As filed with the Securities and Exchange File No. 2-51739
Commission on February 18, 1997 File No. 811-2514
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 51
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 36
AETNA VARIABLE FUND
151 Farmington Avenue RC4A, Hartford, Connecticut 06156
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(860) 273-7834
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RC4A, Hartford, Connecticut 06156
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(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on ___________________ pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on ___________________ pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
X on May 1, 1997 pursuant to paragraph (a)(2) of Rule 485
-----
Aetna Variable Fund has registered an indefinite number of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Registrant expects to file its Rule 24f-2 Notice for its fiscal
year ended December 31, 1996 on or before February 28, 1997.
<PAGE>
Aetna Variable Fund
Cross-Reference Sheet
<TABLE>
<CAPTION>
Form N-1A
Item No. Caption in Prospectus
- ------- ---------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Fee Table
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective;
Investment Policies and Restrictions
5. Management of the Fund Management of the Fund
5A. Management's Discussion of Fund Financial Highlights (Incorporated by
Performance reference to the Annual Report)
6. Capital Stock and Other Securities General Information;
Tax Matters
7. Purchase of Securities Being Offered Management of the Fund;
Net Asset Value
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Not applicable
Caption in Statement of Additional Information
----------------------------------------------
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 General Information and History;
Investment Objective and Policies of the Fund;
Description of Various Securities and Investment
Techniques
14. Management of the Fund Trustees and Officers of the Fund
15. Control Persons and Principal Control Persons and Principal Shareholders of the
Holders of Securities Fund
16. Investment Advisory and Other Investment Advisory Agreement; Subadvisory
Services Agreement; Administrative Services
Agreement; Custodian; Independent
Auditors
17. Brokerage Allocation and Other Brokerage Allocation and Trading Policies
Practices
18. Capital Stock and Other Securities Description of Shares
19. Purchase, Redemption and Pricing Purchase and Redemption of Shares;
of Securities Being Offered Net Asset Value
20. Tax Status Tax Matters
21. Underwriters Principal Underwriter
22. Calculation of Performance Data Not Applicable
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
AETNA VARIABLE FUND
151 Farmington Avenue
Hartford, Connecticut 06156-8962
1-800-238-6263
Prospectus dated: May 1, 1997
Aetna Variable Fund (Fund) is a diversified, open-end management investment
company whose shares are currently available to (i) variable annuity or variable
life insurance separate accounts to fund variable annuity contracts (VA
Contracts) and variable life insurance policies (VLI Policies) issued by Aetna
Life Insurance and Annuity Company (Aetna) and its affiliates and (ii) other
shareholders of the Fund only through dividend reinvestment.
The Fund seeks to maximize total return through investments in a diversified
portfolio of common stocks and securities convertible into common stock. It is
anticipated that capital appreciation and investment income will both be major
factors in achieving total return. An investment in the Fund is neither insured
nor guaranteed by the U.S. Government.
This Prospectus sets forth concisely the information about the Fund that you
should know before investing. Additional information about the Fund is contained
in a Statement of Additional Information (Statement) dated May 1, 1997, which
has been filed with the Securities and Exchange Commission (Commission) and is
incorporated by reference. You can obtain a Statement, without charge, by
writing to the Fund at the address listed above or by calling the Fund at
1-800-238-6263.
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.
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 and retain for future reference.
<PAGE>
TABLE OF CONTENTS
FEE TABLE 3
FINANCIAL HIGHLIGHTS 4
INVESTMENT OBJECTIVE 5
INVESTMENT POLICIES AND RESTRICTIONS 5
Investment Policies 5
Industry Concentration 5
Illiquid and Restricted Securities 5
Foreign Securities 5
Depositary Receipts 5
Securities Lending 5
Repurchase Agreements 6
Borrowing 6
High-Risk, High-Yield Securities 6
Options, Futures and Other Derivatives 6
MANAGEMENT OF THE FUND 6
Trustees 6
Investment Adviser 6
Subadviser 7
Portfolio Management 7
Expenses and Fund Administration 7
GENERAL INFORMATION 7
Declaration of Trust 7
Capital Stock 7
Shareholder Inquiries and Distribution Options 7
Shareholder Meetings 7
Voting Rights 7
Mixed Funding 8
TAX MATTERS 8
The Fund 8
Fund Distributions 8
Share Redemptions 8
Tax Withholding 8
PURCHASE AND REDEMPTION OF SHARES 8
NET ASSET VALUE 9
2 Aetna Variable Fund
<PAGE>
FEE TABLE
The Fee Table is provided to help the investor understand the various fees and
costs that an investor will bear directly or indirectly. It does not include
charges due under a VA Contract or a VLI Policy. VA Contract holders and
participants, and VLI Policy holders should refer to the appropriate contract or
policy prospectus for a description of the contract or policy charges or fees.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fee
Other Expenses*
TOTAL FUND OPERATING EXPENSES
*These expenses reflect the amendment to the Administrative Service Agreement
that is effective May 1, 1996. See "Management of the Fund" for additional
information concerning the fees payable to Aetna as the Fund's investment
adviser and administrator.
Hypothetical Illustration (Example)
THE FOLLOWING EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN BELOW.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and
redemption at the end of each time period:
</TABLE>
Refer to the applicable VA Contract or VLI Policy prospectus for an explanation
of contract/policy charges and expenses.
Aetna Variable Fund 3
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the years
in the ten-year period ended December 31, 1996 are derived from the financial
statements of the Fund, which statements have been audited by KPMG Peat Marwick
LLP, independent auditors. The financial statements as of December 31, 1996, and
for each of the years in the two-year period then ended, and the independent
auditors' report thereon, are included in the annual report which is
incorporated by reference into the Statement.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1996 1995 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value per share,
beginning of year $26.229 $31.245 $31.602
Income From Investment
Operations
Net investment income .724 .765 .822
Net realized and unrealized gain
(loss) on investments 7.620 (1.071) 1.287
------- ------- ------- -------
Total from inves tment
operations 8.344 (.306) 2.109
Less Distributions
Dividends from net investment
income (.723) (.811) (.814)
Distribution from net realized gains
on investments (4.795) (3.899) (1.652)
------- ------- ------- -------
Net asset value per share,
end of year $29.055 $26.229 $31.245
======= ======= ======= =======
Total Return* 32.25% (.96)% 6.74%
Net assets, end of year (millions) $5,662 $4,424 $4,988
Ratio of total expenses to average
net assets .29% .30% .29%
Ratio of net investment income to
average net assets 2.42% 2.52% 2.57%
Portfolio turnover rate 96.63% 84.27% 25.22%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------
1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of year $30.954 $25.498 $25.977 $22.461 $20.961 $23.941
Income From Investment
Operations
Net investment income .810 .922 .935 1.041 .874 .866
Net realized and unrealized gain
(loss) on investments 1.229 5.780 (.084) 5.402 2.187 .713
------- ------- ------- ------- ------- -------
Total from investment
operations 2.039 6.702 .851 6.443 3.061 1.579
Less Distributions
Dividends from net investment
income (.866) (.942) (.960) (1.056) (.892) (.868)
Distribution from net realized gains
on investments (.525) (.304) (.370) (1.871) (.669) (3.691)
------- ------- ------- ------- ------- -------
Net asset value per share,
end of year $31.602 $30.954 $25.498 $25.977 $22.461 $20.961
======= ======= ======= ======= ======= =======
Total Return* 6.70% 26.41% 3.31% 29.06% 14.63% 5.40%
Net assets, end of year (millions) $ 4,552 $ 3,818 $ 2,768 $ 2,592 $ 2,042 $ 1,834
Ratio of total expenses to average
net assets .30% .30% .30% .29% .38% .29%
Ratio of net investment income to
average net assets 2.86% 3.22% 3.70% 4.01% 3.81% 3.12%
Portfolio turnover rate 16.26% 12.08% 19.40% 28.79% 24.96% 36.52%
</TABLE>
Per share data calculated using weighted average number of shares outstanding
throughout the year.
* The performance data reflects deduction of an investment advisory fee at an
annual rate of 0.25% of the Fund's average daily net assets, prior to August
1, 1996 and 0.50% of average daily net assets thereafter and deductions for
Fund administrative services and other expenses at cost prior to May 1, 1996,
and at an annual rate of 0.06% of average daily net assets thereafter.
Performance data above is for the Fund and not for the separate accounts
investing in the Fund. Therefore, the performance does not reflect insurance
charges for mortality and expense risks, contract maintenance charges,
deferred sales charges or other charges relating to the separate account using
the Fund for VA Contracts or VLI Policies. Inclusion of these expenses would
reduce the total return figures.
Additional information about the performance of the Fund is contained in the
Fund's Annual Report dated December 31, 1996. The Annual Report is incorporated
herein by reference and is available, without charge, by writing to the Fund at
the address listed on the cover of this Prospectus or by calling 1-800-238-6263.
4 Aetna Variable Fund
<PAGE>
INVESTMENT OBJECTIVE
The investment objective of the Fund is to maximize total return through
investments in a diversified portfolio of common stocks and securities
convertible into common stock. It is anticipated that capital appreciation and
investment income will both be major factors in achieving total return. The
Fund's investment objective is fundamental and may not be changed without the
vote of a majority of its outstanding voting securities as defined by the
Investment Company Act of 1940 (1940 Act). There can be no assurance that the
Fund will meet its investment objective.
INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies The Fund generally will seek to achieve its investment
objective by investing principally in common stocks and securities convertible
into common stock that are believed to have significant potential for capital
appreciation and/or investment income. In addition, the Fund may invest in
nonconvertible preferred stocks, debt securities, rights and warrants; the Fund
may maintain a reserve of cash and high-grade, short-term debt securities; and
the Fund may purchase securities on a when-issued or delayed-delivery basis.
Industry Concentration The Fund will not concentrate its investments in any one
industry, and, therefore the Fund will not invest 25% or more of its total
assets in securities issued by companies principally engaged in the same
industry. This limitation will not, however, apply to securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities;
securities invested in, or repurchase agreements for, U.S. Government
securities; and certificates of deposit, bankers' acceptances, or securities of
banks and bank holding companies. For purposes of this restriction, 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. Also, the Fund will not hold securities constituting more than 5% 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 latter restriction
applies only to 75% of the Fund's total assets and does not include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities.
The Fund does not invest in the securities of companies determined by the
Adviser to be primarily involved in the production or distribution of tobacco
products.
Illiquid and Restricted Securities The Fund may invest up to 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 in the
ordinary course of business without taking a materially reduced price. In
addition, the Fund 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. The Board of Trustees of
the Fund (Trustees) has established a policy concerning investments in
restricted and illiquid securities.
Foreign Securities The Fund may invest up to 25% of its assets in foreign equity
securities. These securities will be marketable equity securities including
common and preferred stock, depositary receipts for stock and fixed income or
equity securities exchangeable for or convertible into stock. 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 stock exchanges
where securities may be traded, 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 income payable on securities or on capital gains; 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 Fund 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 Fund
may 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 the Fund's investment
limitation concerning investment in foreign securities.
Securities Lending The Fund 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 Fund's total assets. The Fund will not lend portfolio securities to
affiliates. Though fully collateralized, lending portfolio securities involves
certain risks, including the possibility that the borrower may become insolvent
or default on the loan. 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. A
loan may be terminated at any time by the borrower or lender upon proper notice.
Aetna Variable Fund 5
<PAGE>
Repurchase Agreements The Fund may enter into repurchase agreements with
domestic banks and broker-dealers. Under a repurchase agreement, a Fund may
acquire a debt instrument for a relatively short period subject to an obligation
by the seller to repurchase and by the Fund to resell the instrument at a fixed
price and time. Such agreements, although fully collateralized, involve the risk
that the seller of the securities may fail to repurchase them. In that event, a
Fund may incur costs in liquidating the securities (or other collateral for the
agreement) or a loss if the securities (or collateral) decline 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 Fund to liquidate the collateral may be
delayed or limited.
