SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. __)
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
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[ ]Preliminary Proxy Statement
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[ ]Definitive Additional Materials
[ ]Soliciting Material Pursuant to ss.240-14a-11(c) or ss.240-14a-12
[ ]Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e) (2))
Franklin Templeton Variable Insurance Products Trust
(Name of Registrant as Specified In Its Charter)
Franklin Templeton Variable Insurance Products Trust
(Name of Person(s) Filing Proxy Statement)
Karen L. Skidmore, Esq.
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
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FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
FRANKLIN RISING DIVIDENDS SECURITIES FUND
IMPORTANT INFORMATION
FOR CONTRACT HOLDERS AND POLICYHOLDERS
These materials are for a special shareholders' meeting scheduled
for February 8, 2000 at 9:00 a.m. Pacific time. They discuss the
proposals to be voted on at the meeting, and contain a proxy
statement and voting instruction card. A voting instruction card
is, in essence, a ballot. When you complete your voting
instruction card, it tells your insurance company how to vote its
proxy on important issues relating to the portion of your account
that is allocated to the Franklin Rising Dividends Securities
Fund, a series of Franklin Templeton Variable Insurance Products
Trust. If you complete and sign the voting instruction card, the
shares will be voted exactly as you instruct. If you simply sign
and return the voting instruction card, the shares will be voted
for the proposals. If you do not return a voting instruction card
at all, the shares will be voted in the same proportion as shares
for which instructions have been received from other variable
annuity contract holders and variable life insurance
policyholders.
WE URGE YOU TO SPEND A FEW MINUTES REVIEWING THE PROPOSALS IN THE
PROXY STATEMENT. THEN, FILL OUT THE VOTING INSTRUCTION CARD AND
RETURN IT TO US SO THAT WE KNOW HOW YOU WOULD LIKE TO VOTE.
WE WELCOME YOUR COMMENTS. IF YOU HAVE ANY QUESTIONS, CALL FUND
INFORMATION AT 1-800/DIAL BEN(R) (1-800/342-5236).
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A LETTER FROM THE CHAIRMAN
Dear Fellow Shareholders:
I am writing to request that you consider four matters relating
to your investment in Franklin Rising Dividends Securities Fund
(the "Fund"), a series of Franklin Templeton Variable Insurance
Products Trust (the "Trust"). The Board of Trustees asks that you
cast your vote in favor of:
1. Modifying the Fund's current criteria for the selection of
portfolio companies related to debt as part of the issuer's
capital structure;
2. Amending certain of the Fund's fundamental investment
restrictions;
3. Eliminating certain of the Fund's fundamental investment
restrictions; and
4. Granting proxyholders the authority to vote upon any other
business that may properly come before the meeting or any
adjournments thereof.
We have proposed a modification to the Fund's current criteria
for the selection of portfolio companies related to debt as part
of the issuer's capital structure. If approved, the change would
expand the universe of high quality companies that meet the
rising dividends criteria. We have also proposed amending or
eliminating certain fundamental investment restrictions. We
believe that the recommended changes will provide additional
investment opportunities to the Fund, as further described in the
attached Proxy Statement. We urge you to approve these proposals
which are designed to benefit all shareholders by providing the
Fund with greater flexibility in pursuing its investment goal.
The Proxy Statement includes a question-and-answer format
designed to provide you with a simpler and more concise
explanation of certain issues. Although much of the information
in the Proxy Statement is technical and required by the various
regulations that govern the Trust, we hope that this format will
be helpful to you.
Your vote is important to the Trust. On behalf of the Board of
Trustees, thank you in advance for considering these issues and
for promptly returning your voting instruction card.
Sincerely,
--------------------------
Charles B. Johnson
CHAIRMAN OF THE BOARD
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON FEBRUARY 8, 2000
A Special Shareholders' Meeting ("Meeting") of Franklin Rising
Dividends Securities Fund (the "Fund"), a series of Franklin
Templeton Variable Insurance Products Trust (the "Trust"), will
be held at the Trust's office at 777 Mariners Island Boulevard,
San Mateo, California 94404, at 9:00 a.m. Pacific time, on
February 8, 2000.
During the Meeting, shareholders of the Fund will vote on the
following Proposals and Sub-Proposals:
1. To modify the Fund's current criteria for the selection of
portfolio companies related to debt as part of the issuer's
capital structure, which is fundamental.
2. To approve amendments to certain of the Fund's fundamental
investment restrictions (includes seven (7) Sub-Proposals).
(a) To amend the Fund's fundamental investment restriction
regarding borrowing;
(b) To amend the Fund's fundamental investment restriction
regarding underwriting;
(c) To amend the Fund's fundamental investment restriction
regarding lending;
(d) To amend the Fund's fundamental investment restrictions
regarding investments in real estate and commodities;
(e) To amend the Fund's fundamental investment restriction
regarding issuing senior securities;
(f) To amend the Fund's fundamental investment restriction
regarding industry concentration; and
(g) To amend the Fund's fundamental investment restriction
regarding diversification of investments.
3. To approve the elimination of certain of the Fund's
fundamental investment restrictions.
4. To grant the proxyholders authority to vote upon any other
business that may properly come before the Meeting or any
adjournments thereof.
The Board of Trustees has fixed November 30, 1999 as the record
date for determination of shareholders entitled to vote at the
Meeting.
Please note that a separate vote is required for each Proposal or
Sub-Proposal.
By Order of the Board of Trustees,
Deborah R. Gatzek,
Secretary
San Mateo, California
December 20, 1999
- -------------------------------------------------------------------
PLEASE MARK, SIGN, DATE AND RETURN YOUR VOTING INSTRUCTION CARD
IN THE SELF-ADDRESSED ENVELOPE SO YOU WILL BE REPRESENTED AT THE
MEETING.
- -------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
PROXY STATEMENT
Questions and Answers .......................... 1
Proposal 1: To Modify the Fund's Current
Criteria for the Selection of
Portfolio Companies Related to
Debt as Part of the Issuer's
Capital Structure, which is
Fundamental .................... 3
Proposal 2: To Approve Amendments to Certain
of the Fund's Fundamental
Investment Restrictions
(Includes Seven (7)
Sub-Proposals) ................. 6
2a:....Borrowing 6
2b:....Underwriting 7
2c:....Lending 8
2d:....Real Estate and Commodities 9
2e:....Issuing Senior Securities 10
2f:....Industry Concentration 11
2g:....Diversification of Investments 12
Proposal 3: To Approve the Elimination of
Certain of the Fund's
Fundamental Investment
Restrictions ................... 14
Proposal 4:.....Other Business 18
Information about the Trust and the Fund 19
Additional Information About Voting and
the Meeting 20
EXHIBITS
Exhibit A: Fundamental Investment
Restrictions Proposed to be
Amended or Eliminated .......... 22
Exhibit B: Current Fundamental
Investment Restrictions Proposed
to be Eliminated ............... 27
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
FRANKLIN RISING DIVIDENDS SECURITIES FUND
PROXY STATEMENT
QUESTIONS AND ANSWERS
- - INFORMATION ABOUT VOTING
WHO IS ASKING FOR MY VOTE?
The Trustees of Franklin Templeton Variable Insurance Products
Trust (the "Trust"), in connection with the Special Shareholders'
Meeting of Franklin Rising Dividends Securities Fund (the
"Fund"), a series of the Trust, to be held February 8, 2000 (the
"Meeting"), have requested your vote on several matters.
WHO IS ELIGIBLE TO VOTE?
Shareholders of record at the close of business on November 30,
1999 are entitled to vote at the Meeting or any adjourned
meeting. Separate accounts of certain insurance companies
("Insurance Companies") are the only shareholders of the Fund.
Each Insurance Company will vote its shares of the Fund based on
voting instructions received from variable annuity contract and
variable life insurance policy owners (collectively, the
"Contract Owners"). This Proxy Statement will be used by the
Insurance Companies in obtaining voting instructions from
Contract Owners. The Notice of Meeting, the proxy (or voting
instruction card), and the Proxy Statement are expected to be
mailed to shareholders of record and Contract Owners on or about
December 20, 1999.
SHAREHOLDERS. Each share is entitled to one vote and each
fractional share shall be entitled to a fractional vote. Shares
represented by duly executed proxies will be voted in accordance
with the Insurance Company shareholders' instructions. If the
proxy is signed by the Insurance Company shareholder, but no
express voting instructions are given for a proposal, the proxy
will be voted in accordance with the recommendations of the Board
of Trustees ("Board" or "Trustees") of the Trust.
