed to be liquid based on
the trading markets for the specific security and other factors.
Where a Portfolio's investment objective or policy restricts it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. There will be no violation of any investment
policy or restriction if that restriction is complied with at the time the
relevant action its taken, notwithstanding a later change in the market value
of an investment, in net or total assets, in the securities rating of the
investment or any other change.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
OPTIONS, FUTURES AND OTHER DERIVATIVE INSTRUMENTS
The Variable Portfolios may use derivative instruments as described in the
prospectus under "Investment Techniques." The following provides additional
information about these instruments.
FUTURES CONTRACTS - Each Portfolio may enter into futures contracts as
described in the prospectus. A Portfolio may enter into futures contracts
which are traded on national futures exchanges and are standardized as to
maturity date and underlying financial instrument. The futures exchanges and
trading in the United States are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (the "CFTC").
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument(s) or a
specific stock market index for a specified price at a designated date and
time. Brokerage fees are incurred when a futures contract is bought or sold
and at expiration, and margin deposits must be maintained. Although certain
futures contracts require actual future delivery of and payment for the
underlying instruments, those contracts are usually closed out before the
delivery date. Stock index futures contracts do not contemplate actual future
delivery and will be settled in cash at expiration or closed out prior to
expiration. Closing out an open futures contract sale or purchase is effected
by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the identical type of
underlying instrument and the same delivery date. There can be no assurance,
however, that a Portfolio will be able to enter into an offsetting transaction
with respect to a particular contract at a particular time. If a Portfolio is
not able to enter into an offsetting transaction, it will continue to be
required to maintain the margin deposits on the contract and continue to bear
the risk of market improvement.
The prices of futures contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and equities
prices, which in turn are affected by fiscal and monetary policies and
national and international political and economic events.
When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the securities being
hedged can be only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand
for futures and for securities, including technical influences in futures
trading, and differences between the financial instruments being hedged and
the instruments underlying the standard futures contracts available for
trading. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or stock market or interest rate trends.
Most United States futures exchanges limit the amount of fluctuation permitted
in interest rates futures contract prices during a single trading day, and
temporary regulations limiting price fluctuations for stock index futures
contracts are also now in effect. The daily limits establishes the maximum
amount that the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading session. Once the
daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some persons
engaging in futures transactions to substantial losses.
Sales of futures contracts which are intended to hedge against a change in the
value of securities held by a Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such
securities upon disposition.
"Margin" is the amount of funds that must be deposited by a Portfolio with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in a Portfolio's futures contracts. A margin
deposit is intended to assure the Portfolio's performance of the futures
contract. The margin required for a particular futures contract is set by the
exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price
changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will promptly pay the excess to a Portfolio. These
daily payments to and from a Portfolio are called variation margin. At times
of extreme price volatility such as occurred during the week of October 19,
1987, intra-day variation margin payments may be required. In computing daily
net asset values, each Portfolio will mark-to-market the current value of its
open futures contracts. Each Portfolio expects to earn interest income on its
initial margin deposits. Furthermore, in the case of a futures contract
purchase, each Portfolio has deposited in a segregated account money market
instruments sufficient to meet all futures contract initial margin
requirements.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, small price movements in
futures contracts may result in immediate and potentially unlimited loss or
gain to a Portfolio relative to the size of the margin commitment. For
example, if at the time of purchase 10% of the value of the futures contract
is deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit before any
deduction for the transaction costs, if the contract were then closed out. A
15% decrease in the value of the futures contract would result in a loss equal
to 150% of the original margin deposit, if the contract were closed out. Thus,
a purchase or sale of a futures contract may result in losses in excess of the
amount initially invested in the futures contract. However, a Portfolio would
presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
A Portfolio can enter into options on futures contacts. See "Covered Call and
Put Options" below. The risk involved in writing options on futures contracts
or market indices is that there could be an increase in the market value of
such contracts or indices. If that occurred, the option would be exercised and
the Portfolio involved would not benefit from any increase in value above the
exercise price. Usually, this risk can be eliminated by entering into an
offsetting transaction. However, the cost to do an offsetting transaction and
terminate the Portfolio's obligation might be more or less than the premium
received when it originally wrote the option. Further, the Portfolio might
occasionally not be able to close the option because of insufficient activity
in the options market.
COVERED CALL AND PUT OPTIONS - Each Variable Portfolio may write (sell)
covered call options and purchase put options and may purchase call and sell
put options including options on securities, indices and futures as discussed
in the prospectus and in this Section. A call option gives the holder (buyer)
the right to buy and obligates the writer (seller) to sell a security or
financial instrument at a stated price (strike price) at any time until a
designated future date when the option expires (expiration date). A put option
gives the holder (buyer) the right to sell and obligates the writer (seller)
to purchase a security or financial instrument at a stated price at any time
until the expiration date. A Portfolio may write or purchase put or call
options listed on national securities exchanges in standard contracts or may
write or purchase put or call options with or directly from investment dealers
meeting the creditworthiness criteria of ALIAC.
So long as the obligation of the writer of a call option continues, the writer
may be assigned an exercise notice by the broker-dealer through which such
option was settled, requiring the writer to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, by the exercise of the call option, or by
entering into an offsetting transaction. To secure the writer's obligation to
deliver the underlying security, a writer of a call option is required to
deposit in escrow the underlying security or other assets in accordance with
the rules of the clearing corporations and of the exchanges. A Portfolio will
only write a call option on a security which it already owns and will not
write call options on when-issued securities.
When writing a call option, in return for the premium, the writer gives up the
opportunity to profit from the price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price
of the security decline. If a call option expires unexercised, the writer
will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security during the
option period. If the call option is exercised, the writer would realize a
gain or loss from the transaction depending on what it received from the call
and what it paid for the underlying security.
A Portfolio may purchase and write call options on stock indices, including
the S&P 500, as well as on any individual stock, as described below. The
Portfolio will use these techniques primarily as a temporary substitute for
taking positions in certain securities or in the securities that comprise the
index, particularly if ALIAC considers these instruments to be undervalued
relative to the prices of particular securities or of the securities that
comprise the index.
An option on an index (or a particular security) is a contract that gives the
purchaser of the option, in return for the premium paid, the right to receive
from the writer of the option cash equal to the difference between the closing
price of the index (or security) and the exercise price of the option,
expressed in dollars, times a specified multiple (the "multiplier"). A
Portfolio may, in particular, purchase call options on an index (or a
particular security) to protect against increases in the price of securities
underlying that index (or individual securities) that the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner.
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security,
since it may be assigned an exercise notice at any time prior to the
expiration date. This obligation terminates earlier if the writer effects a
closing purchase transaction by purchasing a put of the same series as that
previously sold.
To secure its obligation to pay for the underlying security, the writer of a
put generally must deposit in escrow liquid assets with a value equal to or
greater than the exercise price of the put option. The writer therefore
foregoes the opportunity of investing the segregated assets or writing calls
against those assets. A Portfolio may write put options on debt securities or
futures, only if such puts are covered by segregated liquid assets.
In writing puts, there is the risk that a writer may be required to buy the
underlying security at a disadvantageous price. Writing a put covered by
segregated liquid assets equal to the exercise of the put has the same
economic effect as writing a covered call option. The premium the writer
receives from writing a put option represents a profit, as long as the price
of the underlying instrument remains above the exercise price; however, if the
put is exercised, the writer is obligated during the option period to buy the
underlying instrument from the buyer of the put at the exercise price, even
though the value of the investment may have fallen below the exercise price.
If the put lapses unexercised, the writer realizes a gain in the amount of the
premium. If the put is exercised, the writer may incur a loss, equal to the
difference between the exercise price and the current market value of the
underlying instrument.
A Portfolio may purchase put options when ALIAC believes that a temporary
defensive position is desirable in light of market conditions, but does not
desire to sell a portfolio security. The purchase of put options for these
purposes may be used to protect a Portfolio's holdings in an underlying
security against a substantial decline in market value. Such protection is, of
course, only provided during the life of the put option when a Portfolio, as
the holder of the put option, is able to sell the underlying security at the
put exercise price regardless of any decline in the underlying security's
market price. By using put options in this manner, a Portfolio will reduce
any profit it might otherwise have realized in its underlying security by the
premium paid for the put option and by transaction costs. The security
covering the call or put option will be segregated at the Portfolio's
custodian.
The premium received from writing a call or put option, or paid for purchasing
a call or put option will reflect, among other things, the current market
price of the underlying security, the relationship of the exercise price to
such market price, the historical price volatility of the underlying security,
the length of the option period, and the general interest rate environment.
The premium received by a Portfolio for writing call options will be recorded
as a liability in the statement of assets and liabilities of that Portfolio.
This liability will be adjusted daily to the option's current market value.
The liability will be extinguished upon expiration of the option, by the
exercise of the option, or by entering into an offsetting transaction.
Similarly, the premium paid by a Portfolio when purchasing a put option will
be recorded as an asset in the statement of assets and liabilities of that
Portfolio. This asset will be adjusted daily to the option's current market
value. The asset will be extinguished upon expiration of the option, by
selling an identical option in a closing transaction, or by exercising the
option.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit a Portfolio to write
another call option, or purchase another put option, on the underlying
security with either a different exercise price or expiration date or both. If
a Portfolio desires to sell a particular security from its portfolio on which
it has written a call option, or purchased a put option, it will seek to
effect a closing transaction prior to, or concurrently with, the sale of the
security. There is, of course, no assurance that a Portfolio will be able to
effect a closing transaction at a favorable price. If a Portfolio cannot enter
into such a transaction, it may be required to hold a security that it might
otherwise have sold, in which case it would continue to be at market risk on
the security. A Portfolio will pay brokerage commissions in connection with
the sale or purchase of options to close out previously established option
positions. Such brokerage commissions are normally higher as a percentage of
underlying asset values than those applicable to purchases and sales of
portfolio securities. The exercise price of an option may be below, equal to,
or above the current market value of the underlying security at the time the
option is written. From time to time, a Portfolio may purchase an underlying
security for delivery in accordance with an exercise notice of a call option
assignment, rather than delivering such security from its portfolio. In such
cases additional brokerage commissions will be incurred.
A Portfolio will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different option. Also, because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by a Portfolio. Any profits from
writing covered call options are considered short-term gain for federal income
tax purposes and, when distributed by a Portfolio, are taxable as ordinary
income.
FOREIGN FUTURES CONTRACTS AND FOREIGN OPTIONS - The Variable Portfolios may
engage in transactions in foreign futures contracts and foreign options.
Participation in foreign futures contracts and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the CFTC, the National Futures Association
("NFA") nor any domestic exchange regulates activities of any foreign boards
of trade including the execution, delivery and clearing of transactions, or
has the power to compel enforcement of the rules of a foreign board of trade
or any applicable foreign laws. Generally, the foreign transaction will be
governed by applicable foreign law. This is true even if the exchange is
formally linked to a domestic market so that a position taken on the market
may be liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures contract or foreign options transaction occurs. Investors which trade
foreign futures contracts or foreign options contracts may not be afforded
certain of the protective measures provided by domestic exchanges, including
the right to use reparations proceedings before the CFTC and arbitration
proceedings provided by the NFA. In particular, funds received from customers
for foreign futures contracts or foreign options transactions may not be
provided the same protections as funds received for transactions on United
States futures exchanges. The price of any foreign futures contracts or
foreign options contract and, therefore, the potential profit and loss
thereon, may be affected by an variance in the foreign exchange rate between
the time an order is placed and the time it is liquidated, offset or
exercised.
OPTIONS ON FOREIGN CURRENCIES - Each Variable Portfolio may write and purchase
calls on foreign currencies. A Portfolio may purchase and write puts and
calls on foreign currencies that are traded on a securities or commodities
exchange or quoted by major recognized dealers in such options for the
purposes of protecting against declines in the dollar value of foreign
securities and against increases in the dollar cost of foreign securities to
be acquired. If a rise is anticipated in the dollar value of a foreign
currency in which securities to be required are denominated, the increased
cost of such securities may be partially offset by purchasing calls or writing
puts on that foreign currency. If a decline in the dollar value of a foreign
currency is anticipated, the decline in value of portfolio securities
denominated in that currency may be partially offset by writing calls or
purchasing puts on that foreign currency. In the event of rate fluctuations
adverse to a Portfolio's position, it would lose the premium it paid and
transaction costs. A call written on a foreign currency by a Portfolio is
covered if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian) upon conversion or exchange of
other foreign currency held in its portfolio. A call may be written by a
Portfolio on a foreign currency to provide a hedge against a decline due to an
expected adverse change in the exchange rate in the U.S. dollar value of a
security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option. This is a "cross-hedging"
strategy. In such circumstances, the Portfolio collateralizes the position by
maintaining in a segregated account with the Portfolio's custodian cash or
U.S. Government securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
FORWARD EXCHANGE CONTRACTS - Each Variable Portfolio may enter into forward
contracts for foreign currency ("forward exchange contracts"), which obligate
the seller to deliver and the purchaser to take a specific amount of a
specified foreign currency at a future date at a price set at the time of the
contract. These contracts are generally traded in the interbank market
conducted directly between currency traders and their customers. A Portfolio
may enter into a forward exchange contract in order to "lock in" the U.S.
dollar price of a security denominated in a foreign currency which it has
purchased or sold but which has not yet settled (a "transaction hedge"); or to
lock in the value of an existing portfolio security (a "position hedge"); or
to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and a foreign currency. There is a risk
that use of forward exchange contracts may reduce the gain that would
otherwise result from a change in the relationship between the U.S. dollar and
a foreign currency. Forward exchange contracts include standardized foreign
currency futures contracts which are traded on exchanges and are subject to
procedures and regulations applicable to futures. Each Portfolio may also
enter into a forward exchange contract to sell a foreign currency which
differs from the currency in which the underlying security is denominated.
This is done in the expectation that there is a greater correlation between
the foreign currency of the forward exchange contract and the foreign currency
of the underlying investment than between the U.S. dollar and the foreign
currency of the underlying investment. This technique is referred to as
"cross-hedging." The success of cross-hedging is dependent on many factors,
including the ability of ALIAC to correctly identify and monitor the
correlation between foreign currencies and the U.S. dollar. To the extent that
the correlation is not identical, a Portfolio may experience losses or gains
on both the underlying security and the cross currency hedge.
Each Portfolio may use forward exchange contracts to protect against
uncertainty in the level of future exchange rates. The use of forward
exchange contracts does not eliminate fluctuations in the prices of the
underlying securities the Portfolio owns or intends to acquire, but it does
fix a rate of exchange in advance. In addition, although forward exchange
contracts limit the risk of loss due to a decline in the value of the hedged
currencies, at the same time they limit any potential gain that might result
should the value of the currencies increase.
There is no limitation as to the percentage of a Portfolio's assets that may
be committed to forward exchange contracts. The Portfolios will not enter into
a "cross-hedge," unless it is denominated in a currency or currencies that
ALIAC believes will have price movements that tend to correlate closely with
the currency in which the investment being hedged is denominated.
The Variable Portfolios' custodian will place cash or U.S. Government
securities or other liquid high-quality debt securities in a separate account
of each Portfolio having a value equal to the aggregate amount of that
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such contracts. As an
alternative to maintaining all or part of the separate account, a Portfolio
may purchase a call option permitting the Portfolio to purchase the amount of
foreign currency being hedged by a forward sale contract at a price no higher
than the forward contract price, or a Portfolio may purchase a put option
permitting the Portfolio to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such
contracts.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the forward
contract is entered into and the date it is sold. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
(i.e., cash) market (and bear the expense of such purchase), if the market
value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security if its market value exceeds the amount
of foreign currency the Portfolio is obligated to deliver. The projection of
short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
Forward contracts involve the risk that anticipated currency movements will
not be accurately predicted, causing the Portfolio to sustain losses on these
contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Portfolio
to sell a currency, the Portfolio may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Portfolio will obtain, on the same
maturity date, the same amount of the currency that it is obligated to
deliver. Similarly, a Portfolio may close out a forward contract requiring it
to purchase a specified currency by entering into a second contract entitling
it to sell the same amount of the same currency on the maturity date of the
first contract. The Portfolio would realize a gain or loss as a result of
entering into such an offsetting forward contract under either circumstance to
the extent the exchange rate(s) between the currencies involved moved between
the execution dates of the first contract and the offsetting contract.
The cost to a Portfolio of engaging in forward exchange contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved.
Because such contracts are not traded on an exchange, a Portfolio must
evaluate the credit and performance risk of each particular counterparty under
a forward contract.
Although the Variable Portfolios value their assets daily in terms of U.S.
dollars, they do not intend to convert their holdings of foreign currencies
into U.S. dollars on a daily basis. The Portfolios may convert foreign
currency from time to time, and investors should be aware of the costs of
currency conversion. Foreign exchange dealers do not charge a fee for
conversion, but they do seek to realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a
dealer may offer to sell a foreign currency to the Portfolio at one rate,
while offering a lesser rate of exchange should the Portfolio desire to resell
that currency to the dealer.
RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS - CFTC regulations
require that all short futures positions be entered into for the purpose of
hedging the value of securities held, and that all long futures positions
either constitute bona fide hedging transactions, as defined in such
regulations, or have a total value not in excess of an amount determined by
reference to certain cash and securities positions maintained, and accrued
profits on such positions. With respect to futures contracts or related
options that are entered into for purposes that may be considered speculative,
the aggregate initial margin for future contracts and premiums for options
will not exceed 5% of a Portfolio's net assets, after taking into account
realized profits and unrealized losses on such futures contracts.
A Portfolio's ability to engage in the hedging transactions described herein
may be limited by the current federal income tax requirement that a Portfolio
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months.
INTEREST RATE SWAP TRANSACTIONS - Swap agreements entail both interest rate
risk and credit risk. There is a risk that, based on movements of interest
rates in the future, the payments made by a Portfolio under a swap agreement
will have been greater than those received by it. Credit risk arises from the
possibility that the counterparty will default. If the counterparty to an
interest rate swap defaults, a Portfolio's loss will consist of the net amount
of contractual interest payments that a Portfolio has not yet received. ALIAC
will monitor the creditworthiness of counterparties to a Portfolio's interest
rate swap transactions on an ongoing basis. A Portfolio will enter into swap
transactions with appropriate counterparties pursuant to master netting
agreements. A master netting agreement provides that all swaps done between a
Portfolio and that counterparty under that master agreement shall be regarded
as parts of an integral agreement. If on any date amounts are payable in the
same currency in respect of one or more swap transactions, the net amount
payable on that date in that currency shall be paid. In addition, the master
netting agreement may provide that if one party defaults generally or on one
swap, the counterparty may terminate the swaps with that party. Under such
agreements, if there is a default resulting in a loss to one party, the
measure of that party's damages is calculated by reference to the average cost
of a replacement swap with respect to each swap (i.e., the mark-to-market
value at the time of the termination of each swap). The gains and losses on
all swaps are then netted, and the result is the counterparty's gain or loss
on termination. The termination of all swaps and the netting of gains and
losses on termination is generally referred to as "aggregation."
ADDITIONAL RISK FACTORS IN USING DERIVATIVES - In addition to any risk factors
which may be described elsewhere in this section, or in the prospectus under
"Investment Techniques" and "Risk Factors and Other Considerations," the
following sets forth certain information regarding the potential risks
associated with the Portfolio's transactions in derivatives.
Risk of Imperfect Correlation - A Portfolio's ability to hedge
effectively all or a portion of its portfolio through transactions in futures,
options on futures or options on securities and indexes depends on the degree
to which movements in the value of the securities or index underlying such
hedging instrument correlate with movements in the value of the assets being
hedged. If the values of the assets being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for a Portfolio might not be successful and the Portfolio could sustain losses
on its hedging transactions which would not be offset by gains on its
portfolio. It is also possible that there may be a negative correlation
between the security or index underlying a futures or option contract and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken. Stock index futures or options based on a narrower index
of securities may present greater risk than options or futures based on a
broad market index, as a narrower index is more susceptible to rapid and
extreme fluctuations resulting from changes in the value of a small number of
securities. The Portfolio would, however, effect transactions in such futures
or options only for hedging purposes (or to close out open positions).
The trading of futures and options on indices involves the additional risk of
imperfect correlation between movements in the futures or option price and the
value of the underlying index. The anticipated spread between the prices may
be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase
of an option on a futures contract also involves the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. The risk of imperfect correlation, however,
generally tends to diminish as the maturity date of the futures contract or
termination date of the option approaches. The risk incurred in purchasing an
option on a futures contract is limited to the amount of the premium plus
related transaction costs, although it may be necessary under certain
circumstances to exercise the option and enter into the underlying futures
contract in order to realize a profit. Under certain extreme market
conditions, it is possible that a Portfolio will not be able to establish
hedging positions, or that any hedging strategy adopted will be insufficient
to completely protect the Portfolio.
The Variable Portfolios will purchase or sell futures contracts or options for
hedging purposes, only if, in ALIAC's judgment, there is expected to be a
sufficient degree of correlation between movements in the value of such
instruments and changes in the value of the assets being hedged for the hedge
to be effective. There can be no assurance that ALIAC's judgment will be
accurate.
Potential Lack of a Liquid Secondary Market - The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants
in the futures markets are subject to initial deposit and variation margin
requirements. This could require a Portfolio to post additional cash or cash
equivalents as the value of the position fluctuates. Rather than meeting
additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures or options market may be lacking. Prior to exercise or
expiration, a futures or option position may be terminated only by entering
into a closing purchase or sale transaction, which requires a secondary market
on the exchange on which the position was originally established. While a
Portfolio will establish a futures or option position only if there appears to
be a liquid secondary market therefor, there can be no assurance that such a
market will exist for any particular futures or option contract at any
specific time. In such event, it may not be possible to close out a position
held by the Portfolio, which could require the Portfolio to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. The inability to close out
futures or option positions also could have an adverse impact on the
Portfolio's ability effectively to hedge its portfolio, or the relevant
portion thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation limits"
established by the exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange
or clearing house equipment failures, government intervention, insolvency of
the brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Risk of Predicting Interest Rate Movements - Investments in futures
contracts on fixed income securities and related indices involve the risk that
if ALIAC's judgment concerning the general direction of interest rates is
incorrect, a Portfolio's overall performance may be poorer than if it had not
entered into any such contract. For example, if a Portfolio has been hedged
against the possibility of an increase in interest rates which would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its bonds which have been hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell bonds from its portfolio
to meet daily variation margin requirements, possibly at a time when it may be
disadvantageous to do so. Such sale of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market.
Trading and Position Limits - Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Fund does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding the Variable Portfolios.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the Fund's Board of Directors. A repurchase agreement allows a Portfolio to
determine the yield during the Portfolio's holding period. This results in a
fixed rate of return insulated from market fluctuations during such period.
Such underlying debt instruments serving as collateral will meet the quality
standards of a Portfolio. The market value of the underlying debt instruments
will, at all times, be equal to the dollar amount invested. Repurchase
agreements, although fully collateralized, involve the risk that the seller of
the securities may fail to repurchase them from a Portfolio. In that event, a
Portfolio may incur (a) disposition costs in connection with liquidating the
collateral, or (b) a loss if the collateral declines in value. Also, if the
default on the part of the seller is due to insolvency and the seller
initiates bankruptcy proceedings, a Portfolio's ability to liquidate the
collateral may be delayed or limited. Under the 1940 Act, repurchase
agreements are considered loans by a Portfolio. Repurchase agreements
maturing in more than seven days will not exceed 15 percent of the total
assets of a Portfolio.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments (including floating rate instruments) held by
a Portfolio may have maturities of more than one year, provided: (i) the
Portfolio is entitled to the payment of principal at any time, or during
specified intervals not exceeding one year, upon giving the prescribed notice
(which may not exceed 30 days), and (ii) the rate of interest on such
instruments is adjusted at periodic intervals not to exceed one year. In
determining whether a variable rate demand instrument has a remaining maturity
of one year or less, each instrument will be deemed to have a maturity equal
to the longer of the period remaining until its next interest rate adjustment
or the period remaining until the principal amount can be recovered through
demand. A Portfolio will be able (at any time or during specified periods not
exceeding one year, depending upon the note involved) to demand payment of the
principal of a note. If an issuer of a variable rate demand note defaulted on
its payment obligation, a Portfolio might be unable to dispose of the note and
a loss would be incurred to the extent of the default. A Portfolio may invest
in variable rate demand notes only when the investment is deemed to involve
minimal credit risk. The continuing creditworthiness of issuers of variable
rate demand notes held by a Portfolio will also be monitored to determine
whether such notes should continue to be held. Variable and floating rate
instruments with demand periods in excess of seven days and which cannot be
disposed of promptly within seven business days and in the usual course of
business without taking a reduced price will be treated as illiquid securities
that are subject to the Portfolio's policies and restrictions on illiquid
securities.
SECURITIES LENDING
The Variable Portfolios can lend securities in its portfolio subject to the
following conditions: (a) the borrower will provide collateral equal to an
amount of at least 100% of the then current market value of the loaned
securities throughout the life of the loan; (b) loans will be made subject to
the rules of the New York Stock Exchange; (c) the loan collateral will be
either cash, direct obligations of the U.S. government or agencies thereof or
irrevocable letters of credit; (d) cash collateral will be invested only in
highly liquid short-term investments; (e) during the existence of a loan, a
Portfolio will continue to receive any distributions paid on the borrowed
securities or amounts equivalent thereto; and (f) no more than one-third of
the net assets of a Portfolio will be on loan at any one time. A loan may be
terminated at any time by the borrower or lender upon proper notice.
In ALIAC's opinion, lending portfolio securities to qualified broker-dealers
affords a Portfolio a means of increasing the yield on its portfolio. A
Portfolio will be entitled either to receive a fee from the borrower or to
retain some or all of the income derived from its investment of cash
collateral. A Portfolio will continue to receive the interest or dividends
paid on any securities loaned, or amounts equivalent thereto. Although voting
rights will pass to the borrower of the securities, whenever a material event
affecting the borrowed securities is to be voted on, ALIAC will regain or
direct the vote with respect to loaned securities.
The primary risk a Portfolio assumes in loaning securities is that the
borrower may become insolvent on a day on which the loaned security is rapidly
increasing in price. In such event, if the borrower fails to return the
loaned securities, the existing collateral might be insufficient to purchase
back the full amount of the security loaned, and the borrower would be unable
to furnish additional collateral. The borrower would be liable for any
shortage, but a Portfolio would be an unsecured creditor as to such shortage
and might not be able to recover all or any of it.
FOREIGN SECURITIES
Investments in foreign securities, including futures and options contracts,
offer potential benefits not available solely through investment in securities
of domestic issuers. Foreign securities offer the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in exchange rates, adverse foreign political and
economic developments, and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. Since the Variable
Portfolios may invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates will affect
the value of securities in the portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. In
addition, with respect to certain countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability, or diplomatic developments that could adversely affect
investments in those countries.
There may be less publicly available information about a foreign issuer than
about a U.S. issuer, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or
as uniform as those of U.S. issuers. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than
U.S. markets. Securities of many foreign issuers are less liquid and their
prices more volatile than securities of comparable U.S. issuers.
Transactional costs in non-U.S. securities markets are generally higher than
in U.S. securities markets. There is generally less government supervision and
regulation of exchanges, brokers, and issuers than there is in the U.S. The
Fund might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to
domestic issuers in U.S. courts. In addition, transactions in foreign
securities may involve greater time from the trade date until settlement than
domestic securities transactions and involve the risk of possible losses
through the holding of securities by custodians and securities depositories in
foreign countries.
Currently, direct investment in equity securities in China and Taiwan is
restricted, and investments may be made only through a limited number of
approved vehicles. At present this includes investment in listed and unlisted
investment companies, subject to limitations under the 1940 Act. Investment in
these closed-end funds may involve the payment of additional premiums to
acquire shares in the open-market and the yield of these securities will be
reduced by the operating expenses of such companies. In addition, an investor
should recognize that he will bear not only his proportionate share of the
expenses of the Portfolio, but also indirectly bear similar expenses of the
underlying closed-end fund. Also, as a result of a Portfolio's policy of
investing in closed-end mutual funds, investors in the Portfolio may receive
taxable capital gains distributions to a greater extent than if he or she had
invested directly in the underlying closed-end fund.