Borrowing The Fund may borrow up to 5% of the value of its total assets for
temporary or emergency purposes. The Fund does not intend to borrow for
leveraging purposes. It has the authority to do so, but only if, after the
borrowing, the value of the Fund's net assets, including proceeds from the
borrowings, is equal to at least 300% of all outstanding borrowings. Leveraging
can increase the volatility of the Fund since it exaggerates the effects of
changes in the value of the securities purchased with the borrowed funds.
High-Risk, High-Yield Securities The Fund may invest in securities rated BB or
below by Standard and Poor's Corporation or Ba or below by Moody's Investors
Services, Inc., or other ratings agencies, or, if not rated, considered by the
investment adviser to be of comparable quality (high-risk, high-yield securities
commonly called "junk bonds"). The Fund does not intend to invest more than 5%
of its assets in such securities, although it is permitted to invest up to 10%
of its total assets in high-risk, high-yield securities.
Options, Futures and Other Derivatives The Fund may occasionally engage in
hedging and other strategies using derivatives to manage its exposure to
changing interest rates, securities prices and currency exchange rates, or to
increase its investment return. A derivative is a financial instrument the value
of which is "derived" from the performance of an underlying asset (such as a
security or an index of securities). In addition to futures and options,
derivatives include such instruments as forward contracts, swaps, and structured
notes. A forward contract is a purchase or sale of a specific quantity of a
commodity, government security, foreign currency, or other financial instrument
at the current price, with delivery and settlement at a specified future date. A
swap is an exchange of one security for another and may be executed to exchange
the maturities of a bond portfolio or the quality of the issues in a stock or
bond portfolio. Structured notes are privately placed fixed income securities
whose coupon and/or final payment depends on the return of a market index,
portfolio or security. Except for the purpose of hedging, the Fund may not
invest more than 5% of its assets in derivatives which management deems to
involve high risk to the Fund, such as inverse floaters, interest-only and
principal-only securities.
The Fund may write covered call options and purchase put options, on securities
and indices. Put options will be acquired only for temporary defensive purposes.
The Fund may purchase call options and sell put options to close out positions
previously opened by the Fund. At any one time, the Fund may not have
outstanding call options on more than 30% of its assets and it may not buy put
options if more than 3% of the assets of the Fund would be invested in put
options.
The Fund may enter into futures contracts including stock index futures or
options on futures contracts only for hedging purposes. The Fund may not enter
into a futures contract if the current market prices of instruments required to
be delivered and purchased under open futures contracts would exceed 30% of the
Fund's assets. No more than 5% of the Fund's total assets may be committed to
margin deposits on futures contracts.
Options and futures contracts can be volatile investments and involve certain
risks. The Fund may be unable to limit 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 the 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 the Fund.
The amount of gains or losses on investments in futures contracts depends on the
portfolio manager's ability to predict correctly the direction of stock prices,
interest rates and other economic factors. Further information about the use of
futures, options and other derivative instruments, and the associated risks, is
contained in the Statement.
The Fund is subject to further investment restrictions that are described in the
Statement.
MANAGEMENT OF THE FUND
Trustees The operations of the Fund are managed under the direction of the
Trustees. The Trustees set broad policies for the Fund. Information about the
Trustees is found in the Statement.
Investment Adviser Aetna serves as the investment adviser for the Fund and
Aeltus Investment Management, Inc. (Aeltus) serves as the subadviser. Aetna is a
Connecticut insurance corporation with its principal offices located at 151
Farmington Avenue, Hartford, Connecticut 06156. Aetna and Aeltus (collectively,
the "Adviser") are both indirect, wholly-owned subsidiaries of Aetna Retirement
Services, Inc., which is in turn an indirect wholly-owned subsidiary of Aetna
Inc. Aetna is registered with the Commission as an investment adviser. Aetna
receives a management fee at an annual rate of 0.50% of the average daily net
assets of the Fund, payable monthly.
6 Aetna Variable Fund
<PAGE>
Subadviser. The Fund and Aetna have engaged Aeltus as subadviser of the Fund.
Aeltus is a Connecticut corporation with its principal offices located at 242
Trumbull Street, Hartford, Connecticut 06156-1205. Aeltus is registered as an
investment adviser with the Commission.
Under the Subadvisory Agreement, Aeltus is responsible for managing the assets
of the Fund in accordance with the Fund's investment objective and policies
subject to the supervision of Aetna, the Fund and the Trustees. Aeltus
determines what securities and other instruments are purchased and sold by the
Fund and handles certain related accounting and administrative functions,
including determining the Fund's net asset value on a daily basis and preparing
and providing such reports, data and information as Aetna or the Trustees
request from time to time. Aeltus receives a fee at an annual rate of 0.30% of
the average daily net assets of the Fund, payable monthly.
Aetna has overall responsibility for monitoring the investment program
maintained by the Subadviser for compliance with applicable laws and regulations
and the Fund's investment objective and policies.
Portfolio Management Kevin Means, Managing Director, Aeltus, has been the lead
portfolio manager of the Fund since July 1994. Mr. Means is responsible for the
management of over $6 billion in variable annuity and mutual fund assets. Mr.
Means joined Aetna in July of 1994 after serving as Chief Investment Officer at
INVESCO Management and Research, Boston from 1993 to 1994. He also served from
1987 to 1993 as the Director of Quantitative Research and Equity Portfolio
Manager at INVESCO Capital Management, Atlanta.
Expenses and Fund Administration Under an Administrative Services Agreement with
the Fund, Aetna provides all administrative services necessary for the Fund's
operations and is responsible for the supervision of the Fund's other service
providers. Aetna is also responsible for 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, Aetna receives an annual fee, payable monthly, at a rate of 0.06% of
the average daily net assets of the Fund.
GENERAL INFORMATION
Declaration of Trust The Fund was organized as a "Massachusetts business trust"
under the laws of Massachusetts on January 25, 1984. It began operations on May
1, 1984 upon succeeding to the assets of Aetna Variable Fund, Inc., a
corporation that was formed in 1974. Massachusetts law provides that
shareholders of the Fund can, under certain circumstances, be held personally
liable for the obligations of the Fund. The Fund has been structured, and will
be operated in such a way, so as to ensure as much as possible, that
shareholders will not be liable for obligations of the Fund. The Declaration of
Trust (Declaration) contains an express disclaimer of shareholder liability for
acts or obligations of the Fund under Massachusetts law, and requires that
notification of this disclaimer be given in each agreement, obligation or
instrument entered into by the Fund or the Trustees. A more complete discussion
of potential liability of shareholders of the Fund under Massachusetts law is
contained in the Statement under "Description of Shares--Shareholder and Trustee
Liability."
Capital Stock The Declaration permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest in the Fund. All shares are
nonassessable, other than as disclosed above. There are no preemptive rights.
As of , there were shares of the Fund outstanding, % of which
were owned by Aetna and held in its separate accounts to fund Aetna's
obligations under its VA Contracts and VLI Policies. An additional % of the
Fund's shares were owned by affiliates of Aetna at that date. The balance of the
shares were held directly by shareholders who acquired their interests before
the Fund was prohibited from selling shares both directly to investors and to
fund VA contracts and VLI Policies. Direct shareholders may not purchase
additional shares except through dividend reinvestments.
Shareholder Inquiries and Distribution Options Any questions about the Fund can
be addressed to the Fund at the address listed on the cover of this Prospectus
or by calling 1-800-238-6263. Shareholders may elect to receive dividends and
capital gains distributions in cash or to reinvest in additional shares in the
Fund. See "Tax Matters--Fund Distributions" below.
Shareholder Meetings The Fund is not required to hold annual shareholder
meetings. The Declaration provides for meetings of shareholders to elect
Trustees at such time as may be determined by the Trustees 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 Trustees and will assist with communications
concerning that shareholder meeting.
Voting Rights Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held on matters submitted to the
shareholders of the Fund. Voting rights are not cumulative. Persons who select
the Fund for investment through their VA Contract or VLI Policy are not the
shareholders of the Fund, but may have the right to direct the voting of Fund
shares at shareholder meetings if required by law. Participant voting rights are
discussed in the prospectus for the applicable VA Contract or VLI Policy.
Aetna Variable Fund 7
<PAGE>
Mixed Funding Because the Fund is sold to fund variable annuity contracts and
variable life insurance policies issued by Aetna, certain conflicts of interest
could arise. If a conflict of interest were to occur, one of the separate
accounts invested in the Fund might withdraw its investment in the Fund, which
might force the Fund to sell its portfolio securities at disadvantageous prices,
causing its per share value to decrease. The Trustees have agreed to monitor
events in order to identify any material irreconcilable conflicts which might
arise and to determine what action, if any, should be taken to address such
conflict.
TAX MATTERS
The following discussion of federal income tax consequences is based on tax laws
and regulations in effect on the date of this prospectus, and is subject to
change by legislative or administrative action. The following discussion is for
general information only; a more detailed discussion of federal income tax
considerations is contained in the Statement.
The Fund The Fund intends to continue to qualify as a regulated investment
company by satisfying the requirements under Subchapter M of the Internal
Revenue Code of 1986, as amended (Code) concerning: (1) the diversification of
assets; (2) the distribution of income; and (3) the source of income. It is the
policy of the Fund to distribute all of its investment income (net of expenses)
and any capital gains (net of capital losses). Distributions are made to the
separate accounts for shares of the Fund held under VA Contracts and VLI
Policies, and directly to shareholders who hold shares of the Fund directly, in
accordance with the timing requirements imposed by the Code. In addition, the
Fund intends to comply with the variable asset diversification requirements
under Section 817(h) of the Code, which are described more fully in the
Statement.
Fund Distributions Distributions by the Fund to shareholders other than separate
accounts of net long-term capital gains are taxable to those shareholders as
long-term capital gains regardless of the length of time a shareholder has held
the shares. Distributions by the Fund of its net investment income and its net
short-term capital gains are taxable to shareholders as ordinary income.
Distributions paid by the Fund to the insurance company separate accounts are
taxable, if at all, to the separate accounts and not to the holders of VA
Contracts and VLI Policies. Holders of VA Contracts and VLI Policies should
review the prospectus for their VA Contract or VLI Policy for information
regarding the tax treatment of their contracts and policies and distributions
from the Fund to the separate accounts.
In general, shareholders include distributions in their taxable income in the
year in which they are received (whether paid in cash or reinvested). However,
distributions declared in December and paid in January are taxable as if paid on
December 31 of the year of declaration. A statement will be sent to shareholders
indicating the tax status of all distributions made during the previous year.
Share Redemptions Any gain or loss recognized upon a taxable disposition of a
direct shareholder's shares generally will be treated as a taxable long-term or
short-term capital gain or loss (depending on whether the shareholder has held
the shares more than one year). Any loss realized upon a taxable disposition of
a Fund's shares may be subject to limitations that are described more fully in
the Statement.
Tax Withholding The Fund is required to withhold taxes from any distributions
unless the shareholder provides the Fund with a correct social security or
taxpayer identification number or certifies that the shareholder is a
corporation or otherwise exempt from or not subject to withholding by the
Internal Revenue Service (IRS). If a shareholder is subject to backup
withholding, the IRS can require the Fund to withhold 31% of taxable dividends,
capital gains distributions and redemptions.
PURCHASE AND REDEMPTION OF SHARES
Aetna is the principal underwriter of the Fund's shares. Except for the
reinvestment of dividends described under "General Information--Capital Stock,"
shares may only be purchased by Aetna or its affiliated insurance companies as
the depositor of variable annuity and variable life insurance separate accounts
as directed by the holders of the VA Contracts or VLI Policies. Refer to the
prospectus for the applicable VA Contract or VLI Policy for information on how
to direct investments in or redemptions from a Fund and any fees that may apply.
