[Federal Register Volume 75, Number 233 (Monday, December 6, 2010)]
[Notices]
[Pages 75708-75711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30461]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-29521; File No. 812-13780]
American United Life Insurance Company, et al.; Notice of
Application
November 30, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application for an order pursuant to Section 26(c) of
the Investment Company Act of 1940, as amended (``1940 Act''), the
substitution of securities.
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Applicants: American United Life Insurance Company (``AUL''), AUL
American Unit Trust (``AUL Account''). AUL and the AUL Account are
together referred to herein as the ``Applicants.''
Summary of Application: The AUL account is used to fund variable
annuity contracts issued by AUL (``Contracts''). Applicants request an
order to permit the substitution of units issued by the Vanguard
Variable Insurance Fund Small Company Growth Portfolio (the
``Substituted Portfolio'' or ``VVIF''), for units issued by the
Vanguard Explorer Fund (the ``Removed Portfolio'' or ``VEF''), a fund
currently available as an investment option under certain Contracts.
Filing Date: The application was filed on June 8, 2010 and amended and
restated applications were filed on September 2, and October 15, 2010.
Hearing or Notification of Hearing: An order granting the Application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving Applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the SEC by 5:30 p.m. on
December 27, 2010 and should be accompanied by proof of service on
Applicants, in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writer's
interest, the reason for the request, and the issues contested. Persons
who wish to be notified of a hearing may request notification by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-0609. Applicants: c/o Richard M. Ellery,
Esq., American United Life Insurance Company, One American Square,
Indianapolis, Indiana 46282. Copies to: Frederick H. Sherley, Esq.,
Dechert LLP, 100 North Tryon Street, Suite 4000, Charlotte, NC 28202.
FOR FURTHER INFORMATION CONTACT: Patrick Scott, Senior Counsel, Office
of Insurance Products, Division of Investment Management, SEC, at (202)
551-6763, or Zandra Bailes, Branch Chief, at (202) 551-6975.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or obtained for a fee from the Public Reference Branch of
the Commission, 100 F Street, NE., Washington, DC 20549, or by calling:
(202) 551-8090.
Applicants' Representations:
1. AUL is an Indiana stock insurance company. AUL is the depositor
and sponsor of the AUL Account, a separate investment account
established under Indiana law.
2. The AUL Account is used to fund variable annuity contracts
issued by AUL (each, a ``Contract'').\1\ The income, gains or losses of
the AUL Account are credited to or charged against the assets of the
AUL Account without regard to other income, gains or losses of AUL. AUL
owns the assets in the AUL Account and is required to maintain
sufficient assets in the AUL Account to meet all AUL Account
obligations under the Contracts. AUL may transfer to its general
account assets that exceed anticipated obligations of the AUL Account.
All obligations arising under the Contracts are general corporate
[[Page 75709]]
obligations of AUL. AUL serves as sponsor and depositor of the AUL
Account.
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\1\ The registration statement relating to these contracts is
incorporated by reference into the application, to the extent
necessary to support and supplement the descriptions and
representations set forth in the application.
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3. The AUL Account is currently divided into 419 sub-accounts
referred to as Investment Accounts. Each Investment Account invests
exclusively in shares of one of the mutual fund portfolios offered by
the fund companies with whom AUL has executed agreements so that the
portfolios of those fund companies are eligible to be selected by a
Contract Owner as an investment option under a Contract issued by AUL.
Contributions may be allocated to one or more Investment Accounts
available under a Contract. Not all of the Investment Accounts may be
available under a particular Contract and some of the Investment
Accounts are not available for certain types of Contracts. Each
Contract permits allocations of value to available fixed and variable
subaccounts; each variable subaccount invests in a specific investment
portfolio of an underlying mutual fund. The group variable annuity
Contracts may allow ongoing contributions that can vary in amount and
frequency. All of the Contracts provide for the accumulation of values
on a variable basis, a fixed basis or both. The Contracts also provide
several options for fixed annuity payments to begin on a future date.
4. The AUL Account does not impose any limitations on the number of
transfers between Investment Accounts available under a Contract or
between Investment Accounts and the Fixed Interest Account (an
investment option under the Contracts to which contributions may be
allocated for accumulation at rates guaranteed by AUL) or impose
charges on transfers. Under certain circumstances, amounts transferred
from the Fixed Interest Account to an Investment Account during any
given year may not exceed 20% of the Fixed Interest Account's value as
of the beginning of that year. AUL reserves the right, however, at a
future date, to impose a different minimum or maximum transfer amount,
to assess transfer charges, to change the limit on remaining balances,
to limit the number and frequency of transfers, and to suspend the
transfer privilege or the telephone authorization, interactive voice
response, or Internet based transfers.