Dividend and interest income from foreign securities may generally be subject
to withholding taxes by the country in which the issuer is located and may not
be recoverable by a Portfolio or its investors.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the
underlying securities are denominated. Depositary receipts include: (a)
American Depositary Receipts (ADRs), which are typically designed for U.S.
investors and held either in physical form or in book entry form; (b) European
Depositary Receipts (EDRs), which are similar to ADRs but may be listed and
traded on a European exchange as well as in the United States. Typically,
these securities are traded on the Luxembourg exchange in Europe; and (c)
Global Depositary Receipts (GDRS), which are similar to EDRS although they may
be held through foreign clearing agents such as Euroclear and other foreign
depositories. Depositary receipts are not considered foreign securities for
purposes of a Portfolio's investment limitation concerning investment in
foreign securities.
MORTGAGE-RELATED DEBT SECURITIES
Federal mortgage-related securities include obligations issued or guaranteed
by the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). GNMA is a wholly owned corporate instrumentality of the United
States, the securities and guarantees of which are backed by the full faith
and credit of the United States. FNMA, a federally chartered and privately
owned corporation, and FHLMC, a federal corporation, are instrumentalities of
the United States with Presidentially-appointed board members. The obligations
of FNMA and FHLMC are not explicitly guaranteed by the full faith and credit
of the federal government.
Pass-through, mortgage-related securities are characterized by monthly
payments to the holder, reflecting the monthly payments made by the borrowers
who received the underlying mortgage loans. The payments to the security
holders, like the payments on the underlying loans, represent both principal
and interest. Although the underlying mortgage loans are for specified
periods of time, often twenty or thirty years, the borrowers can repay such
loans sooner. Thus, the security holders frequently receive repayments of
principal, in addition to the principal which is part of the regular monthly
payment. A borrower is more likely to repay a mortgage which bears a
relatively high rate of interest. This means that in times of declining
interest rates, some higher yielding securities held by a Portfolio might be
converted to cash, and the Portfolio could be expected to reinvest such cash
at the then prevailing lower rates. The increased likelihood of prepayment
when interest rates decline also limits market price appreciation of
mortgage-related securities. If a Portfolio buys mortgage-related securities
at a premium, mortgage foreclosures or mortgage prepayments may result in
losses of up to the amount of the premium paid since only timely payment of
principal and interest is guaranteed.
As noted in the Prospectus, the Variable Portfolios may also invest in
collateralized mortgage obligations (CMOs). CMOs are securities which are
collateralized by mortgage pass-through securities. Cash flows from
underlying mortgages are allocated to various classes or tranches in a
predetermined, specified order. Each sequential tranche has a "stated
maturity" - the latest date by which the tranche can be completely repaid,
assuming no repayments - and has an "average life" - the average time to
receipt of a principal payment weighted by the size of the principal payment.
The average life is typically used as a proxy for maturity because the debt is
amortized, rather than being paid off entirely at maturity, as would be the
case in a straight debt instrument.
CMOs are typically structured as "pass-through" securities. In these
arrangements, the underlying mortgages are held by the issuer, which then
issues debt collateralized by the underlying mortgage assets. The security
holder thus owns an obligation of the issuer and payment of interest and
principal on such obligations is made from payments generated by the
underlying mortgage assets. The underlying mortgages may be guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
Government such as GNMA or otherwise backed by FNMA or FHLMC. Alternatively,
such securities may be backed by mortgage insurance, letters of credit or
other credit enhancing features. CMOs are issued by private entities. They are
not directly guaranteed by any government agency and are secured by the
collateral held by the issuer.
ASSET-BACKED SECURITIES
Asset-backed securities are collateralized by short-term loans such as
automobile loans, home equity loans, or credit card receivables. The payments
from the collateral are passed through to the security holder. As noted above
with respect to CMOs, the average life for these securities is the
conventional proxy for maturity. Asset-backed securities may pay all interest
and principal to the holder, or they may pay a fixed rate of interest, with
any excess over that required to pay interest going either into a reserve
account or to a subordinate class of securities, which may be retained by the
originator. The originator may guarantee interest and principal payments.
These guarantees often do not extend to the whole amount of principal, but
rather to an amount equal to a multiple of the historical loss experience of
similar portfolios.
Two varieties of asset-backed securities are CARs and CARDs. CARs are
securities, representing either ownership interests in fixed pools of
automobile receivables, or debt instruments supported by the cash flows from
such a pool. CARDs are participations in fixed pools of credit accounts.
These securities have varying terms and degrees of liquidity.
Asset-backed securities may be subject to the type of prepayment risk
discussed above due to the possibility that prepayments on the underlying
assets will alter the cash flow. Faster prepayments will shorten the average
life and slower prepayments will lengthen it.
The coupon rate of interest on mortgage-related and asset-backed securities is
lower than the interest rates paid on the mortgages included in the underlying
pool, by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor. Actual yield may vary from the coupon rate, however, if such
securities are purchased at a premium or discount, trade in the secondary
market at a premium or discount, or to the extent that the underlying assets
are prepaid as noted above.
HIGH RISK, HIGH-YIELD SECURITIES
The Variable Portfolios may invest in high risk, high-yield securities ("junk
bonds"), which are fixed income securities that offer a current yield above
that generally available on higher quality debt securities. These securities
are regarded as speculative and generally involve more risk of loss of
principal and income than higher-rated securities. Also their yields and
market values tend to fluctuate more. Fluctuations in value do not affect the
cash income from the securities but are reflected in a Portfolio's net asset
value. The greater risks and fluctuations in yield and value occur, in part,
because investors generally perceive issuers of lower-rated and unrated
securities to be less creditworthy. Lower ratings, however, may not
necessarily indicate higher risks. In pursuing a Portfolio's objectives, ALIAC
seeks to identify situations in which the rating agencies have not fully
perceived the value of the security or in which ALIAC believes that future
developments will enhance the creditworthiness and the ratings of the issuer.
The yields earned on high risk, high-yield securities (junk bonds) generally
are higher than those of higher quality securities with the same maturities
because of the additional risks associated with them. These risks include:
(1) SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. High risk,
high-yield securities (junk bonds) are more sensitive to adverse economic
changes or individual corporate developments but less sensitive to interest
rate changes than are investment grade bonds. As a result, when interest rates
rise, causing bond prices to fall, the value of these securities may not fall
as much as investment grade corporate bonds. Conversely, when interest rates
fall, these securities may underperform investment grade corporate bonds
because the prices of high risk, high-yield securities (junk bonds) tend not
to rise as much as the prices of those other bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability of
issuers of these securities to service their principal and interest payments,
to meet projected business goals and to obtain additional financing, than on
more creditworthy issuers. Holders of these securities could also be at
greater risk because these securities are generally unsecured and subordinated
to senior debt holders and secured creditors. If the issuer of a high risk,
high-yield security (junk bonds) owned by a Portfolio defaults, the Portfolio
may incur additional expenses to seek recovery. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of these securities and a Portfolio's net asset
value. Furthermore, in the case of high risk, high-yield securities (junk
bonds) structured as zero coupon or pay-in-kind securities, their market
prices are affected to a greater extent by interest rate changes and thereby
tend to be more speculative and volatile than securities which pay interest
periodically and in cash.
(2) PAYMENT EXPECTATIONS. High risk, high-yield securities (junk bonds),
like other debt instruments, present risks based on payment expectations. For
example, these securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, the
Portfolio may have to replace the securities with a lower yielding security,
resulting in a decreased return for investors. Also, the value of these
securities may decrease in a rising interest rate market. In addition, there
is a higher risk of non-payment of interest and/or principal by issuers of
these securities than in the case of investment grade bonds.
(3) LIQUIDITY AND VALUATION RISKS. Some high risk, high-yield securities
(junk bonds) are traded among a small number of broker-dealers rather than in
a broad secondary market. Many of these securities may not be as liquid as
investment grade bonds. The ability to value or sell these securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease or increase the value and liquidity of
these securities more than other securities, especially in a thinly-traded
market.
(4) LIMITATIONS OF CREDIT RATINGS. The credit ratings assigned to high
risk, high-yield securities (junk bonds) may not accurately reflect the true
risks of an investment. Credit ratings typically evaluate the safety of
principal and interest payments rather than the market value risk of such
securities. In addition, credit agencies may fail to adjust credit ratings to
reflect rapid changes in economic or company conditions that affect a
security's market value. Although the ratings of recognized rating services
such as Moody's Investors Service, Inc. and Standard & Poor's Corporation are
considered, ALIAC primarily relies on its own credit analysis which includes a
study of existing debt, capital structure, ability to service debts and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. Thus the achievement of a
Portfolio's investment objective may be more dependent on ALIAC's own credit
analysis than might be the case for a fund which does not invest in these
securities.
(5) LEGISLATION. Legislation may have a negative impact on the market for
high risk, high-yield securities (junk bonds), such as legislation requiring
federally-insured savings and loan associations to divest themselves of their
investments in these securities.
ZERO COUPON AND PAY-IN-KIND SECURITIES
The Variable Portfolios may invest in zero coupon securities and pay-in-kind
securities. In addition, the Portfolios may invest in STRIPS (Separate
Trading of Registered Interest and Principal of Securities). Zero coupon or
deferred interest securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date when the securities begin paying current interest (the "cash payment
date") and therefore are issued and traded at a discount from their face
amounts or par value. The discount varies, depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, decreases as the final
maturity or cash payment date of the security approaches. STRIPS are created
by the Federal Reserve Bank by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. The market prices of zero coupon, STRIPS and deferred interest
securities generally are more volatile than the market prices of securities
with similar maturities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero
coupon securities having similar maturities and credit quality.
The risks associated with lower-rated debt securities apply to these
securities. Zero coupon and pay-in-kind securities are also subject to the
risk that in the event of a default, a Portfolio may realize no return on its
investment, because these securities do not pay cash interest.
CONVERTIBLES
A convertible bond or convertible preferred stock gives the holder the option
of converting these securities into common stock. Some convertible securities
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
WARRANTS
Warrants allow the holder to subscribe for new shares in the issuing company
within a specified time period, according to a predetermined formula governing
the number of shares per warrant and the price to be paid for those shares.
Warrants may be issued separately or in association with a new issue of bonds,
preferred stock, common stock or other securities.
Covered warrants allow the holder to purchase existing shares in the issuing
company, or in a company associated with the issuer, or in a company in which
the issuer has or may have a share stake which covers all or part of the
warrants' subscription rights.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES
During any period that a Portfolio has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, that Portfolio will
maintain a segregated account consisting of cash, U.S. Government securities
or other high-quality debt obligations with its custodian bank. To the extent
that the market value of securities held in this segregated account falls
below the amount that the Portfolio will be required to pay on settlement,
additional assets may be required to be added to the segregated account. Such
segregated accounts could affect the Portfolio's liquidity and ability to
manage its portfolio. When a Portfolio engages in when-issued or
delayed-delivery transactions, it is effectively relying on the seller of such
securities to consummate the trade; failure of the seller to do so may result
in the Portfolio's incurring a loss or missing an opportunity to invest
securities held in the segregated account more advantageously. A Portfolio
will not pay for securities purchased on a when-issued or delayed-delivery
basis, or start earning interest on such securities, until the securities are
actually received. However, any security so purchased will be recorded as an
asset of the purchasing Portfolio at the time the commitment is made. Because
the market value of securities purchased on a when-issued or delayed-delivery
basis may increase or decrease prior to settlement as a result of changes in
interest rates or other factors, such securities will be subject to changes in
market value prior to settlement and a loss may be incurred if the value of
the security to be purchased declines prior to settlement.
PORTFOLIO TURNOVER
The Variable Portfolios' policies on portfolio turnover are discussed in the
prospectus.
DIRECTORS AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the direction of the
Board of Directors. The Directors and executive officers of the Fund and their
principal occupations for the past five years are listed below. Those
Directors who are "interested persons," as defined in the 1940 Act, are
indicated by an asterisk (*). All Directors and officers hold similar
positions with other investment companies in the same Fund Complex managed by
ALIAC as the investment adviser. The Fund Complex presently consists of Aetna
Series Fund, Inc., Aetna Variable Fund, Aetna Income Shares, Aetna Variable
Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund (Series B
and Series C), Aetna Generation Portfolios, Inc. and Aetna Variable
Portfolios, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
Position(s) Principal Occupation During Past Five Years
Held with (and Positions held with Affiliated Persons
Name, Address and Age Registrant or Principal Underwriters of the Registrant)
- ------------------------ ---------------- ---------------------------------------------------
Shaun P. Mathews* Director and Chief Executive, Aetna Investment Services,
151 Farmington Avenue President Inc., October, 1995 to Present; President,
Hartford, Connecticut Aetna Investment Services, Inc., March, 1994
Age 41 to Present; Director and Chief Operating Officer,
Aetna Investment Services, Inc., July 1993 to
Present; Director and Senior Vice President, Aetna
Insurance Company of America, February 1993 to
Present; Senior Vice President and Director of
Aetna Life Insurance and Annuity Company
("ALIAC"), March 1991 to Present; Vice President
of Aetna Life Insurance Company, 1991 to Present.
J. Scott Fox Vice President Director, Managing Director, Chief Operating
242 Trumbull Street and Treasurer Officer, Chief Financial Officer and Treasurer,
Hartford, Connecticut Aeltus Investment Management, Inc. (Aeltus),
Age 41 April 1994 to present; Managing Director and
Treasurer, Equitable Capital Management Corp.,
March 1987 to September 1993; Director and
Chief Financial Officer, Aeltus Capital, Inc. and
Aeltus Trust Company Inc. Director, President
and Chief Executive Officer, Aetna Investment
Management, (Bermuda) Holding, Ltd.
Susan E. Bryant Secretary Counsel, ALIAC and Aetna Inc., March 1993 to
151 Farmington Avenue Present; General Counsel and Corporate
Hartford, Connecticut Secretary, First Investors Corporation,
Age 48 April 1991 to March 1993.
Morton Ehrlich Director Chairman and Chief Executive Officer,
1000 Venetian Way Integrated Management Corp. (an entrepre-
Miami, Florida neurial company) and Universal Research
Age 61 Technologies, January 1992 to Present;
Director and Chairman, Audit Committee,
National Bureau of Economic Research, 1985
to 1992; President, LIFECO Travel Services
Corp., October 1988 to December 1991.
Maria T. Fighetti Director Attorney, New York City Department of
325 Piermont Road Mental Health, 1973 to Present.
Closter, New Jersey
Age 53
David L. Grove Director Private Investor; Economic/Financial Con-
5 The Knoll sultant, December 1988 to Present.
Armonk, New York
Age 77
Timothy A. Holt* Director Director, Aeltus, April, 1996 to Present.
151 Farmington Avenue Director, Senior Vice President and Chief
Hartford, Connecticut Financial Officer, ALIAC, February 1996 to
Age 43 Present; Senior Vice President, Business
Strategy & Finance, Aetna Retirement
Services, Inc., February 1996 to Present;
Vice President, Portfolio Management/
Investment Group, Aetna Inc.,
August 1992 to February 1996.
Daniel P. Kearney* Director Chairman (since February 1996), Director
151 Farmington Avenue (since March 1991) and President (since
Hartford, Connecticut March 1994), ALIAC; Executive Vice President
Age 57 (since December 1993), and Group Executive,
Investment Division (from February 1991 to
December 1993), Aetna Inc. Director,
Aeltus, April, 1996 to Present.
Sidney Koch Director Senior Adviser, Hambro America, Inc.,
455 East 86th Street January, 1993 to Present; Senior Adviser,
New York, New York Daiwa Securities America, Inc. January 1991
Age 60 to January 1993.
Corine T. Norgaard** Director, Chair Dean of the School of Management, State
School of Management Audit Committee University of New York (Binghamton), August
Binghamton University and Contract 1993 to Present; Professor, Accounting,
Binghamton, New York Committee University of Connecticut (Storrs,
Age 59 Connecticut), September 1969 to June 1993;
Director, The Advest Group, Inc. (holding
company for brokerage firm) from August,
1983 to Present.
Richard G. Scheide Director Private Banking Consultant, July 1992 to
11 Lily Street Present; Consultant, Fleet Bank, from July
Nantucket, Massachusetts 1991 to July 1992.
Age 67
<FN>
** Dr. Norgaard is a director of a holding company that has as a subsidiary a
broker-dealer that sells contracts for ALIAC. The Portfolios are offered as investment options
under the contracts. Her position as a director of the holding company may cause her to be an
"interested person" for purposes of the 1940 Act.
</TABLE>
During the year ended December 31, 1995, members of the Boards of the Funds
within the Aetna Fund Complex who are also directors, officers or employees of
Aetna Inc. and its affiliates were not entitled to any compensation from the
Funds. Effective November 1, 1995, members of the Boards who are not
affiliated as employees of Aetna or its subsidiaries are entitled to receive
an annual retainer of $30,000 for service on the Boards of the Funds within
the Aetna Fund Complex. In addition, each such member will receive a fee of
$5,000 per meeting for each regularly scheduled Board meeting; $5,000 for each
Contract Committee meeting which is held on any day on which a regular Board
meeting is not scheduled; and $3,000 for each committee meeting other than for
a Contract Committee meeting on any day on which a regular Board meeting is
not scheduled. A Committee Chairperson fee of $2,000 each will be paid to the
Chairperson of the Contract and Audit Committees. All of the above fees are to
be allocated proportionately to each Fund within the Aetna Fund Complex based
on the net assets of the Fund as of the date compensation is earned.
<TABLE>
<CAPTION>
<S> <C> <C>
Total Compensation from
Aggregate Compensa- Registrant and Fund
Name of Person, Position tion from Registrant Complex Paid to Directors
- ----------------------------- --------------------- --------------------------
Corine Norgaard $ -0- $ 51,000
Director and Chairman,
Audit and Contract Committees
Sidney Koch $ -0- $ 47,000
Director and Member,
Audit and Contract Committees
Maria T. Fighetti $ -0- $ 46,000
Director and Member,
Audit and Contract Committees
Morton Ehrlich $ -0- $ 46,000
Director and Member,
Audit and Contract Committees
Richard G. Scheide $ -0- $ 46,500
Director and Member,
Audit and Contract Committees
David L. Grove $ -0- $ 46,500*
Director and Member,
Audit and Contract Committees
<FN>
* Mr. Grove elected to defer all such compensation.
</TABLE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
Shares of the Variable Portfolios will be owned by insurance companies as
depositors of separate accounts which are used to fund variable annuity
contracts ("VA Contracts") and variable life insurance policies ("VLI
Policies"). It is currently expected that all shares will be held by separate
accounts of ALIAC and its subsidiary, Aetna Insurance Company of America,
Inc., on behalf of their respective separate accounts. See "Voting Rights"
below.
ALIAC is an indirect wholly-owned subsidiary of Aetna Retirement Services,
Inc., which is in turn an indirect wholly-owned subsidiary of Aetna Inc.
ALIAC's principal office is located at 151 Farmington Avenue, Hartford,
Connecticut 06156. ALIAC is registered with the SEC as an investment adviser
and manages over $22 billion in assets.
THE INVESTMENT ADVISORY AGREEMENT
On June 18, 1996, the Fund's Board of Directors approved an investment
advisory agreement (Investment Advisory Agreement) between the Fund and ALIAC
for each of the Variable Portfolios to continue through December 31, 1997.
Under the Investment Advisory Agreement and subject to the direction of the
Board of Directors of the Fund, ALIAC has responsibility for (i) supervising
all aspects of the operations of each Portfolio; (ii) selecting the securities
to be purchased, sold or exchanged by each Portfolio or otherwise represented
in its investment portfolio, placing trades for all such securities and
regulatory reporting thereon to the Board of Directors; (iii) formulating and
implementing continuing programs for the purchase and sale of securities; (iv)
obtaining and evaluating pertinent information about significant developments
and economic, statistical and financial data, domestic foreign or otherwise,
whether affecting the economy generally, the Portfolios, securities held by or
under consideration for each Portfolio, or the issuers of those securities;
(v) providing economic research and securities analyses as ALIAC considers
necessary or advisable in connection with ALIAC's performance of its duties
thereunder; (vi) obtaining the services of, contracting with, and providing
instructions to custodians and/or sub-custodians of each Portfolio's
securities, transfer agents, dividend paying agents, pricing services and
other service providers as are necessary to carry out the terms of the
Agreement; (vii) preparing financial and performance reports, calculating and
reporting daily net asset values, and preparing any other financial data or
reports, as ALIAC from time to time, deems necessary or as is requested by the
Board; and (viii) taking any other actions which appear to ALIAC and the Board
to be necessary.
The Investment Advisory Agreement provides that ALIAC shall pay (a) the
salaries, employment benefits and other related costs of those of its
personnel engaged in providing investment advice to the Fund, including,
without limitation, office space, office equipment, telephone and postage
costs and (b) any fees and expenses of all Directors, officers and employees,
if any, of the Fund who are employees of ALIAC or an affiliated entity and any
salaries and employment benefits payable to those persons. The Investment
Advisory Agreement provides that each Portfolio will pay (i) investment
advisory fees; (ii) brokers' commissions and certain other transaction fees
including the portion of such fees, if any, which is attributable to brokerage
research services; (iii) fees and expenses of the Portfolio's independent
auditors and legal counsel; (iv) expenses of printing and distributing
proxies, proxy statements, prospectuses and reports to shareholders of each
Portfolio, except as such expenses may be borne by the distributor; (v)
interest and taxes; (vi) fees and expenses of those of the Fund's Directors
who are not "interested persons" (as defined by the 1940 Act) of the Fund or
ALIAC; (vii) costs and expenses of promoting the sale of shares in each
Portfolio, including preparing prospectuses and reports to shareholders of
each Portfolio; (viii) administrator, transfer agent, custodian and dividend
disbursing agent fees and expenses; (ix) fees of dividend, accounting and
pricing agents appointed by each Portfolio; (x) fees payable to the SEC or in
connection with the registration of shares of each Portfolio under the laws of
any state or territory of the United States or the District of Columbia; (xi)
fees and assessments of the Investment Company Institute or other association
memberships approved by the Board of Directors; (xii) such nonrecurring or
extraordinary expenses as may arise; (xiii) all other ordinary business
expenses incurred in the operations of each Portfolio, unless specifically
allocable otherwise by the Investment Advisory Agreement; (xiv) costs
attributable to investor services, administering shareholder accounts and
handling shareholder relations; (xv) all expenses incident to the payment of
any dividend, distribution, withdrawal or redemption; and (xvi) insurance
premiums on property or personnel (including officers and Directors) of the
Fund which benefit the Fund. Some of the costs payable by each Portfolio under
the Investment Advisory Agreement are being assumed by ALIAC under the terms
of the Administrative Services Agreement (see "Administrative Services
Agreement").
The Investment Advisory Agreement provides that it will remain in effect from
year-to-year if approved annually by a majority vote of the Directors,
including a majority of the Directors who are not "interested persons," in
person at a meeting called for that purpose. The Investment Advisory Agreement
may be terminated as to a particular Portfolio without penalty at any time on
sixty days' written notice by (i) the Directors, (ii) a majority vote of the
outstanding voting securities of that Portfolio, or (iii) ALIAC. The
Investment Advisory Agreement terminates automatically in the event of
assignment.
The service mark of the Variable Portfolios and the name "Aetna" have been
adopted by the Fund with the permission of Aetna Inc. and their continued use
is subject to the right of Aetna Inc. to withdraw this permission in the event
ALIAC or another subsidiary or affiliated corporation of Aetna Inc. should not
be the investment adviser of the Variable Portfolios.
THE SUBADVISORY AGREEMENT
On June 18, 1996, the Fund's Board of Directors approved a subadvisory
agreement (Subadvisory Agreement) between ALIAC and Aeltus Investment
Management, Inc. (Aeltus) with respect to each of the Variable Portfolios to
continue through December 31, 1997. The Subadvisory Agreement remains in
effect from year-to-year if approved annually by a majority vote of the
Directors, including a majority of the Directors who are not "interested
persons," in person, at a meeting called for that purpose. The Subadvisory
Agreement may be terminated without penalty at any time on sixty days' written
notice by (i) the Directors, (ii) a majority vote of the outstanding voting
securities of the respective Portfolios, (iii) ALIAC, or (iv) Aeltus. The
Subadvisory Agreement terminates automatically in the event of its assignment
or in the event of the termination of the Investment Advisory Agreement with
ALIAC.
Under the Subadvisory Agreement, Aeltus supervises the investment and
reinvestment of cash and securities comprising the assets of the Portfolios.
The Subadvisory Agreement also directs Aeltus to (a) determine the securities
to be purchased or sold by the Portfolios, and (b) take any actions necessary
to carry out its investment subadvisory responsibilities.
Aeltus pays the salaries, employment benefits and other related costs of
personnel engaged in providing investment advice including office space,
facilities and equipment.
As compensation, ALIAC pays the subadviser a monthly fee as described in
the prospectus.
ALIAC has certain obligations under the Subadvisory Agreement and retains
overall responsibility for monitoring the investment program maintained by
Aeltus for compliance with applicable laws and regulations and each
Portfolio's respective investment objectives. ALIAC will also obtain and
evaluate data regarding economic trends in the United States and industries in
which the Portfolios invest and consult with the subadviser on such data and
trends. In addition, ALIAC will consult with and assist the subadviser in
maintaining appropriate policies, procedures and records and oversee matters
relating to promotion, marketing materials and reports by the subadviser to
the Fund's Board of Directors.
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, between the Fund and
ALIAC, ALIAC has agreed to provide all administrative services in support of
the Portfolios. In addition, ALIAC has agreed to pay on behalf of each
Portfolio, all ordinary recurring direct costs of the Portfolio that it would
otherwise be required to pay under the terms of the Investment Advisory
Agreement except brokerage costs and other transaction costs in connection
with the purchase and sale of securities for its portfolios (Transaction
Costs). As a result, the Portfolios' costs and fees are limited to its
advisory fee, the administrative services charge and Transaction Costs. For
the services under the Administrative Services Agreement, ALIAC will receive
an annual fee, payable monthly, at a rate of 0.15% of the average daily net
assets of the Portfolio.
The Administrative Services Agreement will remain in effect until December 31,
1997. It will then remain in effect from year-to-year if approved annually by
a majority of the Directors. It may be terminated by either party on sixty
days' written notice.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, PA, 15258 serves as
custodian for the assets of the Variable Portfolios. The custodian does not
participate in determining the investment policies of a Portfolio or in
deciding which securities are purchased or sold by a Portfolio. A Portfolio,
however, may invest in obligations of the custodian and may purchase or sell
securities from or to the custodian.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Hartford, Connecticut 06103 will serve as independent
auditors to the Variable Portfolios. KPMG Peat Marwick LLP provides audit
services, assistance and consultation in connection with SEC filings.
PRINCIPAL UNDERWRITER
Shares of the Variable Portfolios are offered on a continuous basis. ALIAC has
agreed to use its best efforts to distribute the shares as the principal
underwriter of the Portfolios pursuant to an Underwriting Agreement between it
and the Fund. The Agreement was approved on June 18, 1996 to continue through
December 31, 1997. The Underwriting Agreement may be continued from year to
year if approved annually by the Directors or by a vote of holders of a
majority of each Variable Portfolio's shares, and by a vote of a majority of
the Directors who are not "interested persons," as that term is defined in the
1940 Act, of ALIAC, and who are not interested persons of the Fund, appearing
in person at a meeting called for the purpose of approving such Agreement.
This Agreement terminates automatically upon assignment, and may be terminated
at any time on sixty (60) days' written notice by the Directors or ALIAC or by
vote of holders of a majority of a Variable Portfolio's shares without the
payment of any penalty.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Directors, ALIAC and Aeltus have
responsibility for making the Variable Portfolios' investment decisions, for
effecting the execution of trades for the Variable Portfolios and for
negotiating any brokerage commissions thereof. It is the policy of ALIAC and
Aeltus to obtain the best quality of execution available, giving attention to
net price (including commissions where applicable), execution capability
(including the adequacy of a brokerage firm's capital position), research and
other services related to execution; the relative priority given to these
factors will depend on all of the circumstances regarding a specific trade.