Shares of the Fund are purchased and redeemed at their net asset value next
determined after receipt of a purchase or redemption order in acceptable form.
Shareholders redeeming directly from the Fund and not through a VA Contract or
VLI Policy must provide a signature guarantee regardless of the redemption
amount. Orders for the purchase or redemption of shares of the Fund that are
received before the close of regular trading on the New York Stock Exchange
(normally 4 p.m. eastern time) are effected at the net asset value per share
determined that day, as described below (see Net Asset Value).
8 Aetna Variable Fund
<PAGE>
If the value of shares held directly by a shareholder is less than $1,000, the
shares may be liquidated upon six months' notice. Shares will be redeemed at the
net asset value determined on the day the account is closed. The Fund 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 Commission.
If such a shareholder holds shares directly having a net asset value of $5,000
or more, the shareholder may establish a systematic withdrawal program. Further
information about this program may be obtained from the Fund.
NET ASSET VALUE
The net asset value per share (NAV) is determined as of the earlier of 15
minutes after the close of the New York Stock Exchange or 4:15 p.m. eastern time
on each day that the New York Stock Exchange is open for trading. The NAV is
computed by dividing the total value of the Fund's securities, plus any cash and
other assets less all liabilities (including accrued expenses), 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 under the authority of the Trustees.
Aetna Variable Fund 9
<PAGE>
INVESTMENT ADVISER
Aetna Life Insurance
and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
CUSTODIAN
Mellon Bank N.A.
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
TRANSFER, DIVIDEND DISBURSING
AND REDEMPTION AGENT
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
CityPlace II
Hartford, Connecticut 06103-4103
AETNA LOGO
Aetna Life Insurance and Annuity Company
AVF-3
<PAGE>
Statement of Additional Information dated: May 1, 1997
AETNA VARIABLE FUND
151 Farmington Avenue
Hartford, Connecticut 06156
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Aetna Variable Fund dated May 1,
1997.
A free prospectus is available upon request from the local Aetna office, by
writing to Aetna Variable Fund at the address listed above or by calling
1-800-238-6263.
Read the prospectus before you invest.
TABLE OF CONTENTS
General Information and History 2
Investment Objective and Policies of the Fund 2
Description of Various Securities and Investment Techniques 3
Trustees and Officers of the Fund 13
Control Persons and Principal Shareholders of the Fund 16
Investment Advisory Agreement 16
Subadvisory Agreement 16
Administrative Services Agreement 17
License Agreement 17
Brokerage Allocation and Trading Policies 17
Description of Shares 18
Purchase and Redemption of Shares 20
Principal Underwriter 20
Tax Matters 20
Net Asset Value 25
Custodian 26
Independent Auditors 26
Financial Statements F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Variable Fund (Fund) is an open-end diversified management investment
company which sells its shares of beneficial interest to (i) variable annuity
and variable life insurance separate accounts to fund variable annuity contracts
(VA Contracts) or variable life insurance policies (VLI Policies) issued by
Aetna Life Insurance and Annuity Company ("Aetna" or the "Company") and its
affiliates, and (ii) other shareholders of the Fund only through reinvestment of
dividends.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective of the Fund is to maximize total return through
investments in a diversified portfolio of common stocks and securities
convertible into common stock. It is anticipated that capital appreciation and
investment income will both be major factors in achieving such return. The
Fund's investment adviser may invest principally in common stocks having
significant potential for capital appreciation, or may purchase common stocks
principally for their income potential through dividends and option writing, or
may acquire securities having a mix of these characteristics.
The Fund will operate under the following restrictions, which together with its
investment objective, are matters of fundamental policy and cannot be changed
without the approval of a majority of the outstanding voting securities of the
Fund as defined by the Investment Company Act of 1940 (1940 Act). This means the
lesser of: (i) 67% of the shares of the Fund present or represented at a
shareholders' meeting if the holders of more than 50% of the shares then
outstanding are present or represented; or (ii) more than 50% of the outstanding
voting securities of the Fund.
In seeking to accomplish its investment objective, the Fund will not:
(1) issue any senior security (as defined in the 1940 Act), except that (a) the
Fund may enter into commitments to purchase securities in accordance with
the Fund's investment program, including reverse repurchase agreements,
delayed-delivery and when-issued securities, which may be considered the
issuance of senior securities; (b) the Fund 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) the Fund 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 or related options shall not be
considered to involve the issuance of a senior security; and (e) subject to
fundamental restrictions, the Fund may borrow money as authorized by the
1940 Act;
(2) with respect to 75% of the value of the Fund's total assets, 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.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are excluded from these restrictions;
(3) concentrate its investments in any one industry except that the Fund may
invest up to 25% of its total assets in securities issued by companies
principally engaged in any one industry. This limitation will not, however,
apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(4) make loans, except that, to the extent appropriate under its investment
program, the Fund 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 Fund's total
assets;
(5) invest in commodity contracts, except that the Fund 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;
2 Aetna Variable Fund
<PAGE>
(6) borrow money, except that (a) the Fund may enter into certain futures
contracts or options related thereto; (b) the Fund may enter into
commitments to purchase securities in accordance with the Fund's investment
program, including delayed-delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary, emergency purposes, the Fund 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, the Fund
may borrow money from banks (including its custodian bank) only if,
immediately after such borrowing, the value of the Fund'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 the Fund's assets fails to meet the 300% asset coverage
requirement relative only to leveraging, the Fund will, within three days
(not including Sundays and holidays), reduce its borrowings to the extent
necessary to meet the 300% test;
(7) purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Fund 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; or
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Fund, the
Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933, as amended (1933 Act).
The Fund has also adopted certain other investment restrictions that may be
changed by the Fund's Trustees and without shareholder vote. Under such
restrictions, the Fund will not:
(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 program of the Fund;
(2) invest in companies for the purpose of exercising control or management;
(3) purchase the securities of any other investment company, except as
permitted under the 1940 Act or by Order of the Securities and Exchange
Commission (Commission); or
(4) 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, 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 the Fund's investment objective or policies restrict 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 of
purchase notwithstanding a later change in the market value of an investment, in
net or total assets, in securities rating of the investment, or any other
change.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
The following information supplements and should be read in conjunction with the
section of the prospectus entitled "Investment Policies and Restrictions."
Futures Contracts
The Fund may enter into stock index futures contracts ("futures" or "futures
contracts") or options thereon as a hedge against changes in prevailing levels
of equities prices and in anticipation of future purchases or sales of
securities. The Fund's investment techniques may include sales of futures as an
offset against
Aetna Variable Fund 3
<PAGE>
the effect of expected declines in equities prices. The Fund will enter into
futures contracts or options thereon for hedging purposes only and will only
enter into futures contracts or options thereon that are traded on national
futures exchanges and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodities Futures Trading Commission (CFTC).
Although techniques other than sales and purchases of futures contracts could
be used to reduce the Fund's exposure to market fluctuations, the Fund may be
able to hedge its exposure more effectively and perhaps at a lower cost through
using futures contracts. The Fund will not enter into a futures contract if, as
a result thereof, (i) the then current aggregate futures market prices of
financial instruments required to be delivered and purchased under open futures
contracts would exceed 30% of the Fund's total assets (taken at market value at
the time of entering into the contract), or (ii) more than 5% of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to margin deposits on such futures contracts.
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) (debt
security) or a specific stock market index for a specified price at a designated
date, time, and place. Brokerage fees are incurred when a futures contract is
bought or sold and at expiration and margin deposits must be maintained. 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 the Fund will be able to
enter into an offsetting transaction with respect to a particular contract at a
particular time. If the Fund is not able to enter into an offsetting
transaction, it will continue to be required to maintain the margin deposits on
the contract.
Persons who engage in futures contracts transactions may be broadly
classified as "hedgers" and "speculators." Hedgers, such as the Fund, whose
business activity involves investment in securities, use the futures markets
primarily to offset unfavorable changes in value that may occur because of
fluctuations in the value of the securities held or expected to be acquired by
them. Debtors and other obligors may also hedge the interest cost of their
obligations. The speculator, like the hedger, generally expects neither to
deliver nor to receive the financial instrument underlying the futures contract,
but, unlike the hedger, hopes to profit from fluctuations in prevailing equities
prices.
"Margin" is the amount of funds that must be deposited by the the Fund with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in the Fund's futures contracts. A margin deposit
is intended to assure the Fund'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
the Fund. These daily payments to and from the Fund 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, the Fund will mark to market the current value of its
open futures contracts. The Fund expects to earn interest income on its initial
margin deposits.
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 the
Fund 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
4 Aetna Variable Fund
<PAGE>
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, the Fund 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. With regard to transactions involving futures
contracts, the Fund maintains a segregated account holding liquid assets in
accordance with applicable Commission staff positions.
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 in the Fund's portfolio, 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 for the Fund, and accrued profits on such positions.
The Fund's ability to engage in the hedging transactions described herein may
be limited by the current federal income tax requirement that a Fund derive less
than 30% of its gross income from the sale or other disposition of stock or
securities held for less than three months.
Call and Put Options on Securities
The Fund may write (sell) covered call options (call options) and purchase put
options (put options) on securities and indices, and purchase call and sell put
options to close out positions previously opened by the Fund, provided, however,
that it will not have call options outstanding at any one time on more than 30%
of its total assets nor will it buy put options if more than 3% of the assets of
the Fund immediately following such purchase would consist of put options. The
purpose of writing call options and purchasing put options on securities will be
to reduce the effect of price fluctuations of the securities owned by the Fund
(and underlying the options) on the net asset value per share of the Fund.
A call option gives the holder (buyer) the right to purchase a security at a
specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was settled, requiring him to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, the exercise of the call option, or by entering
into an offsetting transaction. To secure his obligation to deliver the
underlying security in the case of a call option, a writer 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 put option gives the
holder (buyer) the right to sell a security at a specified price (the exercise
price) at any time until a certain date (the expiration date). The Fund will
only write a call option on a security that it already owns and will not write
call options on when-issued securities. The Fund may purchase a put option on a
security that it already owns and on stock indices.
The Fund will write call options and purchase put options in standard
contracts listed on national securities exchanges, or write call options with
and purchase put options directly from investment dealers meeting the
creditworthiness criteria of the Company.
When writing a call option, the Fund, in return for the premium, gives up the
opportunity to profit from a 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 which the Fund has written expires, the Fund
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 Fund will realize a gain or
loss from the sale of the underlying security. The Fund will purchase put
options involving portfolio securities only when the Company believes that a
temporary defensive position is desirable in light of market conditions, but
does not desire to sell the portfolio security. Therefore, the purchase of put
options will be used to protect the Fund's holdings in an underlying security
against a substantial decline
Aetna Variable Fund 5
<PAGE>
in market value. Such protection is, of course, only provided during the life of
the put option when the Fund, 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, the
Fund 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 Fund's
custodian.
The premium the Fund will receive from writing a call option, or the Fund
will pay when purchasing a 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 the Fund for writing covered call
options will be recorded as a liability in the statement of assets and
liabilities of the Fund. 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 the Fund when purchasing a put
option will be recorded as an asset in the statement of assets and liabilities
of the Fund. 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 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 the Fund 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 the Fund
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 the Fund will be able to effect such closing
transactions at a favorable price. If the Fund 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. The
Fund 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 the options may be below, equal to, or above the
current market values of the underlying securities at the time the options are
written. From time to time, the Fund may purchase an underlying security for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security from its portfolio. In such cases
additional brokerage commissions will be incurred. The Fund 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
call 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 call or put 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 the Fund. Any profits from writing covered call
options are considered short-term gain for federal income tax purposes and, when
distributed by the Fund, are taxable as ordinary income.