CONTRACT OWNERS. If a Contract Owner returns a properly executed
voting instruction card with express voting instructions, the
relevant Insurance Company will vote those shares in accordance
with the Contract Owner's instructions. If a Contract Owner does
not return the voting instruction card, the relevant Insurance
Company will vote the shares of the Fund attributable to the
Contract Owner in the same manner and in the same proportion as
the shares of that Fund for which it has received instructions.
If a Contract Owner returns the voting instruction card properly
executed, but with no express voting instructions indicated on
the card, the relevant Insurance Company will vote the shares in
accordance with the Trustees' recommendations.
ON WHAT ISSUES AM I BEING ASKED TO VOTE?
You are being asked to vote on the following proposals:
1. To modify the Fund's criteria for the selection of portfolio
companies related to debt as part of the issuer's capital
structure;
2. To amend certain of the Fund's fundamental investment
restrictions;
3. To eliminate certain of the Fund's fundamental investment
restrictions; and
4. To grant proxyholders authority to vote upon any other
business that may properly come before the Meeting or any
adjournments thereof.
WHAT VOTE IS REQUIRED?
Provided that a quorum is present, approval of Proposals 1, 2 and
3, which would modify the Fund's current criteria for the
selection of portfolio companies related to debt as part of the
issuer's capital structure, and amend or eliminate the Fund's
fundamental investment restrictions, require the affirmative vote
of the lesser of: (i) more than 50% of the outstanding voting
securities of the Trust; or (ii) 67% or more of the voting
securities of the Trust present at the Meeting, if the holders of
more than 50% of the outstanding voting securities are present or
represented by proxy.
HOW DO THE TRUSTEES RECOMMEND THAT I VOTE?
The Trustees unanimously recommend that you vote:
1. FOR modification of the Fund's current criteria for the
selection of portfolio companies related to debt as part of
the issuer's capital structure;
2. FOR the amendment of each of the Fund's fundamental investment
restrictions proposed to be amended;
3. FOR the elimination of each of the Fund's fundamental
investment restrictions proposed to be eliminated; and
4. FOR the proxyholders to vote, in their discretion, on any
other business as may properly come before the Meeting or any
adjournments thereof.
The Trustees do not intend to bring any other business before the
Meeting, and are not currently aware of any other business to be
presented.
CAN I REVOKE MY VOTING INSTRUCTION?
Contract Owners may revoke their voting instructions at any time
before the proxy is voted by: (1) forwarding a written revocation
to the Secretary of the Trust, (2) forwarding to the Trust a
later-dated proxy that is received by the Trust at or prior to
the Meeting, or (3) attending the Meeting and instructing the
Insurance Company in person.
- - THE PROPOSALS
PROPOSAL 1: TO MODIFY THE FUND'S CURRENT CRITERIA
FOR THE SELECTION OF PORTFOLIO COMPANIES
RELATED TO DEBT AS PART OF THE ISSUER'S
CAPITAL STRUCTURE, WHICH IS FUNDAMENTAL
WHAT IS THE FUND'S CURRENT CRITERIA FOR THE SELECTION OF
PORTFOLIO COMPANIES RELATED TO DEBT AS PART OF THE ISSUER'S
CAPITAL STRUCTURE, AND WHAT IS THE PROPOSED MODIFICATION?
The Fund invests primarily in equity securities of financially
sound companies that have paid consistently rising dividends. At
least 65% of the Fund's assets are invested in securities of
companies that have:
i. consistently increased dividends, in at least eight out of
the last ten years, and have not decreased dividends in that
time;
ii. substantially increased dividends (at least 100%) over the
past ten years;
iii. reinvested earnings, and paid out less than 65% of the
current earnings in dividends;
iv. strong balance sheets, with long-term debt representing no
more than 30% of total capitalization; and
v. attractive prices (i.e. prices in the lower half of the
stock's price/earnings ratio range for the last ten years,
or less than the current market price/earnings ratio of the
stocks in the Standard & Poor's 500 Stock Index).
The above criteria comprise a "fundamental" policy of the Fund
which means that they cannot be changed without shareholder
approval.
The proposed modification relates to the fourth criteria listed
above. This criteria selection will be referred to in this
Proposal 1 as the Fund's "Debt Test." The Fund's investment
adviser, Franklin Advisory Services, LLC ("Advisory") has
recommended modifying this Debt Test to require that rising
dividends companies either have: (1) long-term debt that is no
more than 50% of total capitalization; or (2) senior debt that
has been rated investment grade by at least one of the major bond
rating agencies.
WHY IS THE BOARD RECOMMENDING THIS MODIFICATION TO THE DEBT TEST?
By modifying the current Debt Test to require either that
long-term debt not exceed 50% of total capitalization, or that
senior debt obtain an investment grade rating, the Board, based
on Advisory's recommendation, believes that additional investment
opportunities will be available to the Fund through a greater
range of high quality companies that meet this proposed rising
dividends criteria.
In recommending to the Board the change to the Debt Test,
Advisory explained that it has identified many attractive rising
dividends companies that have debt in excess of the current 30%
limitation. Despite their possibly higher levels of debt, many of
these companies also have the qualitative characteristics that
the rising dividends criteria was designed to identify. As market
interest rates have fallen over the past decade, the cost of
servicing debt has declined. This means that companies can
service a higher level of debt with the same cash flow than they
could historically, when the interest rates were higher. In fact,
Advisory has found that companies that meet the Fund's other
rising dividends criteria have increasingly taken advantage of
lower rates by using more long-term debt in their capital
structure. Therefore, many of the companies with the qualitative
characteristics that the Fund's five criteria were originally
designed to target carry a higher level of debt than they may
have in the past. Modifying the Debt Test would allow the Fund to
invest in such companies.
Advisory has proposed an alternative analysis to the Debt Test.
This alternative evaluates the rating of the issuer's senior debt
rather than, as described above, whether an issuer's debt exceeds
50% of total capitalization. Under this alternative test, an
issuer would qualify under the new Debt Test if its senior debt
has been rated investment grade by at least one of the major bond
rating agencies. Historically, the Fund did not consider whether
a company's debt was investment grade, but looked only to the
total percentage of debt. Typically, a wide range of factors is
considered in the determination of a company's debt rating. If
the Fund modifies its Debt Test to include a ratings-based test
as an alternative criteria, it would be able to take advantage of
a greater pool of companies eligible to meet the full range of
rising dividends criteria. Advisory believes that, generally,
those companies that meet the full range of rising dividends
criteria are likely to have debt rated investment grade, if they
have long-term debt outstanding.
As modified, the Fund's Debt Test would include either one of
those tests described above. Under the first prong of the
modified Debt Test, the Fund would be permitted to invest in
companies where debt is not rated investment grade as long as the
debt does not exceed 50% of total capitalization. Under the
second prong, the Fund may invest in companies whose senior debt
is rated investment grade, even if such debt exceeds 50% of total
capitalization.
WHAT ARE THE RISKS OF SUCH A MODIFICATION TO THE DEBT TEST?
The proposed modifications are not expected to change the day to
day management of the Fund as it pursues its investment goal.
Based on Advisory's recommendation, the Board does not anticipate
that the increase from 30% to 50% in long-term debt exposure will
present any significant degree of increased risk. In addition,
none of the other four rising dividends criteria will be changed,
which should further limit the degree of additional risk to which
the Fund will be exposed. However, since the proposed
modification will permit the Fund to invest in companies with a
higher percentage of long-term debt, the Fund theoretically could
be exposed to a slightly higher risk that such companies may not
be able to meet their individual goals, and may default on their
debt. If companies in which the Fund invests default, the value
of the Fund's portfolio may decline.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU APPROVE
PROPOSAL 1
INTRODUCTION TO PROPOSALS 2 AND 3.
WHY IS THE FUND AMENDING OR ELIMINATING CERTAIN OF ITS
FUNDAMENTAL INVESTMENT RESTRICTIONS IN FAVOR OF A STANDARDIZED
LIST OF INVESTMENT RESTRICTIONS?
The Fund is subject to certain investment restrictions which
govern the Fund's investment activities. Under the Investment
Company Act of 1940, as amended (the "1940 Act"), certain
investment restrictions are required to be "fundamental," which
means that they can only be changed by a shareholder vote. An
investment company may designate additional restrictions that are
fundamental, and it may also adopt "non-fundamental"
restrictions, which may be changed by the Trustees without
shareholder approval.