In implementing their trading policy, ALIAC and Aeltus may place a Portfolio's
transactions with such brokers or dealers and for execution in such markets
as, in the opinion of the Fund, will lead to the best overall quality of
execution for the Portfolio.
ALIAC and Aeltus currently receive a variety of brokerage and research
services from brokerage firms in return for the execution by such brokerage
firms of trades in securities held by the Portfolios. These brokerage and
research services include, but are not limited to, quantitative and
qualitative research information and purchase and sale recommendations
regarding securities and industries, analyses and reports covering a broad
range of economic factors and trends, statistical data relating to the
strategy and performance of the Portfolio and other investment companies and
accounts, services related to the execution of trades in a Portfolio's
securities and advice as to the valuation of securities. ALIAC and Aeltus
consider the quantity and quality of such brokerage and research services
provided by a brokerage firm along with the nature and difficulty of the
specific transaction in negotiating commissions for trades in a Portfolio's
securities and may pay higher commission rates than the lowest available when
it is reasonable to do so in light of the value of the brokerage and research
services received generally or in connection with a particular transaction.
ALIAC's and Aeltus' policy in selecting a broker to effect a particular
transaction is to seek to obtain "best execution," which means prompt and
efficient execution of the transaction at the best obtainable price with
payment of commissions which are reasonable in relation to the value of the
services provided by the broker, taking into consideration research and other
services provided. When either ALIAC or Aeltus believes that more than one
broker can provide best execution, preference may be given to brokers who
provide additional services to ALIAC or Aeltus.
Consistent with securities laws and regulations, ALIAC and Aeltus may obtain
such brokerage and research services regardless of whether they are paid for
(1) by means of commissions; or (2) by means of separate, non-commission
payments. ALIAC's and Aeltus' judgment as to whether and how they will obtain
the specific brokerage and research services will be based upon their analysis
of the quality of such services and the cost (depending upon the various
methods of payment which may be offered by brokerage firms) and will reflect
ALIAC's and Aeltus' opinion as to which services and which means of payment
are in the long-term best interests of a Portfolio. The Variable Portfolios
have no present intention to effect any brokerage transactions in portfolio
securities with ALIAC or any affiliate of the Variable Portfolios or ALIAC
except in accordance with applicable SEC rules. All transactions will comply
with Rule 17e-1 under the 1940 Act.
Certain officers of ALIAC and Aeltus also manage the securities portfolios of
ALIAC's own accounts. Further, ALIAC and Aeltus also act as investment
adviser to other investment companies registered under the 1940 Act and other
client accounts. ALIAC and Aeltus have adopted policies designed to prevent
disadvantaging the Variable Portfolios in placing orders for the purchase and
sale of securities for the Variable Portfolios.
To the extent ALIAC or Aeltus desires to buy or sell the same publicly traded
security at or about the same time for more than one client, the purchases or
sales will normally be allocated as nearly as practicable on a pro rata basis
in proportion to the amounts to be purchased or sold by each, taking into
consideration the respective investment objectives of the clients, the
relative size of portfolio holdings of the same or comparable securities,
availability of cash for investment, and the size of their respective
investment commitments. Orders for different clients received at
approximately the same time may be bunched for purposes of placing trades, as
authorized by regulatory directives. Prices are averaged for those
transactions. In some cases, this procedure may adversely affect the size of
the position obtained for or disposed of by a Portfolio or the price paid or
received by a Portfolio.
The Board of Directors has adopted a policy allowing trades to be made between
registered investment companies provided they meet the terms of Rule 17a-7
under the 1940 Act. Pursuant to this policy, a Portfolio may buy a security
from or sell another security to another registered investment company advised
by ALIAC.
The Board of Directors has also adopted a Code of Ethics governing personal
trading by persons who manage, or who have access to trading activity by, a
Portfolio. The Code allows trades to be made in securities that may be held
by a Portfolio, however, it prohibits a person from taking advantage of
Portfolio trades or from acting on inside information. ALIAC and Aeltus have
adopted Codes of Ethics which the Board of Directors of the Fund review
annually.
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Fund to issue one billion shares
of common stock with a par value of $.001 per share. The shares are
nonassessable, transferable, redeemable and do not have pre-emptive rights or
cumulative voting rights. The shares may be issued as whole or fractional
shares and are uncertificated.
The shares may be issued in series or portfolios having separate assets and
separate investment objectives and policies. Upon liquidation of a portfolio,
its shareholders are entitled to share pro rata in the net assets of that
portfolio available for distribution to shareholders. Shares, when issued,
will be fully paid and nonassessable.
SALE AND REDEMPTION OF SHARES
Shares of a Portfolio are sold and redeemed at the net asset value next
determined after receipt of a purchase or redemption order in acceptable form
as described in the Prospectus under "Sale and Redemption of Shares" and "Net
Asset Value."
NET ASSET VALUE
Securities of the Variable Portfolios are generally valued by independent
pricing services. The values for equity securities traded on registered
securities exchanges are based on the last sale price or, if there has been no
sale that day, at the mean of the last bid and asked price on the exchange
where the security is principally traded. Securities traded over the counter
are valued at the mean of the last bid and asked price if current market
quotations are not readily available. Short-term debt securities which have a
maturity date of more than sixty days will be valued at the mean of the last
bid and asked price obtained from principal market makers. Long-term debt
securities are valued at the mean of the last bid and asked price of such
securities obtained from a broker who is a market-maker in the securities or a
service providing quotations based upon the assessment of market-makers in
those securities.
Options are valued at the mean of the last bid and asked price on the exchange
where the option is primarily traded. Stock index futures contracts and
interest rate futures contracts are valued daily at a settlement price based
on rules of the exchange where the futures contract is primarily traded.
PERFORMANCE INFORMATION
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period.
Total return for a period of one year or less is equal to the actual
investment return on a $1,000 investment in the Portfolio during that period.
Total return calculations assume that all Portfolio distributions are
reinvested at net asset value on their respective reinvestment dates.
From time to time, ALIAC may reduce its compensation or assume expenses in
respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield
and total return during the period of the waiver or assumption.
The performance of the Portfolios may, from time to time, be compared to that
of other mutual funds tracked by mutual fund rating services, to broad groups
of comparable mutual funds, or to unmanaged indices which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs.
The Prospectus contains historical performance information of the Aetna Small
Company Growth Fund which is a series of a public mutual fund which has the
same investment objective and follows substantially the same investment
strategies as the Small Company Portfolio.
The performance of this series of Aetna Series Fund, Inc. is commonly measured
as total return. An average annual compounded rate of return ("T") may be
computed by using the redeemable value at the end of a specified period
("ERV") of a hypothetical initial investment of $1,000 ("P") over a period of
time ["n"] according to the formula:
n
P ( 1 + T ) = ERV
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios of the Fund.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its
operating expenses. Performance information of any Portfolio will not be
compared in advertisements with such information for funds that offer their
shares directly to the public, because Portfolio performance data does not
reflect charges imposed by the insurance company on the VA Contracts and VLI
Policies. The total return for a Portfolio should be distinguished from the
rate of return of a corresponding division of the insurance company's separate
account, which rate will reflect the deduction of additional insurance
charges, including mortality and expense risk charges, and will therefore be
lower. Accordingly, performance figures for a Portfolio will only be
advertised if comparable performance figures for the corresponding division of
the separate account are included in the advertisements. VA Contract owners
and VLI Policy owners should consult their contract and policy prospectuses,
respectively, for further information. Each Portfolio's results also should be
considered relative to the risks associated with its investment objectives and
policies.
TAX STATUS
The following is only a summary of certain additional tax considerations
generally affecting each Variable Portfolio and its shareholders which are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Portfolio or its shareholders, and
the discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Variable Portfolio has elected to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, a Portfolio is not subject
to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) and at least 90% of its tax-exempt income (net of
expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described in this section. Distributions by a Portfolio made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies (to the
extent such currency gains are directly related to the regulated investment
company's principal business of investing in stock or securities) and other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement"); and (2) derive less than
30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less
than three months (the "Short-Short Gain Test"). For purposes of these
calculations, gross income includes tax-exempt income. However, foreign
currency gains, including those derived from options, futures and forwards,
will not in any event be characterized as Short-Short Gain if they are
directly related to the regulated investment company's investments in stock or
securities (or options or futures thereon). Because of the Short-Short Gain
Test, a Portfolio may have to limit the sale of appreciated securities that it
has held for less than three months. However, the Short-Short Gain Test will
not prevent a Portfolio from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding period
is disregarded for this purpose. Interest (including original issue discount)
received by a Portfolio at maturity or upon the disposition of a security held
for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of the
Short-Short Gain Test. However, income that is attributable to realized
market appreciation will be treated as gross income from the sale or other
disposition of securities for this purpose.
In general, gain or loss recognized by a Portfolio on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including municipal obligations) purchased
by a Portfolio at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the
Portfolio held the debt obligation. In addition, under the rules of Code
Section 988, gain or loss recognized on the disposition of a debt obligation
denominated in a foreign currency or an option with respect thereto (but only
to the extent attributable to changes in foreign currency exchange rates), and
gain or loss recognized on the disposition of a foreign currency forward
contract, futures contract, option or similar financial instrument, or of
foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless the Portfolio elects otherwise),
will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset
is used to close a "short sale" (which includes for certain purposes the
acquisition of a put option ) or is substantially identical to another asset
so used, (2) the asset is otherwise held by the Portfolio as part of a
"straddle" (which term generally excludes a situation where the asset is stock
and the Portfolio grants a qualified covered call option (which, among other
things, must not be deep-in-the-money) with respect thereto) or (3) the asset
is stock and the Portfolio grants an in-the-money qualified covered call
option with respect thereto. However, for purposes of the Short-Short Gain
Test, the holding period of the asset disposed of may be reduced only in the
case of clause (1) above. In addition, a Portfolio may be required to defer
the recognition of a loss on the disposition of an asset held as part of a
straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Portfolio on the lapse of, or any gain or loss
recognized by a Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain
or loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by a Portfolio will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, a Portfolio may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Transactions that may be engaged in by a Portfolio (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes
and futures contracts) will be subject to special tax treatment as "Section
1256 contracts." Section 1256 contracts are treated as if they are sold for
their fair market value on the last day of the taxable year, even though a
taxpayer's obligations (or rights) under such contracts have not terminated
(by delivery, exercise, entering into a closing transaction or otherwise) as
of such date. Any gain or loss recognized as a consequence of the year-end
deemed disposition of Section 1256 contracts is taken into account for the
taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section
1256 contracts (including any capital gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A
Portfolio, however, may elect not to have this special tax treatment apply to
Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Portfolio that are not Section 1256 contracts. The IRS has
held in several private rulings that gains arising from Section 1256 contracts
will be treated for purposes of the Short-Short Gain Test as being derived
from securities held for not less than three months if the gains arise as a
result of a constructive sale under Code Section 1256, provided that the
contract is actually held by the Portfolio uninterrupted for a total of at
least three months.
Because only a few regulations regarding the treatment of swap agreements and
other financial derivatives have been issued, the tax consequences of
transactions in these types of instruments are not always entirely clear. The
Fund intends to account for derivatives transactions in a manner deemed by it
to be appropriate, but the Internal Revenue Service might not necessarily
accept such treatment. If it did not, the status of a Portfolio as a regulated
investment company and/or its compliance with the diversification requirement
under Code Section 817(h) might be affected. The Fund intends to monitor
developments in this area. Certain requirements that must be met under the
Code in order for a Portfolio to qualify as a regulated investment company may
limit the extent to which a Portfolio will be able to engage in swap
agreements.
A Portfolio may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICS") for
federal income tax purposes. If a Portfolio invests in a PFIC, it may elect to
treat the PFIC as a qualifying electing portfolio (a "QEP") in which event the
Portfolio will each year have ordinary income equal to its pro rata share of
the PFIC's ordinary earnings for the year and long-term capital gain equal to
its pro rata share of the PFIC's net capital gain for the year, regardless of
whether the Portfolio receives distributions of any such ordinary earnings or
capital gain from the PFIC. If a Portfolio does not (because it is unable to,
chooses not to or otherwise) elect to treat the PFIC as a QEP, then in general
(1) any gain recognized by the Portfolio upon sale or other disposition of its
interest in the PFIC or any excess distribution received by the Portfolio from
the PFIC will be allocated ratably over the Portfolio's holding period of its
interest in the PFIC, (2) the portion of such gain or excess distribution so
allocated to the year in which the gain is recognized or the excess
distribution is received shall be included in the Portfolio's gross income for
such year as ordinary income (and the distribution of such portion by the
Portfolio to shareholders will be taxable as an ordinary income dividend, but
such portion will not be subject to tax at the Portfolio level), (3) the
Portfolio shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution
by the portfolio to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the
Portfolio thereon) will again be taxable to the shareholders as an ordinary
income dividend.
Under recently proposed Treasury Regulations a Portfolio can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Portfolio's adjusted
tax basis in that share ("mark to market gain"). Such mark to market gain will
be included by the Portfolio as ordinary income, such gain will not be subject
to the Short-Short Gain Test, and the Portfolio's holding period with respect
to such PFIC stock commences on the first day of the next taxable year. If a
Portfolio makes such election in the first taxable year it holds PFIC stock,
the Portfolio will include ordinary income from any mark to market gain, if
any, and will not incur the tax described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each Portfolio
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and as to which the
Portfolio does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or of two
or more issuers which the Portfolio controls and which are engaged in the same
or similar trades or businesses or related trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security not the issuer of the option. However, with regard to
forward currency contracts, there does not appear to be any formal or informal
authority which identifies the issuer of such instrument. For purposes of
asset diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation,
a Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, the Government National Mortgage
Corporation, and the Student Loan Marketing Association are treated as U.S.
Government securities.
If for any taxable year a Portfolio does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current
and accumulated earnings and profits. Such distributions generally will be
eligible for the dividends-received deduction in the case of corporate
shareholders.
QUALIFICATION OF SEGREGATED ASSET ACCOUNTS
Under Code Section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in the
Treasury Regulations. Specifically, the Treasury Regulations provide, that
except as permitted by the "safe harbor" discussed below, as of the end of
each calendar quarter (or within 30 days thereafter) no more than 55% of a
Portfolio's total assets may be represented by any one investment, no more
than 70% by any two investments, no more than 80% by any three investments and
no more than 90% by any four investments. For this purpose, all securities of
the same issuer are considered a single investment, and while each U.S.
Government agency and instrumentality is considered a separate issuer, a
particular foreign government and its agencies, instrumentalities and
political subdivisions may be considered the same issuer. As a safe harbor, a
separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M are satisfied and no more than
55% of the value of the account's total assets are cash and cash items, U.S.
government securities and securities of other regulated investment companies.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided the regulated investment
company satisfies certain conditions relating to the ownership of the shares.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year election")).
Tax-exempt interest on municipal obligations is not subject to the excise tax.
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as
having distributed any amount on which it is subject to income tax for any
taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses from Section 998 transactions incurred after October
31 of any year (or after the end of its taxable year if it has made a taxable
year election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax.
However, investors should note that a Portfolio may in certain circumstances
be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
PORTFOLIO DISTRIBUTIONS
Each Portfolio anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to the shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they may qualify for the dividends-received
deduction for corporate shareholders to the extent discussed below.
Each Portfolio may either retain or distribute to the shareholders its net
capital gain for each taxable year. Each Portfolio currently intends to
distribute any such amounts. If net capital gain is distributed and
designated as a capital gain dividend, it will be taxable to the shareholders
as long-term capital gain, regardless of the length of time the shareholders
have held shares or whether such gain was recognized by the Variable Portfolio
prior to the date on which the shareholder acquired the shares.
If a Portfolio elects to retain its net capital gain, the Portfolio will be
taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. Where a Portfolio elects to retain its net
capital gain, it is expected that the Portfolio also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of its pro rata share of such gain, with the result
that each shareholder will be required to report its pro rata share of such
gain on its tax return as long-term capital gain, will receive a refundable
tax credit for its pro rata share of tax paid by the Portfolio on the gain,
and will increase the tax basis for its shares by an amount equal to the
deemed distribution less the tax credit. All distributions paid to ALIAC,
whether characterized as ordinary income or capital gain, are not taxable to
VA Contract or VLI Policy holders.
Ordinary income dividends paid by a Portfolio with respect to a taxable year
may qualify for the dividends-received deduction generally available to
corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and
the personal holding company tax) to the extent of the amount of qualifying
dividends received by a Portfolio from domestic corporations for the taxable
year and if the shareholder meets eligibility requirements in the Code. A
dividend received by the Portfolio will not be treated as a qualifying
dividend (1) if it has been received with respect to any share of stock that
the Portfolio has held for less than 46 days (91 days in the case of certain
preferred stock), excluding for this purpose under the rules of Code Section
246(c)(3) and (4): (i) any day more than 45 days (or 90 days in the case of
certain preferred stock) after the date on which the stock becomes ex-dividend
and (ii) any period during which the Portfolio has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or
has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that
the Portfolio is under an obligation (pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or
related property; or (3) to the extent the stock on which the dividend is paid
is treated as debt-financed under the rules of Code Section 246(a). Moreover,
the dividends-received deduction for a corporate shareholder may be disallowed
or reduced (i) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Portfolio or (ii) by
application of Code Section 246(b) which in general limits the
dividends-received deduction.
Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate
of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning
after 1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and
the AMT net operating loss deduction) over $2 million. For purposes of the
corporate AMT and the environmental super-fund tax (which are discussed
above), the corporate dividends-received deduction is not itself an item of
tax preference that must be added back to taxable income or is otherwise
disallowed in determining a corporation's AMTI. However, corporate
shareholders will generally be required to take the full amount of any
dividend received from a Variable Portfolio into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its
AMTI (determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Investment income that may be received by a Portfolio from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle a Portfolio to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known.
Distributions by a Portfolio that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions paid to shareholders are generally reinvested in additional
shares. Shareholders receiving a distribution in the form of additional
shares will be treated as receiving a distribution in an amount equal to the
fair market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder purchases
shares of a Portfolio reflects undistributed net investment income or
recognized capital gain net income, or unrealized appreciation in the value of
the assets of the Portfolio, distributions of such amounts will be taxable to
the shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Portfolio
into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Portfolio) on December
31 of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the
year.
SALE OR REDEMPTION OF SHARES
Shareholders generally will recognize gain or loss on the sale or redemption
of shares of a Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if
the shareholder purchases other shares of the Portfolio within 30 days before
or after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of a Portfolio will
be considered capital gain or loss and will be long-term capital gain or loss
if the shares were held for longer than one year. However, any capital loss
arising from the sale or redemption of shares held, or deemed under Code rules
to be held, for six months or less will be treated as a long-term capital loss
to the extent of the amount of capital gain dividends received on such shares.
TAX EFFECT ON CONTRACT OWNERS AND POLICY OWNERS
Owners of VA Contracts and VLI Policies are taxed through prior ownership of
such contracts and policies, as described in the insurance company's
prospectus for the applicable contract or policy.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation
described above. Shareholders are urged to consult their tax advisers as to
the consequences of these and other state and local tax rules affecting
investment in a Portfolio.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares held) and will vote in the election of Directors
(to the extent hereinafter provided) and on other matters submitted to the
vote of the shareholders. The shareholders of the Portfolios are the
insurance companies for their separate accounts using the Portfolios to fund
VA Contracts and VLI Policies. The insurance company depositors of the
separate accounts pass voting rights attributable to shares held for VA
Contracts and VLI Policies through to Contract owners and Policy owners as
described in the prospectus for the applicable VA Contract or VLI Policy.
Once the initial Board of Directors is elected, no meeting of the shareholders
for the purpose of electing Directors will be held unless and until such time
as less than a majority of the Directors holding office have been elected by
the shareholders, or shareholders holding 10% or more of the outstanding
shares request such a vote. The Directors then in office will call a
shareholder meeting for election of Directors. Vacancies occurring between any
such meeting shall be filled as allowed by law, provided that immediately
after filling any such vacancy, at least two-thirds of the Directors holding
office have been elected by the shareholders.
Special shareholder meetings may be called when requested in writing by the
holders of not less than 10% of the outstanding voting shares of a Portfolio.
Any request must state the purposes of the proposed meeting.
Except as set forth above, the Directors shall continue to hold office and may
appoint successor Directors. Directors may be removed from office (1) at any
time by two-thirds vote of the Directors; (2) by a majority vote of Directors
where any Director becomes mentally or physically incapacitated; (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares
(4) by written declaration filed with Mellon Bank, N.A., the Variable
Portfolio's custodian, signed by two-thirds of a Variable Portfolio's
shareholders. Any Director may also voluntarily resign from office. Voting
rights are not cumulative, so that the holders of more than 50% of the shares
voting in the election of Directors can, if they choose to do so, elect all
the Directors of the Variable Portfolios, in which event the holders of the
remaining shares will be unable to elect any person as a Director.
The Articles may be amended by an affirmative vote of a majority of the shares
at any meeting of shareholders or by written instrument signed by a majority
of the Directors and consented to by a majority of the shareholders. The
Directors may also amend the Articles without the vote or consent of
shareholders if they deem it necessary to conform the Articles to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Code, but the Directors
shall not be liable for failing to do so.
FINANCIAL STATEMENTS
A Statement of Assets and Liabilities of each of the Portfolios as of August
28, 1996 and related footnotes is set forth below.
AETNA VARIABLE PORTFOLIOS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
AUGUST 28, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Aetna Variable Aetna Variable Aetna Variable Aetna Variable
Index Plus Growth Small Company Capital Appreciation
Portfolio Portfolio Portfolio Portfolio
--------------- --------------- --------------- ---------------------
Assets:
Cash in bank $ 100,000 $ 100,000 $ 100,000 $ 100,000
--------------- --------------- --------------- ---------------------
Net assets applicable to outstanding
shares $ 100,000 $ 100,000 $ 100,000 $ 100,000
=============== =============== =============== =====================
Net assets represented by:
Common stock-authorized 1,000,000,000
shares for all portfolios; $.001
par value; issued and outstanding
10,000 shares for each portfolio $ 10 $ 10 $ 10 $ 10
Additional paid in capital 99,990 99,990 99,990 99,990
--------------- --------------- --------------- ---------------------
Total-representing net assets
applicable to outstanding shares $ 100,000 $ 100,000 $ 100,000 $ 100,000
=============== =============== =============== =====================
Net asset value per share of
outstanding shares $ 10.00 $ 10.00 $ 10.00 $ 10.00
=============== =============== =============== =====================
<FN>
See accompanying notes to statements of assets and liabilities.
</TABLE>
AETNA VARIABLE PORTFOLIOS, INC.
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
AUGUST 28, 1996
(1) ORGANIZATION
Aetna Variable Portfolios, Inc. (the "Company") is an open-end management
investment company incorporated under the laws of Maryland on June 4, 1996.
The Articles of Incorporation provide for the issuance of multiple series of
shares, each representing a diversified portfolio of investments
(collectively, the "Portfolios") with different investment objectives,
policies and restrictions.
Shares of each Portfolio are available to be sold to Aetna Life Insurance and
Annuity Company ("ALIAC"), its affiliates and subsidiaries, for allocation to
certain of its variable life/annuity separate accounts.
The Company is currently offering four Portfolios:
Aetna Variable Index Plus Portfolio seeks to outperform the total return
performance of common stocks represented by the Standard & Poor's 500
Composite Stock Price Index, a broad-based stock market index;
Aetna Variable Growth Portfolio seeks growth of capital through investment in
a diversified portfolio of common stocks and securities convertible into
common stocks believed to offer growth potential;
Aetna Variable Small Company Portfolio seeks growth of capital through
investment in a diversified portfolio of common stocks and securities
convertible into common stocks of companies with smaller market
capitalizations;
Aetna Variable Capital Appreciation Portfolio seeks growth of capital
primarily through investment in a diversified portfolio of common stocks and
securities convertible into common stocks.
(2) FEDERAL TAXES
The Company intends to comply with the requirements of the Internal Revenue
Code, as amended, applicable to regulated investment companies and to
distribute taxable income to the shareholders of each Portfolio in amounts
that will avoid or minimize federal income or excise taxes for each Portfolio.
(3) FEES AND EXPENSES
On June 18, 1996, the Company's Board of Directors (the "Directors") voted to
approve an Investment Advisory Agreement (the "Management Agreement") between
the Company and ALIAC. Under the terms of the Management Agreement, ALIAC has
responsibility for supervising all aspects of the operations of each Portfolio
subject to the supervision of the Directors. ALIAC has agreed to ensure that
assets of the Portfolios are invested in accordance with their respective
investment objectives and policies. For its services, ALIAC receives a fee,
payable monthly, based on a percentage of each Portfolio's average daily net
assets as follows:
Aetna Variable Index Plus Portfolio 0.35%
Aetna Variable Growth Portfolio 0.60%
Aetna Variable Small Company Portfolio 0.70%
Aetna Variable Capital Appreciation Portfolio 0.60%
On June 18, 1996, the Directors approved a subadvisory agreement (the
"Subadvisory Agreement") among the Company, ALIAC, and an affiliate of ALIAC,
Aeltus Investment Management, Inc. ("Aeltus"). Under the terms of the
Subadvisory Agreement, Aeltus will supervise the investment and reinvestment
of cash and securities and provide certain related administrative services to
each Portfolio in exchange for fees, payable by ALIAC, of up to 0.30% of each
Portfolio's average daily net assets.
Also on June 18, 1996, the Directors approved an administrative services
agreement (the "Agreement") between the Company and ALIAC. Under the terms of
the Agreement, ALIAC provides all administrative services necessary for the
Company's operations and is responsible for the supervision of the Company's
other service providers. ALIAC also assumes all ordinary, recurring direct
costs of the Company, such as custodian fees, Directors' fees, transfer agency
costs and accounting expenses. For these services, ALIAC receives an annual
fee, paid monthly, at a rate of 0.15% of each Portfolio's average daily net
assets.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Aetna Variable Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of Aetna
Variable Index Plus Portfolio, Aetna Variable Growth Portfolio, Aetna Variable
Small Company Portfolio and Aetna Variable Capital Appreciation Portfolio,
portfolios of Aetna Variable Portfolios, Inc. (the "Company") as of August 28,
1996. These statements of assets and liabilities are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements of assets and liabilities based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the statements of assets and
liabilities are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of assets and liabilities. Our procedures included confirmation of
cash held as of August 28, 1996 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of the
individual portfolios of Aetna Variable Portfolios, Inc., as of August 28,
1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
August 29, 1996
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS
The Financial Statements filed as part of this Registration Statement are
as follows:
Statements of Assets and Liabilities of the Aetna Variable Index Plus,
Aetna Variable Growth, Aetna Variable Small Company and Aetna Variable
Capital Appreciation Portfolios as of August 28, 1996*
Notes to Statements of Assets and Liabilities - August 28, 1996*
Independent Auditors' Report*
* Included in Part B of this Registration Statement.
b. EXHIBITS
(1) Articles of Incorporation*
(2) By-laws
(3) Not Applicable
(4) Not Applicable
(5)(a) Form of Investment Advisory Agreement between each Portfolio and
Aetna Life Insurance and Annuity Company ("ALIAC")
(5)(b) Form of Subadvisory Agreement between Aetna Life Insurance and
Annuity Company and Aeltus Investment Management, Inc.
(6) Form of Underwriting Agreement between the Registrant and ALIAC
(7) Not Applicable
(8) Form of Custodian Agreement - Mellon Bank, N.A.
(9)(a) Form of Administrative Services Agreement
(9)(b) License Agreement
(10)(b) Opinion of Counsel
(11) Consent of Independent Auditors
(12) Not Applicable
(13) Agreement re: Initial Contribution to Working Capital
(14) Not Applicable
(15) Not Applicable
(16)(a) Schedule for Computation of Performance Data - Calculation of
Private Account Composite Performance Information
(16)(b) Schedule for Computation of Performance Data - Aetna Small Company
Growth Fund**
(17) Not Applicable
(18) Not Applicable
(19) Powers of Attorney
(27) Financial Data Schedules
* Incorporated by reference to Form N-1A, File No. 333-05173 as filed
electronically with the Securities and Exchange Commission on June 4, 1996.
** Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A, File No. 33-41694, as filed
electronically with the Securities and Exchange Commission on February 29,
1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
A diagram of all persons directly or indirectly under common control with the
Registrant and a list indicating the principal business of each such company
referenced in the diagram are incorporated herein by reference to Item 26 of
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A (File
No. 333-01107), as filed electronically with the Securities and Exchange
Commission on August 2, 1996.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
None
ITEM 27. INDEMNIFICATION
Article 9, Section (d) of the Registrant's Articles of Incorporation, provides
for indemnification of directors and officers. In addition, the Registrant's
officers and directors are covered under a directors and officers errors and
omissions liability insurance policy issued by Gulf Insurance Company which
expires in October, 1996.
Reference is also made to Section 2-418 of the Corporations and Associations
Article of the Annotated Code of Maryland which provides generally that (1) a
corporation may (but is not required to) indemnify its directors for
judgments, fines and expenses in proceedings in which the director is named a
party solely by reason of being a director, provided the director has not
acted in bad faith, dishonestly or unlawfully, and provided further that the
director has not received any "improper personal benefit"; and (2) that a
corporation must (unless otherwise provided in the corporation's charter or
articles of incorporation) indemnify a director who is successful on the
merits in defending a suit against him by reason of being a director for
"reasonable expenses." The statutory provisions are not exclusive; i.e., a
corporation may provide greater indemnification rights than those provided by
statute.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a trustee, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
ALIAC is an insurance company that issues variable and fixed annuities,
variable and universal life insurance policies and acts as depositor for
separate accounts holding assets for variable contracts and policies.
The following table summarizes the business connections of the directors and
principal officers of ALIAC.
<TABLE>
<CAPTION>
<S> <C> <C>
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Within Last Two Years/Addresses*/**
- -------------------- ---------------------------- ---------------------------------------------
Daniel P. Kearney Director, President and Chairman (since February 1996), Director
Chairman, Executive since March 1991) and President (since
Committee (Principal March 1994), ALIAC; Executive Vice President
Executive Officer) (since December 1993), and Group Executive,
Investment Division (from February 1991 to
December 1993), Aetna Inc. Director
Aeltus, April, 1996 to Present.
Christopher J. Burns Director (1991); Senior Director, Aetna Financial Services,
Vice President Inc. (since January 1996); Director
(since July 1993) of Aetna Investment
Services, Inc.; Director (1992 -
April 1995) and Senior Vice President,
North American Operations (1993 - April
1995) of Aetna International, Inc.
Laura R. Estes Director and Senior Vice Director, Aetna Financial Services,
President Inc. (since January 1996); Director
and Senior Vice President, Aetna
Insurance Company of America (since
February 1993); Director, Aetna
Investment Services, Inc. (since
July 1993).
Timothy A. Holt Director, Senior Vice Director, Aeltus, April, 1996 to Present.
President and Chief Director, Senior Vice President and Chief
Financial Officer (1996) Financial Officer, ALIAC, February 1996 to
Present; Senior Vice President, Business
Strategy & Finance, Aetna Retirement
Services, Inc., February 1996 to Present;
Vice President, Portfolio Management/
Investment Group, Aetna Inc.,
August 1992 to February 1996; Vice
President - Finance and Treasurer,
Aetna Inc., August, 1989 through
July, 1991; Treasurer, Aetna
Capital Management, Inc., February 1990
to June 1991.
Gail P. Johnson Director and Vice Vice President, Service and Retain
President Customers, Aetna Retirement Services
(since February 1996); Vice
President, Defined Benefit Services
(September 1994 - February 1996);
Vice President, Plan Services,
Pensions and Financial Services
(December 1992 - September 1994).
John Y. Kim Director and Senior Vice President, Aeltus Investment
President Management, Inc. (since December 1995);
Chief Investment Officer, Aetna Inc.
(since May 1994); Managing Director,
Mitchell Hutchins Institutional Investors,
New York, NY (September 1993 - April 1994).
Shaun P. Mathews Director and Vice President Chief Executive, Aetna Investment Services,
Inc., October, 1995 to Present; President,
Aetna Investment Services, Inc., March, 1994
to Present; Director and Chief Operations
Officer, Aetna Investment Services, Inc.,
July 1993 to Present; Director and Senior
Vice President, Aetna Insurance Company of
America, February 1993 to Present; Senior
Vice President and Director of ALIAC,
March 1991 to Present; Vice President of
Aetna Life Insurance Company, 1991 to
Present.
Glen Salow Director and Vice President Vice President, Information
Technology, Investment, and
Financial Services (February 1995 -
February 1996); Vice President,
Investment Systems, AIT (1992 - 1995).
Creed R. Terry Director and Vice President Vice President, Select and Managed
Markets, Aetna Retirement Services
(since February 1996); ALIAC Market
Strategist (August 1995 - February
1996); President, Chemical
Technology Corporation (a subsidiary
of Chemical Bank) (1993 - 1995).
Zoe Baird Senior Vice President and Senior Vice President and General
General Counsel Counsel of Aetna Inc. (since April 1992).
Susan E. Schechter Counsel and Corporate Counsel, Aetna Inc.
Secretary (since November 1993).
Deborah Koltenuk Vice President and Assistant Vice President, Finance and
Treasurer, Corporate Administration Aetna Information Technology,
Controller Aetna Life Insurance Company, The Aetna
Casualty and Surety Company, The Standard
Fire Insurance Company June 1994 to October
1994; Vice President, Investment Planning and
Financial Reporting, Aetna Life Insurance
Company, The Aetna Casualty and Surety
Company, The Standard Fire Insurance Company,
October 1994 to April 1996; Vice President
Investment Planning and Financial Reporting,
Aetna Life Insurance Company April 1996 to
July 1996.
Diane B. Horn Vice President and Chief Senior Compliance Officer (August 1993
Compliance Officer - Present) Aetna Life Insurance and
Annuity Company and Aetna Inc.
<FN>
* The principal business address of each person named is 151 Farmington Avenue, Hartford,
Connecticut 06156.
** Certain officers and directors of the investment adviser currently hold (or have held
during the past two years) other positions with affiliates of the Registrant which are not deemed
to be principal positions.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) In addition to serving as the principal underwriter for the
Registrant, Aetna Life Insurance and Annuity Company (ALIAC) also acts as the
principal underwriter for Aetna Series Fund, Inc., Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund,
Inc., Aetna GET Fund, and Aetna Generation Portfolios, Inc. (all registered
management investment companies under the 1940 Act), and for Variable Annuity
Accounts B, C and G, and Variable Life Account B (separate accounts of ALIAC
registered as unit investment trusts under the 1940 Act), and Variable Annuity
Account I (a separate account of Aetna Insurance Company of America registered
as a unit investment trust under the 1940 Act). ALIAC is also the depositor of
Variable Life Account B, and Variable Annuity Accounts B, C and G.
Additionally, ALIAC is the investment adviser for Aetna Series Fund, Inc.,
Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Investment Advisers Fund, Inc., Aetna GET Fund, and Aetna Generation
Portfolios, Inc.
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- -------------------- ----------------------------------- ----------------------
Daniel P. Kearney Director and President Director
Timothy A. Holt Director, Senior Vice President Director
and Chief Financial Officer
Christopher J. Burns Director and Senior Vice President None
Laura R. Estes Director and Senior Vice President None
Gail P. Johnson Director and Vice President None
John Y. Kim Director and Senior Vice President None
Shaun P. Mathews Director and Vice President Director and President
Glen Salow Director and Vice President None
Creed R. Terry Director and Vice President None
Zoe Baird Senior Vice President and General None
Counsel
Susan E. Schechter Corporate Secretary and Counsel None
Deborah Koltenuk Vice President and Treasurer, None
Corporate Controller
Diane B. Horn Vice President and Chief Compliance None
Officer
<FN>
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
As required by Section 31(a) of the 1940 Act and the Rules promulgated
thereunder, the Registrant and its investment adviser, ALIAC, maintain
physical possession of each account, book or other documents at its principal
offices at 151 Farmington Avenue, Hartford, Connecticut 06156.
ITEM 31. MANAGEMENT SERVICES
Not Applicable
ITEM 32. UNDERTAKINGS
The Registrant undertakes that if requested by the holders of at least 10% of
a Portfolio's outstanding shares, the Registrant will hold a shareholder
meeting for the purpose of voting on the removal of one or more Directors and
will assist with communication concerning that shareholder meeting as if
Section 16(c) of the Investment Company Act of 1940 applied.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the portfolio's latest annual report to shareholders, upon
request and without charge.
The Registrant undertakes to file a Post-Effective Amendment to this
Registration Statement, using financial statements which need not be
certified, within four to six months from the effective date of Registrant's
1933 Act Registration Statement.
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Variable Portfolios, Inc. has duly caused this Pre-Effective Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned thereto duly authorized, in the City of Hartford and State of
Connecticut on the 6th day of September, 1996.
AETNA VARIABLE PORTFOLIOS, INC.
______________________________________
Registrant
By: Shaun P. Mathews*
___________________________________
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Pre-Effective Amendment to the Registration Statement has been signed below by
the following persons on September 6, 1996 in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE
Shaun P. Mathews* President and Director
- -------------------
(Principal Executive Officer)
Morton Ehrlich* Director
- -------------------
Maria T. Fighetti* Director
- -------------------
David L. Grove* Director
- -------------------
Timothy A. Holt* Director
- -------------------
David P. Kearney* Director
- -------------------
Sidney Koch* Director
- -------------------
Corine T. Norgaard* Director
- -------------------
Richard G. Scheide* Director
- -------------------
J. Scott Fox* Treasurer
- -------------------
(Principal Financial and Accounting Officer)
</TABLE>
By: /s/ Susan E. Bryant
______________________________________
* Susan E. Bryant
Attorney-in-Fact
AETNA VARIABLE PORTFOLIOS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Exhibit Page
- -------------- ------------------------------------------------------- ----
EX-99.B(2) Bylaws
EX-99.B(5)(a) Form of Investment Advisory Agreement between each
Portfolio and Aetna Life Insurance and Annuity Company
("ALIAC")
EX-99.B(5)(b) Form of Subadvisory Agreement between Aetna Life
Insurance and Annuity Company and Aeltus Investment
Management, Inc.
EX-99.B(6) Form of Underwriting Agreement between the Registrant
and ALIAC
EX-99.B(8) Form of Custodian Agreement - Mellon Bank, N.A.
EX-99.B(9)(a) Form of Administrative Services Agreement
EX-99.B(9)(b) License Agreement
EX-99.B(10)(b) Opinion of Counsel
EX-99.B(11) Consent of Independent Auditors
EX-99.B(13) Agreement re: Initial Contribution to Working Capital
EX-99.B(16)(a) Schedule for Computation of Performance Data -
Calculation of Private Account Composite Performance
Information
EX-99.B(19) Powers of Attorney
EX-27 Financial Data Schedules
</TABLE>
AETNA VARIABLE PORTFOLIOS, INC.
FORM OF
BYLAWS
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1. ANNUAL MEETINGS. An annual meeting of Shareholders shall be
held only in those years in which the election of Directors is required to be
acted on under the Investment Company Act of 1940. At each annual meeting, any
other proper business within the power of Shareholders may be transacted. An
annual meeting shall be held on a date and at a time designated by the Board of
Directors.
Section 2. SPECIAL MEETINGS. Special meetings of Shareholders may be
called by the President or by the Board of Directors; and shall be called by the
President, Secretary or any Director at the request in writing of the holders of
not less than 10% of the outstanding voting shares of the capital stock of the
Corporation (hereinafter, the outstanding voting shares of the capital stock of
the Corporation are referred to as "Shares"). Any such request shall state the
purposes of the proposed meeting.
Section 3. PLACE OF MEETINGS. All meetings of the Shareholders shall be
held at the office of the Corporation in Hartford, Connecticut, or at such other
place within or without the State of Maryland as may be fixed by the party or
parties making the call as stated in the notice thereof.
Section 4. NOTICE. Not less than ten or more than ninety days before the
date of every Annual or Special Meeting of Shareholders, the Secretary or an
Assistant Secretary shall give to each Shareholder of record notice of such
meeting by mail, telegraph, cable or radio. Such notice shall be deemed to have
been given when deposited in the mail or with a telegraph or cable office or
radio station for transmission to the Shareholder at his address appearing on
the books of the Corporation. It shall not be necessary to set forth the
business proposed to be transacted in the notice of any Annual Meeting, except
that any proposal to amend the Articles of Incorporation of the Corporation
shall be set forth in such notice. Notice of a Special Meeting shall state the
purpose or purposes for which it is called.
Section 5. QUORUM. At all meetings of the Shareholders (including
meetings of Shareholders of a particular series), the presence in person or by
proxy of Shareholders entitled to cast a majority in number of votes shall be
necessary to constitute a quorum for the transaction of business. In the absence
of a quorum at any meeting, a majority of those Shareholders present in person
or by proxy may adjourn the meeting from time to time to be held at the same
place without further notice other than by announcement until a quorum, as
above defined, shall be present, whereupon any business may be transacted which
might have been transacted at the meeting originally called had the same been
held at the time so called.
Section 6. VOTING. At all meetings of Shareholders, each Shareholder
shall be entitled to one vote or fraction thereof for each Share standing in his
name on the books of the Corporation on the date for the determination of
Shareholders entitled to vote at such meeting. On any matter submitted to a vote
of Shareholders, all Shares of the Corporation then issued and outstanding and
entitled to vote shall be voted in the aggregate and not by class except that
(1) when otherwise expressly required by the Maryland General Corporation Law or
the Investment Company Act of 1940, as amended, Shares shall be voted by
individual class; and (2) only Shares of the respective portfolios are entitled
to vote on matters concerning only that portfolio.
Section 7. PROXIES. Any Shareholder entitled to vote at any meeting of
Shareholders may vote either in person or by proxy, but no proxy which is dated
more than eleven months before the meeting named therein shall be accepted.
Every proxy shall be in writing subscribed by the Shareholder or his duly
authorized attorney and dated, but need not be sealed, witnessed or
acknowledged. All proxies shall be filed with and verified by the Secretary or
an Assistant Secretary of the Corporation or, if the meeting shall so decide, by
the Secretary of the Meeting.
Section 8. CONSENTS. Any action required or permitted to be taken at any
meeting of Shareholders may be taken without a meeting if a written consent,
setting forth such action, is signed by all the Shareholders entitled to vote on
the subject matter thereof, and such consent is filed with the records of the
Corporation.
ARTICLE II
BOARD OF DIRECTORS
Section 1. POWERS. The Board of Directors shall have control and
management of the affairs, business and properties of the Corporation. They
shall have and exercise in the name and on behalf of the Corporation all the
rights and privileges legally exercisable by the Corporation except as otherwise
provided by law, the Articles of Incorporation or these Bylaws.
Section 2. NUMBER, QUALIFICATIONS, MANNER OF ELECTION AND TERM OF OFFICE.
The number of directors of the Corporation shall be fixed from time to time by a
majority of the entire Board of Directors but shall be not less than three nor
more than twenty. Subject to the foregoing, the Board of Directors may from time
to time by a majority of the entire Board increase or decrease the number of
directors to such number as they deem expedient and fill the vacancies so
created. The term of office of a Director shall not be affected by any decrease
in the number of Directors made by the Board pursuant to the foregoing
authorization. Directors need not be Shareholders. Until the first Annual
Meeting of Shareholders or until successors are duly elected and qualify, the
Board of Directors shall consist of the persons named as such in the Articles of
Incorporation. The members of the Board of Directors shall be elected by the
Shareholders at the Annual Meeting of Shareholders. Each Director shall hold
office until the Annual Meeting next held after his election or until his
successor shall be elected and qualified.
Section 3. PLACE OF MEETING. The Board of Directors may hold its meetings
at such place or places within or without the State of Maryland as the Board may
from time to time determine.
Section 4. ANNUAL MEETINGS. The Board of Directors shall meet for the
election of officers and any other business as promptly as possible after the
adjournment of the Annual Meeting of Shareholders.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such intervals and on such dates as the Board may from time to
time designate.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be held at such times and at such places as may be designated in the call of
such meeting. Special meetings shall be called by the Secretary or Assistant
Secretary at the request of the President or any Director.
Section 7. NOTICE. The Secretary or Assistant Secretary shall give notice
of each Annual, Regular or Special Meeting of the Board of Directors to each
member of the Board at least two days before the meeting by mail, telegram or
telephone to his last known address. It should not be necessary to state the
purpose or business to be transacted in the notice of any Annual or Regular
meeting. The notice of a Special Meeting shall state the purpose or purposes for
which it is called. Personal attendance at any meeting by a Director other than
to protest the validity of said meeting shall constitute a waiver of the
foregoing requirement of notice.
Section 8. CONDUCT OF MEETINGS AND BUSINESS. The Board of Directors may
adopt such rules and regulations for the conduct of their meetings and the
management of the affairs of the Corporation as they may deem proper and not
inconsistent with applicable law, the Articles of Incorporation of the
Corporation or these Bylaws.
Section 9. QUORUM. A majority of the total membership of the Board of
Directors shall constitute a quorum at any meeting of the Board of Directors.
The action of a majority of Directors present at any meeting at which a quorum
is present shall be the action of the Board of Directors unless the concurrence
of a greater proportion is required by applicable law, the Articles of
Incorporation of the Corporation or these Bylaws. In the absence of a quorum at
any meeting a majority of the Directors present may adjourn the meeting from
day to day or for such longer periods as they may designate without notice
other than by announcement at the meeting.
Section 10. RESIGNATIONS. Any Director of the Corporation may resign at
any time by mailing or delivering, or transmitting by radio, telegraph or cable,
written notice to the President or to the Secretary of the Corporation. The
resignation of any Director shall take effect at the time specified therein and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 11. REMOVAL. At any meeting of Shareholders duly called for the
purpose, any Director may by the vote of a majority of all of the Shares
entitled to vote be removed from office. At the same meeting, the vacancy in the
Board of Directors may be filled by the election of a Director to serve for the
remainder of the term and until the election and qualification of his successor.
Section 12. VACANCIES. Except as otherwise provided by the Investment
Company Act of 1940 or other applicable law, any vacancy occurring in the Board
of Directors for any cause other than by reason of an increase in the number of
Directors may be filled by a majority of the remaining members of the Board of
Directors although such majority is less than a quorum, and any vacancy
occurring by reason of an increase in the number of Directors may be filled by
action of a majority of the entire Board of Directors; provided, however, that
upon the death, resignation or removal during any consecutive period of twelve
months of more than one-half of the Directors holding office at the beginning of
such period, a Shareholders' Meeting shall be called for the purpose of electing
an entire new Board, including the vacancies filled pursuant to this Section of
the Bylaws. A Director elected by the Board to fill a vacancy shall be elected
to hold office until the next Annual Meeting of Shareholders or until his
successor is duly elected and qualified. Notwithstanding the foregoing, the
Shareholders may, at any time during the term of such director, elect to fill a
vacancy or elect some other person to fill said vacancy and thereupon the
election by the Board shall be superseded and the election by the Shareholders
shall be deemed a filling of the vacancy and not a removal and may be made at
any meeting called for such purpose.
Section 13. COMPENSATION OF DIRECTORS. The Directors may receive a stated
salary for their services as Directors, and by Resolution of the Board of
Directors a fixed fee and expenses of attendance may be allowed for attendance
at each Meeting. Nothing herein contained shall be construed to preclude any
Director from serving the Corporation in any other capacity, as an officer,
agent or otherwise, and receiving compensation therefor.
Section 14. TELEPHONE PARTICIPATION. Unless otherwise restricted by law,
the Articles of Incorporation of the Corporation or these Bylaws, any member of
the Board of Directors may participate in any meeting of the Board by conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting.
Section 15. CONSENTS. Any action required or permitted to be taken at any
Annual, Regular or Special Meeting of the Board of Directors may be taken
without a meeting if a written consent, setting forth such action, is signed by
all members of the Board and such consent is filed with the minutes of
proceedings of the Board.
Section 16. POWER TO DECLARE DIVIDENDS. The Board of Directors is
expressly authorized to determine in accordance with generally accepted
accounting principles and practices what constitutes net profits, earnings,
surplus or net assets in excess of capital, and to determine what accounting
periods shall be used by the Corporation for any purpose, whether annual or any
other period, including daily; to set apart out of any funds of the Corporation
such reserves for such purposes as it shall determine and to abolish the same;
to declare and pay dividends and distributions on any series by means of a
formula or other method of determination, at meetings held less frequently than
the frequency of the effectiveness of such declarations; to establish payment
dates for dividends or any other distributions on any basis, including dates
occurring less frequently than the effectiveness of declarations thereof; and to
provide for the payment of declared dividends on a date earlier or later than
the specified payment date in the case of Shareholders redeeming their entire
ownership of shares.
ARTICLE III
EXECUTIVE AND OTHER COMMITTEES
Section 1. APPOINTMENT AND TERM OF OFFICE. The Board of Directors, by
resolution passed by a vote of at least a majority of the entire Board, may
appoint an Executive Committee, which shall consist of two (2) or more
Directors.
Section 2. VACANCIES. Vacancies occurring in the Executive Committee
from any cause shall be filled by the Board of Directors at any Meeting thereof
by a vote of the majority of the entire Board.
Section 3. REPORTS TO BOARD. All actions by the Executive Committee
shall be reported to the Board of Directors at its meeting next succeeding such
action.
Section 4. PROCEDURES. The Executive Committee shall fix its own rules of
procedure not inconsistent with these Bylaws or with any directions of the Board
of Directors. It shall meet at such times and places and upon such notice as
shall be provided by such rules or by resolution of the Board of Directors. The
presence of a majority shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of the Committee present at
which a quorum is present shall be necessary for the taking of any action.
Section 5. POWERS OF EXECUTIVE COMMITTEE. During the intervals between
the meetings of the Board of Directors, the Executive Committee, except as
limited by the Bylaws of the Corporation or by specific directions of the Board
of Directors, shall possess and may exercise all the powers of the Board of
Directors in the management and direction of the business and conduct of the
affairs of the Corporation in such manner as the Executive Committee shall deem
to be in the best interests of the Corporation, and shall have power to
authorize the Seal of the Corporation to be affixed to all instruments and
documents requiring same. Notwithstanding the foregoing, the Executive Committee
shall not have the power to elect Directors, increase or decrease the number of
Directors, elect or remove any officer, declare dividends, issue shares or
recommend to Shareholders any action requiring Shareholder approval.
Section 6. OTHER COMMITTEES. From time to time the Board of Directors may
appoint any other Committee or Committees for any purpose or purposes to the
extent lawful, which shall have such powers as shall be specified in the
resolution of appointment.
Section 7. COMPENSATION. The members of any duly appointed Committee
shall receive such compensation and/or fees as may be fixed from time to time by
the Board of Directors.
Section 8. TELEPHONE PARTICIPATION. Unless otherwise restricted by law,
the Articles of Incorporation or these Bylaws, any member of any Committee of
the Board may participate in any meeting of such Committee by conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting.
Section 9. CONSENTS. Any action required or permitted to be taken at any
meeting of the Executive Committee or any other duly appointed Committee may be
taken without a meeting if a written consent, setting forth such action, is
signed by all members of such Committee and such consent is filed with the
minutes of the proceedings of such Committee.
ARTICLE IV
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall be
the President, one or more Vice Presidents, a Treasurer and a Secretary. The
Board of Directors shall elect or appoint such other officers or agents as the
business of the Corporation may require, including one or more Assistant Vice
Presidents, one or more Assistant Secretaries and one or more Assistant
Treasurers. The same person may hold any two offices except those of President
and Vice President.
Section 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers
shall be elected annually by the Board of Directors at its Annual Meeting
following the Annual Meeting of Shareholders, if an Annual Meeting of
Shareholders is held. Each officer shall hold office until the Annual Meeting in
the next year and until the election and qualification of his successor. Any
vacancy in any of the offices may be filled for the unexpired portion of the
term by the Board of Directors at any Regular or Special Meeting of the Board.
The Board of Directors may elect or appoint additional officers or agents at any
Regular or Special Meeting of the Board.
Section 3. REMOVAL. Any officer elected by the Board of Directors may be
removed with or without cause at any time upon a vote of the majority of the
entire Board of Directors. Any other employee of the Corporation may be removed
or dismissed at any time by the President.
Section 4. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors. Any such resignation shall take effect
at the date of receipt of each notice or at any later time specified therein,
and unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in these Bylaws for
regular election or appointment to such office.
Section 6. PRESIDENT. The President shall be the chief executive officer
of the Corporation. The President shall, unless other provisions are made
therefor by the Board or Executive Committee, employ and define the duties of
all employees of the Corporation; have the power to discharge any such
employees; exercise general supervision over the affairs of the Corporation; and
perform such other duties as may be assigned from time to time by the Board of
Directors. In the absence of the President, an officer or Director appointed by
the President shall preside at all meetings of Shareholders.
Section 7. VICE PRESIDENT. The Vice President (or if more than one, the
senior Vice President) in the absence of the President shall perform all duties
and may exercise any of the powers of the President subject to the control of
the Board. Each Vice President shall perform such other duties as may be
assigned from time to time by the Board of Directors, the Executive Committee,
or the President.
Section 8. SECRETARY. The Secretary shall (i) keep or cause to be kept in
books provided for the purpose the Minutes of the Meetings of the Shareholders
and of the Board of Directors; (ii) see that all Notices are duly given in
accordance with the provisions of these Bylaws and as required by law; (iii) be
custodian of the records and of the Seal of the Corporation and see that the
Seal is affixed to all documents which have been duly authorized to be executed
on behalf of the Corporation under its seal; (iv) keep directly or through a
transfer agent a register of the post office address of each Shareholder and
make all proper changes in such register, retaining and filing his authority
for such entries; (v) see that the books, reports, statements, certificates
and all other documents and records required by law are properly kept and
filed; and (vi) in general perform all duties incident to the office of
Secretary and such other duties as may, from time to time, be assigned by the
Board of Directors, the Executive Committee, or the President.
Section 9. TREASURER. The Treasurer shall have supervision of the custody
of the funds and securities of the Corporation, subject to the Articles of
Incorporation of the Corporation and applicable law. The Treasurer shall submit
to the Annual Meeting of Shareholders a statement of the financial condition of
the Corporation and whenever required by the Board of Directors shall make and
render a statement of the accounts of the Corporation and such other statements
as may be required. The Treasurer shall cause to be kept in books of the
Corporation a full and accurate account of all moneys received and paid out for
the account of the Corporation and perform such other duties as may be from time
to time be assigned by the Board of Directors, the Executive Committee, or the
President.
Section 10. ASSISTANT VICE PRESIDENT. The Assistant Vice President or
Vice Presidents of the Corporation shall have such authority and perform such
duties as may be assigned to them by the Board of Directors, the Executive
Committee, or the President of the Corporation.
Section 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
Assistant Secretary or Secretaries and the Assistant Treasurer or Treasurers of
the Corporation shall perform the duties of the Secretary and of the Treasurer,
respectively, in the absence of those officers and shall have such further
powers and perform such other duties as may be assigned to them, respectively,
by the Board of Directors, the Executive Committee or the President.
Section 12. SALARIES. The salaries of the officers shall be fixed from
time to time by the Board of Directors. No officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 1. REGISTER OF SHARES. A register of shares shall be kept at the
principal office of the Corporation or of any transfer agent duly appointed by
the Board of Directors and shall contain the names and addresses of all the
shareholders, the number of shares held by them and a record of all transfers
thereof. Fractional shares may be issued. Share certificates will not be issued.
Section 2. TRANSFER OF SHARES. Shares shall be transferable on the
books of the Corporation by request of the holder thereof in person or by duly
authorized attorney.
Section 3. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. The
Board of Directors may fix in advance a date as the record date for the purpose
of determining Shareholders entitled to notice of or to vote at any Meeting of
Shareholders or Shareholders entitled to receive payment of any dividend. Such
date shall in any case not be more than 60 days and, in case of a Meeting of
Shareholders, not less than 10 days prior to the date on which the particular
action is to be taken. In lieu of fixing a record date, the Board of Directors
may provide that the share transfer books of the Corporation shall be closed for
a stated period not to exceed in any case 20 days. If the share transfer books
are closed for the purpose of determining Shareholders entitled to notice of or
to vote at a Meeting of Shareholders, such books shall be closed for at least 10
days immediately preceding such meeting.