Additional Risk Factors for Futures and Options
In addition to any risk factors described above, the following sets forth
certain information regarding the potential risks associated with the Fund's
futures and options transactions.
Risk of Imperfect Correlation--The Fund'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 relevant portion of the Fund's
portfolio. If the values of the
6 Aetna Variable Fund
<PAGE>
portfolio securities being hedged do not move in the same amount or direction as
the underlying security or index, the hedging strategy for the Fund might not be
successful and the Fund 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 Fund'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 Fund 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 indexes 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 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 the Fund will not
be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Fund.
The Fund will purchase or sell futures contracts or options only if, in the
Company'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 relevant portion of the Fund's portfolio for the hedge to be effective.
There can be no assurance that the Company'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 market are subject to initial deposit and variation margin requirements.
This could require the Fund to post additional cash or cash equivalents as the
value of the position fluctuates. Further, 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 the Fund 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 Fund, which could require the Fund 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
Fund'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.
Aetna Variable Fund 7
<PAGE>
Risk of Predicting Interest Rate Movements--Investments in futures contracts
on fixed income securities and related indexes involve the risk that if the
Company's investment judgment concerning the general direction of interest rates
is incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract. For example, if the Fund 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 Fund 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 Fund 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 that
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 Company does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Fund's portfolio.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the Fund's Board of Trustees. A repurchase agreement allows the Fund to
determine the yield during the Fund'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 the Fund. 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 the Fund. In that event, the Fund
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, the Fund's ability to liquidate the collateral may be delayed or
limited. Under the 1940 Act, repurchase agreements are considered loans by the
Fund. Repurchase agreements maturing in more than seven days will not exceed 10
percent of the total assets of the Fund. The Fund does not intend to use reverse
repurchase agreements.
Securities Lending
The Fund may lend up to one-third of its total assets, although it is
anticipated that less than 10% of such assets will be on loan at any one time.
In the Company's opinion, lending portfolio securities to qualified
broker-dealers affords the Fund a means of increasing the yield on its
portfolio. All such loans will be fully collateralized with either cash or
direct obligations of the U.S. government or agencies thereof, and the Fund 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. The Fund 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
securities, whenever a material event affecting the borrowed securities is to be
voted on, the Fund may terminate the loan to vote such proxy.
The primary risk the Fund 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 security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the Fund would be
an unsecured creditor as to such shortage and might not be able to recover all
or any of it. A loan may be terminated at any time by the borrower or lender
upon proper notice.
Foreign Securities The Fund may invest up to 25% of its total assets in
foreign equity securities. These securities will be marketable equity securities
(including common and preferred stock, depository receipts for stock and fixed
income or equity securities exchangeable for or convertible into stock) of
foreign companies which generally are listed on recognized foreign securities
exchanges or are traded in a foreign over-the-counter
8 Aetna Variable Fund
<PAGE>
market. The Fund also invests in foreign securities listed on recognized U.S.
securities exchanges or traded in the U.S. over-the-counter market. Such foreign
securities may be issued by foreign companies located in developing countries in
various regions of the world. A "developing country" is a country in the initial
stages of its industrial cycle. As compared to investment in the securities
markets of developed countries, investment in the securities markets of
developing countries involves exposure to markets that may have substantially
less trading volume and greater price volatility, economic structures that are
less diverse and mature, and political systems that may be less stable.
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: (1) American Depositary
Receipts (ADRs), which are typically designed for U.S. investors and held either
in physical form or in book entry form; (2) European Depositary Receipts (EDRs),
which are similar to ADRs but may be listed and traded on a European exchange
(typically, Luxembourg) as well as in the United States; and (3) Global
Depositary Receipts (GDRs), which are similar to EDRs although they may be held
through foreign clearing agents such as Euroclear and other foreign
depositaries. All depositary receipts will be considered foreign securities for
purposes of a Fund's investment limitation concerning investment in foreign
securities.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. These
risks include the following:
Currency Risk--The value of the Fund's foreign investments will be affected
by changes in currency exchange rates. The U.S. dollar value of a foreign
security decreases when the value of the U.S. dollar rises against the foreign
currency in which the security is denominated, and increases when the value of
the U.S. dollar falls against such currency.
Political and Economic Risk--The economies of many of the countries in which
the Fund may invest are not as developed as the U.S. economy and may be subject
to significantly different forces. Political or social instability,
expropriation or confiscatory taxation and limitation upon the removal of funds
or other assets could adversely affect the value of the Fund's investments.
Regulatory Risk--Foreign companies are not registered with the Commission and
are generally not subject to the regulatory controls imposed on United States
issuers and, as a consequence, there is generally less publicly available
information about foreign securities than is available regarding domestic
securities. Foreign companies are not subject to uniform accounting, auditing
and financial standards, practices and requirements comparable to those
applicable to U.S. companies. Income from foreign securities owned by the Fund
may be subject to withholding taxes imposed at the source which would reduce
dividend income payable to the Fund's shareholders.
Market Risk--The securities markets in many of the countries in which the
Fund may invest have substantially less trading volume than the major U.S.
markets. Consequently, the securities of some foreign issuers may be less liquid
and experience more price volatility than comparable domestic securities.
Indeed, custodian costs, as well as administrative costs (such as the need to
use foreign custodians) may be associated with the maintenance of assets in
foreign jurisdictions. There is generally less government regulation and
supervision of foreign stock exchanges, brokers and issuers which may make it
difficult to enforce contractual obligations. In addition, transaction costs in
foreign commission rates in foreign jurisdictions are likely to be higher than
in the United States.
High-Risk, High-Yield Securities
The Fund 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 debt securities rated in the four highest categories by Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Corporation (S&P) or, if
unrated, considered to be of comparable quality by the investment adviser.
These securities include:
(a) fixed rate corporate debt obligations (including bonds, debentures and
notes) rated Ba or lower by Moody's or BB or lower by S&P;
Aetna Variable Fund 9
<PAGE>
(b) preferred stocks that have yields comparable to those of high-yielding
debt securities; and
(c) any securities convertible into any of the foregoing.
Debt obligations rated BB/Ba or lower 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 the Fund'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 the Fund's
objectives, the Company seeks to identify situations in which the rating
agencies have not fully perceived the value of the security or in which the
Company believes that future developments will enhance the creditworthiness and
the ratings of the issuer.
High-risk, high-yield securities (junk bonds) may not constitute more than
10% of the total assets of the Fund. The Fund will not invest in any debt
security rated lower than B.
The yields earned on high-risk, high-yield securities (junk bonds) generally
are related to the quality ratings assigned by recognized ratings agencies.
These securities tend to offer higher yields than those of other 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 these securities tend not to
rise as much as the prices of these 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 high-risk, high-yield securities (junk bonds)
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 bond) owned by the Fund
defaults, the Fund 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
the Fund'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 Fund 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 junk bonds than in the case of
investment-grade bonds.
(3) Liquidity and Valuation Risks. High-risk, high-yield securities (junk
bonds) are often traded among a small number of broker-dealers rather
than in a broad secondary market. Purchasers of these securities in the
past tended to be institutions rather than individuals, a factor that
further limits the 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
10 Aetna Variable Fund
<PAGE>
securities are thinly traded or illiquid. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease
or increase the values and liquidity of high-risk, high-yield securities
(junk bonds) 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 and S&P are considered, the Company
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 the Fund's investment objective may be more dependent on
the Company's own credit analysis than might be the case for a fund
which does not invest in high risk high-yield securities (junk bonds).
(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
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 (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. The market prices of zero
coupon 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 may apply to zero
coupon and pay-in-kind securities. These securities are also subject to the risk
that in the event of a default, the Fund may realize no return on its
investment, because these securities do not pay cash interest.
When-Issued or Delayed-Delivery Securities
During any period that the Fund has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, the Fund 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 Fund 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 Fund's liquidity and ability to manage its portfolio. When the
Fund 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 Fund's incurring a loss or missing an
opportunity to invest funds held in the segregated account more advantageously.
The Fund 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 Fund 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.
Aetna Variable Fund 11
<PAGE>
Convertibles
A convertible bond or convertible preferred stock gives the holder the option of
converting these securities into common stock. Convertible securities also
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Illiquid and Restricted Securities
The Fund may invest up to 15% of its total assets in illiquid securities. For
this purpose, "illiquid securities" are those which cannot be sold in seven days
in the ordinary course of business without taking a materially reduced price.
Because of the absence of a trading market for these investments, the Fund may
take longer to liquidate the position and may realize less than the amount
originally paid by the Fund. The Fund may purchase securities, which, while
privately placed, are eligible for purchase and sale pursuant to Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. The Company, under the supervision of the
Board of Trustees of the Fund, will consider whether securities purchased under
Rule 144A and other restricted securities are illiquid and thus subject to the
Fund's restriction of investing no more than 15% of the Fund's total assets in
illiquid securities. In making this determination, the Company will consider the
trading markets for the specific security taking into account the unregistered
nature of the Rule 144A security. In addition, the Company may consider, among
other things, the (i) frequency of trades and quotes, (ii) number of dealers and
potential purchasers, (iii) dealer undertakings to make a market, and (iv) the
nature of the security and market place trades. The liquidity of Rule 144A
securities will also be monitored by the Company and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities will be reviewed to assure that the Fund
does not invest more than 15% of its total assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the amount
of the Fund's investments in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. At the present time, it is not
possible to predict with certainty how the market for Rule 144A securities will
continue to operate.
Warrants
Warrants allow the holder to purchase new shares in the issuing company at a
predetermined price within either a specified length of time or perpetually.
Warrants may be sold individually or attached to preferred stock or bonds.
The purchaser of a warrant expects that the market price of a security will
exceed the purchase price of the warrant plus the exercise price of the warrant,
thus giving him a profit. Since the market price may never exceed the exercise
price before the expiration date of the warrant, the purchaser of the warrant
risks the loss of the entire purchase price of the warrant.
Borrowing
The Fund may borrow up to 5% of the value of its total assets for temporary or
emergency purposes. The Fund may also borrow up to one-third of the value of its
total assets from banks (including its custodian bank) to increase its holdings
of portfolio securities. Leveraging by means of borrowing may affect the Fund's
net asset value by exaggerating any increase or decrease in the value of
portfolio securities, and money borrowed is subject to interest and other costs
which may or may not exceed the income derived from the securities purchased
with borrowed funds. There is no present intention to leverage the Fund.
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. The Fund does not intend to make a general practice of short-term trading,
although it may occasionally realize short-term gains or losses. Purchases and
sales will be made whenever such action is deemed prudent and consistent with
investment objectives. It is anticipated that under normal market conditions the
average annual portfolio turnover rate will not exceed 125%. A high turnover
rate involves greater expenses and may involve greater risk to the Fund. The
portfolio turnover rates for 1995 and 1996 were 97% and __% respectively.
12 Aetna Variable Fund
<PAGE>
TRUSTEES AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the direction of the
Board of Trustees. The Trustees and executive officers of the Fund and their
principal occupations for the past five years are listed below. Those trustees
who are "interested persons," as defined in the 1940 Act, are indicated by an
asterisk (*). All Trustees and officers hold similar positions with other
investment companies in the same Fund Complex managed by the Investment Adviser.
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>
- ---------------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shaun P. Mathews* Trustee and Vice President/Senior Vice President, ALIAC, March 1991 to
151 Farmington Avenue President present and Vice President, Aetna Life Insurance Company,
Hartford, Connecticut 1991 to present. Director and President, Aetna Investment
Age 41 Services, Inc.; and Director and Senior Vice President,
Aetna Insurance Company of America, March 1991 to present.