5. Each Contract reserves the right, upon notice to Contract Owners
and in compliance with applicable law, to add, combine or remove
subaccounts, or to withdraw assets from one subaccount and put them
into another subaccount. Each Contract's prospectus provides that
Applicants may add, remove or combine subaccounts or withdraw assets
relating to a Contract from one subaccount and put them into another.
6. Applicants propose to substitute units of the VEF with units of
the VVIF (the proposed ``Substitution''). Applicants state that no
material differences exist between VEF and VVIF from the perspective of
the Contract Owners. As represented in the application, and as the
table below indicates, the investment objectives and primary risks of
the two portfolios are the same, and the investment strategies are
substantially similar. Further, the expense ratio of the VVIF is lower
than the expense ratio of VEF and the one, five and ten year
performance of the VVIF for the period ended December 31, 2009 is
better than that of the VEF over the same period. While VEF has seven
investment advisers and VVIF has two, VVIF's advisers are both advisers
of VEF.
7. Applicants submit that the foregoing demonstrates that no
material difference exists between the Removed Portfolio and the
Substituted Portfolio; both invest in small company stocks using a
growth strategy and share the same primary risks. Accordingly,
Applicants believe that the Contract Owners have a reasonable
continuity in their investment expectation.
8. As of July 31, 2010, VEF had assets of approximately
$6,231,000,000. As of July 31, 2010, VVIF had assets of approximately
$601,000,000. Applicants believe that both VEF and VVIF hold sufficient
assets such that the Substitution should be immaterial to portfolio
management.
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\2\ The application represents that the information in this
table was transcribed as it appears in the registration statement
dated February 24, 2010, File Nos. 811-01530, 002-27203. That
registration statement was incorporated by reference into the
application to the extent necessary to support and supplement the
descriptions and representations set forth in the application.
\3\ The application represents that the information in this
table was transcribed as it appears in the registration statement
dated April 30, 2010, File Nos. 811-05962, 033-32216. That
registration statement was incorporated by reference into the
application to the extent necessary to support and supplement the
descriptions and representations set forth in the application.
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Removed portfolio \2\ Substituted portfolio \3\
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Vanguard Explorer Fund (cusip- Vanguard Variable Insurance
921926101). Fund Small Company Growth
Portfolio (cusip-921925889).
Objective: Long-term capital Objective: Long-term capital
appreciation. appreciation.
Principal Investment Strategies:....... Principal Investment
The Fund invests mainly in the stocks Strategies: The portfolio
of small companies. These companies invests at least 80% of its
tend to be unseasoned but are assets primarily in common
considered by the Fund's advisors to stocks of smaller companies.
have superior growth potential. Also, These companies tend to be
these companies often provide little unseasoned but are considered
or no dividend income. The Fund uses by the Portfolio's advisors to
multiple investment advisors. have superior growth
potential. Also, these
companies often provide little
or no dividend income. The
Portfolio's 80% policy may be
changed only upon 60 days'
notice to shareholders. The
Portfolio uses multiple
investment advisors.
Primary Risks: An investment in the Primary Risks: An investment in
Fund could lose money over short or the Portfolio could lose money
even long periods. You should expect over short or even long
the Fund's share price and total periods. You should expect the
return to fluctuate within a wide Portfolio's share price and
range, like the fluctuations of the total return to fluctuate
overall stock market. The Fund's within a wide range, like the
performance could be hurt by: fluctuations of the overall
stock market. The Portfolio's
performance could be hurt by:
Stock market risk, which Stock market risk,
is the chance that stock prices which is the chance that
overall will decline. Stock stock prices overall will
markets tend to move in cycles, decline. Stock markets tend
with periods of rising prices and to move in cycles, with
periods of falling prices. periods of rising prices
and periods of falling
prices.
Investment style risk, Investment style
which is the chance that returns risk, which is the chance
from small-capitalization growth that returns from small-
stocks will trail returns from the capitalization growth
overall stock market. stocks will trail returns
Historically, small-cap stocks from the overall stock
have been more volatile in price market. Historically, small-
than the large-cap stocks that cap stocks have been more
dominate the overall market, and volatile in price than the
they often perform quite large-cap stocks that
differently. dominate the overall
market, and they often
perform quite differently.