Section 4. TRANSFER AGENT; REGULATIONS. The Board of Directors shall have
power and authority to make all such rules and regulations as they may deem
expedient concerning the issuance and transfer of shares and may appoint a
Transfer Agent for that purpose.
ARTICLE VI
AGREEMENTS, CHECKS, DRAFTS, ENDORSEMENTS, ETC.
Section 1. AGREEMENTS, ETC. The Board of Directors or the Executive
Committee may authorize any officer or officers or agent or agents of the
Corporation to enter into any Agreement or execute and deliver any instrument in
the name and on behalf of the Corporation, and such authority may be general or
confined to specific instances. Unless so authorized by the Board of Directors
or by the Executive Committee or these Bylaws, no officer, agent or employee
shall have any power or authority to bind the Corporation by any Agreement or
engagement, to pledge its credit, or to render it liable pecuniarily for any
purpose or to any amount.
Section 2. CHECKS, DRAFTS, ETC. All checks, drafts, or orders for the
payment of money, notes and other evidences of indebtedness shall be signed by
such officer or officers, employee or employees, or agent or agents as shall be
from time to time designated by the Board of Directors or the Executive
Committee, or as may be specified in or pursuant to the agreement between the
Corporation and the bank or trust company appointed as custodian, pursuant to
the provisions of the Articles of Incorporation of the Corporation.
Section 3. ENDORSEMENTS, ASSIGNMENTS AND TRANSFER OF SECURITIES. All
endorsements, assignments, stock powers or other instruments of transfer of
securities standing in the name of the Corporation or its nominee, or directions
for the transfer of securities belonging to the Corporation, shall be made by
such officer or officers, employee or employees, or agent or agents as may be
authorized by the Board of Directors or the Executive Committee.
Section 4. EVIDENCE OF AUTHORITY. Anyone dealing with the Corporation
shall be fully justified in relying on a copy of a resolution of the Board of
Directors or of any Committee thereof empowered to act in the premises which is
certified as true by the Secretary or an Assistant Secretary under the Seal of
the Corporation.
Section 5. DESIGNATION OF A CUSTODIAN. The Corporation shall place and at
all times maintain in the custody of a Custodian all funds, securities and
similar investments owned by the Corporation, with the exception of securities
loaned under a properly authorized securities loan agreement. The Custodian
shall be a bank having not less than $5,000,000 aggregate capital, surplus and
undivided profits and shall be appointed from time to time by the Board of
Directors, which shall fix its remuneration.
Section 6. ACTION UPON TERMINATION OF A CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Board of Directors shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a Special Meeting of the Shareholders to determine whether
the Corporation shall function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding Shares, the
Custodian shall deliver and pay over all property of the Corporation held by it
as specified in such vote.
Section 7. WHEN TO DETERMINE NET ASSET VALUE. The net asset value per
Share of the outstanding Shares shall be determined at such times as the Board
of Directors shall prescribe, provided that such net asset value shall be
determined at least weekly.
ARTICLE VII
MISCELLANEOUS
Section 1. SEAL. The Seal of the Corporation shall be a disk inscribed
with the words "AETNA VARIABLE PORTFOLIOS, INC."
Section 2. WAIVER OF NOTICE. Whenever under the provisions of these
Bylaws or of any law, the Shareholders or Directors or members of the Executive
Committee or other Committee are authorized to hold any meeting after notice or
after the lapse of any prescribed period of time, such meeting may be held
without notice or without such lapse of time by the written waiver of notice
signed by every person entitled to notice, or if every person entitled to notice
shall be present at such meeting.
Section 3. BOOKS AND RECORDS. The books and records of the Corporation,
including the stock ledger or ledgers, may be kept in or outside the State of
Maryland at such office or agency of the Corporation as may from time to time be
determined by the Board of Directors.
ARTICLE VIII
AMENDMENTS
Section 1. BY THE DIRECTORS. The Board of Directors shall have the power,
at any Regular or Special Meeting, if notice thereof be included in the notice
of such Special Meeting, to alter, amend or repeal any Bylaws of the Corporation
and to make new Bylaws.
Section 2. BY THE SHAREHOLDERS. The Shareholders shall have the power, at
any Annual or Special Meeting if notice thereof be included in the notice of
such Special Meeting, to alter, amend or repeal any Bylaws of the Corporation or
to make new Bylaws.
State of Connecticut:
: ss: Hartford
County of Hartford :
I, the undersigned, Secretary of Aetna Variable Portfolios, Inc., hereby certify
that the foregoing is a true and complete copy of the Bylaws of said Company in
force at the date hereof.
--------------------------------
Dated: Secretary
Subscribed and sworn to before me at Hartford, Conn., this day of
---------------------------------
Notary Public
My commission expires June, 1996
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY,
a Connecticut insurance corporation (the "Adviser"), and AETNA VARIABLE
PORTFOLIOS, INC., a Maryland corporation (the "Fund"), on behalf of its Aetna
Variable _______________ Portfolio as of the Date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company
consisting of multiple investment portfolios under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, pursuant to authority granted by the Fund's Articles of Incorporation,
the Fund has established the Portfolio as a separate investment portfolio; and
WHEREAS, the Adviser is registered with the Commission as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and
is in the business of acting as an investment adviser; and
WHEREAS, the Fund, on behalf of the Portfolio, and the Adviser desire to enter
into an agreement to provide for investment advisory and management services for
the Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement and the policies and
control of the Fund's Board of Directors (the "Board"), the Fund, on behalf of
the Portfolio, hereby appoints the Adviser to serve as the investment adviser to
the Portfolio, to provide the investment advisory services set forth below in
Section II. The Adviser agrees that, except as required to carry out its duties
under this Agreement or otherwise expressly authorized, it is acting as an
independent contractor and not as an agent of the Portfolio and has no authority
to act for or represent the Portfolio in any way.
II. DUTIES OF THE ADVISER
In carrying out the terms of this Agreement, the Adviser shall do the following:
1. supervise all aspects of the operations of the Portfolio;
2. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment portfolio,
place trades for all such securities and regularly report thereon to the
Board;
3. formulate and implement continuing programs for the purchase and
sale of securities and regularly report thereon to the Board;
4. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally, the
Portfolio, securities held by or under consideration for the Portfolio, or
the issuers of those securities;
5. provide economic research and securities analysis as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
6. obtain the services of, contract with, and provide instructions to
custodians and/or subcustodians of the Portfolio's securities, transfer
agents, dividend paying agents, pricing services and other service
providers as are necessary to carry out the terms of this Agreement;
7. prepare financial and performance reports, calculate and report
daily net asset values, and prepare any other financial data or reports, as
the Adviser from time to time, deems necessary or as are requested by the
Board; and
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Adviser
Adviser hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Adviser is duly organized
and is in good standing under the laws of the State of Connecticut and is
fully authorized to enter into this Agreement and carry out its duties and
obligations hereunder.
2. Registration. The Adviser is registered as an investment adviser
with the Commission under the Advisers Act, and is registered or licensed
as an investment adviser under the laws of all jurisdictions in which its
activities require it to be so registered or licensed. The Adviser shall
maintain such registration or license in effect at all times during the
term of this Agreement.
3. Best Efforts. The Adviser at all times shall provide its best
judgment and effort to the Portfolio in carrying out its obligations
hereunder.
B. Representations and Warranties of the Portfolio and the Fund,
The Fund, on behalf of the Portfolio, hereby represents and warrants
to the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
incorporated under the laws of the State of Maryland and it is authorized
to enter into this Agreement and carry out its obligations hereunder.
2. Registration. The Fund is registered as an investment company with
the Commission under the 1940 Act and shares of the Portfolio are
registered or qualified for offer and sale to the public under the
Securities Act of 1933, as amended (the "1933 Act") and all applicable
state securities laws. Such registrations or qualifications will be kept in
effect during the term of this Agreement.
IV. DELEGATION OF RESPONSIBILITIES
A. Appointment of Subadviser
Subject to the approval of the Board and the shareholders of the
Portfolio, the Adviser may enter into a Subadvisory Agreement to engage a
subadviser (the "Subadviser") to the Adviser with respect to the Portfolio.
B. Duties of Subadviser
Under a Subadvisory Agreement, the Subadviser may be delegated some or
all of the following duties of the Adviser:
1. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment portfolio,
place trades for all such securities and regularly report thereon to the
Board;
2. formulate and implement continuing programs for the purchase and
sale of the securities of such issuers and regularly report thereon to the
Board;
3. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally, the
Portfolio, securities held by or under consideration for the Portfolio, or
the issuers of those securities;
4. provide economic research and securities analysis as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
5. give instructions to the custodian and/or sub-custodian of the
Portfolio appointed by the Board, as to deliveries of securities, transfers
of currencies and payments of cash for the Portfolio as required to carry
out the investment activities of the Portfolio, in relation to the matters
contemplated by this Agreement; and
6. provide such financial support, administrative services and other
duties as the Adviser deems necessary and appropriate.
C. Duties of the Adviser
In the event the Adviser delegates certain responsibilities hereunder
to a Subadviser, the Adviser shall, among other things:
1. monitor the investment program maintained by the Subadviser for the
Portfolio and the Subadviser's compliance program to ensure that the
Portfolio's assets are invested in compliance with the Subadvisory
Agreement and the Portfolio's investment objectives and policies as adopted
by the Board and described in the most current effective amendment of the
registration statement for the Portfolio, as filed with the Commission
under the 1933 Act and the 1940 Act ("Registration Statement");
2. review all data and financial reports prepared by the Subadviser to
assure that they are in compliance with applicable requirements and meet
the provisions of applicable laws and regulations;
3. establish and maintain regular communications with the Subadviser
to share information it obtains with the Subadviser concerning the effect
of developments and data on the investment program maintained by the
Subadviser; and
4. oversee all matters relating to the offer and sale of the
Portfolio's shares, the Fund's corporate governance, reports to the Board,
contracts with all third parties on behalf of the Portfolio for services to
the Portfolio, reports to regulatory authorities and compliance with all
applicable rules and regulations affecting the Portfolio's operations.
V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser, at its own expense, shall place all orders for the
purchase and sale of portfolio securities for the Portfolio with brokers or
dealers selected by the Adviser, which may include brokers or dealers
affiliated with the Adviser. The Adviser shall use its best efforts to seek
to execute portfolio transactions at prices that are advantageous to the
Portfolio and at commission rates that are reasonable in relation to the
benefits received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide brokerage
and research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) to the Portfolio and/or the other accounts
over which the Adviser or its affiliates exercise investment discretion.
The Adviser may also select brokers or dealers to effect transactions for
the Portfolio who provide payment for expenses of the Portfolio. The
Adviser is authorized to pay a broker or dealer who provides such brokerage
and research services or expenses, a commission for executing a portfolio
transaction for the Portfolio that is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction
if the Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer and is paid in compliance with Section
28(e) or other rules and regulations of the Commission. This determination
may be viewed in terms of either that particular transaction or the overall
responsibilities that the Adviser and its affiliates have with respect to
accounts over which they exercise investment discretion. The Board shall
periodically review the commissions paid by the Portfolio to determine if
the commissions paid over representative periods of time were reasonable in
relation to the benefits received.
VI. CONTROL BY THE BOARD
Any investment program undertaken by the Adviser pursuant to this Agreement, as
well as any other activities undertaken by the Adviser on behalf of the
Portfolio pursuant thereto, shall at all times be subject to any directives of
the Board.
VII. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Adviser shall at all
times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act and any
rules and regulations adopted thereunder;
2. all policies and procedures of the Fund as adopted by the Board and
as described in the Registration Statement;
3. the provisions of the Fund's Articles of Incorporation, as amended;
4. the provisions of the Bylaws of the Fund, as amended; and
5. any other applicable provisions of state and federal law.
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the expenses
assumed by the Adviser, the Fund, on behalf of the Portfolio, shall pay to the
Adviser an annual fee, payable monthly, equal to .60% of the average daily net
assets of the Portfolio. Except as hereinafter set forth, compensation under
this Agreement shall be calculated and accrued daily at the rate of 1/365 of
.60% of the daily net assets of the Portfolio. If this Agreement becomes
effective subsequent to the first day of a month or terminates before the last
day of a month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the fees
set forth above. Subject to the provisions of Section X hereof, payment of the
Adviser's compensation for the preceding month shall be made as promptly as
possible. For so long as a Subadvisory Agreement is in effect, the Portfolio
acknowledges on behalf of the Portfolio that the Adviser will pay to the
Subadviser, as compensation for acting as Subadviser to the Portfolio, the fees
specified in the Subadvisory Agreement.
IX. EXPENSES
The expenses in connection with the management of the Portfolio shall be
allocated between the Portfolio and the Adviser as follows:
A. Expenses of the Adviser
The Adviser shall pay:
1. the salaries, employment benefits and other related costs and
expenses of those of its personnel engaged in providing investment advice
to the Portfolio, including without limitation, office space, office
equipment, telephone and postage costs;
2. all fees and expenses of all directors, officers and employees, if
any, of the Fund who are employees of the Adviser or an affiliated entity,
including any salaries and employment benefits payable to those persons;
B. Expenses of the Portfolio
The Portfolio shall pay:
1. investment advisory fees pursuant to this Agreement;
2. brokers' commissions, issue and transfer taxes or other transaction
fees payable in connection with any transactions in the securities in the
Portfolio's investment portfolio or other investment transactions incurred
in managing the Portfolio's assets, including portions of commissions that
may be paid to reflect brokerage research services provided to the Adviser;
3. fees and expenses of the Portfolio's independent accountants and
legal counsel and the independent directors' legal counsel;
4. fees and expenses of any administrator, transfer agent, custodian,
dividend, accounting, pricing or disbursing agent of the Portfolio;
5. interest and taxes;
6. fees and expenses of any membership in the Investment Company
Institute or any similar organization in which the Board deems it advisable
for the Fund to maintain membership;
7. insurance premiums on property or personnel (including officers and
directors) of the Fund which benefit the Portfolio;
8. all fees and expenses of the Company's directors, who are not
"interested persons" (as defined in the 1940 Act) of the Fund or the
Adviser;
9. expenses of preparing, printing and distributing proxies, proxy
statements, prospectuses and reports to shareholders of the Portfolio,
except for those expenses paid by third parties in connection with the
distribution of Portfolio shares and all costs and expenses of
shareholders' meetings;
10. all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in shares of the Portfolio
or in cash;
11. costs and expenses of promoting the sale of shares in the
Portfolio, including preparing prospectuses and reports to shareholders of
the Portfolio, provided, nothing in this Agreement shall prevent the
charging of such costs to third parties involved in the distribution and
sale of Portfolio shares;
12. fees payable by the Portfolio to the Commission or to any state
securities regulator or other regulatory authority for the registration of
shares of the Portfolio in any state or territory of the United States or
of the District of Columbia;
13. all costs attributable to investor services, administering
shareholder accounts and handling shareholder relations, (including,
without limitation, telephone and personnel expenses), which costs may also
be charged to third parties by the Adviser; and
14. any other ordinary, routine expenses incurred in the management of
the Portfolio's assets, and any nonrecurring or extraordinary expenses,
including organizational expenses, litigation affecting the Portfolio and
any indemnification by the Fund of its officers, directors or agents.
X. EXPENSE LIMITATION
If, for any fiscal year, the total of all ordinary business expenses payable by
the Portfolio, including all investment advisory fees but excluding brokerage
commissions, distribution fees, taxes, interest and extraordinary expenses and
certain other excludable expenses, would exceed the most restrictive expense
limits imposed by any statute or regulatory authority of any jurisdiction in
which shares of the Portfolio are offered for sale (unless a waiver is
obtained), the Adviser shall reduce its advisory fee to the extent necessary to
meet such expense limit, but the Adviser will not be required to reimburse the
Portfolio for any ordinary business expenses which exceed the amount of its
advisory fee for such fiscal year. The amount of any such reduction is to be
borne by the Adviser and shall be deducted from the monthly advisory fee
otherwise payable to the Adviser during such fiscal year. For the purposes of
this paragraph, the term "fiscal year" shall exclude the portion of the current
fiscal year which shall have elapsed prior to the date hereof and shall include
the portion of the then current fiscal year which shall have elapsed at the date
of termination of this Agreement.
XI. ADDITIONAL SERVICES
Upon the request of the Board, the Adviser may perform certain accounting,
shareholder servicing or other administrative services on behalf of the
Portfolio that are not required by this Agreement. Such services will be
performed on behalf of the Portfolio and the Adviser may receive from the
Portfolio such reimbursement for costs or reasonable compensation for such
services as may be agreed upon between the Adviser and the Board on a finding by
the Board that the provision of such services by the Adviser is in the best
interests of the Portfolio and its shareholders. Payment or assumption by the
Adviser of any Portfolio expense that the Adviser is not otherwise required to
pay or assume under this Agreement shall not relieve the Adviser of any of its
obligations to the Portfolio nor obligate the Adviser to pay or assume any
similar Portfolio expense on any subsequent occasions. Such services may
include, but are not limited to, (a) the services of a principal financial
officer of the Fund (including applicable office space, facilities and
equipment) whose normal duties consist of maintaining the financial accounts and
books and records of the Fund and the Portfolio and the services (including
applicable office space, facilities and equipment) of any of the personnel
operating under the direction of such principal financial officer; (b) the
services of staff to respond to shareholder inquiries concerning the status of
their accounts, providing assistance to shareholders in exchanges among the
investment companies managed or advised by the Adviser, changing account
designations or changing addresses, assisting in the purchase or redemption of
shares; or otherwise providing services to shareholders of the Portfolio; and
(c) such other administrative services as may be furnished from time to time by
the Adviser to the Fund or the Portfolio at the request of the Board.
XII. NONEXCLUSIVITY
The services of the Adviser to the Portfolio are not to be deemed to be
exclusive, and the Adviser shall be free to render investment advisory or other
services to others (including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the Adviser
may serve as officers or directors of the Fund, and that officers or directors
of the Fund may serve as officers or directors of the Adviser to the extent
permitted by law; and that the officers and directors of the Adviser are not
prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, directors
or trustees of any other firm or trust, including other investment companies.
XIII. TERM
This Agreement shall become effective at the close of business on ____________,
1996 and shall remain in force and effect through December 31, 1997.
XIV. RENEWAL
Following the expiration of its initial term, the Agreement shall continue in
force and effect from year to year, provided that such continuance is
specifically approved at least annually:
1. a. by the Board, or
b. by the vote of a majority of the Portfolio's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in person
at a meeting specifically called for such purpose.
XV. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board or by vote of a majority of the Portfolio's
outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act),
or by the Adviser, on sixty (60) days' written notice to the other party. The
notice provided for herein may be waived by the party required to be notified.
This Agreement shall automatically terminate in the event of its "assignment",
as that term is defined in Section 2(a)(4) of the 1940 Act.
XVI. LIABILITY
The Adviser shall be liable to the Portfolio and shall indemnify the Portfolio
for any losses incurred by the Portfolio, whether in the purchase, holding or
sale of any security or otherwise, to the extent that such losses resulted from
an act or omission on the part of the Adviser or its officers, directors or
employees, that is found to involve willful misfeasance, bad faith or
negligence, or reckless disregard by the Adviser of its duties under this
Agreement, in connection with the services rendered by the Adviser hereunder.
XVII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such addresses shall be:
if to the Fund, on behalf of the Portfolio or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn: Secretary
XVIII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in the provisions of this Agreement
is revised by rule, regulation or order of the Commission, such provisions shall
be deemed to incorporate the effect of such rule, regulation or order.
XIX. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund with the permission of Aetna Life and Casualty Company and
their continued use is subject to the right of Aetna Life and Casualty Company
to withdraw this permission in the event the Adviser or another subsidiary or
affiliated corporation of Aetna Life and Casualty Company should not be the
investment adviser of the Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the ___ day of _______________,
199__.
AETNA LIFE INSURANCE AND ANNUITY
COMPANY
By:
------------------------------
Name:
-----------------------------
Title:
----------------------------
Attest:
- ------------------------------- AETNA VARIABLE PORTFOLIOS, INC.
on behalf of its
Aetna Variable ______________ Portfolio
By:
------------------------------
Name:
------------------------------
Attest: ------------------------ Title:
------------------------------
FORM OF
SUBADVISORY AGREEMENT
THIS AGREEMENT is made by and among AETNA LIFE INSURANCE AND ANNUITY COMPANY, a
Connecticut corporation (the "Adviser"), AETNA VARIABLE PORTFOLIOS, INC., a
Maryland Corporation, (the "Fund"), on behalf of its AETNA VARIABLE
______________________________ PORTFOLIO (the "Portfolio") and AELTUS INVESTMENT
MANAGEMENT, INC., a Connecticut corporation (the "Subadviser") as of the date
set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company
consisting of multiple investment portfolios, under the Investment Company Act
of 1940, as amended (the "1940 Act"); and
WHEREAS, pursuant to authority granted by the Fund's Articles of Incorporation,
the Fund has established the Portfolio as a separate investment portfolio; and
WHEREAS, both the Adviser and the Subadviser are registered with the Commission
as investment advisers under the Investment Advisers Act of 1940, as amended
(the "Advisers Act") and both are in the business of acting as investment
advisers; and
WHEREAS, the Adviser has entered into an Investment Advisory Agreement with the
Fund, on behalf of the Portfolio, (the "Investment Advisory Agreement") which
appoints the Adviser as the investment adviser for the Portfolio; and
WHEREAS, Article IV of the Investment Advisory Agreement authorizes the Adviser
to delegate all or a portion of its obligations under the Investment Advisory
Agreement to a subadviser;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement, the Adviser and the Fund,
on behalf of the Portfolio, hereby appoint the Subadviser to manage the assets
of the Portfolio as set forth below in Section II, under the supervision of the
Adviser and subject to the approval and direction of the Fund's Board of
Directors (the "Board"). The Subadviser hereby accepts such appointment and
agrees that it shall, for all purposes herein, undertake such obligations as an
independent contractor and not as an agent of the Adviser. The Subadviser
agrees, that except as required to carry out its duties under this Agreement or
otherwise expressly authorized, it has no authority to act for or represent the
Portfolio in any way.
II. DUTIES OF THE SUBADVISER AND THE ADVISER
A. Duties of the Subadviser
The Subadviser shall regularly provide investment advice with respect to
the assets held by the Portfolio and shall continuously supervise the investment
and reinvestment of cash, securities and instruments or other property
comprising the assets of the Portfolio. In carrying out these duties, the
Subadviser shall:
1. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment portfolio,
place trades for all such securities and regularly report thereon to the Adviser
and, at the request of the Adviser, to the Board;
2. formulate and implement continuing programs for the purchase and sale of
securities and regularly report thereon to the Adviser and, at the request of
the Adviser or the Portfolio, to the Board;
3. obtain and evaluate pertinent information about significant developments
and economic, statistical and financial data, domestic, foreign or otherwise,
whether affecting the economy generally, the Portfolio, securities held by or
under consideration for the Portfolio, or the issuers of those securities;
4. provide economic research and securities analysis as requested by the
Adviser from time to time, or as the Adviser considers necessary or advisable in
connection with the Subadviser's performance of its duties hereunder; and
5. give instructions to the custodian and/or sub-custodian of the Portfolio
appointed by the Board, concerning deliveries of securities, transfers of
currencies and payments of cash for the Portfolio, as required to carry out the
investment activities of the Portfolio as contemplated by this Agreement; and
6. provide such financial support, administrative and other services, such
as preparation of financial data, determination of the Portfolio's net asset
value, preparation of financial and performance reports, as the Adviser from
time to time, deems necessary and appropriate and which the Subadviser is
willing and able to provide.
B. Duties of the Adviser
The Adviser shall retain responsibility for oversight of all activities of
the Subadviser and for monitoring its activities on behalf of the Portfolio. In
carrying out its obligations under this Agreement and the Investment Advisory
Agreement, the Adviser shall:
1. monitor the investment program maintained by the Subadviser for the
Portfolio and the Subadviser's compliance program to ensure that the Portfolio's
assets are invested in compliance with the Subadvisory Agreement and the
Portfolio's investment objectives and policies as adopted by the Board and
described in the most current effective amendment of the registration statement
for the Portfolio, as filed with the Commission under the Securities Act of
1933, as amended (the "1933 Act"), and the 1940 Act ("Registration Statement");
2. review all data and financial reports prepared by the Subadviser to
assure that they are in compliance with applicable requirements and meet the
provisions of applicable laws and regulations;
3. file all periodic reports required to be filed by the Portfolio with the
applicable regulatory authorities;
4. review and deliver to the Board all financial, performance and other
reports prepared by the Subadviser under the provisions of this Agreement or as
requested by the Adviser;
5. establish and maintain regular communications with the Subadviser to
share information it obtains concerning the effect of developments and data on
the investment program maintained by the Subadviser;
6. maintain contact with and enter into arrangements with the custodian,
transfer agent, auditors, outside counsel, and other third parties providing
services to the Portfolio;
7. oversee all matters relating to (i) the offer and sale of shares of the
Portfolio, including promotions, marketing materials, preparation of
prospectuses, filings with the Commission and state securities regulators, and
negotiations with broker-dealers; (ii) shareholder services, including,
confirmations, correspondence and reporting to shareholders; (iii) all corporate
matters on behalf of the Portfolio, including monitoring the corporate records
of the Portfolio, maintaining contact with the Board, preparing for, organizing
and attending meetings of the Board and the Portfolio's shareholders; (iv)
preparation of proxies when required; and (v) any other matters not expressly
delegated to the Subadviser by this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Subadviser
The Subadviser hereby represents and warrants to the Adviser as follows:
1. Due Incorporation and Organization. The Subadviser is duly organized and
is in good standing under the laws of the State of Connecticut and is fully
authorized to enter into this Agreement and carry out its duties and obligations
hereunder.
2. Registration. The Subadviser is registered as an investment adviser with
the Commission under the Advisers Act, and is registered or licensed as an
investment adviser under all of the laws of all jurisdictions in which its
activities require it to be so registered or licensed. The Subadviser shall
maintain such registration or license in effect at all times during the term of
this Agreement.
3. Regulatory Orders. The Subadviser is not subject to any stop orders,
injunctions or other orders of any regulatory authority affecting its ability to
carry out the terms of this Agreement. The Subadviser will notify the Adviser
and the Portfolio immediately if any such order is issued or if any proceeding
is commenced that could result in such an order.
4. Compliance. The Subadviser has in place compliance systems and
procedures designed to meet the requirements of the Advisers Act and the 1940
Act and it shall at all times assure that its activities in connection with
managing the Portfolio follow these procedures.
5. Authority. The Subadviser is authorized to enter into this Agreement and
carry out the terms hereunder.
6. Best Efforts. The Subadviser at all times shall provide its best
judgment and effort to the Portfolio in carrying out its obligations hereunder.
B. Representations and Warranties of the Adviser
The Adviser hereby represents and warrants to the Subadviser as follows:
1. Due Incorporation and Organization. The Adviser is duly organized and is
in good standing under the laws of the State of Connecticut and is fully
authorized to enter into this Agreement and carry out its duties and obligations
hereunder.
2. Registration. The Adviser is registered as an investment adviser with
the Commission under the Advisers Act, and is registered or licensed as an
investment adviser under all of the laws of all jurisdictions in which its
activities require it to be so registered or licensed. The Adviser shall
maintain such registration or license in effect at all times during the term of
this Agreement.
3. Regulatory Orders. The Adviser is not subject to any stop orders,
injunctions or other orders of any regulatory authority affecting its ability to
carry out the terms of this Agreement. The Adviser will notify the Subadviser
and the Portfolio immediately if any such order is issued or if any proceeding
is commenced that could result in such an order.
4. Authority. The Adviser is authorized to enter into this Agreement and
carry out the terms hereunder.
5. Best Efforts. The Adviser at all times shall provide its best judgment
and effort to the Portfolio in carrying out its obligations hereunder.
C. Representations and Warranties of the Portfolio and the Fund
The Fund, on behalf of the Portfolio, hereby represents and warrants to the
Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly incorporated
as a Corporation under the laws of the State of Maryland and it is authorized to
enter into this Agreement and carry out its obligations hereunder.