Wayne F. Baltzer Vice President Assistant Vice President, ALIAC, May 1991 to present; Vice
151 Farmington Avenue President, Aetna Investment Services, Inc. July 1993 to
Hartford, Connecticut present.
Age 53
Martin T. Conroy Vice President Assistant Treasurer, ALIAC, October 1991 to present.
151 Farmington Avenue
Hartford, Connecticut
Age 57
J. Scott Fox Vice President Director, Managing Director, Chief Operating Officer, Chief
242 Trumbull Street and Treasurer Financial Officer and Treasurer, Aeltus Investment
Hartford, Connecticut Management, Inc. (Aeltus), April 1994 to present; Managing
Age 42 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, Aetna Inc. (formerly Aetna Life and Casualty
151 Farmington Avenue Company), March 1993 to present; General Counsel and
Hartford, Connecticut Corporate Secretary, First Investors Corporation, April
Age 49 1991 to March 1993. Secretary, Aetna Investment Services,
Inc. and Vice President and Senior Counsel, Aetna Financial
Services, Inc.
Morton Ehrlich Trustee Chairman and Chief Executive Officer, Integrated Management
1000 Venetian Way Corp. (an entrepreneurial company) and Universal Research
Miami, Florida Technologies, 1992 to present; Director and Chairman, Audit
Age 62 Committee, National Bureau of Economic Research, 1985 to
1992.
Aetna Variable Fund 13
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)
- ---------------------------------------------------------------------------------------------------------------
Maria T. Fighetti Trustee Manager/Attorney, Health Services, New York City Department
325 Piermont Road of Mental Health, Mental Retardation and Alcohol Services,
Closter, New Jersey 1973 to present.
Age 53
David L. Grove Trustee Private Investor; Economic/Financial Consultant, December
5 The Knoll 1985 to present.
Armonk, New York
Age 78
Timothy A. Holt* Trustee Director, Senior Vice President and Chief Financial
151 Farmington Avenue Officer, ALIAC, February 1996 to present; Vice President,
Hartford, Connecticut Portfolio Management/Investment Group, Aetna Inc. (formerly
Age 43 Aetna Life and Casualty Company), June 1991 to February
1996. Director and Vice President Aetna Retirement
Holdings, Inc.
Daniel P. Kearney* Trustee Director, President, and Chief Executive Officer, ALIAC,
151 Farmington Avenue December 1993 to present; Executive Vice President, Aetna
Hartford, Connecticut Inc. (formerly Aetna Life and Casualty Company), December
Age 57 1993 to present; Group Executive, Aetna Inc. (formerly
Aetna Life and Casualty Company), 1991 to 1993; Director,
Aetna Investment Services, Inc., November 1994 to present;
Director, Aetna Insurance Company of America, May 1994 to
present.
Sidney Koch Trustee Financial Adviser, self-employed, January 1993 to present;
455 East 86th Street Senior Adviser, Daiwa Securities America, Inc., January
New York, New York 1992 to January 1993; Executive Vice President, Member of
Age 61 Executive Committee, Daiwa Securities America, Inc.,
January 1986 to January 1992.
Corine T. Norgaard Trustee, Chair Dean of the Barney School of Business, University of
556 Wormwood Hill Audit Committee and Hartford, (West Hartford, CT), August 1996 to present;
Mansfield Center, Contract Committee Professor, Accounting and Dean of the School of Management,
Connecticut Binghamton University, (Binghamton, NY), August 1993 to
Age 59 August 1996; Professor, Accounting, University of
Connecticut, (Storrs, Connecticut), September 1969 to
June 1993; Director, The Advest Group (holding company for
brokerage firm) through September 1996.
Richard G. Scheide Trustee Trust and Private Banking Consultant, David Ross Palmer
11 Lily Street Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 67
</TABLE>
* Interested persons as defined in the 1940 Act.
14 Aetna Variable Fund
<PAGE>
During the year ended December 31, 1996, members of the Boards of the Funds
within the Aetna Mutual 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 Mutual 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 Mutual Fund Complex
based on the net assets of the Fund as of the date compensation is earned.
As of December 31, 1996, the unaffiliated members of the Board of Trustees
were compensated as follows:
Total
Compensation
from Registrant
Aggregate and Fund
Name of Person, Compensation Complex Paid
Position from Registrant to Trustees
------------------------ ------------------- -------------------
Corine Norgaard $ $
Trustee and
Chairman, Audit and
Contract Committees
Sidney Koch $ $
Trustee and
Member, Audit and
Contract Committees
Maria T. Fighetti $ $
Trustee and
Member, Audit and
Contract Committees
Morton Ehrlich $ $
Trustee and
Member, Audit and
Contract Committees
Richard G. Scheide $ $
Trustee and
Member, Audit and
Contract Committees
David L. Grove $ $
Trustee and
Member, Audit and
Contract Committees
* Mr. Grove elected to defer all such compensation.
Aetna Variable Fund 15
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF THE FUND
As of , ( %) shares of the Fund were owned by the Company and its affiliates and
allocated to variable annuity and variable life insurance separate accounts to
fund obligations under VA Contracts and VLI Policies. Contract holders in these
separate accounts are provided the right to direct the voting of Fund shares at
shareholder meetings. The Company and its affiliates vote the shares they own in
these separate accounts in accordance with contract holders' directions.
Undirected shares of the Fund will be voted for each Account in the same
proportion as directed shares. The Company is a wholly owned subsidiary of Aetna
Retirement Holdings, Inc., which is in turn a wholly owned subsidiary of Aetna
Retirement Services, Inc. and an indirect wholly owned subsidiary of Aetna Inc.
located at 151 Farmington Avenue, Hartford, Connecticut 06156.
INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement (Advisory Agreement)
appointing Aetna as its Investment Adviser. The Advisory Agreement was adopted
by the Board of Trustees in February 1996, and approved by the shareholders in
June, 1996. The Advisory Agreement has been effective since August 1, 1996. The
Advisory Agreement will remain in effect if approved at least annually by a
majority of the Trustees, including a majority of the Trustees who are not
"interested persons" of the Fund, at a meeting called for that purpose and held
in person. The Advisory Agreement may be terminated without penalty at any time
by the Trustees or, by a majority vote of the outstanding voting securities of
the Fund, or it may be terminated on sixty days' written notice by Aetna. The
Advisory Agreement terminates automatically in the event of assignment.
This Advisory Agreement replaces a prior agreement with Aetna that was approved
by shareholders in April 1994. Under both advisory agreements, and subject to
the direction of the Board of Trustees, Aetna has responsibility for supervising
all aspects of the operations of the Fund including the selection, purchase and
sale of securities, the calculation of net asset values and the preparation of
financial and other reports as requested by the Board. Under both the old and
the new agreements, Aetna is given the right to delegate any or all of its
obligations to a subadviser.
The Advisory Agreement provides that Aetna is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or Trustees of the Fund. The Fund is responsible for payment of all of
its other costs; however, under the Administrative Services Agreement described
below, Aetna has agreed to pay all direct expenses for the fund except for
broker's commissions and other costs incurred in effecting transactions on
behalf of the Fund.
For its services under the prior agreement, Aetna received a monthly fee at an
annual rate of 0.25% of the average daily net assets of the Fund. For the years
ended December 31, 1993, 1994, 1995 and 1996, the Fund paid Aetna investment
advisory fees of $ , $ , $ and $ , respectively. Under the new
Advisory Agreement, Aetna will receive an advisory fee at an annual rate of
0.50% of the average daily net assets of the Fund, payable monthly.
SUBADVISORY AGREEMENT
The Fund and Aetna have entered into a Subadvisory Agreement with Aeltus
Investment Management, Inc. (Aeltus) effective August 1, 1996. The Subadvisory
Agreement will remain in effect if approved at least annually by a majority of
the Trustees, including a majority of the Trustees who are not "interested
persons" of the Fund, at a meeting called for that purpose and held in person.
The Subadvisory Agreement may be terminated without penalty at any time by the
Trustees or by a majority of the outstanding voting securities of the Fund or
terminated on sixty days' written notice by the Adviser, the Fund, or the
Subadviser. The Subadvisory Agreement terminates automatically in the event of
its assignment.
Under the Subadvisory Agreement, Aeltus is responsible for managing the assets
of the Fund in accordance with the Fund's investment objective and policies
subject to the supervision of Aetna and the Trus-
16 Aetna Variable Fund
<PAGE>
tees, and for preparing and providing accounting and financial information as
requested by the Adviser and the Trustees. The Subadviser pays the salaries,
employment benefits and other related costs of its personnel. For its services,
Aetna has agreed to pay the Subadviser a fee at an annual rate of up to 0.30% of
the average daily net assets of the Fund, payable monthly. This fee is not
charged to the Fund but is paid by Aetna out of its investment advisory fees.
Aetna, as the Investment Adviser, retains overall responsibility for monitoring
the investment program maintained by Aeltus for compliance with applicable laws
and regulations and the Fund's investment objective and policies.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund entered into an Administrative Services Agreement with Aetna effective
May 1, 1996 under which Aetna provides all administrative services for the Fund
and pays all ordinary recurring costs of the Fund (except brokerage costs and
other transaction costs). These are costs that the fund would otherwise be
required to pay under the terms of the Investment Advisory Agreement. As a
result, the fund's costs and fees are limited to the advisory fee, the
administrative services charge and brokerage and transaction costs. For its
services and as reimbursement for the costs it incurs under the Administrative
Services Agreement, Aetna receives an annual fee, payable monthly, at a rate of
0.06% of the average daily net assets of the Fund.
The Administrative Services Agreement will remain in effect if approved
annually by a majority of the Trustees. It may be terminated by either party
on sixty days' written notice.
Prior to May 1, 1996, Aetna provided administrative services under an agreement
that allowed for the reimbursement of a proportionate share of Aetna's overhead
in administering the Fund and the Fund reimbursed Aetna directly for all other
costs. The total of the direct costs and administrative costs reimbursed to
Aetna for the years ended December 31, 1993, 1994, 1995 and 1996 were $ ,
$ , $ , and $ , respectively.
LICENSE AGREEMENT
The Fund uses the service mark of the Aetna Variable Fund and the name
"Aetna" with the permission of Aetna Inc. granted under a License Agreement.
The continued use is subject to the right of Aetna Inc. to withdraw this
permission in the event Aetna or another subsidiary or affiliated corporation
of Aetna Inc. should not be the investment adviser of the Fund.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Trustees, Aetna and Aeltus have responsibility
for making the Fund's investment decisions, for effecting the execution of
trades for the Fund and for negotiating any brokerage commissions thereof. It is
the policy of Aetna 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, Aetna and Aeltus may place the Fund'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.
Aetna 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 Fund. 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 Fund
and other investment companies and accounts, services related to the
Aetna Variable Fund 17
<PAGE>
execution of trades in the Fund's securities and advice as to the valuation of
securities. Aetna 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 Fund'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. Aetna 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 Aetna or Aeltus believes that more than one
broker can provide best execution, preference may be given to brokers who
provide additional services to Aetna or Aeltus.
Consistent with securities laws and regulations, Aetna 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.
Aetna'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 Aetna's and Aeltus'
opinion as to which services and which means of payment are in the long-term
best interests of the Fund. Research services furnished by brokers through whom
the Fund effects securities transactions may be used by the Investment Adviser
in servicing all of its accounts; not all such services will be used by the
Investment Adviser to benefit the Fund. The Fund has no present intention to
effect any brokerage transactions in Fund securities with Aetna or any affiliate
of the Fund or Aetna except in accordance with applicable Commission rules. All
transactions will comply with Rule 17e-1 under the 1940 Act.