After the Trust was formed in 1988, certain legal and regulatory
requirements applicable to mutual funds changed. For example,
certain restrictions imposed by state laws and regulations were
preempted by the National Securities Markets Improvement Act of
1996 ("NSMIA") and therefore are no longer applicable to mutual
funds. As a result of NSMIA, the Fund currently is subject to
fundamental investment restrictions that are either more
restrictive than required under current law, or which are no
longer required at all. Accordingly, the Trustees recommend that
the Fund's shareholders approve the amendment or elimination of
certain of the Fund's current fundamental investment
restrictions. This will result in the Fund having a list of
fundamental investment restrictions that are standardized with
those of the other funds in the Franklin Templeton Group of
Funds. The proposed standardized restrictions satisfy current
federal regulatory requirements and are written to provide
flexibility to respond to future legal, regulatory, market or
technical changes.
By both standardizing and reducing the total number of investment
restrictions that can be changed only by a shareholder vote, the
Trustees believe that the Fund will be able to minimize the costs
and delays associated with holding future shareholder meetings to
revise fundamental policies that become outdated or
inappropriate. The Trustees also believe that the investment
adviser's ability to manage the Fund's assets in a changing
investment environment will be enhanced. The proposed changes
also will help ensure that the Fund's investment opportunities
are not unecessarily limited as a result of fundamental policies
that have become outdated or unduly restrictive.
The proposed standardized changes will not affect the Fund's
investment goal. Although the proposed changes in fundamental
investment restrictions will provide the Fund greater flexibility
to respond to future investment opportunities, the Trustees do
not anticipate that the changes, individually or in the
aggregate, will result in a material change in the level of
investment risk associated with investment in the Fund. The
Trustees do not anticipate that the proposed changes will
materially affect the manner in which the Fund is managed.
The Fund's existing investment restrictions, together with the
recommended changes to these restrictions, are detailed in
Exhibit A, which is entitled "Fundamental Investment Restrictions
Proposed to be Amended or Eliminated." Shareholders are requested
to vote on each Sub-Proposal in Proposal 2 separately.
PROPOSAL 2: TO APPROVE AMENDMENTS TO CERTAIN OF THE FUND'S
FUNDAMENTAL INVESTMENT RESTRICTIONS
(THIS PROPOSAL INVOLVES SEPARATE VOTES ON SUB-PROPOSALS 2A - 2G)
SUB-PROPOSAL 2A: TO AMEND THE FUND'S FUNDAMENTAL
INVESTMENT RESTRICTION REGARDING BORROWING.
The 1940 Act requires investment companies to impose certain
limitations on their borrowing activities. The limitations on
borrowing are generally designed to protect shareholders and
their investments by restricting a fund's ability to subject its
assets to the claims of creditors who might have a claim to the
fund's assets that would take precedence over the claims of
shareholders. A fund's borrowing restriction must be fundamental.
Under the 1940 Act, a fund may borrow from banks up to one-third
of its total assets (including the amount borrowed). In addition,
a fund may borrow up to 5% of its total assets for temporary
purposes from any person. Funds typically borrow money to meet
redemptions in order to avoid forced, unplanned sales of
portfolio securities. This technique allows a fund greater
flexibility to buy and sell portfolio securities for investment
or tax considerations, rather than for cash flow considerations.
WHAT EFFECT WILL STANDARDIZATION OF THE CURRENT BORROWING
RESTRICTION HAVE ON THE FUND?
As described in the Fund's current investment restriction 2, the
Fund is presently limited to borrowing up to 5% of total assets
for any reason, rather than for temporary purposes only. In
addition, the current restriction does not specifically limit the
Fund's overall ability to borrow up to the 331/3% allowed under
current law. The proposed restriction would clarify that the Fund
may borrow: (1) from banks to the extent permitted by the 1940
Act or any exemptions therefrom, and (2) from any person for
temporary purposes; but (3) in any event all borrowings must not
exceed 331/3% of total assets. The Fund's current restriction
also states that the Fund may not borrow in excess of 5% "for
direct investment in securities." The 1940 Act limits on
borrowing historically were interpreted to prohibit mutual funds
from making additional investments in securities while borrowings
exceeded 5% of total assets. However, such a 5% limit is not
required under the 1940 Act and originated from informal
regulatory positions. Accordingly, under the proposed
restriction, the Fund would be permitted to make additional
investments, even if borrowings exceed 5% of total assets.
The proposed restriction also permits the Fund to borrow cash
from affiliated investment companies. The Fund, together with
other funds in the Franklin Templeton Group of Funds, has
requested an exemptive order from the Securities and Exchange
Commission ("SEC") that would permit the Fund to borrow money
from affiliated Franklin and Templeton funds (the "Interfund
Borrowing and Lending Order"). As discussed in Sub-Proposal 2c,
the Interfund Borrowing and Lending Order also would permit the
Fund to lend money to other Franklin and Templeton funds. If the
Interfund Borrowing and Lending Order is approved, the proposed
restriction would permit the Fund, under certain circumstances,
to borrow money from other Franklin and Templeton funds at rates
which are more favorable than those which the Fund would receive
if it borrowed from banks or other lenders.
Finally, the proposed restriction also would help the Fund
achieve the goal of standardizing the language of the investment
restrictions among the Franklin Templeton Group of Funds.
Standardization is expected to enable all Franklin and Templeton
funds to operate more efficiently and to more easily monitor
compliance with investment restrictions.
Since the proposed borrowing restriction would provide the Fund
with greater borrowing flexibility, the Fund may be subject to
additional costs, as well as the risks inherent to borrowing,
such as reduced total return.
SUB-PROPOSAL 2B: TO AMEND THE FUND'S FUNDAMENTAL
INVESTMENT RESTRICTION REGARDING UNDERWRITING.
Under the 1940 Act, the Fund's policy concerning underwriting is
required to be fundamental. Under the federal securities laws, a
person or company generally is considered an underwriter if it
participates in the public distribution of securities of other
issuers, usually by purchasing the securities from the issuer
with the intention of re-selling the securities to the public.
From time to time, a mutual fund may purchase a security for
investment purposes which it later sells or redistributes to
institutional investors or others under circumstances where the
Fund could possibly be considered to be an underwriter under the
technical definition of underwriter contained in the securities
laws. For example, funds often purchase securities in private
securities transactions where a resale could raise a question
relating to whether or not the fund is technically acting as an
underwriter. However, recent SEC interpretations clarify that
re-sales of privately placed securities by institutional
investors do not make the institutional investor an underwriter
in these circumstances. The proposed restriction encompasses
these SEC positions.
WHAT EFFECT WILL STANDARDIZATION OF THE CURRENT UNDERWRITING
RESTRICTION HAVE ON THE FUND?
The proposed restriction is substantially similar to the Fund's
current restriction 4. As with current restriction 4, the
proposed restriction specifically permits the Fund to resell
restricted securities in those instances where there may be a
question as to whether the Fund is technically acting as an
underwriter. The proposed underwriting restriction also clarifies
that the Fund may sell its own shares without being deemed an
underwriter. Under the 1940 Act, a mutual fund will not be
considered an underwriter if it sells its own shares pursuant to
a written distribution plan that complies with Rule 12b-1 of the
1940 Act.
Furthermore, the new restriction would help the Fund achieve the
goal of standardizing the language of the investment restrictions
among the Franklin Templeton Group of Funds. It is not
anticipated that adoption of the proposed restriction would
involve any additional risk as the proposed restriction would not
affect the way the Fund is currently managed.
SUB-PROPOSAL 2C: TO AMEND THE FUND'S FUNDAMENTAL
INVESTMENT RESTRICTION REGARDING LENDING.
Under the 1940 Act, a fund's policy regarding lending must be
fundamental. Certain investment techniques could, under certain
circumstances, be considered to be loans. For example, if the
Fund invests in debt securities, such investments might be
considered to be loans from the Fund to the issuer of the debt
securities. In order to ensure that the Fund may invest in
certain debt securities or repurchase agreements, which could
technically be characterized as the making of loans, the Fund's
current fundamental restriction 3 specifically carves out such
policies from its prohibitions. In addition, the Fund's
fundamental policy explicitly permits the Fund to lend its
portfolio securities. Securities lending is a practice that has
become common in the mutual fund industry and involves the
temporary loan of portfolio securities to parties who use the
securities for the settlement of securities transactions. The
collateral delivered to the Fund in connection with such a
transaction is then invested to provide the Fund with additional
income it might not otherwise have. Securities lending involves
certain risks if the borrower fails to return the securities.
WHAT EFFECT WILL STANDARDIZATION OF THE CURRENT LENDING
RESTRICTION HAVE ON THE FUND?