2. Registration. The Fund is registered as an investment company with the
Commission under the 1940 Act and shares of the Portfolio are registered or
qualified for offer and sale to the public under the 1933 Act and all applicable
state securities laws. Such registrations or qualifications, will be kept in
effect during the term of this Agreement.
IV. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Subadviser shall place all orders for the purchase and sale of
portfolio securities for the Portfolio with brokers or dealers selected
by the Subadviser, which may include brokers or dealers affiliated with
the Subadviser. The Subadviser shall use its best efforts to seek to
execute portfolio transactions at prices that are advantageous to the
Portfolio giving consideration to the services and research provided
and at commission rates that are reasonable in relation to the benefits
received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Portfolio and/or
the other accounts over which the Subadviser or its affiliates exercise
investment discretion. The Subadviser may also select brokers or
dealers to effect transactions for the Portfolio who provide payment
for expenses of the Portfolio. The Subadviser is authorized to pay a
broker or dealer who provides such brokerage and research services or
expenses, a commission for executing a portfolio transaction for the
Portfolio that is in excess of the amount of commission another broker
or dealer would have charged for effecting that transaction if the
Subadviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage, research and
other services provided by such broker or dealer and is paid in
compliance with Section 28(e) or other rules and regulations of the
Commission. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities that the
Subadviser and its affiliates have with respect to accounts over which
they exercise investment discretion. The Board shall periodically
review the commissions paid by the Portfolio to determine if the
commissions paid over representative periods of time were reasonable in
relation to the benefits received.
V. CONTROL BY THE BOARD OF TRUSTEES
Any investment program undertaken by the Subadviser pursuant to this Agreement,
as well as any other activities undertaken by the Subadviser at the direction of
the Adviser on behalf of the Portfolio, shall at all times be subject to any
directives of the Board.
VI. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Subadviser shall at
all times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act and any
rules and regulations adopted thereunder;
2. all policies and procedures of the Portfolio as adopted by the Board and
as described in the Registration Statement;
3. the provisions of the Articles of Incorporation of the Fund, as amended
from time to time;
4. the provisions of the Bylaws of the Fund, as amended from time to time;
and
5. any other applicable provisions of state or federal law.
VII. COMPENSATION
A. Payment Schedule
The Adviser shall pay the Subadviser, as compensation for services
rendered hereunder, from its own assets, an annual fee of up to .35% of
the average daily net assets in the Portfolio, payable monthly. Except
as hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of the annual
Subadvisory fee of up to .35% applied to the daily net assets of the
Portfolio. If this Agreement becomes effective subsequent to the first
day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect
shall be prorated in a manner consistent with the calculation of the
fees set forth above.
B. Reduction
Payment of the Subadviser's compensation for the preceding month shall
be made as promptly as possible, except as provided below. The
Subadviser acknowledges that, pursuant to the Investment Advisory
Agreement, the Adviser has agreed to reduce its fee or reimburse the
Portfolio if the expenses borne by the Portfolio exceed the expense
limitations applicable to the Portfolio imposed by the securities laws
or regulations of any jurisdiction in which the Portfolio shares are
qualified for sale. Accordingly, the Subadviser agrees that, if, for
any fiscal year, the total of all ordinary business expenses of the
Portfolio, including all investment advisory fees but excluding
brokerage commissions, distribution fees, taxes, interest,
extraordinary expenses and certain other excludable expenses, would
exceed the most restrictive expense limits imposed by any statute or
regulatory authority of any jurisdiction in which shares of the
Portfolio are offered for sale (unless a waiver is obtained), the
Subadviser shall reduce its advisory fee to the extent necessary to
meet such expense limit, but will not be required to reimburse the
Portfolio for any ordinary business expenses which exceed the amount of
its advisory fee for the fiscal year. The Subadviser shall contribute
to the amount of such reduction by reimbursing the Adviser in
proportion to the amounts which the Adviser and Subadviser would have
been entitled to receive for such year. For the purposes of this
paragraph, the term "fiscal year" shall exclude the portion of the
current fiscal year which elapsed prior to the effective date of this
Agreement, but shall include the portion of the then current fiscal
year has elapsed at the date of termination of this Agreement.
VIII. ALLOCATION OF EXPENSES
The Subadviser shall pay the salaries, employment benefits and other related
costs of those of its personnel engaged in providing investment advice to the
Portfolio hereunder, including, but not limited to, office space, office
equipment, telephone and postage costs. In the event the Subadviser incurs any
expense that is the obligation of the Adviser as set out in this Agreement, the
Adviser shall reimburse the Subadviser for such expense on presentation of a
statement indicating the expenses incurred and the amount paid by the
Subadviser.
IX. NONEXCLUSIVITY
The services of the Subadviser with respect to the Portfolio are not to be
deemed to be exclusive, and the Subadviser shall be free to render investment
advisory and administrative or other services to others (including other
investment companies) and to engage in other activities. It is understood and
agreed that officers or directors of the Subadviser may serve as officers or
directors of the Adviser or officers or directors of the Fund; that officers or
directors of the Adviser or officers or directors of the Fund may serve as
officers or directors of the Subadviser to the extent permitted by law; and that
the officers and directors of the Subadviser are not prohibited from engaging in
any other business activity or from rendering services to any other person, or
from serving as partners, officers, directors or trustees of any other firm or
trust, including other investment advisory companies.
X. TERM
This Agreement shall become effective at the close of business on _________,
1996, and shall remain in force and effect through December 31, 1997, unless
earlier terminated under the provisions of Article XI. Following the expiration
of its initial term, the Agreement shall continue in force and effect for one
year periods, provided such continuance is specifically approved at least
annually:
1. (a) by the Board or (b) by the vote of a majority of the Portfolio's
outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act),
and
2. by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this Agreement
(other than as a director of the Fund), by votes cast in person at a meeting
specifically called for such purpose.
XI. TERMINATION
This Agreement may be terminated:
1. at any time, without the payment of any penalty, by vote of the Board or
by vote of a majority of the outstanding voting securities of the Portfolio; or
2. by the Adviser, the Fund, on behalf of the Portfolio, or the Subadviser
on sixty (60) days' written notice to the other party, unless written notice is
waived by the party required to be notified; or
3. automatically in the event there is an "assignment" of this Agreement,
as defined in Section 2 (a) (4) of the 1940 Act.
XII. LIABILITY
The Subadviser shall be liable to the Portfolio and the Adviser and shall
indemnify the Portfolio and the Adviser for any losses incurred by the
Portfolio, or the Adviser whether in the purchase, holding or sale of any
security or otherwise, to the extent that such losses resulted from an act or
omission on the part of the Subadviser or its officers, directors or employees,
that is found to involve willful misfeasance, bad faith or negligence, or
reckless disregard by the Subadviser of its duties under this Agreement, in
connection with the services rendered by the Subadviser hereunder.
XIII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such address shall be:
if to the Fund, on behalf of the Portfolio or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn: Secretary
if to the Subadviser:
242 Trumbull Street
Hartford, Connecticut 06103-1205
Fax number: 860/275-4440
Attention: President
XIV. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in any provision of the Agreement is
revised by rule, regulation or order of the Commission, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
XV. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund with the permission of Aetna Life and Casualty Company and
their continued use is subject to the right of Aetna Life and Casualty Company
to withdraw this permission in the event the Subadviser or another subsidiary or
affiliated corporation of Aetna Life and Casualty Company should not be the
investment adviser of the Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the ______ day of ______________,
19__.
Aetna Life Insurance and Annuity Company
By:
----------------------------------
Attest: -------------------- Name:
----------------------------------
Title:
----------------------------------
Aeltus Investment Management, Inc.
Attest: --------------------- By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
Aetna Variable Portfolios, Inc.
on behalf of its
Aetna Variable _________________ Portfolio
By:
----------------------------------
Name:
----------------------------------
Attest: Title:
------------------------ ---------------------------------
FORM OF
AETNA VARIABLE PORTFOLIOS, INC.
UNDERWRITING AGREEMENT
THIS AGREEMENT, is entered into this ___ day of ___________, 1996, by and
between Aetna Life Insurance and Annuity Company, Inc., a Connecticut
corporation (Aetna), and Aetna Variable Portfolios, Inc., a Maryland corporation
("Fund") on behalf of its investment portfolios (the "Portfolios").
WHEREAS, the Fund is an open-end management investment company registered with
the Securities and Exchange Commission (Commission) under the Investment Company
Act of 1940, as amended (1940 Act) authorized to issue shares of distinct
investment portfolios; and
WHEREAS the Fund has registered the shares of its common stock (Shares) in its
Portfolios for offer and sale to the public under the Securities Act of 1933, as
amended; and
WHEREAS, the Fund wishes to retain Aetna, and Aetna is willing to act, as
principal underwriter in connection with the offer and sale of the Shares; and
NOW, THEREFORE, in consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Appointment of Underwriter. The Fund hereby appoints Aetna and Aetna hereby
accepts appointment as underwriter in connection with the distribution of the
Shares. The Fund authorizes Aetna to solicit orders for the purchase of the
Shares as set forth in the Registration Statement currently effective with the
Commission for the Shares. It is understood that the Shares are offered only
through variable annuity contracts and variable life policies issued by Aetna
and its affiliates.
2. Compensation. Aetna shall receive no separate compensation for providing
services under this Agreement. It is understood that the compensation Aetna
receives in connection with the issuance of the variable annuity contracts or
variable life policies shall be the only consideration it receives for
serving as underwriter hereunder.
3. Aetna Expenses. Aetna shall be responsible for any costs of printing and
distributing prospectuses and statements of additional information necessary to
offer and sell the Shares, and such other sales literature, reports, forms and
advertisements in connection as it elects to prepare, provided such materials
comply with the applicable provisions of federal and state law.
4. Fund Expenses. The Fund shall be responsible for the costs of registering
the Shares with the Commission and for the costs of preparing prospectuses,
statements of additional information and such other documents as are required to
maintain the registration of the Shares with the Commission.
5. Share Certificates. The Fund shall not issue certificates representing
Shares.
6. Status of underwriter and Other Persons. Aetna is an independent contractor
and shall be agent for the Fund only in respect to the sale and redemption of
the Shares. Any person, even though also an officer, director, employee or agent
of Aetna, who may be or become an officer, director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Aetna even though paid by Aetna.
7. Nonexclusivity. The services of Aetna to the Fund under this Agreement
are not to be deemed exclusive, and Aetna shall be free to render similar
services or other services to others and to engage in other activities related
or unrelated to those provided under this agreement.
8. Effectiveness and Termination of Agreement. This Agreement shall become
effective at the close of business on the date set forth in the first paragraph
of this Agreement and shall remain in force and effect, through December 31,
1997, unless earlier terminated under the provisions of Section 9. Following the
expiration of its initial term, the Agreement shall continue in force and effect
for one year periods, provided such continuance is specifically approved at
least annually by the Fund's trustees, or by the vote of a majority of the
Fund's outstanding voting securities (as defined in Section 2(a)(42) of the 1940
Act.
9. Termination. This Agreement may be terminated at any time, by either
party, without the payment of any penalty, on sixty (60) days' written notice
to the other party.
10. Liability of Aetna. Aetna shall be liable to the Fund and shall indemnify
the Fund for any losses incurred by the Fund, to the extent that such losses
resulted from an act or omission on the part of Aetna or its officers, directors
or employees in carrying out its duties hereunder, that is found to involve
willful misfeasance, bad faith or negligence, or reckless disregard by Aetna of
its duties under this Agreement.
11. Amendments. This Agreement may be amended or changed only by an
instrument in writing signed by both parties.
12. Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of Connecticut and the 1940 Act. To the extent that
the applicable laws of the State of Connecticut conflict with the
applicable provisions of the 1940 Act, however, the latter shall control.
13. Notices. Any notices under this Agreement shall be in writing, addressed and
delivered, mailed postage paid, or sent by other delivery service, or by
facsimile transmission to each party at such address as each party may designate
for the receipt of notice. Until further notice, such addresses shall be:
if to the Fund or Aetna:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
14. Questions of Interpretation. This Agreement shall be governed by the laws of
the State of Connecticut. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretations thereof, if any, by the United
States Courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the Commission issued pursuant to the 1940
Act. In addition, where the effect of a requirement of the 1940 Act reflected in
the provisions of this Agreement is revised by rule, regulation or order of the
Commission, such provisions shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the ___ day of _______________,
199__.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
By:
----------------------------------------
Name:
--------------------------------------
Title:
Attest: -------------------- -------------------------------------
Secretary
AETNA VARIABLE PORTFOLIOS, INC.
By:
---------------------------------------
Name:
---------------------------------------
Title: -------------------------------------
Attest:
---------------------
Secretary
FORM OF
Custodian Agreement
between
Mellon Bank, N.A.
and
Aetna Variable Portfolios, Inc.
INDEX
Page
1.Appointment
2.Application of this Agreement
3.Delivery of Documents
4.Definitions
5.Delivery and Registration of the Property
6.Receipt and Disbursement of Money
7.Receipt of Securities; Subcustodian
8.Use of Book-Entry System
9.Instructions Consistent with Charter, Etc.
10.Transactions Not Requiring Instructions
11.Transactions Requiring Instructions
12.Segregated Accounts; Securities Lending
13.Dividends and Distributions
14.Purchases of Securities
15.Sales of Securities
16.Records
17.Reports
18.Cooperation with Accountants
19.Confidentiality
20.Right to Receive Advice
21.Compensation
22.Indemnification
23.Responsibility of the Bank
24.Collections
25.Duration and Termination
26.Notices
27.Further Actions
28.Amendments
29.Counterparts
30.Miscellaneous
EXHIBIT A
CUSTODIAN AGREEMENT
THIS AGREEMENT is made by and between AETNA VARIABLE PORTFOLIOS, INC., a
Maryland corporation (the "Company"), and MELLON BANK, N.A., a national banking
association (the "Bank").
W I T N E S S E T H :
WHEREAS, the Company is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Company is authorized to issue one or more series of shares,
each of which represents a separate investment portfolio, and which may create
additional series in the future; and
WHEREAS, the Company currently has authorized four series, entitled Aetna
Variable Index Plus Portfolio, Aetna Variable Small Company Portfolio, Aetna
Variable Capital Appreciation Portfolio, and Aetna Variable Growth Portfolio
(each individually a "Fund" and collectively the "Funds"); and
WHEREAS, Aetna Life Insurance and Annuity Company ("Adviser") will serve as
investment adviser to the Funds pursuant to Investment Advisory Agreements
between the Fund, on behalf of each of the Funds, and the Adviser; and
WHEREAS, the Company and the Adviser desire to retain the Bank to serve as
the custodian for each of the Funds, as well as for some or all of any
additional series created by the Fund in the future, and the Bank is willing to
serve as custodian for each of the Funds set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment
The Company hereby appoints the Bank to act as custodian of the portfolio
securities, cash and other property belonging to the Funds for the period and on
the terms set forth in this Agreement. The Bank accepts such appointment and
agrees to furnish the services herein set forth in return for the compensation
as provided in Paragraph 21 of this Agreement. The Bank agrees to comply with
all relevant provisions of the 1940 Act and applicable rules and regulations
thereunder. It is understood that each of the Funds represent a separate
investment portfolio of the Company and, accordingly, that the Bank shall
identify to each such Fund Property belonging to such Fund and in such reports,
confirmations and notices to the Company called for under this Agreement shall
identify the Fund to which such report, confirmation or notice pertains.
2. Application of this Agreement
(a) It is expressly understood that the Company is entering into this
Agreement on behalf of each Fund individually and not jointly with any other
Fund. The responsibilities and benefits set forth in this Agreement shall refer
to each Fund severally and not jointly.
(b) Any breach of this Agreement regarding the Company with respect to any
Fund shall not create a right or obligation with respect to any other Fund.
(c) Under no circumstances shall the Bank have the right to set off claims
relating to a Fund by applying Property of any other Fund. No Fund shall have
the right to set off against the assets held by any other Fund.
(d) The business and contractual relationships created by this Agreement
and the consequences of such relationships relate solely to the particular Fund
to which such relationship was created. All Property held by the Bank on behalf
of a particular Fund shall relate solely to that particular Fund.
3. Delivery of Documents
The Company has furnished the Bank with copies properly certified or
authenticated of each of the following:
(a) Resolutions of the Company's Board of Directors authorizing the
appointment of the Bank as custodian of the portfolio securities, cash and other
property belonging to the Fund and approving this Agreement;
(b) Appendix A identifying and containing the signatures of the Company's
officers and/or officers of the Fund's Adviser authorized to issue Oral
Instructions and to sign Written Instructions, as hereinafter defined, on behalf
of the Fund;
(c) The Company's Articles of Incorporation as filed with the Department of
Assessments and Taxation of the State of Maryland and all amendments thereto
(such Articles of Incorporation, as presently in effect and as they shall from
time to time be amended, are herein called the "Charter");
(d) The Company's By-Laws and all amendments thereto (such By-Laws, as
presently in effect and as they shall from time to time be amended, are herein
called the "ByLaws");
(e) The Investment Advisory Agreement currently in effect (the "Advisory
Agreement") between each of the Funds and its Adviser; and
(f) The Company's most recent prospectus and statement of additional
information relating to shares of the Company's Common Stock ("Shares") (such
prospectus and statement of additional information as presently in effect and
all amendments and supplements thereto are herein called the "Prospectus");
The Company will furnish the Bank from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Definitions
(a) "Authorized Person". As used in this Agreement, the term "Authorized
Person" means any of the officers of the Company or the Adviser (whether or not
any such person is an officer or employee of the Company): (i) who is duly
authorized by the Board of Directors of the Company or under the terms of the
Advisory Agreement, the Charter or the ByLaws, as each may from time to time be
amended, to act on behalf of the Fund; and (ii) whose name is listed on the
Certificate annexed hereto as Appendix A or any amendment thereto as may be
received by the Bank from time to time.
(b) "Book-Entry System". As used in this Agreement, the term "Book-Entry
System" means the Federal Reserve Treasury book-entry system for United States
and federal agency securities, its successor or successors and its nominee or
nominees and any book-entry system maintained by a clearing agency registered
with the Securities and Exchange Commission (the "SEC") under Section 17A of the
Securities Exchange Act of 1934 (the "1934 Act") and authorized to act as a
depository for the Company's portfolio securities by the Company's Board of
Directors including, without limitation, Participants Trust Company, Depository
Trust Company, CEDEL and Euroclear, and their respective successor or successors
and nominee or nominees.
(c) "Cash" or "Money" or "Monies" shall mean all uninvested funds (in the
form of currency or checks) but shall not include funds represented by cash
equivalents such as repurchase agreements, certificates of deposit, Treasury
bills or notes, or similar instruments.
(d) "Oral Instructions". As used in this Agreement, the term "Oral
Instructions" means oral instructions actually received by the Bank from an
Authorized Person or from a person reasonably believed by the Bank to be an
Authorized Person. The Company agrees to deliver to the Bank, at the time
and in the manner specified in Paragraph 8(b) of this Agreement, Written
Instructions confirming Oral Instructions.
(e) "Property". The term "Property", as used in this Agreement, means:
(i) any and all securities and other property which the Fund may from time
to time deposit, or cause to be deposited, with the Bank or which the Bank may
from time to time hold for the Fund;
ii) all income in respect of any of such securities or other property;
(iii) all proceeds of the sale of any such securities or other property;
and
(iv) all proceeds of the sale of securities issued by the Company, which
are received by the Bank from time to time from or on behalf of the Company.
(f) "Written Instructions". As used in this Agreement, the term "Written
Instructions" means written instructions delivered by hand (including Federal
Express or other express courier), certified or registered mail, return receipt
requested, tested telegram, cable, telex or facsimile sending device, received
by the Bank and signed by an Authorized Person and shall also include computer
transmission with coded access as agreed upon by the Bank and the Company.
5. Delivery and Registration of the Property
The Company will deliver or cause to be delivered to the Bank all
securities and all moneys owned by it, including cash received for the issuance
of Shares, at any time during the period of this Agreement. The Bank will not be
responsible for such securities and such moneys until actually received by it.
All securities delivered to the Bank (other than in bearer form) shall be
registered in the name of the Company or in the name of a nominee of the Company
or in the name of any nominee of the Bank (with or without indication of
fiduciary status), or in the name of any sub-custodian or any nominee of any
such sub-custodian appointed pursuant to Paragraph 7 hereof or shall be properly
endorsed and in form for transfer satisfactory to the Bank.
6. Receipt and Disbursement of Money
(a) Not less frequently than once on the afternoon of each business day,
all cash held in the custody account, other than cash required to settle
securities transactions on such business day, shall be transferred to the
trustee under a Trust Agreement of even date herewith between the Bank and the
Company and attached hereto as Exhibit A.
The Bank shall make payments of cash to, or for the account of, the Company
from such cash only (i) for the purchase of securities for the Fund's portfolio
as provided in Paragraph 13 hereof; (ii) upon receipt of Written Instructions,
for the payment of interest, dividends, taxes, fees or expenses of the Fund;
(iii) upon receipt of Written instructions, for payments in connection with the
conversion, exchange or surrender of securities owned or subscribed to by the
Fund and held by or to be delivered to the Bank; (iv) to a sub-custodian
pursuant to Paragraph 7 hereof; (v) for the redemption of Shares; (vi) for
payment of the amount of dividends received in respect of securities sold short
against the box; or (vii) upon receipt of Written Instructions, for other proper
Fund purposes. No payment pursuant to (i) above shall be made unless the Bank
has received a copy of the broker's or dealer's confirmation or the payee's
invoice, as appropriate.
(b) The Bank is hereby authorized to endorse and collect all checks, drafts
or other orders for the payment of money received as custodian for the account
of the Fund.
7. Receipt of Securities; Subcustodian
(a) Except as provided by Paragraph 8 hereof, the Bank shall hold and
physically segregate in a separate account, identifiable at all times from those
of any other persons, firms, or corporations, all securities and non-cash
property received by it for the account of the Fund. All such securities and
non-cash property are to be held or disposed of by the Bank for the Fund
pursuant to the terms of this Agreement. In the absence of Written Instructions
accompanied by a certified resolution of the Company's Board of Directors
authorizing the transaction, the Bank shall have no power or authority to
withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any such
securities and investments except in accordance with the express terms provided
for in this Agreement. In no case may any director, officer, employee or agent
of the Company withdraw any securities.
(b) Where securities are transferred to an account of the Fund established
pursuant to Paragraph 8 hereof, the Bank shall also by book-entry or otherwise
identify as belonging to the Fund the quantity of securities in a fungible bulk
of securities registered in the name of the Bank (or its nominee) or shown in
the Bank's account on the books of the Book-Entry System. The Bank shall furnish
the Company with reports relating to Property held for the Fund under this
Agreement in accordance with Paragraph 17 hereof.
In connection with its duties under this Paragraph 7, the Bank may, at its
own expense, enter into sub-custodian agreements with other banks or trust
companies for the receipt of certain securities and cash to be held by the Bank
for the account of the Company pursuant to this Agreement, provided that each
such bank or trust company has an aggregate capital, surplus and undivided
profits, as shown by its last published report, of not less than ten million
dollars ($10,000,000) and that such bank or trust company agrees with the Bank
to comply with all relevant provisions of the 1940 Act and applicable rules and
regulations thereunder. The Bank shall remain responsible for the performance of
all of its duties under this Agreement and shall hold the Fund harmless from the
acts and omissions, under the standards of care applicable to the Bank under
Paragraph 23 hereof, of any bank or trust company that it might choose pursuant
to this Paragraph 7 or of the Book-Entry System.
8. Use of Book-Entry System
The Company shall deliver to the Bank certified resolutions of the Board of
Directors of the Company approving, authorizing and instructing the Bank on a
continuous and on-going basis until instructed to the contrary by Oral or
Written Instructions actually received by the Bank (a) to deposit in the
Book-Entry System all securities belonging to the Funds and eligible for deposit
therein and (b) to use the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the Fund,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. Without limiting
the generality of such use, it is agreed that the following provisions shall
apply thereto:
(a) Securities and any cash of the Funds deposited in the Book-Entry System
will at all times be segregated from any assets and cash controlled by the Bank
in other than a fiduciary or custodian capacity but may be commingled with other
assets held in such capacities.
(b) All books and records maintained by the Bank which relate to the Funds'
participation in the Book-Entry System will at all times during the Bank's
regular business hours be open to the inspection of the Company's duly
authorized employees or agents, and the Company will be furnished with all
information in respect of the services rendered to it as it may require.
(c) The Bank will provide the Company with copies of any report obtained by
the Bank on the system of internal accounting control of the Book-Entry System
promptly after receipt of such a report by the Bank. The Bank will also provide
the Company with such reports on its own system of internal control as the
Company may reasonably request from time to time.
9. Instructions Consistent with Charter, Etc.
(a) Unless otherwise provided in this Agreement, the Bank shall act only
upon Oral and Written Instructions. Although the Bank may know of the provisions
of the Charter and By-Laws of the Company, the Bank may assume that any Oral or
Written Instructions received hereunder are not in any way inconsistent with any
provisions of such Charter or ByLaws or any vote, resolution or proceeding or
the Company's shareholders, or of its board of directors, or of any committee
thereof.
(b) the Bank shall be entitled to rely upon any Oral Instructions and any
Written Instructions actually received by the Bank pursuant to this Agreement.
The Company agrees to forward to the Bank Written Instructions confirming Oral
Instructions in such manner that the Written Instructions are received by the
Bank by the close of business of the same day that such Oral Instructions are
given to the Bank. The Company agrees that the fact that such confirming Written
Instructions are not received by the Bank shall in no way affect the validity of
the transactions or enforceability of the transactions authorized by the Company
by giving Oral Instructions. The Company agrees that the Bank shall incur no
liability to the Company in acting upon Oral Instructions given to the Bank
hereunder concerning such transactions, provided such instructions reasonably
appear to the Bank to have been received from an Authorized Person.
10. Transactions Not Requiring Instructions
In the absence of contrary Written Instructions, the Bank is authorized to
take the following actions:
(a) Collections of Income and Other Payments. The Bank shall, on behalf of
each Fund:
(i) collect and receive for the account of the Fund, all income
and other payments and distributions, including (without limitation) stock
dividends, rights, bond coupons, option premiums and similar items, included or
to be included in the Property, and promptly advise the Fund of such receipt and
shall credit such income, as collected, to the Fund's custodian account;
(ii) endorse and deposit for collection, in the name of the Fund, checks,
drafts, or other orders for the payment of money on the same day as received;
(iii) receive and hold for the account of the Fund all securities received
as a distribution on the Fund's portfolio securities as a result of a stock
dividend, share split-up or reorganization, recapitalization, readjustment or
other rearrangement or distribution of rights or similar securities issued with
respect to any portfolio securities belonging to the Fund held by the Bank
hereunder;
(iv) present for payment and collect the amount payable upon all securities
which may mature or be called, redeemed, or retired, or otherwise become payable
on the date such securities become payable; and
(v) take any action which may be necessary and proper in connection with
the collection and receipt of such income and other payments and the endorsement
for collection of checks, drafts, and other negotiable instruments as described
in Paragraph 24 of this Agreement.
(b) Miscellaneous Transactions. The Bank is authorized to deliver or cause
to be delivered Property against payment or other consideration or written
receipt therefor in the following cases:
(i) for examination by a broker selling for the account of the Fund in
accordance with street delivery custom;
(ii) for the exchange of interim receipts or temporary securities for
definitive securities; and
(iii) for transfer of securities into the name of the Fund or the Bank or
nominee of either, or for exchange of securities for a different number of
bonds, certificates, or other evidence, representing the same aggregate face
amount or number of units bearing the same interest rate, maturity date and call
provisions, if any; provided that, in any such case, the new securities are to
be delivered to the Bank.