Certain officers of Aetna and Aeltus also manage the securities portfolios of
Aetna's own accounts. Further, Aetna and Aeltus also act as investment adviser
to other investment companies registered under the 1940 Act and other client
accounts. Aetna and Aeltus have adopted policies designed to prevent
disadvantaging the Fund in placing orders for the purchase and sale of
securities for the Fund.
To the extent Aetna or Aeltus desires to buy or sell the same 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 the Fund or the
price paid or received by the Fund.
The Board of Trustees 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, the Fund may buy a security from or sell
another security to another registered investment company advised by Aetna.
For 1993, 1994, 1995, and 1996, the Fund paid brokerage commissions of
$4,270,255, $13,406,837, $17,298,663, and $ , respectively.
For the fiscal year ended December 31, 1996, portfolio transactions in the
amount of $ were directed to certain brokers because of research services, of
which commissions in the amount of $ were paid with respect to such
transactions. No brokerage business was placed with any brokers affiliated with
Aetna during the last three fiscal years.
DESCRIPTION OF SHARES
Aetna Variable Fund was originally established as a Maryland corporation in 1974
and was converted to a Massachusetts business trust on May 1, 1984. It operates
under a Declaration of Trust (Declaration) dated January 25, 1984.
18 Aetna Variable Fund
<PAGE>
The Declaration permits the Trustees to issue an unlimited number of full and
fractional shares of beneficial interest of a single class, each of which
represents a proportionate interest in the Fund equal to each other share. The
Trustees have the power to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportional beneficial interest
in the Fund.
Upon liquidation of the Fund, shareholders are entitled to share pro rata in the
net assets of the Fund available for distribution to shareholders. Fund shares
are fully paid and nonassessable, except as set forth below.
Shareholder and Trustee Liability
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such business trusts may, under
certain circumstances, be held personally liable as partners for the obligations
of the Fund, which is not true in the case of a corporation. The Declaration
provides that shareholders shall not be subject to any personal liability for
the acts or obligations of the Fund and that every written agreement,
obligation, instrument or undertaking made by the Fund shall contain a provision
to the effect that shareholders are not personally liable thereunder. With
respect to tort claims, contract claims where the provision referred to is
omitted from the undertaking, and claims for taxes and certain statutory
liabilities in other jurisdictions, a shareholder may be held personally liable
to the extent that claims are not satisfied by the Fund. However, upon payment
of any such liability the shareholder will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund, with the advice of counsel, in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Fund.
The Declaration further provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
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 Trustees (to
the extent hereinafter provided) and on other matters submitted to the vote of
shareholders. Participants who select the Fund for investment through their VA
Contract or VLI Policy are not the shareholders of the Fund. The insurance
company depositors of the separate accounts pass voting rights for shares held
for VA Contracts or VLI Policies through to Contract holders or Participants as
described in the prospectus for the applicable VA Contract or VLI Policy. A
meeting of the shareholders at which Trustees were elected was held most
recently on April 13, 1994. Thereafter, no further meeting of shareholders for
the purpose of electing Trustees will be held unless and until such time as less
than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for election of Trustees. Vacancies occurring between such
meetings shall be filled in an otherwise legal manner if, immediately after
filling any such vacancy, at least two-thirds of the Trustees holding office
have been elected by shareholders. Except as set forth above, the Trustees shall
continue to hold office and may appoint successor Trustees. Trustees may be
removed from office (1) at any time by two-thirds vote of the Trustees; (2) by a
majority vote of Trustees where any Trustee 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 Fund's custodian, signed by two-thirds of the Fund's shareholders. Any
Trustee 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 Trustees can, if they choose to do so, elect all the Trustees of the
Fund, in which event the holders of the remaining shares will be unable to elect
any person as a Trustee.
The Declaration 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 Trustees and consented to by a majority of the shareholders. The
Trustees may also amend the Declaration without the vote or consent of
shareholders if they deem it necessary to conform the Declaration to the
requirements of applicable federal
Aetna Variable Fund 19
<PAGE>
laws or regulations or the requirements of the regulated investment company
provisions of the Internal Revenue Code of 1986, as amended, but the Trustees
shall not be liable for failing to do so.
Shares have no preemptive or conversion rights.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are purchased and redeemed at the net asset value next
determined after receipt of a purchase or redemption order in acceptable form by
Firstar Trust Company ("Firstar"). No sales charge or redemption charge is made.
The value of shares redeemed may be more or less than the shareholder's cost,
depending upon the market value of the portfolio securities at the time of
redemption. Payment for shares redeemed will be made within seven days after the
redemption request is received in proper form by Firstar. Any written request to
redeem shares must bear the signatures of all the registered holders of those
shares. The signatures must be guaranteed by a commercial bank, trust company or
a member of a national securities exchange. Firstar will, on request, explain
any additional requirements for shares held in the name of a corporation,
partnership, trustee, guardian or in any other representative capacity. However,
the right to redeem Fund shares may be suspended or payment therefore postponed
for any period during which (a) trading on the New York Stock Exchange is
restricted as determined by the Commission or such Exchange is closed for other
than weekends and holidays; (b) an emergency exists, as determined by the
Commission, as a result of which (i) disposal by the Fund of securities owned by
it is not reasonably practicable, or (ii) it is not reasonably practicable for
the Fund to determine fairly the value of its net assets; or (c) the Commission
by order so permits for the protection of shareholders of the Fund.
An open account is automatically set up and maintained for each shareholder to
facilitate the voluntary accumulation of Fund shares. The open account system
makes unnecessary the issuance and delivery of stock certificates, thereby
relieving shareholders of the responsibility of safekeeping. Through the open
account system, each shareholder is informed of his or her holdings after any
transaction affecting the number of shares he or she owns. Share certificates
will not be issued.
PRINCIPAL UNDERWRITER
The Company is the principal underwriter of the Fund pursuant to a contract
(Underwriting Agreement) between it and the Fund. The Underwriting Agreement
will remain in effect through December 1997 and may be continued annually
thereafter if approved annually by the Board of Trustees of the Fund or by a
vote of holders of a majority of the Fund's shares. The Underwriting 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.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning. Holders of
VA Contracts or VLI Policies must consult the prospectuses of their respective
contracts or policies for information concerning the federal income tax
consequences of owning such VA Contracts or VLI Policies.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (Code). As a
regulated investment company, the Fund generally 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) for the taxable
year (Distribution Requirement), and satisfies certain other require-
20 Aetna Variable Fund
<PAGE>
ments of the Code that are described below. Distributions by the Fund 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 (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 (Short-Short Gain Test). 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, the Fund 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 the Fund 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 the Fund 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 the Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund 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 Fund 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, will generally be
treated as ordinary income or loss.
For purposes of determining whether capital gain or loss recognized by the
Fund on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected if (i) 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, (ii) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto) or (iii) the asset is stock and the Fund 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 (i) above. In addition, the Fund 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 the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund 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 the Fund 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, the Fund
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.
Aetna Variable Fund 21
<PAGE>
Transactions that may be engaged in by the Fund (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. The Fund, 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 Fund 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 Fund 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 Fund 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 the
Fund to qualify as a regulated investment company may limit the extent to which
it will be able to engage in swap agreements.
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.
Finally, the Fund 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 the Fund's taxable year, at least 50% of the value of the Fund'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 Fund has not invested more than 5% of the value of the
Fund's total assets in securities of such issuer and as to which the Fund 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 in two or more issuers
which the Fund controls and which are engaged in the same or similar 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 by or
guaranteed by agencies and instrumentalities of the U.S. Government such as the
Federal Agricultural Mortgage Corporation, the Farm Credit System Financial
Assistance Corporation, the 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 the Fund 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
22 Aetna Variable Fund
<PAGE>
dividends to the extent of the Fund'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 fund'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")). 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 988 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).
The Fund 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 the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
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.
The Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. The Fund 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 shareholders as long-term capital gain,
regardless of the length of time a shareholder has held its shares or whether
such gain was recognized by the Fund prior to the date on which
Aetna Variable Fund 23
<PAGE>
the shareholder acquired his shares. All distributions paid to Aetna or its
affiliates, whether characterized as ordinary income or capital gain, are not
taxable to VA Contract or VLI Policy holders.
If the Fund elects to retain its net capital gain, the Fund will be taxed
thereon (except to the extent of any available capital loss carryovers) at the
35% corporate tax rate. Where the Fund elects to retain its net capital gain, it
is expected that the Fund also will elect to have shareholders of record on the
last day of its taxable year treated as if each received a distribution of his
pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.
Ordinary income dividends paid by the Fund 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 the Fund from domestic corporations for the taxable year
and if the shareholder meets eligibility requirements in the Code. A dividend
received by the Fund will not be treated as a qualifying dividend (1) if it has
been received with respect to any share of stock that the Fund 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
Fund 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 Fund 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 246A. 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 Fund 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 the Fund 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 the Fund 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 the Fund 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 the Fund's assets to be invested in various countries is not
known.
24 Aetna Variable Fund
<PAGE>
Distributions by the Fund 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 Aetna and its affiliates will be reinvested in
additional shares. Distributions to other shareholders will be reinvested in
additional Fund shares unless Firstar Trust Company, the Fund's transfer agent,
is otherwise notified in writing prior to the record date for such
distributions.
Shareholders receiving a distribution in the form of either cash or
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 the Fund reflects undistributed net investment income or
recognized capital gain net income, or unrealized appreciation in the value of
the assets of the Fund, 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 the Fund 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 Fund) 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 will recognize gain or loss on the sale or redemption of shares of
the Fund 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 Fund 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 the Fund 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. Although gain or loss realized on shares
redeemed through the direction of VA Contract or VLI Policy holders is taxable
to Aetna or its affiliates, such VA Contract or VLI Policy holders will not be
subject to tax.
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 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 the Fund.
NET ASSET VALUE
Securities of the Fund are generally valued by independent pricing services.
Equity securities of the Fund which are traded on a registered securities
exchange 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 mak-
Aetna Variable Fund 25
<PAGE>
ers. Short-term debt securities maturing in sixty days or less at the date of
purchase will be valued using the "amortized cost" method of valuation. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization of premium or increase of discount. Long-term debt securities
traded on a national securities exchange 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.
Call options written by the Fund and put options are valued at the mean of the
last bid and asked price on the principal exchange where the option is 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.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258
serves as custodian for assets of the Fund. The custodian does not participate
in determining the investment policies of the Fund or in deciding which
securities are purchased or sold by the Fund. The Fund, 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, CityPlace II, Hartford, Connecticut 06103-4103 serves as
independent auditors to the Fund. KPMG Peat Marwick LLP provides audit services,
assistance and consultation in connection with Commission filings.
26 Aetna Variable Fund
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for Aetna Variable Fund are incorporated herein by
reference to the Annual Report dated December 31, 1996. The Annual Report is
available upon request and without charge by calling 1-800-238-6263 or by
writing to Aetna Variable Fund at 151 Farmington Avenue, Hartford, CT 06156.
F-1
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
- ---------------------------------------------------
(a) Financial Statements:*
(1) Included in Part A by incorporation by reference to the
Fund's Annual Report dated December 31, 1996, as filed
electronically with the Securities and Exchange Commission
on ___________ (File No. 811-2514):
Financial Hightlights
(2) Included in Part B by incorporation by reference to the
Fund's Annual Report dated December 31, 1996, as filed
electronically with the Securities and Exchange Commission
on ___________ (File No. 811-2514):
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1996 Statement of Operations for the year ended
December 31, 1996 Statement of Changes in Net Assets
for the years ended December 31, 1996 and 1995
Notes to Financial Statements
Independent Auditors' Reports
(b) Exhibits:
(1) Charter (Declaration of Trust)(1)
(2) Amended and Restated Bylaws (adopted by Board of
Trustees September 14, 1994)(1)
(3) Not Applicable
(4) Instruments Defining Rights of Holders(2)
(5.1) Investment Advisory Agreement (8/1/96)
(5.2) Subadvisory Agreement (8/1/96)
(6) Underwriting Agreement (4/30/96)
(7) Not Applicable
(8) Custodian Agreements and Depository Contracts
(9-1-92)(1)
(9) Administrative Services Agreement (5-1-96)(2)
(10.1) Opinion of Counsel*
(10.2) Consent of Counsel*
(11) Consent of Independent Auditors*
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Financial Data Schedule*
(18) Not Applicable
(19) Powers of Attorney(3)
* To be filed by Amendment
<PAGE>
1. Incorporated by reference to Post-Effective Amendment No. 48 to
Registration Statement on Form N-1A (File No. 2-51739), as filed
electronically on April 25, 1996.