[[Page 75710]]
Manager risk, which is the Manager risk, which
chance that poor security is the chance that poor
selection or focus on securities security selection or focus
in a particular sector, category, on securities in a
or group of companies will cause particular sector,
the Fund to underperform relevant category, or group of
benchmarks or other funds with a companies will cause the
similar investment objective. Portfolio to underperform
relevant benchmarks or
other funds with a similar
investment objective.
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Total annual fund oTotal annual fund operating expenses: 0.40%
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Average annual total returns for periods ended December
Average annual total returns for periods ended December
31, 2009
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1 Year 5 Years 10 Years 1 Year 5 Years 10 Years
36.21% 0.44% 3.35% 39.38% 0.50% 4.47%
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9. Among the reasons for the proposed Substitution, Applicants
state that the proposed Substitution will strengthen the fund offerings
within the Contracts' fund lineup. Applicants expect the proposed
Substitution to provide benefits to the Contract Owners including a
better performing, lower cost portfolio. The application states that
Vanguard has been consulted about the proposed Substitution and has no
objection to it.
10. Moreover, Applicants state that after the proposed
Substitution, Contract Owners will continue to be able to select among
portfolios with a full range of investment objectives, investments
strategies and risks.
11. In sum, the Applicants also have concluded that the Substituted
Portfolio is better suited than the Removed Portfolio to serve as the
underlying portfolio for the AUL Account as an operational and
procedural matter; the Substituted Portfolio is designed to serve as an
investment vehicle for insurance company separate accounts.
12. In comparing expense ratios, the application states that as set
forth in the Prospectuses of the Substituted Portfolio and Removed
Portfolio, the Substituted Portfolio has a lower total expense ratio
(0.40%) than the Removed Portfolio (0.54%). Neither the Substituted
Portfolio nor the Removed Portfolio pays fees pursuant to Rule 12b-1 of
the Act.
13. The chart below, as included in the application, provides a
comparison of expenses:
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Total annual
Management 12b-1 Other expenses operating
expenses (in distribution fee (in percent) expenses (in
percent) percent)
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Removed Portfolio, Investor Shares...... 0.50 None 0.04 0.54
Substituted Portfolio................... 0.35 None 0.05 0.40
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14. In addition to expenses, Applicants state in the application
that relative performance is a reason for the substitution. According
to Vanguard, the Substituted Portfolio has outperformed the Removed
Portfolio over the last one, five and ten year periods for the period
ended December 31, 2009. In these time periods, respectively, the
Substituted Portfolio has returned 39.38%, 0.50% and 4.47%, while the
Removed Portfolio has returned 36.21%, 0.44% and 3.35%, each before
taxes.
15. The proposed Substitution will take place at each Portfolio's
relative net asset values determined on the date of the Substitution in
accordance with Section 22 of the 1940 Act and Rule 22c-1 thereunder
with no change in the amount of any Contract Owner's cash value of his
or her investment in any of the subaccounts. Accordingly, there will be
no financial impact on any Contract Owner. The Substitution will be
effected by having the subaccount that invests in the Removed Portfolio
redeem its shares at the net asset value calculated on the date of the
Substitution and purchase shares of the Substituted Portfolio at the
net asset value calculated on the same date.
16. The application notes that the Substitution will be described
in detail in a written notice mailed to Contract Owners. The notice
will inform Contract Owners of Applicants' intent to implement the
Substitution and describe the Substitution, the reasons for engaging in
the proposed Substitution and how the Substitution will be implemented.
The notice will be mailed to all Contract Owners at least 30 days prior
to the Substitution and will inform affected Contract Owners that they
may transfer assets from the subaccount investing in the Removed
Portfolio at any time after receipt of the notice, and from the
subaccount investing in the Substituted Portfolio for 30 days after the
Substitution, to any subaccounts investing in other portfolios
available under their respective Contracts without the imposition of
any transfer charge or limitation and without diminishing the number of
free transfers that may be made in a given contract year. A supplement
will be filed with the Commission for the current prospectus containing
the information to be included in the notice.
17. Applicants state further that each Contract Owner will be
provided a prospectus for the Substituted Portfolio. Within five
business days after the Substitution, Applicants will send each
affected Contract Owner written confirmation that the Substitution has
occurred.