The proposed restriction would provide the Fund with greater
lending flexibility. While the proposed restriction retains the
carve-outs in the existing restriction, it also would permit the
Fund to invest in loan participations and direct corporate loans
which recently have become more common as investments for
investment companies. The proposed restriction also would provide
the Fund with additional flexibility to make loans to affiliated
investment companies to the extent permitted by the Interfund
Borrowing and Lending Order. If the Interfund Borrowing and
Lending Order is approved, the proposed restriction would permit
the Fund, under certain conditions, to lend cash to other
Franklin or Templeton funds at rates higher than those which the
Fund would receive if the Fund loaned cash to banks through short
term lendings such as repurchase agreements. The Board
anticipates that this additional flexibility to lend cash to
affiliated investment companies would provide additional
investment opportunities, and would enhance the Fund's ability to
respond to changes in legal, market, industry or regulatory
conditions.
In addition, the proposed restriction would help the Fund achieve
the goal of standardizing the language of the investment
restrictions among the Franklin Templeton Group of Funds. It is
not anticipated that adoption of the proposed restriction would
involve any additional risk as the proposed restriction would not
affect the way the Fund is currently managed.
SUB-PROPOSAL 2D: TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT
RESTRICTIONS REGARDING INVESTMENTS IN REAL ESTATE AND COMMODITIES.
Under the 1940 Act, a fund's restrictions regarding investments
in real estate and commodities must be fundamental. The Fund
presently has two separate investment restrictions, 10 and 11,
which govern the Fund's ability to invest in real estate and
commodities. The proposed standardized restriction would combine
these two restrictions into one, as well as clarify the types of
financial commodities and other instruments in which the Fund may
invest.
WHAT EFFECT WILL STANDARDIZATION OF THE REAL ESTATE AND
COMMODITIES RESTRICTIONS HAVE ON THE FUND?
The proposed restriction would combine the limitations on
investing in both real estate and commodities into one
restriction.
REAL ESTATE: The proposed investment restriction is designed to
standardize the language of the real estate restriction among the
Franklin Templeton Group of Funds. The Fund's current restriction
states that the Fund may not invest in real estate, but it
specifically excludes "first mortgage loans or other direct
obligations secured by real estate" from the restriction. Since
an investment in first mortgage loans or other obligations
secured by real estate would not be considered a direct
investment in real estate, the proposed restriction would
continue to permit such an investment. The proposed restriction
would specifically reference the Fund's ability to purchase
securities of real estate investment trusts ("REITs") to the
extent that an investment in REITs would otherwise meet the
Fund's investment criteria. Investing in REITs has gained in
popularity since the early 1990s, and the number of REITs
available for investment also has increased dramatically.
The Fund will continue to be prohibited from directly purchasing
or selling real estate. It is not anticipated that the proposed
restriction would involve any additional risk to the Fund as the
Fund does not currently, and has not in the past, invested in
real estate or REITs. Therefore, the proposed restriction will
not affect the way the Fund is currently managed.
COMMODITIES: The proposed investment restriction is designed to
standardize the language of the commodities restriction among the
Franklin Templeton Group of Funds. Generally, commodities are
considered to be physical commodities such as wheat, cotton, rice
and corn. However, futures contracts, including financial futures
contracts such as those related to currencies, stock indices or
interest rates, are also considered to be commodities. Funds
typically invest in such contracts and options on contracts for
hedging or other investment purposes. The proposed restriction
clarifies that the Fund has the flexibility to invest in
financial futures contracts and related options. The proposed
restriction would permit investment in financial futures
instruments for either investment or hedging purposes. Although
the Fund has always had the ability to invest in options on
securities and options on futures, it has not done so. The Fund
does not intend to begin investing in financial futures contracts
and related options. Therefore, it is not anticipated that the
proposed restriction would involve any additional risk. Using
financial futures instruments can involve substantial risks, and
will be utilized only if the investment manager believes such
risks are advisable.
SUB-PROPOSAL 2E: TO AMEND THE FUND'S FUNDAMENTAL
INVESTMENT RESTRICTION REGARDING ISSUING SENIOR SECURITIES.
Under the 1940 Act, the Fund must have an investment policy
describing its ability to issue senior securities. A "senior
security" is an obligation of a fund with respect to its earnings
or assets that takes precedence over the claims of the fund's
shareholders with respect to the same earnings or assets. The
1940 Act generally prohibits an open-end fund from issuing senior
securities in order to limit the use of leverage. In general, a
fund uses leverage when it borrows money to enter into securities
transactions, or acquires an asset without being required to make
payment until a later time.
SEC staff interpretations allow a fund to engage in a number of
types of transactions which might otherwise be considered to
create "senior securities" or "leverage," so long as the fund
meets certain collateral requirements designed to protect
shareholders. For example, some transactions that may create
senior security concerns include short sales, certain options and
futures transactions, reverse repurchase agreements and
securities transactions that obligate the fund to pay money at a
future date (such as when-issued, forward commitment or delayed
delivery transactions). When engaging in such transactions, a
fund must mark on its or its custodian bank's books, or set aside
money or securities with its custodian bank to meet the SEC
staff's collateralization requirements. This procedure
effectively eliminates a fund's ability to engage in leverage for
these types of transactions.
A number of the Fund's current fundamental and non-fundamental
investment restrictions relate to senior securities. For example,
the Fund's current investment restriction 9 prohibits the Fund
from purchasing securities on margin and making short sales.
Funds were originally required by the states to have fundamental
restrictions regarding these transactions. These types of
transactions also raise senior security issues under the federal
securities laws. In addition, the Fund presently has a
non-fundamental policy under which it may not "pledge, mortgage
or hypothecate its assets as security for loans (except to the
extent of allowable temporary loans)." These types of
transactions are generally considered to raise senior security
concerns. Adopting Sub-Proposal 2e would consolidate into one
fundamental investment restriction: (1) a concise statement of
the Fund's senior security restriction, as well as (2) the Fund's
current fundamental and non-fundamental restrictions that address
senior security issues. The part of the Fund's current
restriction relating to the purchase of securities on margin is
proposed to be eliminated in Proposal 3. The restriction on short
sales, included in current investment restriction 9, would be
carved out of the new senior securities restriction, as further
described below.
WHAT EFFECT WILL STANDARDIZATION OF THE RESTRICTION REGARDING
ISSUING SENIOR SECURITIES HAVE ON THE FUND?
The proposed restriction would permit the Fund to engage in
permissible types of leveraging transactions. The proposed
restriction would permit the Fund to engage in options, futures
contracts, forward contracts, repurchase transactions or reverse
repurchase transactions. The proposed restriction also would
permit the Fund to make short sales as permitted under the 1940
Act, and any exemptions available under the 1940 Act.
Essentially, the proposed restriction clarifies the Fund's
ability to engage in those investment transactions (such as
repurchase transactions) that, while appearing to raise senior
security concerns, have been interpreted as not constituting the
issuance of senior securities under the federal securities laws.
Finally, the proposed investment restriction is designed to
standardize the language regarding issuing senior securities
among the Franklin Templeton Group of Funds. The Board does not
anticipate that any additional risk to the Fund will occur if the
Fund combines the current fundamental restriction with the
non-fundamental restriction to result in one, standardized,
fundamental investment restriction regarding senior securities.
SUB-PROPOSAL 2F: TO AMEND THE FUND'S FUNDAMENTAL
INVESTMENT RESTRICTION REGARDING CONCENTRATION OF THE
FUND'S INVESTMENTS IN THE SAME INDUSTRY.
Under the 1940 Act, a fund's policy of concentrating its
investments in securities of companies in the same industry must
be fundamental. Under the federal securities laws, a mutual fund
"concentrates" its investments if it invests more than 25% of its
"net" assets (exclusive of certain items such as cash, U.S.
government securities, securities of other investment companies,
and tax-exempt securities) in a particular industry or group of
industries. A fund is not permitted to concentrate its
investments in a particular industry unless it so states.
WHAT EFFECT WILL STANDARDIZATION OF THE CURRENT RESTRICTION
REGARDING INDUSTRY CONCENTRATION HAVE ON THE FUND?
The Fund's existing fundamental restriction 7 recites the Fund's
concentration policy and states that the Fund may not invest more
than 25% of its assets in any single industry. The proposed
restriction would help the Fund achieve the goal of standardizing
the language of the investment restrictions among the Franklin
Templeton Group of Funds. The proposed restriction provides the
Fund with marginally added flexibility because, consistent with
SEC interpretations, it exempts from the 25% limitation: (i)
securities of other investment companies, and (ii) securities
issued or guaranteed by the U. S. government or any of its
agencies or instrumentalities. It also recites the current
federal securities law requirement with respect to concentration
that limits investments to "net" as opposed to "total" assets.