11. Transactions Requiring Instructions
Upon receipt of Oral or Written Instructions and not otherwise, the Bank,
directly or through the use of the Book-Entry System, shall:
(a) execute and deliver to such persons as may be designated in such Oral
or Written Instructions, proxies, consents, authorizations, and any other
instruments whereby the authority of the Company as owner of any securities may
be exercised;
(b) deliver any securities held for a Fund against receipt of other
securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, tender offer, merger, consolidation or
recapitalization of any corporation, or the exercise of any conversion
privilege;
(c) deliver any securities held for a Fund to any protective committee,
reorganization committee or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or sale of assets of any
corporation, and receive and hold under the terms of this Agreement such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
(d) make such transfers or exchanges of the assets of a Fund and take such
other steps as shall be stated in said Oral or Written Instructions to be for
the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Fund;
(e) release securities belonging to a Fund to any bank or trust company for
the purpose of pledge or hypothecation to secure any loan incurred by such Fund;
provided, however, that securities shall be released only upon payment to the
Bank of the monies to be received by the Bank in accordance with such Oral or
Written Instructions, except that in cases where additional collateral is
required to secure a borrowing already made, in which case and subject to
receipt by the Bank of "Oral or Written Instructions", further securities may be
released for that purpose; an repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon surrender of the note or
notes evidencing the loan;
(f) release and deliver securities owned by a Fund in connection with any
repurchase agreement entered into on behalf of the Fund, but only on receipt of
payment therefor; and pay out moneys of the Fund in connection with such
repurchase agreements, but only upon the delivery of the securities; and
(g) otherwise transfer, exchange or deliver securities in accordance with
Oral or Written Instructions.
12. Segregated Accounts; Securities Lending
(a) the Bank shall upon receipt of Written or Oral Instructions establish
and maintain a segregated account or accounts on its records for and on behalf
of each of the Funds, into which account or accounts may be transferred cash
and/or securities, including securities in the Book-Entry System (i) for the
purposes of compliance by the Fund with the procedures required by a securities
or option exchange, provided such procedures comply with the 1940 Act and
Investment Company Act Release No. 10666 (April 18, 1979) or any subsequent
release or releases of the SEC relating to the maintenance of segregated
accounts by registered investment companies, and (ii) for other proper corporate
purposes, but only, in the case of clause (ii), upon receipt of Written
Instructions.
(b) The Bank hereby acknowledges that the Company may require it to enter
into one or more third-party custodial agreements regarding Funds' purchases and
sales of futures contracts and options thereon, and that any such third-party
agreement with a futures commission merchant may contain any provisions which
the Company and the futures commission merchant reasonably deem necessary and
which do not subject the Bank to higher standards of care (except as may be
required by law) than does this Agreement.
(c) The Company may, from time to time, furnish the Bank with copies of
securities loan agreements (singly "Securities Loan Agreement" and collectively
"Securities Loan Agreements"), pursuant to which the Company may lend securities
of any Fund to the respective brokerage firms named therein (singly the
"Brokerage Firm" and collectively the "Brokerage Firms").
In each such case, and until the Company shall have given the Bank Written
Instructions that such Securities Loan Agreement has terminated, the Company
authorizes the Bank, as its agent in connection with the lending of securities
from time to time upon receipt by the Bank of Oral or Written Instructions: (a)
to deliver to the Brokerage Firm named in the Securities Loan Agreement specific
securities held in the specified Fund, it being understood that in each case the
Bank will give prompt notice thereof to the Company; (b) to receive from the
Brokerage Firm a certified or bank cashier's check, in immediately available
funds, or obligations of the U. S. Government in an amount equal to the then
market value of the securities, as specified in such Instructions.
The Company will evaluate on a daily basis its rights and obligations under
each Securities Loan Agreement, such as marking to market, and will demand that
additional collateral be delivered to the Bank by the Brokerage Firm under
proper advice to the Bank, or shall give Oral or Written Instructions to the
Bank to release excess collateral to the Brokerage Firm.
The Bank may, through its commercial, trust or other departments, be a
creditor for its own account, or represent in a fiduciary capacity other
creditors and/or customers, or any Brokerage Firm, even though any of such
interests may potentially be in conflict with those of the Company.
The Company represents that it has the power and authority to lend the
securities in accordance with a Securities Loan Agreement and that such lending
as provided in such Securities Loan Agreement and as provided herein, has been
duly authorized by all necessary action, has received any required regulatory
approval and will not violate any law, regulation, Charter, By-law or other
instrument, restriction or provision applicable to the Company.
With respect to acting as agent for the Company in connection with the
lending of securities to Brokerage Firms pursuant to Securities Loan Agreements,
the Bank shall have no duties or responsibilities except those expressly set
forth herein and the Company will indemnify the Bank against any liability which
it may incur in connection with such lending in accordance with Paragraph 22
hereof. The Bank shall have no responsibility in connection with the present or
future financial condition of any such Brokerage Firm or any failure on the part
of any such Brokerage Firm or any failure on the part of any such Brokerage Firm
to return any such securities for any reason whatsoever or to comply with any
provision of any Securities Loan Agreement or any failure on the part of any
such Brokerage Firm to comply with any law or regulation, all such risks being
assumed by the Company.
13. Dividends and Distributions
The Company shall furnish the Bank with appropriate evidence of action by
the Company's Board of Directors declaring and authorizing the payment of any
dividends and distributions. Upon receipt by the Bank of Written Instructions
with respect to dividends and distributions declared by the Company's Board of
Directors and payable to shareholders of the Fund who have elected in the proper
manner to receive their distributions or dividends in cash, and in conformance
with procedures mutually agreed upon by the Bank, the Company, and the Company's
transfer agent, the Bank shall pay to the Fund's transfer agent, as agent for
the Fund's shareholders, an amount equal to the amount indicated in said Written
Instructions as payable by the Fund to such shareholders for distribution in
cash by the transfer agent to such shareholders.
14. Purchases of Securities
Promptly after each decision to purchase securities by the Adviser, the
Company, through the Adviser, shall deliver to the Bank Written or Oral
Instructions specifying with respect to each such purchase: (a) the name of the
issuer and the title of the securities, (b) the number of shares or the
principal amount purchased and accrued interest, if any, (c) the date of
purchase and settlement, (d) the purchase price per unit, (e) the total amount
payable upon such purchase and (f) the name of the person from whom or the
broker through whom the purchase was made. Oral Instructions shall be confirmed
by Written Instructions. The Bank shall upon receipt of securities purchased by
or for the Fund pay out of the moneys held for the account of the Fund the total
amount payable to the person from whom or the broker through whom the purchase
was made, provided that the same conforms to the total amount payable as set
forth in such Oral Instructions in accordance with current industry practices.
15. Sales of Securities
Promptly after each decision to sell securities by the Adviser or exercise
of an option written by the Company, the Company, through the Adviser, shall
deliver to the Bank Oral or Written Instructions, specifying with respect to
each such sale: (a) the name of the issuer and the title of the security, (b)
the number of shares or principal amount sold, and accrued interest, if any, (c)
the date of sale and settlement, (d) the sale price per unit, (e) the total
amount payable to the Fund upon such sale, and (f) the name of the broker
through whom or the person to whom the sale was made. The Bank shall deliver the
securities upon receipt of the total amount payable to the Fund upon such sale,
provided that the same conforms to the total amount payable as set forth in such
Oral Instructions in accordance with current industry practice. Subject to the
foregoing, the Bank may accept payment in such form as shall be satisfactory to
it, and may deliver securities and arrange for payment in accordance with the
customs prevailing among dealers in securities.
16. Records
The books and records pertaining to the Fund which are in the possession of
the Bank shall be the property of the Funds. Such books and records shall be
prepared and maintained as required by the 1940 Act and other applicable
securities laws and regulations. The Company, or the Company's authorized
representatives, shall have access to such books and records at all times during
the Bank's normal business hours. Upon the reasonable request of the Company,
copies of any such books and records shall be provided by the Bank to the
Company or authorized representative at the Company's expense.
17. Reports
(a) The Bank shall furnish the Company the following reports:
(1) such periodic and special reports as the Company may reasonably
request;
(2) a daily report detailing all transactions (cash and securities) that
have been posted to each Fund's account; such report, which shall be in such
form as may be agreed upon by the Bank and the Company from time to time, shall
be received not later than the morning of the business day next following the
day to which the report relates;
(3) statements, at such intervals as the Company may reasonably request but
not less frequently than monthly, summarizing all transactions and entries for
the account of the Funds, listing the portfolio securities belonging to the
Funds with the adjusted average cost of each issue and the market value at the
end of such month, and stating the cash account of the Fund including
disbursements;
(4) the reports to be furnished to the Company pursuant to Rule 17f-4 under
the 1940 Act; and
(5) such other information as may be agreed upon from time to time between
the Company and the Bank.
(b) The Bank shall transmit promptly to the Company any proxy statement,
proxy materials, notice of a call or conversion or similar communications
received by it as Custodian of the Property.
18. Cooperation with Accountants
The Bank shall cooperate with the Company's independent public accountants
and shall take all reasonable action in the performance of its obligations under
this Agreement to assure that the necessary information is made available to
such accountants for the expression of their opinion, as such may be required
from time to time by the Company.
19. Confidentiality
The Bank agrees on behalf of itself and its employees to treat
confidentially all records and other information relative to the Fund and its
prior, present, or potential shareholders, except, after prior notification to
and approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where the Bank may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
20. Right to Receive Advice
(a) Advice of Fund. If the Bank shall be in doubt as to any action to be
taken or omitted by it, it may request, and shall receive, from the Company
directions or advice, including Oral or Written Instructions where appropriate.
(b) Advice of Counsel. If the Bank shall be in doubt as to any question of
law involved in any action to be taken or omitted by the Bank, it may request
advice at its own cost from counsel of its own choosing (who may be counsel for
the Adviser, the Company or the Bank, at the option of the Bank).
(c) Conflicting Advice. In case of conflict between directions, advice or
Oral or Written Instructions received by the Bank pursuant to subparagraph (a)
of this Paragraph and advice received by the Bank pursuant to subparagraph (b)
of this Paragraph, the Bank shall be entitled to rely on and follow the advice
received pursuant to the latter provision alone.
(d) Protection of the Bank. The Bank shall be protected in any action or
inaction which it takes in reliance on any directions, advice or Oral or Written
Instructions received pursuant to subparagraphs (a) or (b) of this Paragraph
which the Bank, after receipt of any such directions, advice or Oral or Written
Instructions, in good faith believes to be consistent with such directions,
advice or Oral or Written Instructions, as the case may be. However, nothing in
this Paragraph shall be construed as imposing upon the Bank any obligation (i)
to seek such directions, advice or Oral or Written Instructions, or (ii) to act
in accordance with such directions, advice or Oral or Written Instructions when
received, unless, under the terms of another provision of this Agreement, the
same is a condition to the Bank's properly taking or omitting to take such
action. Nothing in this subsection shall excuse the Bank when an action or
omission on the part of the Bank constitutes willful misfeasance, bad faith,
negligence or reckless disregard by the Bank of any duties or obligations under
this Agreement.
21. Compensation
As compensation for the services rendered by the Bank during the term of
this Agreement, the Company will pay to the Bank fees in accordance with the fee
schedule agreed upon from time to time in writing by the Bank and the Company.
22. Indemnification
The Company, as sole owner of the Property, agrees to indemnify and hold
harmless the Bank and its nominees from all taxes, charges, expenses,
assessments, claims and liabilities and expenses, including attorneys' fees and
disbursements, arising directly or indirectly from any action or thing which the
Bank takes or does or omits to take or do upon receipt of Oral or Written
Instructions or under this Agreement, provided, that neither the Bank nor any of
its nominees shall be indemnified against any liability to the Company or to its
shareholders (or any expenses incident to such liability) arising out of the
Bank's or such nominee's own willful misfeasance, bad faith, negligence or
reckless disregard of its duties or responsibilities under this Agreement.
23. Responsibility of the Bank
(a) In the performance of its duties hereunder, the Bank shall be obligated
to exercise care and diligence and to act in good faith and to use its best
efforts to assure the accuracy and completeness of all services performed under
this Agreement. Except as provided in (b) below, the Bank shall be responsible
for all direct losses occasioned by the Bank's negligent failure to perform its
duties under this Agreement, including but not limited to losses related to
inaccuracies in the daily reports (upon which the Company and its agents rely in
calculating the Fund's net asset value and in determining whether the Company
and the Funds are in compliance with the 1940 Act and the requirements of
Subchapter M of the Internal Revenue Code of 1986 (as amended) to be provided
under Paragraph 17 hereof or otherwise. However, the Bank shall not be liable
for any incidental, consequential or punitive damages.
(b) The Bank shall assume entire responsibility for loss occasioned by
robbery, burglary, fire, theft or mysterious disappearance irrespective of
whether such losses occur while such Property is in possession of the Bank or
the possession of one of the Bank's agents, nominees, depositories,
correspondents or sub-custodians appointed pursuant to Paragraph 7 hereof or any
Book-Entry System. In the event of any such loss the Bank's liability shall be
limited to the replacement value thereof as of the date of the discovery of such
loss and the Bank, at the Company's option, shall make prompt replacement of
Property with like kind and quality or shall make prompt restitution to the Fund
for such loss. In addition, in the event of any loss of the Property due to any
other cause, unless the Bank can prove that it and its agents, nominees,
depositories and correspondents were not negligent and did not act with willful
misconduct, the Bank will be liable for such loss. Notwithstanding the
foregoing, the Bank shall not be liable for losses occurring by reason of acts
of civil or military authority, national emergencies, floods, acts of God,
insurrections, wars, riots or similar catastrophes.
(c) The Bank shall not have any duty or obligation to inquire (i) into the
validity or invalidity or authority or lack thereof of any Oral or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, if any, and which the Bank reasonably believes
to be genuine; (ii) the validity or invalidity of the issuance of any securities
included or to be included in the Property, the legality or illegality of the
purchase of such securities, or the propriety or impropriety of the amount paid
therefor; (iii) the legality or illegality of the sale (or exchange) of any
Property or the propriety or impropriety of the amount for which such Property
is sold (or exchanged); or (iv) whether any Property at any time delivered to or
held by the Bank may properly be held by or for the Fund.
24. Collections
All collections of monies or other property in respect, or which are to
become part, of the Property (but not the safekeeping thereof upon receipt by
the Bank) shall be at the sole risk of the Company, provided that the Bank
agrees to the following procedures:
(i) upon maturity of any security held by a Fund, proceeds will be credited
and available for investment by the Fund on the maturity date;
(ii) with respect to sales of securities held by a Fund and provided the
Bank receives timely and accurate notification of any such sale, sale proceeds
will be credited and available for investment by the Fund on the settlement date
for transactions settled in Federal funds, and on settlement date plus one for
transactions settled in Clearinghouse funds;
(iii) with respect to income and principal from securities held by the
Fund, where the precise amount to be received is known prior to payable date,
such moneys will be credited to the Fund on the payable date and will be made
available to the Fund for investment on such date in cases where such moneys are
to be received in Federal funds or, in cases where such moneys are to be
received in Clearinghouse funds, on the day following the payable date;
(iv) with respect to any income and principal payment on securities held by
a Fund a amount of which is unknown either by the Bank or the Adviser, such
payments will be credited to the Fund upon receipt by the Bank, it being
understood that the Bank will make every effort to collect such payments as
quickly as possible.
With respect to items referred to in (i), (ii) and (iii) above, in any case
where the Bank does not receive any payment due to the Fund within a reasonable
time after the Bank has made proper demands for the same, it shall so notify the
Company in writing, including copies of all demand letters, any written
responses thereto, and memoranda of all oral responses thereto and to telephonic
demands, and shall thereafter have the right to reverse the credit previously
posted to the Fund with respect to such item. The Bank shall not be obliged to
take legal action for collection of any unpaid item unless and until reasonably
indemnified to its satisfaction.
25. Duration and Termination
This Agreement shall continue until termination by the Company on 60 days
written notice or by the Bank on 120 days' written notice. In the event of such
notice of termination, the Company's Board of Directors shall, by resolution
duly adopted, promptly appoint a Successor Custodian to serve upon the terms set
forth in this Agreement. Upon termination hereof the Company shall pay to the
Bank such compensation as may be due as of the date of such termination and
shall likewise reimburse the Bank for its reasonable costs, expenses and
disbursements incurred prior to such termination. The Bank shall have no lien,
right of set-off, or claim of any kind whatsoever against any Property of the
Funds (including records relating to the Fund maintained by the Bank) in the
possession of the Bank.
If a Successor Custodian is appointed by the Directors, the Bank shall,
upon termination, deliver to such Successor Custodian the records of the Bank
with respect to the Funds, and duly endorsed and in form for transfer, all
securities then held hereunder and all funds or other properties of the Fund
deposited with or held by the Bank under this Agreement.
In the event that no such Successor Custodian is appointed within 90 days
after the date of such notice of termination by the Bank, the Company will
promptly submit to the shareholders of each of the Funds the question whether
they wish to terminate the Fund or to function without a bank custodian, and the
Bank shall deliver the funds and property of the Funds to the Company only
pursuant to a certified copy of a resolution of the Company's Board of
Directors, signed by a majority of the Board of Directors of the Fund in the
exercise of such power conferred upon the Fund by its shareholders, such
delivery to be made in accordance with such resolution.
In the event that the Bank is not notified of the appointment of a
Successor Custodian on or before the date of the termination of this Agreement,
the Bank shall have the right to deliver to a bank or trust company of its own
selection (a) with significant experience in serving as a custodian for
registered investment companies; and (b) having an aggregate capital, surplus,
and undivided profits, as shown by its last published report, of not less than
$10,000,000, all securities, records, and other properties then held by the Bank
to be held by such bank or trust company provided that such bank or trust
company agrees to serve as custodian for such securities, records and other
properties substantially in accordance with the term hereof and in accordance
with its customary fee schedule for such services.
In the event that securities, funds, and other properties remain in the
possession of the Bank after the date of termination hereof owing to failure of
the Board of Directors to appoint a Successor Custodian, the Bank shall be
entitled to fair compensation for its services during such period and the
provisions of this Agreement relating to the duties and obligations of the Bank
shall remain in full force and effect. If any Property remains in the custody of
the Bank pursuant to the preceding sentence for more than six months, the Bank
shall be entitled to receive a premium of one and one-half percent over the fees
to which it would otherwise be entitled for its services for each succeeding
month during which the Bank remains in possession of such property.
26. Notices
All notices and other communications (collectively referred to as "Notice"
or "Notices" in this Paragraph) under this Agreement (other than Written or Oral
Instructions as defined in this Agreement and as referred to in Paragraph 9 (b))
must be in writing and will be deemed to have been duly given or delivered when
delivered by hand (including by Federal Express or similar express courier) or
three days after being mailed by prepaid registered or certified mail, return
receipt requested: (a) if to the Bank at the Bank's address, 1735 Market Street,
Philadelphia, Pennsylvania 19101-7899, marked for the attention of Donna Owens,
Trust Officer (or her successor); (b) if to the Company, at the address of the
Fund, 151 Farmington Avenue, Hartford, CT 06156-8962, marked for the attention
of the Fund's Treasurer; or (c) to such other address as shall have been last
designated by Notice in accordance with this on Paragraph 26. All postage,
cable, telegram, telex and facsimile sending device charges arising from the
sending of a Notice hereunder shall be paid by the sender.
27. Further Actions
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
28. Amendments
This Agreement or any part hereof may be changed or waived only by an
instrument in writing signed by the party against which enforcement of such
change or waiver is sought.
29. Counterparts
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
30. Miscellaneous
This Agreement embodies the entire agreement and understanding between the
parties hereto, and supersedes all prior agreements and understandings relating
to the subject matter hereof, provided that the parties hereto may embody in one
or more separate documents their agreement, if any, with respect to delegated
and/or Oral Instructions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement shall be deemed to be a contract made in Pennsylvania and governed by
Pennsylvania law. If any provision of this Agreement shall be held or made
invalid by a court decision, statue, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding and
shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on this ______ day of
________________, 1996.
[SEAL] MELLON BANK, N. A.
Attest: By:
--------------------------- --------------------------------
[SEAL] AETNA VARIABLE PORTFOLIOS, INC.
Attest: By:
--------------------------- --------------------------------
EXHIBIT A
TRUST AGREEMENT
THIS TRUST AGREEMENT is made between AETNA VARIABLE PORTFOLIOS, INC., a
Maryland corporation (the "Fund") as Settlor, and MELLON BANK, N. A., a national
banking association (the "Bank") as Trustee.
I. Background: The background of this Agreement is as follows:
A. The Fund is registered as an open-end, diversified management investment
company under the Investment Company Act of 1940, as amended, and [currently
issues four classes of shares,] each of which represents a separate investment
portfolio;
B. The Fund has retained the Bank to serve as the Fund's custodian under a
Custodian Agreement of even date herewith ("Custodian Agreement") for its
Portfolios as follows: Aetna Variable Index Plus Portfolio, Aetna Variable Small
Company Portfolio, Aetna Variable Growth Portfolio, Aetna Variable Capital
Appreciation Portfolio and for such additional portfolios as may from time to
time be offered by the Fund on the terms set forth herein (each, a "Portfolio"),
and the Bank is willing to serve as such; and
C. The Fund intends to transfer to the Bank to hold as trustee under this
Agreement all the income and principal cash balances which are transferred to it
in accordance with Paragraph 6(a) of the Custodian Agreement (the Bank in such
capacity is hereinafter referred to as the "Trustee"), and hereby directs the
Trustee to hold such cash balances in accordance with the following terms.
II. Dispositive Terms: The Trustee shall invest and manage the income and
principal cash balances of each Portfolio in accordance with the provisions of
Article III hereof. Distributions to or from the trust shall be as directed from
time to time by the Fund.
III. Management Provisions: The Trustee shall invest as it deems
appropriate in any one or more money market demand accounts of the Bank or of
any other bank, provided the accounts are fully insured by the FDIC and any
excess above the insurance limit is collateralized by securities in accordance
with Regulation 9.10(b) of the Comptroller of the Currency, 12 CFR 9.10 (b).
IV. Accounting: The Trustee will send the Fund statements at least monthly
showing the transactions in the trust. The Fund must report any errors to the
Trustee, including the non-receipt of a statement, within 90 days after the Fund
normally receives a statement. Otherwise, the Fund, at the Trustee's discretion,
may be deemed to have accepted the transactions as stated.
V. Provisions Regarding the Trustee:
A. The "Authorized Person" to act for the Fund and the methods of properly
acting for the Fund under this Agreement shall be the same as specified in the
Custodian Agreement, as that may be amended from time to time;
B. The fact that the Bank is Trustee and in such capacity deposits trust
assets in banking accounts of the Bank shall no be deemed a conflict of
interest. The Bank may receive its usual charges or profits for that service;
and
C. The Trustee may resign upon 120 days' notice to the Fund; Settlor may
terminate this Agreement at any time. Immediately upon termination the Trustee
shall pay all trust assets held hereunder to the Successor Custodian or the Fund
in accordance with Paragraph 25 of the Custodian Agreement.
VI. Situs and Governing Law: The situs of this Trust shall be in
Pennsylvania, and all questions as to the construction, validity, effect or
administration of this trust shall be governed by Pennsylvania law.
VII. Rights Reserved: The Fund reserves the right to revoke this trust by
writing delivered to the Trustee and to amend this trust with the Trustee's
approval.
Signed _________________________,1996
ATTEST: AETNA VARIABLE PORTFOLIOS, INC.
By:
----------------------------
The foregoing trust was delivered, and is hereby accepted in Pennsylvania
on __________________, 1996.
ATTEST: MELLON BANK, N.A.
______________________ By: ___________________________
BALLARD SPAHR ANDREWS & INGERSOLL
1735 MARKET STREET, 51ST FLOOR
PHILADELPHIA, PENNSYLVANIA
19103-7599
TELEPHONE 215-665-8500
FAX 215-864-8999
MEMORANDUM
October 27, 1992
To: Martin T. Conroy (ALIAC)
Donna M. Owens (Mellon Bank)
From: Laura Anne Corsell (Ballard Spahr)
Re: Aetna Life Insurance and Annuity Company
Aetna Series Fund, Inc.
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna Income Shares
Aetna Guaranteed Equity Trust
Aetna Variable Fund
The purpose of this memorandum is to clarify certain technical items which
appear in the text of the recently executed custodian agreements ("Agreements")
between Mellon Bank, N.A. and Aetna Life Insurance and Annuity Company ("ALIAC")
and the various mutual funds for which ALIAC serves as investment adviser
("ALIAC Funds"), respectively. In addition, enclosed is a corrected first page
for each of those Agreements relating to the ALIAC Funds to reflect the correct
name of the adviser.
1. The words "cash", "monies" and "moneys" are used interchangeably in
the Agreements and refer to all uninvested funds (in the form of either
currency or checks) but do not include funds represented by cash
equivalents such as repurchase agreements, certificates of deposit,
treasury bills or notes and the like.
2. The term "Shares" as used in those Agreements relating to the ALIAC
Funds refers to "units of beneficial interest" in the case of those
mutual funds that are organized as Massachusetts business trusts and
"shares of common stock" in the case of those mutual funds organized as
Maryland corporations.
Similarly, the term "Board of Directors" as used in such agreements
encompasses the Board of Trustees in those cases where the relevant
mutual fund is organized as a Massachusetts business trust.
3. The transactions referred to in paragraphs 10, 13 and 14 may be
authorized either by Written Instructions or Oral Instructions. In
accordance with paragraph 8(b), all Oral Instructions must be confirmed
by Written Instructions.
4. With respect to the Agreements relating to Aetna Income Shares, Aetna
Variable Fund, Aetna Guaranteed Equity Trust and Aetna Variable Encore
Fund, the term "Trust Agreement" as used in paragraph 26 refers to the
Declaration of Trust of each such mutual fund and does not refer in any
way to the trust arrangement evidenced by Exhibit A to each such
agreement.
As noted above, the foregoing items are intended to clarify the
text of the Agreements as executed and do not change the substance of the
various Agreements. Please file a copy of this memorandum with each of
the Agreements, as executed.
cc(w/encls.): George Gingold, Esq.
Ms. Pat Rup
Institutional Trust Services Group Mellon Bank
MELLON BANK DOMESTIC FEE SCHEDULE
Account Fee:
$500 per account, per year.
Asset Fee:
Domestic Assets - 1/6 Basis Point (0.0000166) on all assets
Euroclear Assets - 1.4 Basis Points (0.00014) on all assets
Transaction Fees:
$7 per book entry transaction (purchase - sale - maturity) $15 per physical
transaction (purchase - sale - maturity) $25 per Euroclear transaction (purchase
- - sale - maturity) $50 per option and future transaction (open - close)
The foregoing fee schedule shall remain in effect for not less than three years
from the effective date of the Custodian Agreement between the fund and Mellon
Bank, N. A.
Mellon Bank, N.A.
Aetna Variable Portfolios, Inc.
FORM OF
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY,
a Connecticut insurance corporation (the "Adviser"), and AETNA VARIABLE
PORTFOLIOS, INC., a Maryland corporation (the "Fund"), on behalf of its Aetna
Variable ______________ Portfolio as of the Date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund has established the Portfolio; and
WHEREAS, the Administrator is registered with the Commission as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act") and has entered into an agreement with the Fund for the benefit of the
Portfolio to serve as investment adviser to the Portfolio; and
WHEREAS, the Fund, on behalf of the Portfolio, desires that the Administrator
provide certain administrative services for the Portfolio in connection with the
operation and management of the Portfolio;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT OF THE ADMINISTRATOR
Subject to the terms and conditions of this Agreement and the policies and
control of the Fund's Board of Directors (the "Board"), the Fund, on behalf of
the Portfolio, hereby appoints the Administrator to provide the administrative
services and assume the obligations described below, for the compensation set
forth in Section VI. The Administrator agrees that, except as required to carry
out its duties under this Agreement or otherwise expressly authorized, it is
acting as an independent contractor and not as an agent of the Portfolio and has
no authority to act for or represent the Portfolio in any way.