2. Incorporated by reference to Post-Effective Amendment No. 50 to
Registration Statement on Form N-1A (File No. 2-51739), as filed
electronically on June 7, 1996.
3. Incorporated by reference to Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A (File No. 33-12723), as filed
electronically with the Securities and Exchange Commission on
December 31, 1996.
Item 25. Persons Controlled by or Under Common Control with Registrant
- -------------------------------------------------------------------------------
Incorporated herein by reference to Item 26 of Post-Effective
Amendment No. 12 to the Registration Statement on Form N-4
(File No. 33-75964), as filed electronically with the
Securities and Exchange Commission on February 11, 1997.
Item 26. Number of Holders of Securities
- -------------------------------------------------
<TABLE>
<CAPTION>
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
<S> <C>
Shares of Beneficial Interest 26,884 as of December 31, 1996
$1.00 par value
</TABLE>
Item 27. Indemnification
- ---------------------------------
Article V of the Registrant's Declaration of Trust, which is
incorporated by reference to Exhibit 24(b)(1) to
Post-Effective Amendment No. 48 to Registrant's Registration
Statement on Form N-1A (File No. 2-51739), as filed
electronically on April 25, 1996, provides indemnification for
Registrant's trustees and officers.
In addition, the Registrant's trustees and officers are
covered under director and officer liability policies, issued
by National Union Fire Insurance Company, which generally
indemnify the Registrant's trustees and officers for judgments
and expenses in proceedings brought against them solely by
reason of their positions as trustees and officers (in the
absence of gross neglect or misfeasance). The policy expires
on October 1, 1997.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
- --------------------------------------------------------------------
The Investment Adviser, Aetna Life Insurance and Annuity
Company 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 the Investment Adviser.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and, President (since December 1995) -- Aetna
Executive Officer Retirement Services, Inc.; President (since
December 1993) -- Aetna Life Insurance and
Annuity Company; Executive Vice President
(since December 1993) within the Aetna
organization; Director, (since 1992)
MBIA, Inc.
Christopher J. Burns Director and Senior Vice Director: Aetna Financial Services, Inc.
President (since January 1996) and Aetna Investment
Services, Inc. (since July 1992); and
President, Chief Operations Officer (since
November 1996) -- Aetna Investment Services,
Inc.
Laura R. Estes Director and Senior Vice President Senior Vice President, (March 1991 -
Present) -- Aetna Life Insurance and Annuity
Company.
Timothy A. Holt Director, Senior Vice President Senior Vice President and Chief Financial
and Chief Financial Officer Officer, (since February 1996) -- Aetna Life
Insurance and Annuity Company; Vice President
(August 1991 - February 1996) within the
Aetna organization.
Gail P. Johnson Director and Vice President Vice President (December 1992 - Present) --
Aetna Life Insurance and Annuity Company.
<PAGE>
- ---------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
- ---------------------------------------------------------------------------------------------------------------
John Y. Kim Director and Senior Vice President President (since December 1995) -- Aeltus
Investment Management, Inc.; Chief
Investment Officer (since May 1994) within
the Aetna organization.
Shaun P. Mathews Director and Vice President Vice President (since February 1996), Senior
Vice President (March 1991 - Present) --
Aetna Life Insurance and Annuity Company;
Director: Aetna Investment Services, Inc.
(since July 1993) and Aetna Insurance
Company of America (since February 1993).
Glen Salow Director and Vice President Vice President (1992 - 1995) -- Aetna Life
Insurance and Annuity Company.
Creed R. Terry Director and Vice President Vice President (since February 1996), Market
Strategist (August 1995 - February 1996) --
Aetna Life Insurance and Annuity Company;
President, (1991 - 1995) Chemical Technology
Corporation (a subsidiary of Chemical Bank).
Kirk P. Wickman Vice President, General Counsel Vice President and Counsel within the Aetna
and Secretary Organization (September 1992 - Present).
Deborah Koltenuk Vice President and Treasurer, Vice President, Investment Planning and
Corporate Controller Financial Reporting (April 1996 to July
1996) -- Aetna Life Insurance Company; Vice
President, Investment Planning and
Financial Reporting (October 1994 to
April 1996) within the Aetna organization.
Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to
Compliance Officer September 1996) -- Nationwide Life Insurance
Company
</TABLE>
<PAGE>
* 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 that are not deemed to be principal
positions.
For information regarding Aeltus Investment Management, Inc.
("Aeltus"), the subadviser for the Registrant, reference is hereby made
to "Management of the Fund" in the Prospectus. For information as to
the business, profession, vocation or employment of a substantial
nature of each of the officers and directors of Aeltus, reference is
hereby made to the current Form ADV of Aeltus filed under the
Investment Advisers Act of 1940, incorporated herein by reference and
the file number of which is 801-9046.
Item 29. Principal Underwriters
- ----------------------------------------
(a) In addition to serving as the principal underwriter and
investment adviser for the Registrant, Aetna Life Insurance
and Annuity Company (ALIAC) also acts as the principal
underwriter and investment adviser for Aetna Series Fund,
Inc., Aetna Generation Portfolios, Inc., Aetna Variable
Encore Fund, Aetna Income Shares, Aetna Investment Advisers
Fund, Inc., Aetna Variable Portfolios, Inc., and Aetna GET
Fund (all registered management investment companies under
the 1940 Act). Additionally, ALIAC is also the principal
underwriter and depositor for Variable Life Account B and
Variable Annuity Accounts B, C and G (separate accounts of
ALIAC registered as unit investment trusts under the 1940
Act). ALIAC is also the principal underwriter for Variable
Annuity Account I (a separate account of Aetna Insurance
Company of America registered as a unit investment trust
under the 1940 Act).
(b) The following are the directors and principal officers of
the Underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ------------------ -------------------------- ---------------------
<S> <C> <C>
Daniel P. Kearney Director and President Trustee
Timothy A. Holt Director, Senior Vice President and Chief Trustee
Financial Officer
Christopher J. Burns Director and Senior Vice President
Laura R. Estes Director and Senior Vice President
Gail P. Johnson Director and Vice President
<PAGE>
John Y. Kim Director and Senior Vice President
Shaun P. Mathews Director and Vice President Trustee and President
Glen Salow Director and Vice President
Creed R. Terry Director and Vice President
Kirk P. Wickman Vice President, General Counsel and Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer
</TABLE>
* The principal business address of all directors and officers listed is
151 Farmington Avenue, Hartford, Connecticut 06156.
(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, except shareholder records, at its
principal offices at 151 Farmington Avenue, Hartford,
Connecticut 06156.
Shareholder records are maintained by the transfer agent,
Firstar Trust Company, 615 East Michigan Street, Milwaukee,
Wisconsin 53261.
Item 31. Management Services
- -------------------------------------
Not applicable.
Item 32. Undertakings
- ------------------------------
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Fund's latest annual
report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
----------
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
the Registrant, Aetna Variable Fund, has duly caused this Post-Effective
Amendment No. 51 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 18th day of February, 1997.
AETNA VARIABLE FUND
-------------------
Registrant
By Shaun P. Mathews*
---------------------
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons on February 18, 1997 in the capacities indicated.
Signature Title
Shaun P. Mathews* President and Trustee
- ------------------------- (Principal Executive Officer)
Shaun P. Mathews
Morton Ehrlich* Trustee
- -------------------------
Morton Ehrlich
Maria T. Fighetti* Trustee
- -------------------------
Maria T. Fighetti
David L. Grove* Trustee
- -------------------------
David L. Grove
Timothy A. Holt* Trustee
- ------------------------
Timothy A. Holt
Daniel P. Kearney* Trustee
- ------------------------
Daniel P. Kearney
Sidney Koch* Trustee
- ------------------------
Sidney Koch
<PAGE>
Corine T. Norgaard* Trustee
- ------------------------
Corine T. Norgaard
Richard G. Scheide* Trustee
- ------------------------
Richard G. Scheide
J. Scott Fox* Vice President and Treasurer
- ------------------------ (Principal Financial and
J. Scott Fox Accounting Officer)
By: Julie E. Rockmore
- ------------------------
* Julie E. Rockmore
Attorney-in-Fact
<PAGE>
Aetna Variable Fund
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-(b)(1) Charter (Declaration of Trust) *
99-(b)(2) Amended and Restated Bylaws *
99-(b)(4) Instruments Defining Rights of Holders *
99-(b)(5.1) Investment Advisory Agreement (8/1/96) ____________
99-(b)(5.2) Subadvisory Agreement (8/1/96) ____________
99-(b)(6) Underwriting Agreement (4/30/96) ____________
99-(b)(8) Custodian Agreements and Depository Contracts (9-1-92) *
99-(b)(9) Administrative Services Agreement (5-1-96) *
99-(b)(10.1) Opinion of Counsel **
99-(b)(10.2) Consent of Counsel **
99-(b)(11) Consent of Independent Auditors **
99-(b)(19) Powers of Attorney *
27 Financial Data Schedule **
</TABLE>
* Incorporated by Reference
** To be filed by Amendment
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY,
a Connecticut corporation (the "Adviser") and AETNA VARIABLE FUND, a
Massachusetts business trust (the "Fund") 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 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 and the Adviser desire to enter into an agreement to provide
for investment advisory and management services for the Fund 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 Trustees (the "Board"), the Fund hereby appoints
the Adviser to serve as the investment adviser to the Fund, 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 Fund and has no authority to act for or represent the
Fund 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 Fund;
2. select the securities to be purchased, sold or exchanged
by the Fund or otherwise represented in the Fund'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;
<PAGE>
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 Fund, securities
held by or under consideration for the Fund, or the
issuers of those securities;
5. provide economic research and securities analyses 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
Fund'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
8. take any other actions which appear to the Adviser and
the Board necessary to carry into effect the purposes
of this Agreement.
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 Fund in carrying out its
obligations hereunder.
-2-
<PAGE>
B. Representations and Warranties of the Fund
The Fund hereby represents and warrants to the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been
duly formed as a business trust under the laws of the
Commonwealth of Massachusetts 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 Fund are registered 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 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 Fund,
the Adviser may enter into a Subadvisory Agreement to engage a
subadviser (the "Subadviser") to the Adviser with respect to the Fund.
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 Fund or otherwise represented in the Fund'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 Fund, securities
held by or under consideration for the Fund, or the
issuers of those securities;
4. provide economic research and securities analyses as the
Adviser considers necessary or advisable in connection
with the Adviser's performance of its duties hereunder;
-3-
<PAGE>
5. give instructions to the custodian and/or sub-custodian
of the Fund appointed by the Board, as to deliveries of
securities, transfers of currencies and payments of cash
for the Fund as required to carry out the investment
activities of the Fund, 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 Fund and the Subadviser's compliance
program to ensure that the Fund's assets are invested in
compliance with the Subadvisory Agreement and the Fund's
investment objectives and policies as adopted by the
Board and described in the most current effective
amendment of the registration statement for the Fund, as
filed with the Commission under the 1933 Act, as amended,
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
Fund's shares, the Fund's corporate governance, reports
to the Board, contracts with all third parties on behalf
of the Fund for services to the Fund, reports to
regulatory authorities and compliance with all applicable
rules and regulations affecting the Fund's operations.