While the proposed restriction does not address specifically the
timing of the application of the concentration policy, as the
current restriction does, the parenthetical clarifying that the
Fund may not "invest" more than 25% of its assets in the
securities industry is adequate to reflect that the test applies
at the time of investment. The investment flexibility provided by
the new concentration restriction will help the Fund respond to
future legal, regulatory, market or technical changes. However,
adoption of the proposed restriction is not expected to change
materially the way in which the Fund currently is managed as the
Fund does not intend to begin concentrating in shares of other
investment companies or the U. S. government or any of its
agencies or instrumentalities.
SUB-PROPOSAL 2G: TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT
RESTRICTION REGARDING DIVERSIFICATION OF INVESTMENTS.
The 1940 Act prohibits a "diversified" investment company, like
the Fund, from purchasing securities of any one issuer if, at the
time of purchase, as to 75% of the fund's total assets, more than
5% of the fund's total assets would be invested in securities of
that issuer, or the fund would own or hold more than 10% of the
outstanding voting securities of that issuer, except that up to
25% of the fund's total assets may be invested without regard to
these limitations. Under the 1940 Act, these 5% and 10%
limitations do not apply to securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, or to the
securities of other investment companies.
While the 1940 Act excludes the securities of other investment
companies and the U.S. government and its agencies and
instrumentalities, the Fund's current restriction 1 does not
include a carve out for the securities of other investment
companies. In addition, although the 1940 Act prohibits a fund
from owning or holding more than 10% of the "outstanding voting
securities" of an issuer, the Fund's current restriction 1
prohibits the Fund from holding more than 10% of "any or all
classes" of the securities of an issuer. Since the Fund's
restriction excludes a broader class of securities from the 10%
limitation, it is more restrictive than the requirements of the
1940 Act.
WHAT EFFECT WILL STANDARDIZATION OF THE CURRENT INVESTMENT
DIVERSIFICATION RESTRICTION HAVE ON THE FUND?
Amending the Fund's diversification policy would make it
consistent with the definition of a diversified investment
company under the 1940 Act, and would provide the Fund with
greater investment flexibility. The proposed restriction is
similar to the current restriction, but would help the Fund
achieve the goal of standardizing the language of the investment
restrictions among the Franklin Templeton Group of Funds. The
most significant change in the proposed restriction is that it
excludes from the 5% and 10% limitations the purchase of the
securities of other investment companies. With this exclusion,
the Fund would be able to invest cash held at the end of the day
in money market funds or other short-term investments without
regard to the 5% and 10% investment limitations. The Fund,
together with the other funds in the Franklin Templeton Group of
Funds, has obtained an exemptive order from the SEC (the "Cash
Sweep Order") which permits the Franklin and Templeton funds to
invest their uninvested cash in one or more Franklin or Templeton
money market funds. Amending the Fund's current restriction would
permit the Fund to take advantage of the investment opportunities
presented by the Cash Sweep Order, since the Cash Sweep Order
contemplates relief from the 1940 Act restrictions relating to
the permissible percentage investments in other investment
companies.
In addition, the proposed investment restriction clarifies that
the 5% and 10% limitations do not apply as to 25% of the Fund's
total assets. Finally, the proposed restriction also clarifies
that the Fund's 10% investment limitation excludes only an
issuer's "outstanding voting securities," rather than "any or all
classes" of an issuer. However, it is not currently anticipated
that adoption of the proposed restriction would materially change
the way the Fund is managed.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU APPROVE
SUB-PROPOSALS 2A-2G
PROPOSAL 3: TO APPROVE THE ELIMINATION OF CERTAIN OF THE FUND'S
FUNDAMENTAL INVESTMENT RESTRICTIONS
WHICH TEN (10) FUNDAMENTAL INVESTMENT RESTRICTIONS IS THE BOARD
RECOMMENDING THAT THE FUND ELIMINATE?
Several of the Fund's fundamental investment restrictions were
originally drafted pursuant to state laws and regulations, which,
due to NSMIA, are no longer in accordance with SEC staff
positions because the positions have either changed or are no
longer relevant to the Fund. Since NSMIA eliminated the states'
ability to substantively regulate investment companies, the Fund
is no longer legally required to include current restrictions 5,
6, 8, 9, 12, 13, 14, 15, 16 and 17 among its fundamental
investment restrictions. Advisory has recommended, and the Board
has determined, that all of these current fundamental investment
restrictions should be eliminated.
The exact wording of these ten restrictions (referred to in this
Proposal 3 as the "Restrictions") has been compiled in Exhibit B,
which is entitled "Current Fundamental Investment Restrictions
Proposed to be Eliminated," for ease of reference.
ILLIQUID AND RESTRICTED SECURITIES:
The Fund's current restrictions 5 and 17 limit the Fund's ability
to invest in illiquid securities, and restriction 14 limits the
Fund's ability to purchase restricted securities. Illiquid
securities are securities which may not be readily sold within
seven days at the price at which they are being accounted for.
Similarly, restricted securities are subject to certain
contractual or other restrictions on their resale. Restricted
securities are often considered to be illiquid because their
disposition is often difficult or requires more than seven days.
The Board is recommending that all three of these fundamental
investment restrictions be eliminated. These restrictions likely
originated under certain state securities laws. While based on
previous SEC positions, under NSMIA, such restrictions are no
longer required by the states. The SEC does not require a fund's
illiquid securities restriction to be fundamental. In addition,
there is currently no SEC requirement that a fund state a
restricted securities policy.
Under the current restrictions, the Fund is prevented from
investing more than 10% of its assets in securities which are
illiquid. The SEC recently amended its position to permit funds
to invest up to 15% of their assets in illiquid securities.
However, the Fund may not take advantage of this new SEC position
because its existing policies relating to investments in illiquid
securities are both fundamental and contain a lower percentage
limitation. Since the current policy is fundamental, it may only
be changed by a shareholder vote. Eliminating this as a
fundamental policy would enable the Fund to both take advantage
of the current SEC position, and to respond to future SEC changes
in this area without the delay and expense of a shareholder vote,
thereby providing the Fund with additional investment
flexibility. Although the Fund's policy relating to illiquid
securities would no longer be fundamental, the Fund would
continue to be subject to the SEC rules and regulations in this
area, which do not require them to be fundamental.
The Fund's current restriction 14 was adopted because
historically the states required a fund to include a restriction
relating to restricted securities. In addition, most restricted
securities were traditionally considered illiquid to the extent
that they could not be sold within seven days. Therefore
restricted securities raised liquidity concerns. However, current
SEC rules have substantially increased the number of restricted
securities that can now be considered liquid and, in addition,
have given to Trustees the ability to determine, under specific
guidelines, that a security is liquid. The most common form of
liquid restricted securities would be Rule 144A securities.
Elimination of this restriction would allow the Fund greater
flexibility to invest in restricted securities.
Elimination of these restrictions should not have an impact on
the day to day management of the Fund as the Fund does not
currently intend to increase the percentages in which the Fund
invests in either illiquid or restricted securities.
CONTROL OR MANAGEMENT:
The Fund's current fundamental investment restriction 6 limits
the Fund's ability to invest for purposes of exercising control
or management. This restriction was enacted in response to
various state securities laws and is no longer required under
NSMIA. Typically, if a fund acquires a large percentage of the
securities of a single issuer, it will be deemed to have invested
in such issuer for the purposes of exercising control or
management. This restriction was intended to ensure that a mutual
fund would not make investments in order to become engaged in the
business of managing another company or to influence management.
Eliminating this restriction will not have any impact on the day
to day management of the Fund because the Fund has not in the
past, and has no present intention, of investing in an issuer for
the purposes of exercising control or management. Further, the
goal of this restriction, namely to limit a fund's ability to
control another issuer, is embodied in the 1940 Act
diversification rule, which is proposed to be incorporated in the
proposed investment restriction relating to diversification
(described in Sub-Proposal 2g). The diversification restriction
limits the Fund's ability to own more than a certain percentage
of any one issuer, which acts to limit its ability to exercise
control or management over another company.
UNSEASONED COMPANIES:
The Fund's current fundamental investment restriction 8 limits
the Fund's ability to invest in companies which have a record of
less than three years of continuous operations. Such relatively
new companies are considered to be unseasoned companies. This
restriction was originally included in response to the various
state law requirements to which mutual funds were previously
subject. This restriction was intended to ensure a fund's
stability through its investment in companies with a proven track
record. However, this three-year restriction is unnecessary since
under the rising dividends criteria, the Fund will invest only in
the securities of companies that have increased dividends over
the past ten years. As discussed earlier in the introduction,
under NSMIA the Fund is no longer required to retain a
fundamental policy regarding investments in unseasoned companies.
Elimination of this restriction should not have an impact on the
day to day management of the Fund as the Fund has not previously,
nor does it currently intend, to invest in unseasoned companies.