II. DUTIES OF THE ADMINISTRATOR
A. Services
The Administrator agrees to use its best judgment, efforts and facilities
in providing services to the Portfolio and in connection therewith, it agrees
that those administrative services will consist of:
1. providing office space, equipment and facilities (which may be the
Administrator's or its affiliates') for maintaining the Fund's business
organization and for performing administrative services hereunder;
2. supervising and managing all aspects of the Portfolio's operations
(other than investment advisory activities) including administering relations
with, and monitoring the performance of, custodians, depositories, transfer and
pricing agents, accountants, attorneys, underwriters, brokers and dealers,
insurers and other persons in any capacity deemed to be necessary and desirable
by the Board;
3. calculating and arranging for the publication of the net asset value of
the Portfolio;
4. providing noninvestment related statistical and research data and such
other reports, evaluations and information as the Portfolio or the Board may
request from time to time;
5. providing internal clerical, accounting and legal services, and
stationery and office supplies;
6. preparing, to the extent requested by the Fund, the Portfolio's
prospectus, statement of additional information, and annual and semi- annual
reports to shareholders;
7. arranging for the printing and mailing (at the Portfolio 's expense) of
proxy statements and other reports or other materials provided to the
Portfolio's shareholders;
8. preparing for execution and filing all the Portfolio 's federal and
state tax returns and required tax filings other than those required to be made
by the Portfolio's custodian and transfer agent;
9. preparing periodic reports to and filings with the Securities and
Exchange Commission and state Blue Sky authorities with the advice of the
Portfolio's counsel;
10. maintaining the Fund's existence, and its corporate records and during
such times as the shares of the Portfolio are publicly offered, maintaining the
registration and qualification of the Portfolio's shares under federal and state
law;
11. keeping and maintaining the financial accounts and records of the
Portfolio;
12. developing and implementing, if appropriate, management and shareholder
services designed to enhance the value or convenience of the Portfolio as an
investment vehicle; and
13. providing the Board on a regular basis with reports and analysis of the
Portfolio's operations and the operations of comparable investment companies.
B. Expenses
During the term of this Agreement, the Administrator shall be responsible
for all of its costs and expenses incurred in carrying out the services
described in Paragraph A of this Section. In addition, it agrees that it shall
be responsible for, and pay or reimburse the Portfolio for, all of the following
expenses that would otherwise be payable by the Portfolio:
1. fees and expenses of the Portfolio's independent accountants and legal
counsel;
2. fees and expenses of any transfer agent, custodian, dividend,
accounting, pricing or disbursing agent of the Portfolio;
3. insurance premiums on property or personnel (including officers and
directors) of the Fund which benefit the Fund or its directors;
4. all fees and expenses of the Fund's directors, who are not "interested
persons" (as defined in the 1940 Act) of the Fund or the Adviser;
5. expenses of preparing, printing and distributing prospectuses and
reports to shareholders of the Portfolio, except for those expenses paid by
third parties in connection with the distribution of Portfolio shares;
6. all expenses incident to the payment of any dividend, distribution,
withdrawal or redemption, whether in shares of the Portfolio or in cash;
7. costs and expenses of promoting the sale of shares in the Portfolio,
including preparing prospectuses and reports to shareholders of the Portfolio,
provided, nothing in this Agreement shall prevent the charging of such costs to
third parties involved in the distribution and sale of Portfolio shares;
8. fees payable by the Portfolio to the Commission or to any state
securities regulator or other regulatory authority for the registration of
shares of the Portfolio in any state or territory of the United States or in the
District of Columbia;
9. all costs attributable to investor services, administering shareholder
accounts and handling shareholder relations, (including, without limitation,
telephone and personnel expenses), which costs may also be charged to third
parties by the Adviser;
10. all dues and fees payable to the ICI or successor organization; and
11. any other ordinary, recurring expenses incurred in the management of
the Portfolio's assets or administering its affairs.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Administrator
The Administrator hereby represents and warrants to the Fund as
follows:
1. Due Incorporation and Organization. The Administrator is duly organized
and is in good standing under the laws of the State of Connecticut and is fully
authorized to enter into this Agreement and carry out its duties and obligations
hereunder.
2. Best Efforts. The Administrator at all times shall provide its best
judgment and effort to the Portfolio in carrying out its obligations hereunder.
B. Representations and Warranties of the Portfolio and the Fund
The Fund, on behalf of the Portfolio, hereby represents and warrants to the
Administrator as follows:
1. Due Organization. The Fund has been duly incorporated under the laws of
the State of Maryland and it is authorized to enter into this Agreement and
carry out its obligations hereunder.
2. Registration. The Company is registered as an investment company with
the Commission under the 1940 Act and shares of the Portfolio are registered or
qualified for offer and sale to the public under the Securities Act of 1933, as
amended (the "1933 Act") and all applicable state securities laws. Such
registrations or qualifications will be kept in effect during the term of this
Agreement.
IV. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Administrator shall
comply with the following:
A. all applicable provisions of the 1940 Act;
B. all terms and provisions described in the most current effective amendment
of the registration statement for the Portfolio, as filed with the
Commission under the 1933 Act and the 1940 Act ("Registration Statement")
and all policies adopted by the Board;
C. the provisions of the Fund's Articles of Incorporation, as amended;
D. the Bylaws of the Fund, as amended; and
E. any other applicable provisions of state or federal law, or any rules
or regulations issued by such regulatory authorities.
V. DELEGATION OF RESPONSIBILITIES
All services to be provided by the Administrator under this Agreement may be
furnished by any directors, officers or employees of the Administrator, by any
affiliates of the Administrator under the Administrator's supervision, or by any
party to which such services may lawfully be delegated.
VI. COMPENSATION
For the services to be rendered, the facilities furnished, and the expenses
paid, by the Administrator, the Portfolio shall pay to the Administrator an
annual fee, at a rate of 0.15% of the average daily net assets of the Portfolio
payable monthly in arrears. Except as hereinafter set forth, compensation under
this Agreement shall be calculated and accrued daily at the rate of 1/365 of
0.15% of the daily net assets of the Portfolio. If this Agreement becomes
effective subsequent to the first day of a month or terminates before the last
day of a month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the fees
as set forth above.
VII. NONEXCLUSIVITY
The services of the Administrator to the Portfolio are not to be deemed to be
exclusive, and the Administrator shall be free to render administrative or other
services to others (including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the
Administrator may serve as officers or directors of the Fund, and that officers
or directors of the Fund may serve as officers or directors of the Administrator
to the extent permitted by law; and that the officers and directors of the
Administrator are not prohibited from engaging in any other business activity or
from rendering services to any other person, or from serving as partners,
officers, directors or trustees of any other firm or corporation, including
other investment companies.
VIII. TERM
This Agreement shall become effective at the close of business on the date
hereof and shall continue through December 31, 1997. Thereafter it shall
continue for successive annual periods, provided such continuance is
specifically approved at least annually by the Fund's directors who are not
parties to this Agreement or "interested persons" as defined in the 1940 Act
("disinterested directors"), or by the vote of the holders of a "majority" as
defined in Section 2(a)(42) of the 1940 Act ("majority") of the outstanding
voting securities of the Portfolio and by a majority of the disinterested
directors.
IX. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Fund's directors or by vote of a majority of the
Portfolio's outstanding voting securities or by the Administrator, on sixty (60)
days' written notice to the other party.
X. LIABILITY OF ADMINISTRATOR
The Administrator shall be liable to the Portfolio and shall indemnify the
Portfolio for any losses incurred by the Portfolio, whether in the purchase,
holding or sale of any security or otherwise, to the extent that such losses
resulted from an act or omission on the part of the Administrator or its
officers, directors or employees, that is found to involve willful misfeasance,
bad faith or negligence, or reckless disregard by the Administrator of its
duties under this Agreement, in connection with the services rendered by the
Administrator hereunder.
XI. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such address shall be:
if to the Fund, the Portfolio or the Administrator:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn.: Secretary
XII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in the provisions of this Agreement
is revised by rule, regulation or order of the Commission, such provisions shall
be deemed to incorporate the effect of such rule, regulation or order.
XIII. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund with the permission of Aetna Life and Casualty Company and
their continued use is subject to the right of Aetna Life and Casualty Company
to withdraw this permission in the event the Administrator or another subsidiary
or affiliated corporation of Aetna Life and Casualty Company should not be the
administrator of the Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the _______ day of ______________,
1996.
AETNA VARIABLE
PORTFOLIOS, INC. on
behalf of its series,
XXXXXXXXX FUND
Attest:
By:
__________________________
Name Title
- --------------------------
AETNA LIFE INSURANCE
AND ANNUITY COMPANY
Attest:
- -------------------------- By:
__________________________
Name Title
FORM OF
LICENSE AGREEMENT
This Agreement, made at Hartford, Connecticut, this ____ day of
________, 1996 by and between Aetna Life and Casualty Company, a Connecticut
corporation with its principal place of business at 151 Farmington Avenue,
Hartford, Connecticut, 06156 ("Licensor") and Aetna Variable Portfolios, Inc., a
Maryland corporation with its principal place of business at 151 Farmington
Avenue, Hartford, Connecticut 06156 ("Licensee").
WITNESSETH:
WHEREAS, Licensor either directly or by its affiliated companies has
adopted and is using and is the owner of the name "AETNA" and the associated
service marks and registrations listed on Schedule A hereto (collectively, the
"Licensed Service Marks"), which service marks have become valuable and
important in identifying the high quality of services rendered under the marks
by Licensor; and
WHEREAS, Licensee is a related company of Licensor by virtue of the
management of the assets of Licensee by Aetna Life Insurance and Annuity Company
and Aeltus Investment Management, Inc., both wholly-owned subsidiaries of
Licensor; and
WHEREAS, the parties deem it in the interest of each, and it is the
intention and desire of the parties, that Licensee be permitted to use the
Licensed Service Marks to identify the services of Licensee specified
hereinafter and that it be permitted to use the name of "Aetna" as a part of its
corporate or trade name; and
WHEREAS, both parties recognize the desire to maintain and preserve the
validity and integrity of the Licensed Service Marks;
NOW, THEREFORE, in consideration of their mutual promises and
undertakings and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Licensor grants to Licensee and Licensee accepts a nonexclusive,
nontransferable license to use the Licensed Service Marks throughout the United
States and Canada in connection with and for identifying the investment
facilities provided by Licensee. The license granted in this paragraph 1
includes the grant of permission to Licensee to use the name "Aetna" as part of
its corporate or trade name as follows: Aetna Variable Portfolios, Inc. and as
part of the name of any investment portfolios which it issues, including but not
limited to Aetna Variable Index Plus Portfolio, Aetna Variable Small Company
Portfolio, Aetna Variable Growth Portfolio, and Aetna Variable Capital
Appreciation Portfolio. No change in said corporate or trade name shall be made
by Licensee except with the prior written consent of Licensor.
2. Licensee agrees not to use any service marks other than the Licensed
Service Marks in connection with the services of Licensee listed in paragraph 1
hereof, either alone or in combination with the Licensed Service Marks.
3. No right is granted to Licensee to use any other service mark of
Licensor not now or hereafter listed in Schedule A.
4. Licensor shall have the right to specify and control the nature and
quality of the services performed by Licensee under the Licensed Service Marks
and Licensee agrees to maintain, in the sole judgment of Licensor, the same high
quality of services as are maintained by Licensor. Licensee agrees that it will
use the Licensed Service Marks only in accordance with the performance and usage
standards established by Licensor, including, without limitation, corporate
identity and graphic standards as prescribed by Licensor. Licensee shall submit
to Licensor such evidence as Licensor may reasonably require to insure
Licensee's compliance with its obligations set forth herein. Licensor shall have
the right to inspect Licensee's business operations at any time during
Licensee's regular business hours in order to assure Licensor that Licensee is
observing the terms and conditions of this Agreement.
5. It is expressly stipulated that the use of the Licensed Service
Marks by Licensee shall inure to the benefit of Licensor and any registration of
said marks covering the services performed by Licensee under this Agreement
shall be registered in the name of Licensor, it being understood that the
present license will not in any way affect the ownership by Licensor of the
Licensed Service Marks, each of which shall continue to be the exclusive
property of Licensor. Licensee shall not at any time during the term of this
Agreement do or cause to be done any act contesting or in any way impairing or
tending to impair Licensor's entire right, title and interest in the Licensed
Service Marks and the registrations thereof.
6. Licensor shall have the right to control the form and manner in
which the Licensed Service Marks are used by Licensee upon or in connection with
advertisements, brochures, audio or visual presentations, or any other materials
used in the sale or advertising of Licensee's services. Licensee agrees, upon
request of Licensor, to furnish Licensor with specimens of all such materials
which are not or cease to be approved by Licensor.
7. Licensee shall not be deemed by virtue of this Agreement to be the
agent or legal representative of Licensor and shall not by virtue of this
Agreement have the right or authority to pledge the credit of or incur any
obligation, express or implied, on behalf of Licensor. Neither this Agreement
nor the use of the Licensed Service Marks by Licensee shall create, or be deemed
to create, any responsibility for liability on the part of Licensor for the acts
or omissions of Licensee. With the exception of suits for infringement of the
Licensed Service Marks, Licensee shall indemnify and hold Licensor harmless from
any loss, claim, damage, cost or expense of any kind, including reasonable
attorneys' fees and costs that arise in connection with Licensee's use of the
Licensed Service Marks.
8. The right to institute and prosecute actions for infringement of the
Licensed Service Marks is reserved exclusively to Licensor, and Licensor shall
have the right to join Licensee in any such actions as a formal party. Licensee
agrees to assist Licensor to the best of its ability and at Licensor's expense
in any such action brought by Licensor. It is understood, however, that Licensor
is not obligated to institute and prosecute any such actions in any case in
which it, in its sole judgment, may consider it inadvisable to do so.
9. Unless sooner terminated as hereinafter provided, this Agreement
shall continue in full force and effect for a period of one (1) year from its
effective date and shall automatically renew for successive one (1) year terms.
Licensor shall have the unrestricted right to cancel this Agreement, for any
reason or no reason, at any time upon written notice to Licensee.
10. This Agreement shall automatically terminate in the event that:
a) Licensee does not comply with any provision of this
Agreement and the breach is not remedied within twenty (20) days
of written notice thereof by Licensor;
b) Licensor is no longer able to specify or control,
directly or indirectly, the nature and quality of the services
performed by Licensee under this Agreement;
c) Licensee becomes subject to dissolution, liquidation,
bankruptcy, statutory reorganization, receivership, compulsory
composition, or similar proceedings, or if creditors of Licensee
take over its management, or if Licensee otherwise enters into
any scheme or composition with creditors, or makes an assignment
for the benefit of creditors, or if any significant part of
Licensee's undertakings or property are impounded or confiscated
by action of any court or government; or
d) Licensee attempts to assign, sublicense or otherwise
transfer this Agreement or any of Licensee's rights under this
Agreement.
11. Licensee is granted no rights to use the Licensed Service Marks,
other than those rights specifically described and expressly granted in this
Agreement.
12. Neither this Agreement nor any rights hereunder may be assigned,
sublicensed or otherwise transferred by Licensee nor shall they inure to the
benefit of any trustee in bankruptcy, receiver or successor of Licensee, whether
by operation of law or otherwise, without the prior written consent of Licensor.
Any assignment, sublicense or transfer without such consent shall be null and
void.
13. Upon termination of this Agreement, Licensee shall immediately
discontinue all use of the Licensed Service Marks and shall not thereafter use
any names or marks which are similar or likely to cause confusion therewith.
14. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all previous oral or
written agreements between the parties.
15. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Connecticut and the United States of
America.
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Agreement effective as of the date first
written above.
AETNA LIFE AND CASUALTY COMPANY
By:
---------------------------------
(Print or type name)
Title:
-----------------------------
AETNA VARIABLE PORTFOLIOS, INC.
By:
---------------------------------
(Print or type name)
Title:
------------------------------
SCHEDULE A
The following service marks and registrations are hereby licensed by
Aetna Life and Casualty Company (Licensor) to Aetna Variable Portfolios, Inc.
(Licensee) in accordance with the terms of the Agreement dated __________, 1996
by and between Licensor and Licensee.
1. AETNA (word block design, without legend)
2. AETNA (word)
3. Registration No. 822,577, Class 102, issued January 17, 1967
in the United States Patent Office.
APPLICATION FOR LICENSE TO USE AETNA NAME
1. Name of entity to be Licensed (Licensee)
Aetna Variable Portfolios, Inc.
2. Name of person submitting application: Susan E. Bryant
Phone Number: (203) 273-7834
3. Address of Licensee's principal place of business:
151 Farmington Avenue
Hartford, Connecticut 06156
4. State of Incorporation of filing: Maryland
5. Type of entity - e.g., Corporation, Partnership: Corporation
6. Any other name under which Licensee operates: None
7. Nature of Licensee's business Diversified open-end management
investment company (mutual fund)
8. Does Licensee want to use the orange block logo? Yes
9. Does Licensee want to use the logo with the words "Aetna Life &
Casualty" beneath it? If so, explain briefly why. No
10. Trace ownership of Licensee back to Aetna Life and Casualty Company -
Show exact percentages of holdings of each Aetna affiliate in the ownership
chain.
At the date of this application, Licensee has not issued any shares of
stock. It is anticipated that subsidiaries of Aetna Life and Casualty
Company will provide initial capital to Licensee.
11. If Licensee will be doing any business out of the United States, what
has the Tax Section of the Law Department recommended as an annual fee?
Not Applicable
Blazzard, Grodd & Hasenauer, P.C.
943 Post Road East
Westport, CT 06880
(203) 226-7866
August 27, 1996
Board of Directors
Aetna Variable Portfolios, Inc.
151 Farmington Avenue
Hartford, CT 06156
Re: Opinion of Counsel - Aetna Variable Portfolios, Inc.
Ladies and Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with the
Securities and Exchange Commission of a Pre-Effective Amendment to a
Registration Statement on Form N-1A with respect to Aetna Variable Portfolios,
Inc.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to render
the opinions expressed below.
We are of the following opinions:
1. Aetna Variable Portfolios, Inc. ("Fund") is an open-end management
investment company.
2. The Fund is a corporation created and validly existing pursuant to the
General Laws of the State of Maryland.
3. All of the prescribed Fund procedures for the issuance of the
shares have been followed, and, when such shares are issued in
accordance with the Prospectus contained in the Registration
Statement for such shares, all state requirements relating to
such Fund shares will have been complied with.
4. Upon the acceptance of purchase payments made by shareholders
in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable
law, such shareholders will have legally-issued, fully paid,
non-assessable shares of the Fund.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ RAYMOND A. O'HARA III
________________________________
Raymond A. O'Hara III
Consent of Independent Auditors
The Board of Directors and Shareholder
Aetna Variable Portfolios, Inc.:
We consent to the use of our report dated August 29, 1996, included herein and
to the reference to our firm under the caption "INDEPENDENT AUDITORS" in the
statement of additional information.
KPMG Peat Marwick LLP
Hartford, Connecticut
September 6, 1996
151 Farmington Avenue Susan E. Schechter
Hartford, CT 06156 Corporate Secretary and Counsel
Aetna Life Insurance and Annuity
Company, RE4C
(860) 273-5663
Fax: (860) 273-8340
August 27, 1996
Board of Directors
Aetna Variable Portfolios, Inc.
151 Farmington Avenue
Hartford, CT 06156
Ladies and Gentlemen:
Aetna Life Insurance and Annuity Company ("ALIAC") will provide on
or before August 28, 1996 a minimum of $100,000 of initial capital
to each of the various series ("Series") of Aetna Variable
Portfolios, Inc. (the "Fund") to enable the Fund to meet the
requirements of Section 14(a)(1) of the Investment Company Act of
1940 prior to commencing a public offering of shares of its
Series.
Form N-1A under the Securities Act of 1933 and the Investment
Company Act of 1940 requires that there be filed with the Fund's
registration statement, as an exhibit, "copies of any agreements
or understandings made in consideration for providing the initial
capital between or among the Registrant, the underwriter, adviser,
promoter or initial stockholders and written assurances from
promoters or initial stockholders that their purchases were made
for investment purposes without any present intention of redeeming
or reselling;...."
This will advise you that, while there are no formal agreements or
understandings between the Fund and ALIAC in consideration for
ALIAC's providing the initial capital, ALIAC hereby assures you
that its purchase of $100,000 worth of shares of each Series was
made for investment purposes and that ALIAC has no present
intention of redeeming or reselling those shares. ALIAC does,
however, reserve the right to make additional investments in
shares of the Series and to redeem any or all of its shares, with
regard to the possible redemption in the future at a time and in
a manner which would be consistent with the Securities Act
of 1933 and the Investment Company Act of 1940.
Sincerely,
Susan E. Schechter
Corporate Secretary and Counsel
Aetna Life Insurance and Annuity Company
COMPOSITE PERFORMANCE 6/30/96
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Capital Appreciation GROSS 1,000 NET
- -------------------- ----- ---
4q90 0.09 1,094.90 $1,093
1q91 0.21 1,320.12 $1,316
2q91 -0.02 $1,293
3q91 0.07 $1,380
4q91 0.14 $1,573
1q92 0.00 $1,569
2q92 -0.03 $1,527
3q92 0.00 $1,529
4q92 0.14 $1,736
1q93 0.08 $1,874
2q93 0.04 $1,939
3q93 0.05 $2,038
4q93 0.03 $2,106
1q94 0.01 $2,114
2q94 -0.03 $2,055
3q94 0.06 $2,178
4q94 -0.02 $2,141
1q95 0.08 $2,299
2q95 0.09 $2,499
3q95 0.09 $2,720
4q95 0.03 $2,784
1q96 0.09 $3,037
2q96 0.03 $3,128
1 Year 26.06% 25.17%
5 Year 20.19% 19.33%
10 Year
Inception 22.81% 10/1/90 21.93%
</TABLE>
COMPOSITE PERFORMANCE 6/30/96
<TABLE>
<CAPTION>
<S> <C> <C>
Growth Gross Net
- ------ ----- ------
$1,000
1q83 10.39% $1,102
2q83 12.42% $1,237
3q83 -0.67% $1,226
4q83 -0.65% $1,216
1q84 -2.69% $1,181
2q84 -3.44% $1,138
3q84 9.10% $1,240
4q84 0.65% $1,245
1q85 9.48% $1,361
2q85 6.00% $1,440
3q85 -3.78% $1,383
4q85 15.72% $1,598
1q86 14.14% $1,821
2q86 3.99% $1,890
3q86 -7.64% $1,742
4q86 4.14% $1,811
1q87 20.23% $2,174
2q87 3.29% $2,242
3q87 7.99% $2,416
4q87 -20.28% $1,922
1q88 3.69% $1,990
2q88 5.27% $2,091
3q88 -0.28% $2,081
4q88 2.35% $2,126
1q89 7.19% $2,275
2q89 8.87% $2,472
3q89 14.17% $2,818
4q89 2.79% $2,891
1q90 -2.70% $2,808
2q90 11.94% $3,138
3q90 -12.42% $2,742
4q90 9.96% $3,011
1q91 16.00% $3,487
2q91 -1.64% $3,423
3q91 7.95% $3,688
4q91 13.22% $4,169
1q92 -5.55% $3,930
2q92 -3.02% $3,804
3q92 3.54% $3,932
4q92 6.86% $4,194
1q93 2.05% $4,272
2q93 1.63% $4,334
3q93 3.85% $4,492
4q93 0.22% $4,484
1q94 -1.48% $4,419
2q94 -1.44% $4,347
3q94 4.16% $4,519
4q94 1.18% $4,564
1q95 8.62% $4,949
2q95 11.54% $5,511
3q95 9.92% $6,048
4q95 2.57% $6,192
1q96 8.62% $6,714
2q96 4.79% $7,023
1 Year 28.33% 27.43%
5 Year 16.30% 15.46%
10 Year 14.85% 14.03%
</TABLE>
COMPOSITE PERFORMANCE 6/30/96
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quant Eq
NET
2q91 Start value Q % fee
3q91 $1,000 -0.125%
4q91 9.70% 109.70% $1,096 109.58%
1q92 -2.76% 97.24% $1,064 97.12%
2q92 0.87% 100.87% $1,072 100.75%
3q92 3.27% 103.27% $1,106 103.15%
4q92 6.35% 106.35% $1,175 106.23%
1q93 4.51% 104.51% $1,226 104.39%
2q93 0.67% 100.67% $1,233 100.55%
3q93 3.35% 103.35% $1,273 103.22%
4q93 2.01% 102.01% $1,297 101.89%
1q94 -3.11% 96.89% $1,255 96.77%
2q94 -0.35% 99.65% $1,249 99.53%
3q94 4.49% 104.49% $1,303 104.37%
4q94 0.01% 100.01% $1,302 99.88%
1q95 9.15% 109.15% $1,419 109.02%
2q95 10.64% 110.64% $1,568 110.51%
3q95 8.29% 108.29% $1,696 108.16%
4q95 6.18% 106.18% $1,799 106.06%
1q96 5.82% 105.82% $1,902 105.70%
2q96 4.74% 104.74% $1,989 104.62%
return net at .50%
1 Year 27.44% 26.84%
5 Year
10 Year
Inception 10/1/91 16.14% 15.58%
</TABLE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Aetna Series Fund Inc., Aetna
Investment Advisers Fund, Inc., Aetna Generation Portfolios, Inc. and Aetna
Variable Portfolios, Inc. hereby severally constitute and appoint Susan E.
Bryant, Julie E. Rockmore and Kirk P. Wickman, and each of them individually,
our true and lawful attorneys, with full power to them and each of them to sign
for us, and in our names and in the capacities indicated below, any and all
amendments, including but not limited to Pre-Effective and Post-Effective
Amendments, to the Registration Statements listed below filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
and/or the Investment Company Act of 1940:
Registration Statements filed under the Securities Act of 1933, as amended:
<TABLE>
<CAPTION>
<S> <C>
Aetna Series Fund, Inc. (ten portfolios registered) 33-41694
Aetna Series Fund, Inc. (three portfolios registered -
Aetna Generation Funds) 33-85620
Aetna Investment Advisers Fund, Inc. 33-27247
Aetna Generation Portfolios, Inc. 33-88334
Aetna Variable Portfolios, Inc. 333-05173
</TABLE>
Registration Statements filed under the Investment Company Act of 1940:
<TABLE>
<CAPTION>
<S> <C>
Aetna Series Fund, Inc. 811-6352
Aetna Investment Advisers Fund, Inc. 811-5773
Aetna Generation Portfolios, Inc. 811-8934
Aetna Variable Portfolios, Inc. 811-7651
</TABLE>
hereby ratifying and confirming on this 30th day of August, 1996, our signatures
as they may be signed by our said attorneys to any such Registration Statements
and any and all amendments thereto.
<TABLE>
<CAPTION>
<S> <C>
Signature/Title Signature/Title
- ----------------------------- ------------------------------
/s/ Shaun P. Mathews /s/ J. Scott Fox
- ----------------------------- ------------------------------
Shaun P. Mathews J. Scott Fox
President and Director Treasurer and Vice President
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
/s/ Morton Ehrlich /s/ Timothy A. Holt
- ----------------------------- ------------------------------
Morton Ehrlich, Director Timothy A. Holt, Director
/s/ Maria T. Fighetti /s/ Sidney Koch
- ----------------------------- ------------------------------
Maria T. Fighetti, Director Sidney Koch, Director
/s/ David L. Grove /s/ Corine T. Norgaard
- ----------------------------- ------------------------------
David L. Grove, Director Corine T. Norgaard, Director
/s/ Daniel P. Kearney /s/ Richard G. Scheide
- ----------------------------- ------------------------------
Daniel P. Kearney, Director Richard G. Scheide, Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> AETNA VARIABLE PORTFOLIOS, INC.
<SERIES>
<NUMBER> 001
<NAME> INDEX PLUS PORTFOLIO
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> AUG-28-1996
<PERIOD-END> AUG-28-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 100,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 100,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 10
<PAID-IN-CAPITAL-COMMON> 99,990
<SHARES-COMMON-STOCK> 10,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 100,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 100,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 100,000
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> AETNA VARIABLE PORTFOLIOS, INC.
<SERIES>
<NUMBER> 002
<NAME> GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> AUG-28-1996
<PERIOD-END> AUG-28-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 100,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 100,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 10
<PAID-IN-CAPITAL-COMMON> 99,990
<SHARES-COMMON-STOCK> 10,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 100,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 100,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 100,000
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> AETNA VARIABLE PORTFOLIOS, INC.
<SERIES>
<NUMBER> 003
<NAME> SMALL COMPANY PORTFOLIO
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> AUG-28-1996
<PERIOD-END> AUG-28-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 100,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 100,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 10
<PAID-IN-CAPITAL-COMMON> 99,990
<SHARES-COMMON-STOCK> 10,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 100,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 100,000
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 100,000
<PER-SHARE-NAV-BEGIN> 10
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