-4-
<PAGE>
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 Fund 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 Fund and at commission rates that are reasonable in relation to
the benefits received.
-5-
<PAGE>
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 Fund 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 Fund who provide payment for expenses of
the Fund. 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 Fund 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 Fund to determine
if the commissions paid over representative periods of time were
reasonable in relation to the benefits received.
VI. CONTROL BY THE BOARD OF TRUSTEES
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 Fund
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 thereafter;
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 Declaration of Trust,
as amended;
4. the provisions of the Bylaws of the Fund, as amended;
and
5. any other applicable provisions of state and federal law.
-6-
<PAGE>
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the expenses
assumed by the Adviser, the Fund shall pay to the Adviser an annual fee, payable
monthly, equal to .50% of the average daily net assets of the Fund. Except as
hereinafter set forth, compensation under this Agreement shall be calculated and
accrued daily at the rate of 1/365 of .50% of the daily net assets of the Fund.
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 Fund acknowledges that the Adviser will pay to the Subadviser, as
compensation for acting as Subadviser to the Fund, the fees specified in the
Subadvisory Agreement.
IX. EXPENSES
The expenses in connection with the management of the Fund shall be allocated
between the Fund 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 Fund, including
without limitation, office space, office equipment,
telephone and postage costs;
2. all fees and expenses of all Trustees, 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 Fund
The Fund 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 Fund's investment
portfolio or other investment transactions incurred in
managing the Fund's assets, including portions of
commissions that may be paid to reflect brokerage
research services provided to the Adviser;
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<PAGE>
3. fees and expenses of the Fund's independent accountants
and legal counsel and the independent Trustees' legal
counsel;
4. fees and expenses of any administrator, transfer agent,
custodian, dividend, accounting, pricing or disbursing
agent of the Fund;
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 Trustees) of the Fund which benefit the
Fund;
8. all fees and expenses of the Fund's Trustees, 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 Fund, except for those expenses
paid by third parties in connection with the
distribution of Fund 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 Fund or in cash;
11. costs and expenses of promoting the sale of shares in
the Fund, including preparing prospectuses and reports
to shareholders of the Fund, provided, nothing in this
Agreement shall prevent the charging of such costs to
third parties involved in the distribution and sale of
Fund shares;
12. fees payable by the Fund to the Commission or to any
state securities regulator or other regulatory authority
for the registration of shares of the Fund in any
state or territory of the United States or in 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 Fund's assets, and any nonrecurring or
extraordinary expenses, including
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organizational expenses, litigation affecting the Fund
and any indemnification by the Fund of its officers,
Trustees or agents.
X. EXPENSE LIMITATION
If, for any fiscal year, the total of all ordinary business expenses payable by
the Fund, 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 Fund 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 Fund 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 Fund
that are not required by this Agreement. Such services will be performed on
behalf of the Fund and the Adviser may receive from the Fund 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 Fund and its
shareholders. Payment or assumption by the Adviser of any Fund 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 Fund nor obligate the
Adviser to pay or assume any similar Fund 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 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 Fund; and (c)
such other administrative services as may be furnished from time to time by the
Adviser to the Fund at the request of the Board.
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XII. NONEXCLUSIVITY
The services of the Adviser to the Fund 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 trustees of the Fund, and that officers or trustees of the Fund may
serve as officers or trustees 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 July 31, 1996,
and shall remain in force and effect through December 31, 1997, unless earlier
terminated under the provisions of Article XV.
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 Fund's trustees, or
b. by the vote of a majority of the Fund'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 trustees who
are not parties to this Agreement or interested persons
of a party to this Agreement (other than as a trustee 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 Fund's Trustees or by vote of a majority of the Fund'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.
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XVI. LIABILITY
A. Liability of the Adviser
The Adviser shall be liable to the Fund and shall indemnify the Fund
for any losses incurred by the Fund, 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, Trustees 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.
B. Liability of the Fund, the Shareholders and the Trustees
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the trustees of the
Fund as trustees and not individually and that the obligations of this
instrument are not binding upon any of the trustees or shareholders
individually but are binding only upon the assets and property of the
Fund. No provision of this Agreement shall be construed to protect any
trustee or officer of the Fund or director or officer of the Adviser,
from liability in violation of Section 17(h) and (i) of the 1940 Act.
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 or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attention: 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
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<PAGE>
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.
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<PAGE>
XIX. SERVICE MARK
The service mark of the Fund 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 Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 1st day of August, 1996.
AETNA LIFE INSURANCE AND
ANNUITY COMPANY
By: /s/ Shaun P. Mathews
---------------------
Name: Shaun P. Mathews
---------------------
Title: Vice President
---------------------
Attest:
/s/ DeAnn S. Anastasio
-----------------------------
DeAnn S. Anastasio
Assistant Corporate Secretary
AETNA VARIABLE FUND
By: /s/ Shaun P. Mathews
---------------------
Name: Shaun P. Mathews
---------------------
Title: President
---------------------
Attest:
/s/ Susan E. Bryant
-----------------------------
Susan E. Bryant
Secretary
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SUBADVISORY AGREEMENT
THIS AGREEMENT is made by and among AETNA LIFE INSURANCE AND ANNUITY COMPANY, a
Connecticut insurance corporation (the "Adviser"), AETNA VARIABLE FUND, a
Massachusetts Business Trust (the "Fund") 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, under
the Investment Company Act of 1940, as amended (the "1940 Act"); 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 (the "Investment Advisory Agreement") which appoints the Adviser as the
investment adviser for the Fund; 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
hereby appoint the Subadviser to manage the assets of the Fund 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 Trustees (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 Fund in any way.
II. DUTIES OF THE SUBADVISER AND THE ADVISER
A. Duties of the Subadviser
<PAGE>
The Subadviser shall regularly provide investment advice with respect
to the assets held by the Fund and shall continuously supervise the
investment and reinvestment of cash, securities and instruments or
other property comprising the assets of the Fund. In carrying out these
duties, the Subadviser shall:
1. select the securities to be purchased, sold or exchanged
by the Fund or otherwise represented in the Fund'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 Fund, 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 Fund, securities
held by or under consideration for the Fund, or the
issuers of those securities;
4. provide economic research and securities analyses 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 Fund appointed by the Board, as to deliveries of
securities, transfers of currencies and payments of cash
for the Fund, in relation to the matters contemplated by
this Agreement; and
6. provide such financial support, administrative and other
services, such as preparation of financial data,
determination of the Fund'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
Fund. 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 Fund and the Subadviser's compliance
program to ensure that the Fund's assets are invested
in compliance with the Subadvisory Agreement and the
Fund's investment objectives and policies as adopted by
the Board and described in
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<PAGE>
the most current effective amendment of the registration
statement for the Fund, 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
Fund 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 Fund;
7. oversee all matters relating to(i) the offer and sale of
shares of the Fund, 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 Fund, including monitoring the
corporate records of the Fund, maintaining contact with
the Board, preparing for, organizing and attending
meetings of the Board and the Fund's shareholders;
(iv) preparation of proxies when required; and (v) any
other matters no 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.
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<PAGE>
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 Fund 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 Fund 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 Fund 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
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<PAGE>
Subadviser and the Fund 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 Fund in carrying out its
obligations hereunder.
C. Representations and Warranties of the Fund
The Fund hereby represents and warrants to the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been
duly formed as a business trust under the laws of the
Commonwealth of Massachusetts 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 Fund are registered for offer and sale to
the public under the 1933 Act, and all applicable state
securities laws. Such registrations 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 Fund 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
Fund giving consideration to the services and research provided and at
commission rates that are reasonable in relation to the benefits
received ("best execution").
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 Fund 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 Fund who provide payment for
expenses of the Fund. The Subadviser is authorized to pay a broker or
dealer who provides such brokerage and research services or expenses, a
commission for
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<PAGE>
executing a portfolio transaction for the Fund 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 Fund
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 with respect to the Fund, 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 Fund as adopted by the Board
and as described in the Registration Statement;
3. the provisions of the Declaration of Trust 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 .30% of
the average daily net assets in the Fund, 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 .30% applied to the daily net assets of the
Fund. If this Agreement becomes effective subsequent to the first day
of a month or shall terminate before the last day of a month,
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<PAGE>
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
Fund if the expenses borne by the Fund exceed the expense limitations
applicable to the Fund imposed by the securities laws or regulations of
any jurisdiction in which the Fund shares are qualified for sale.
Accordingly, the Subadviser agrees that, if, for any fiscal year, the
total of all ordinary business expenses of the Fund, 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 Fund 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 Fund 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
Fund 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 Fund 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 trustees of the Fund; that officers or directors of
the Adviser or officers or trustees 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,
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<PAGE>
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 July 31, 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 Fund's trustees or (b) by the vote of a majority of
the Fund'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 trustees who are
not parties to this Agreement or interested persons of a party
to this Agreement (other than as a trustee 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
Fund's trustees or by vote of a majority of the outstanding
voting securities of the Fund; or
2. by the Adviser, the Fund 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
A. Liability of the Subadviser
The Subadviser shall be liable to the Fund and the Adviser and shall
indemnify the Fund and the Adviser for any losses incurred by the Fund,
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.
B. Liability of the Fund, the Shareholders and the Trustees
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<PAGE>
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the trustees of the
Fund as trustees and not individually and that the obligations of this
instrument are not binding upon any of the trustees or shareholders
individually but are binding only upon the assets and property of the
Fund. No provision of this Agreement shall be construed to protect any
trustee or officer of the Fund or director or officer of the Adviser,
from liability in violation of Section 17(h) and (i) of the 1940 Act.
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 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 Adviser, 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
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or another subsidiary or affiliated corporation of Aetna Life and Casualty
Company should not be the investment adviser of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 1st day of August, 1996.
Aetna Life Insurance and Annuity Company
By: /s/ Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
Title: Vice President
Attest:
/s/ DeAnn S. Anastasio
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DeAnn S. Anastasio
Assistant Corporate Secretary
Aeltus Investment Management, Inc.
Attest: By: /s/ John Y. Kim
--------------------
Name: John Y. Kim
/s/ Melinda L. Dzaivit Title: President
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Melinda L. Dzaivit
Asst. Secretary
Aetna Variable Fund
By: /s/ Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
Attest: Title: President
/s/ Susan E. Bryant
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Susan E. Bryant
Secretary
AETNA VARIABLE FUND
UNDERWRITING AGREEMENT
THIS AGREEMENT, is entered into this 30th day of April, 1996, by and between
Aetna Life Insurance and Annuity Company, Inc., a Connecticut corporation
(Aetna), and Aetna Variable Fund, a Massachusetts Business Trust (Fund).
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); and
WHEREAS the Fund has registered the shares of its common stock (Shares) 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.
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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. Liability of Trustees. A copy of the Declaration of Trust of the Fund is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the trustees of the
Fund as trustees and not individually and that the obligations of this
instrument are not binding upon any of the trustees or shareholders individually
but are binding only upon the assets and property of the Fund. No provision of
this Agreement shall be construed to protect any trustee or officer of the Fund
or director or officer of the Aetna, from liability in violation of Section
17(h) and (i) of the 1940 Act.
12. Amendments. This Agreement may be amended or changed only by an instrument
in writing signed by both parties.
13. 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.
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14. 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
15. 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 30th day of April, 1996.
AETNA LIFE INSURANCE AND ANNUITY
COMPANY
Attest: By: /s/Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
--------------------
/s/DeAnn S. Anastasio Title: Vice President
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Assistant Secretary
AETNA VARIABLE FUND
By: /s/Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
--------------------
Attest: Title: President
--------------------
/s/Susan E. Bryant
- ---------------------
Secretary