SECURITIES ON MARGIN:
The Fund's current fundamental investment restriction 9 limits
the Fund's ability to purchase securities on margin or sell
securities short. This restriction was originally included in
response to the various state law requirements which specifically
required funds to have policies in this regard. As discussed
earlier in the introduction, under NSMIA the Fund is no longer
required by state law to retain specific fundamental policies
regarding these types of investment activities. The Fund's
ability to sell securities short is addressed in the proposed
restriction relating to issuing senior securities (described in
Sub-Proposal 2e). Further, a fund's purchase of securities on
margin would clearly be viewed as creating a senior security and
would be prohibited under the 1940 Act and the Fund's proposed
restriction as described in Sub-Proposal 2e. Thus, there remains
no reason to specifically address purchasing securities on margin
in a separate restriction. As a general matter, elimination of
this fundamental restriction relating to purchasing securities on
margin should not have an impact on the day to day management of
the Fund, since the 1940 Act prohibitions on these types of
transactions would continue to apply to the Fund.
INVESTMENT IN OTHER INVESTMENT COMPANIES:
The Fund's current investment restriction number 12 limits the
Fund's ability to invest in other open-end investment companies
except in connection with a merger, consolidation, acquisition or
reorganization. This restriction, which is inconsistent with the
1940 Act provisions in this regard, was originally included in
the Fund's fundamental investment restrictions in response to
various state law requirements. Under NSMIA, however, the Fund is
no longer legally required to retain such a policy as a
fundamental restriction.
Upon elimination of this restriction, the Fund would remain
subject to the 1940 Act restrictions (or any exemption from such
restrictions) on a fund's ability to invest in other open-end
funds. The 1940 Act restrictions state that a fund may not
purchase more than 3% of another fund's total outstanding voting
stock, commit more than 5% of its assets to the purchase of
another fund's securities, or have more than 10% of its total
assets invested in securities of all other funds.
Elimination of this restriction should not have an impact on the
day to day management of the Fund as the Fund does not intend to
begin pursuing its investment objective through the purchase of
other open-end investment company securities. Elimination of the
restriction would, however, permit the Fund to invest cash held
at the end of the day in money market funds. This would permit
the Fund to take advantage of the investment opportunities
presented by the Cash Sweep Order, since the Cash Sweep Order
contemplates relief from the 1940 Act restrictions relating to
the permissible percentage invested in other investment companies
in certain limited circumstances.
SECURITIES WITH UNLIMITED LIABILITY:
The Fund's current fundamental investment restriction 13 limits
the Fund's ability to invest in assessable securities or
securities involving unlimited liability on the part of the Fund.
This restriction was originally included in response to the
various state law requirements to which mutual funds used to be
subject. As discussed earlier in the introduction, under NSMIA
the Fund is no longer required to retain a fundamental policy
regarding investments in securities with unlimited liability.
Elimination of this restriction should not have an impact on the
day to day management of the Fund as the Fund has not previously,
nor does it currently intend, to invest in securities with
unlimited liability.
MANAGEMENT OWNERSHIP OF SECURITIES:
The Fund's current restriction 15 limits the Fund's ability to
invest in securities issued by companies whose securities are
owned in certain amounts by Trustees and officers of the Fund, or
its investment manager, Advisory. This policy originated many
years ago with a now obsolete state securities law. As discussed
earlier in the introduction, under NSMIA the Fund is no longer
required to retain a fundamental policy regarding management
ownership of securities.
As a general matter, elimination of this fundamental restriction
should not have an impact on the day to day management of the
Fund, as the 1940 Act restrictions still apply to the Fund. These
restrictions generally prohibit transactions between a fund and
any affiliates or affiliates of affiliates, which include the
Trustees and officers of a fund.
TAX DIVERSIFICATION FOR VARIABLE ANNUITY FUNDS:
The Fund's current restriction 16 prohibits the Fund from
investing in a manner which does not comply with the investment
diversification requirements of Section 817(h) of the Internal
Revenue Code of 1986, as amended (the "Code"). Section 817(h) of
the Code applies to investment companies, like the Fund, which
are held by segregated asset accounts of one or more insurance
companies, and which are only available to the public through the
purchase of a variable contract. Under Section 817(h) of the Code
and applicable Treasury Regulations, the Fund will be "adequately
diversified" for purposes of the Code, if: (i) no more than 55%
of the value of the total assets of the Fund may be represented
by any one investment, (ii) no more than 70% by any two
investments, (iii) no more than 80% by any three investments, and
(iv) no more than 90% by any four investments. The Fund seeks to
maintain compliance with the diversification provisions set forth
in the Code and the Treasury Regulations in order to take
advantage of certain tax opportunities available to insurance
funds. As discussed earlier in the introduction, under NSMIA the
Fund is not required to retain a fundamental policy that it
invest in a manner which is consistent with Section 817(h) of the
Code.
As a general matter, elimination of this fundamental restriction
should not have an impact on the day to day management of the
Fund since the restrictions of the Code and applicable Treasury
Regulations will continue to apply to the Fund, and the Fund will
continue to invest in a manner which complies with the
diversification rules set forth in Section 817(h) of the Code and
applicable Treasury Regulations.
WHY IS THE BOARD RECOMMENDING THAT THE RESTRICTIONS BE
ELIMINATED, AND WHAT EFFECT WILL SUCH ELIMINATION HAVE ON THE
FUND?
The Board has determined that eliminating the Restrictions is
consistent with the federal securities laws, and will conform the
Fund's list of fundamental restrictions with standardized
investment restrictions adopted by other Franklin and Templeton
funds. By both standardizing and reducing the total number of
investment restrictions that can be changed only by a shareholder
vote, the Board believes that the Fund will be able to minimize
the costs and delays associated with holding future shareholder
meetings to revise fundamental policies that become outdated or
inappropriate.
The Board believes that eliminating the Restrictions is in the
best interest of the Fund's shareholders as it will provide the
Fund with increased flexibility to pursue its investment goal.
WHAT ARE THE RISKS, IF ANY, IN ELIMINATING THE RESTRICTIONS?
The Board does not anticipate that eliminating the Restrictions
will result in any additional risk to the Fund. Although the
Fund's current Restrictions, as drafted, are no longer legally
required, the Fund's ability to invest in these areas will
continue to be subject to the limitations of the 1940 Act, any
exemptive orders granted under the 1940 Act, and the Code.
Further, the Fund has no current intention to change its present
investment practices as a result of eliminating these
Restrictions.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU APPROVE
PROPOSAL 3
PROPOSAL 4: OTHER BUSINESS
The Trustees do not intend to bring any matters before the
Meeting other than Proposals 1, 2, and 3 and are not aware of any
other matters to be brought before the Meeting by others. If any
other matters do properly come before the Meeting, the persons
named in the proxy will use their best judgment in voting on such
matters.
- - INFORMATION ABOUT THE TRUST AND THE FUND
The Trust was organized as a Massachusetts business trust on
April 26, 1988 and is registered under the 1940 Act as an
open-end diversified investment management company. The Trust
currently has twenty-five series of shares (each, a "Series").
Shares of the Series are sold only to insurance company separate
accounts to serve as the investment vehicle for certain variable
annuity and life insurance contracts.
THE INVESTMENT MANAGER. Franklin Advisory Services, LLC
("Advisory"), One Parker Plaza, Ninth Floor, Fort Lee, New Jersey
07024, serves as the Trust's investment manager. Advisory is
wholly owned by Franklin Resources, Inc. ("Resources").
THE TRUST ADMINISTRATOR. Under an agreement with Advisory,
Franklin Templeton Services, Inc. ("FT Services"), 777 Mariners
Island Blvd., San Mateo, CA 94404, provides certain
administrative services and facilities for the Trust. FT Services
is a wholly owned subsidiary of Resources, and is an affiliate of
Advisory and the Trust's principal underwriter.
THE UNDERWRITER. The underwriter for the Trust is Franklin
Templeton Distributors, Inc., 777 Mariners Island Blvd., San
Mateo, CA 94404.
THE TRANSFER AGENT. The transfer agent, registrar and dividend
disbursement agent for the Trust is Franklin/Templeton Investor
Services, Inc., 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California 94403-7777.
THE CUSTODIAN. The Bank of New York, Mutual Funds Division, 90
Washington Street, New York, NY 10286, acts as custodian of the
Trust's securities and other assets.
REPORTS TO SHAREHOLDERS AND FINANCIAL STATEMENTS. The Trust's
last audited financial statements and annual report, for the
fiscal year ended December 31, 1998, and its semi-annual report
dated June 30, 1999, are available free of charge. To obtain a
copy, please call 1-800/DIAL BEN(R) or forward a written request to
Franklin/Templeton Investor Services, Inc., 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
PRINCIPAL SHAREHOLDERS.
As of November 30, 1999, the Trust had 34,642,325.865 shares
outstanding and total net assets of $475,291,471.84. From time to
time, the number of shares held in "street name" accounts of
various securities dealers for the benefit of their clients may
exceed 5% of the total shares outstanding. To the knowledge of
the Trust's management, as of November 30, 1999, the following
were beneficial owners of the issued and outstanding shares of
the Trust:
NAME AND ADDRESS NUMBER OF PERCENT OF
OF BENEFICIAL OWNER SHARES OWNED CLASS OWNED
- ------------------------------------------------------------------
Allianz Life Insurance Class 1: 90.50%
Company 31,322,349.772
of North America ("Allianz Class 2:
Life") 30,975.813
1750 Hennepin Avenue 100%
Minneapolis, Minnesota
55403-2195
Preferred Life Insurance Class 1: 9.50%
Company 3,289,000.280
of New York ("Preferred Life") Class 2:
152 West 57th Street, 18th 0 0
Floor
New York, New York 10019
However, the Insurance Companies will exercise voting rights
attributable to the shares held by them in accordance with voting
instructions received from owners of the contracts issued by
them. To this extent, the Insurance Companies do not exercise
control over the Trust or the Fund by virtue of the voting rights
arising from their record ownership of Trust shares.
Except for the foregoing, there were no other entities holding
beneficially or of record more than 5% of the Trust's outstanding
shares. In addition, to the knowledge of the Trust's management,
as of November 30, 1999, no Trustee of the Trust owned 1% or more
of the outstanding shares of the Trust, and the Officers and
Trustees of the Trust owned, as a group, less than 1% of the
outstanding shares of the Trust.
- - ADDITIONAL INFORMATION ABOUT VOTING AND THE MEETING
SOLICITATION OF PROXIES. In addition to soliciting by mail, the
Trustees and the employees of the Insurance Companies and
Resources and its affiliates may solicit voting instructions from
Contract Owners in person or by telephone. The cost of soliciting
these proxies will be borne by the Trust. The Trust does not
reimburse Trustees, officers, or regular employees and agents
involved in the solicitation of proxies.
QUORUM. Forty percent (40%) of the shares entitled to vote shall
constitute a quorum at the Meeting. Shares whose proxies reflect
an abstention on any item are all counted as shares present and
entitled to vote for purposes of determining the presence of a
quorum.
METHODS OF COUNTING THE VOTES. The inspector of election will
count the total number of votes cast "for" approval of each of
the proposals for the purposes of determining whether sufficient
affirmative votes have been cast. Abstentions will be included
for purposes of determining whether a quorum is present at the
Meeting, and will not be counted for purposes of determining
whether the matters to be voted upon at the Meeting have been
approved, and will have the effect of a negative vote on a
proposal.
Each of the Insurance Companies holding the shares of the Funds
have agreed to vote their shares in proportion to and in the
manner instructed by Contract Owners. If a Contract Owner gives
no instructions by not returning the voting instruction card, the
relevant Insurance Company will vote the shares in the same
proportion as shares of that Fund for which it has received
instructions. If a Contract Owner returns a signed voting
instruction card, but does not indicate specific instructions,
the shares will be voted in accordance with the Trustees'
recommendations.
OTHER MATTERS AND DISCRETION OF ATTORNEYS NAMED IN THE PROXY. The
Trust is not required, and does not intend, to hold regular
annual meetings of shareholders. Shareholders wishing to submit
proposals for consideration for inclusion in a proxy statement
for the next meeting of shareholders should send their written
proposals to the Trust's offices, 777 Mariners Island Blvd., San
Mateo, CA 94404, so they are received within a reasonable time
before any such meeting. No business other than the matters
described above is expected to come before the Meeting, but
should any other matter requiring a vote of shareholders arise,
including any question as to an adjournment or postponement of
the Meeting, the persons named on the proxy card will vote on
such matters according to their best judgment in the interests of
the Trust.
By order of the Board of Trustees,
Deborah R. Gatzek
Secretary
Dated: December 20, 1999
San Mateo, California
EXHIBIT A
FUNDAMENTAL INVESTMENT RESTRICTIONS PROPOSED
TO BE AMENDED OR ELIMINATED
PROPOSAL OR
SUB-PROPOSAL RESTRICTION CURRENT PROPOSED FUNDAMENTAL
FUNDAMENTAL RESTRICTION
RESTRICTION
2g Diversification 1. With respect to 7. Purchase the
75% of its total securities of any
assets... one issuer (other
purchase the than the U.S.
securities of government or any
any one issuer of its agencies or
(other than instrumentalities
cash, cash items or securities of
and obligations other investment
of the U.S. companies) if
Government) if immediately after
immediately such investment (a)
thereafter, and more than 5% of the
as a result of value of the fund's
the purchase, total assets would
the fund would be invested in such
(a) have more issuer or (b) more
than 5% of the than 10% of the
value of its outstanding voting
total assets securities of such
invested in the issuer would be
securities of owned by the fund,
such issuer or except that up to
(b) hold more 25% of the value of
than 10% of any the fund's total
or all classes assets may be
of the invested without
securities of regard to such 5%
any one issuer; and 10% limitations.
2a Borrowing 2. Borrow money in 1. Borrow money,
an amount in except that the fund
excess of 5% of may borrow money
the value of its from banks or
total assets, affiliated
except from investment companies
banks for to the extent
temporary or permitted by the
emergency 1940 Act, or any
purposes, and exemptions therefrom
not for direct which may be granted
investment in by the SEC, or for
securities; temporary or
emergency purposes
and then in an
amount not exceeding
331/3% of the value
of the fund's total
assets (including
the amount borrowed).
PROPOSAL CURRENT PROPOSED FUNDAMENTAL
OR RESTRICTION FUNDAMENTAL RESTRICTION
SUB-PROPOSAL RESTRICTION
2c Lending 3. Lend its 3. Make loans to other
assets, except persons except (a)
through the through the lending
purchase or of its portfolio
acquisition of securities, (b)
bonds, through the purchase
debentures or of debt securities,
other debt loan participations
securities of and/or engaging in
any type direct corporate
customarily loans in accordance
purchased by with its investment
institutional objectives and
investors, or policies, and (c) to
through loans the extent the entry
of portfolio into a repurchase
securities, or agreement is deemed
to the extent to be a loan. The
the entry into fund may also make
a repurchase loans to affiliated
agreement may investment companies
be deemed a to the extent
loan; permitted by the
1940 Act or any
exemptions therefrom
which may be granted
by the SEC.
2b Underwriting 4. Underwrite 2. Act as an
securities of underwriter except
other issuers . to the extent the
. . except fund may be deemed
insofar as a to be an
fund may be underwriter when
technically disposing of
deemed an securities it owns
underwriter or when selling its
under the own shares.
federal
securities laws
in connection
with the
disposition of
portfolio
securities;
3 Illiquid 5. Purchase Proposed to be
Securities illiquid Eliminated.
securities,
including
illiquid
securities
which, at the
time of
acquisition,
could be
disposed of
publicly by the
[fund] only
after
registration
under the
Securities Act
of 1933, if as a
result more than
10% of [its] net
assets would be
invested in such
illiquid
securities;
3 Control or 6. Invest in Proposed to be
Management securities for Eliminated.
the purpose of
exercising
management or
control of the
issuer;
2f Concentration 7. Invest more 6. Concentrate (invest
than 25% of its more than 25% of
assets (measured its net assets) in
at the time of securities of
the most recent issuers in a
investment) in particular industry
any single (other than
industry; securities issued
or guaranteed by
the U.S. government
or any of its
agencies or
instrumentalities
or securities of
other investment
companies).
PROPOSAL CURRENT PROPOSED FUNDAMENTAL
OR RESTRICTION FUNDAMENTAL RESTRICTION
SUB-PROPOSAL RESTRICTION
3 Unseasoned 8. Invest in Proposed to be
Companies companies which Eliminated.
have a record
of less than
three years of
continuous
operation,
including the
operations of
any predecessor
companies;
2e, 3 Senior 9. Maintain a 5. Issue securities
Securities margin account senior to the
with a fund's presently
securities authorized shares
dealer or of beneficial
effect short interest. Except
sales; that this
restriction shall
not be deemed to
prohibit the fund
from (a) making any
permitted
borrowings, loans,
mortgages or
pledges, (b)
entering into
options, futures
contracts, forward
contracts,
repurchase
transactions, or
reverse repurchase
transactions, or
(c) making short
sales of securities
to the extent
permitted by the
1940 Act and any
rule or order
thereunder, or SEC
staff
interpretations
thereof.
2d Commodities 10. Invest in 4. Purchase or sell
commodities or real estate and
commodity commodities, except
pools . . . that the fund may
Securities or purchase or sell
other securities of real
investments estate investment
backed by trusts, may
commodities purchase or sell
are not currencies, may
considered enter into futures
commodities or contracts on
commodity securities,
contracts for currencies, and
the purposes other indices or
of this any other financial
restriction; instruments, and
may purchase and
sell options on
such futures
contracts.
2d Real Estate 11. Invest 4. Purchase or sell
directly in real estate and
real estate. . commodities, except
. . First that the fund may
mortgage loans purchase or sell
or other direct securities of real
obligations estate investment
secured by real trusts, may
estate are not purchase or sell
considered real currencies, may
estate for enter into futures
purposes of contracts on
this securities,
restriction; currencies, and
other indices or
any other financial
instruments, and
may purchase and
sell options on
such futures
contracts.
PROPOSAL CURRENT PROPOSED FUNDAMENTAL
OR RESTRICTION FUNDAMENTAL RESTRICTION
SUB-PROPOSAL RESTRICTION
- ----------------------------------------------------------------------------
3 Investment 12. Invest in the Proposed to be
in other securities of Eliminated.
Investment other open-end
Companies investment
companies
(except that
securities of
another
open-end
investment
company may be
acquired
pursuant to a
plan of
reorganization,
merger,
consolidation
or
acquisition).
3 Securities 13. Invest in Proposed to be
with assessable Eliminated.
Unlimited securities or
Liability securities
involving
unlimited
liability on
the part of the
fund.
3 Restricted 14. Invest an Proposed to be
aggregate of Eliminated.
more than 10%
of its assets
in securities
with legal or
contractual
restrictions
on resale,
securities on
resale,
securities
which are not
readily
marketable
(including
over-the-counter
options and
assets used to
cover such
options), and
repurchase
agreements
with more than
seven days to
maturity;
3 Management 15. Purchase or Proposed to be
Ownership retain any Eliminated.
of security if any
Securities officer,
director or
security holder
of the issuer
is at the same
time an
officer,
trustee or
employee of the
Trust or of the
fund's Manager
and such person
owns
beneficially
more than
one-half of 1%
of the
securities and
all such
persons owning
more than
one-half of 1%
own more than
5% of the
outstanding
securities of
the issuer; or
3 Tax 16. Invest its Proposed to be
Diversification assets in a Eliminated.
for manner which
Variable does not comply
Annuity with the
Funds investment
diversification
re quirements
of Section
817(h) of the
Code.
PROPOSAL RESTRICTION CURRENT PROPOSED FUNDAMENTAL
OR FUNDAMENTAL RESTRICTION
SUB-PROPOSAL RESTRICTION
3 Illiquid 17. Invest more Proposed to be
Securities than 10% of Eliminated.
its assets in
illiquid
securities
(including
illiquid
equity
securities,
repurchase
agreements of
more than
seven days
duration,
over-the-counter
options and
assets used to
cover such
options and
other
securities
which are not
readily
marketable),
as more fully
described in
the prospectus
and SAI.
EXHIBIT B
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS PROPOSED TO BE
ELIMINATED
Ten of the Fund's current fundamental investment restrictions
have been proposed to be eliminated, and are listed in the table
below.
SUBJECT CURRENT INVESTMENT RESTRICTION STATES THAT THE FUND MAY
NOT:
- -------------------------------------------------------------------
Illiquid 5. Purchase illiquid securities, including
Securities illiquid securities which, at the time of
acquisition, could be disposed of publicly
by the funds only after registration under
the Securities Act of 1933, if as a result
more than 10% of their net assets would be
invested in such illiquid securities;
Control or 6. Invest in securities for the purpose of
Management exercising management or control of the
issuer;
Unseasoned 8. Invest in companies which have a record of
Companies less than three years of continuous
operation, including the operations of any
predecessor companies;
Senior Securities 9. Maintain a margin account with a securities
dealer or effect short sales;
Investment in 12. Invest in the securities of other open-end
other Investment investment companies (except that securities
Companies of another open-end investment company may
be acquired pursuant to a plan of
reorganization, merger, consolidation or
acquisition).
Securities with 13. Invest in assessable securities or
Unlimited securities involving unlimited liability on
Liability the part of the fund;
Restricted 14. Invest an aggregate of more than 10% of its
Securities assets in securities with legal or
contractual restrictions on resale,
securities on resale, securities which are
not readily marketable (including
over-the-counter options and assets used to
cover such options), and repurchase
agreements with more than seven days to
maturity;
Management 15. Purchase or retain any security if any
Ownership of officer, director or security holder of the
Securities issuer is at the same time an officer,
trustee or employee of the Trust or of the
fund's Manager and such person owns
beneficially more than one-half of 1% of the
securities and all such persons owning more
than one-half of 1% own more than 5% of the
outstanding securities of the issuer; or
Tax 16. Invest its assets in a manner which does not
Diversification comply with the investment diversification
for Variable requirements of Section 817(h) of the Code.
Annuity Funds
Illiquid 17. Invest more than 10% of its assets in
Securities illiquid securities (including illiquid
equity securities, repurchase agreements of
more than seven days duration,
over-the-counter options and assets used to
cover such options and other securities
which are not readily marketable), as more
fully described in the prospectus and SAI.
THESE VOTING INSTRUCTIONS ARE SOLICITED BY
[ ] IN CONNECTION WITH A SOLICITATION OF PROXIES BY THE
TRUSTEES OF FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST.
The undersigned hereby instructs [ ] to vote shares of the
Franklin Rising Dividends Securities Fund, a series of Franklin Templeton
Variable Insurance Products Trust, attributable to the undersigned's variable
annuity or variable life insurance contract at the Special Shareholder's
Meeting to be held at 777 Mariners Island Blvd., H.L. Jamieson Auditorium,
San Mateo, California at 9:00 a.m. Pacific time on the 8th day of February,
2000, and at any adjournments thereof, as indicated below, with respect to
the matters set forth on the reverse side and described in the Notice of
Special Meeting and Proxy Statement dated December 20, 1999 receipt of which
is hereby acknowledged.
PLEASE SIGN IN THE BOX BELOW
Note: If a contract is held jointly, each contract owner should sign. If
only one contract owner signs, his or her signature will be binding. If the
contract owner is a corporation, the President or Vice President should sign
in his or her own name, indicating title. If the contract owner is a
partnership, a partner should sign in his or her own name, indicating that he
or she is a "Partner." If the contract owner is a trust, the trustee should
sign in his or her own name, indicating that he or she is a "Trustee."
------------------------
------------------------
Signature(s), Title(s) if applicable.
Dated:
THESE VOTING INSTRUCTIONS, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED BY THE CONTRACT OWNER. IF THESE VOTING INSTRUCTIONS ARE EXECUTED
AND NO DIRECTION IS MADE, THESE VOTING INSTRUCTIONS WILL BE VOTED FOR ALL
PROPOSALS AND SUB-PROPOSALS AND IN THE DISCRETION OF THE INSURANCE COMPANY
UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF
PROPOSALS 1, 2, 3 AND 4.
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOXES BELOW.
Proposals FOR AGAINST ABSTAIN
To modify the Fund's current criteria for
the selection of portfolio companies
related to debt as a part of the issuer's
capital structure, which is fundamental.
To approve amending certain of the Fund's
fundamental investment restrictions, as
described more fully in the proxy
statement. Modification of fundamental
investment restriction regarding:
2A. Borrowing
2B. Underwriting
2C. Lending
2D. Real estate and commodities
2E. Issuing of senior securities
2F. Industry concentration
2G. Diversification of investments
To approve the elimination of certain of
the
Fund's fundamental
investment
restrictions, as described more
fully in the
proxy statement.
GRANT WITHHOLD ABSTAIN
To grant the proxyholders authority to
vote
upon any other business that may
properly
come before the meeting or any
adjournments thereof.
PLEASE SIGN, FILL-IN, SIGN, DATE AND RETURN THE VOTING INSTRUCTION FORM IN
THE ENCLOSED POSTAGE-PAID ENVELOPE. VOTING INSTRUCTIONS MUST BE RECEIVED BY
FEBRUARY 4, 1999 TO BE VOTED FOR THE MEETING TO BE HELD ON FEBRUARY 8, 2000.
FRANKLIN TEMPLETON
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Tel 1-800/632-2301