18. The application also indicates that:
(a) Applicants will pay all expenses and transaction costs of the
Substitution, including all legal, accounting and allocated brokerage
expenses relating to the Substitution;
(b) that no costs will be borne by the Contract Owners;
(c) that affected Contract Owners will not incur any fees or
charges as a result of the Substitution, nor will their rights or the
obligations of Applicants under the Contracts be altered in any way.
19. Applicants state that the proposed Substitution will not cause
the fees and charges under the Contracts currently being paid by
Contract Owners to be greater after the Substitution than before the
Substitution. The Substitution will
[[Page 75711]]
have no adverse tax consequences to Contract Owners and will in no way
alter the tax benefits to Contract Owners.
Applicants' Legal Analysis:
1. Section 26(c) of the 1940 Act provides that it shall be unlawful
for any depositor or trustee of a registered unit investment trust
holding the security of a single issuer to substitute another security
for such security unless the Commission shall have approved such
substitution; and the Commission shall issue an order approving such
substitution if the evidence establishes that it is consistent with the
protection of investors and the purposes fairly intended by the
policies and provisions of the 1940 Act. Section 26(c) protects the
expectation of investors that the unit investment trust will accumulate
shares of a particular issuer and is intended to insure that
unnecessary or burdensome sales loads, additional reinvestment costs or
other charges will not be incurred due to unapproved substitutions of
securities.
2. The proposed Substitution of shares held by the AUL Account, as
described above, may be deemed to involve a substitution of securities
within the meaning of Section 26(c) of the 1940 Act. The Applicants
therefore request an order from the Commission pursuant to Section
26(c) approving the proposed Substitution.
3. The investment objective and primary risks of the Substituted
Portfolio are the same as that of the Removed Portfolio and the
investment strategies of the two are nearly identical; thus, Contract
Owners will have reasonable continuity in investment expectations.
Accordingly, the Substituted Portfolio is an appropriate investment
vehicle for those Contract Owners who have Contract values allocated to
the Removed Portfolio. Further, the Substituted Portfolio has lower
expenses and better historical performance than that of the Removed
Portfolio.
4. In connection with assets held under the Contracts affected by
the Substitution, Applicants will not receive for three (3) years from
the date of substitution any direct or indirect benefits from the
Substituted Portfolio, its advisors or underwriters (or their
affiliates) at a rate higher than that which they had received from the
Removed Portfolio, its advisors or underwriters (or their affiliates)
including but without limitation, 12b-1, shareholder service,
administration or other service fees, revenue sharing or other
arrangements.
5. Applicants represent and warrant that the Substitution and the
selection of the Substituted Portfolio were not motivated by any
financial consideration paid or to be paid to AUL or its affiliates by
the Substituted Portfolio, its advisors or underwriters or their
respective affiliates.
6. The Substitution will not result in the type of costly forced
redemption that Section 26(c) was intended to guard against because the
Contract Owner will continue to have the same type of investment
choice, with better potential returns and lower expenses and will not
otherwise have any incentive to redeem their shares or terminate their
Contracts.
7. The purposes, terms and conditions of the proposed Substitution
are consistent with the protection of investors, and the principles and
purposes of Section 26(c), and do not entail any of the abuses that
Section 26(c) is designed to prevent.
(a) The Substituted Portfolio has better historical performance
than the Removed Portfolio.
(b) The current total annual operating expenses and management fee
of the Substituted Portfolio are lower than those of the Removed
Portfolio.
(c) The Substituted Portfolio is an appropriate portfolio to move
Contract Owners' values currently allocated to the Removed Portfolio
because the portfolios have the same objectives and risks and very
similar strategies.
(d) All costs of the Substitution, including any allocated
brokerage costs, will be borne by Applicants and will not be borne by
Contract Owners. No charges will be assessed to effect the
Substitution.
(e) The Substitution will be at the net asset value of the
respective portfolio shares without the imposition of any transfer or
similar charge and with no change in the amount of any Contract Owners'
Contract values.
(f) The Substitution will not cause the fees and charges under the
Contracts currently being paid by the Contract Owners to be greater
after the Substitution than before the Substitution and will result in
Contract Owners Contract values being moved to a portfolio with lower
current total annual operating expenses.
(g) Notice of the proposed Substitution will be mailed to all
Contract Owners at least 30 days prior to the Substitution, All
Contract Owners will have an opportunity at any time after receipt of
the notice of the Substitution and for 30 days after the Substitution
to transfer Contract account value affected by the Substitution to
other available subaccounts without the imposition of any transfer
charge or limitation and without being counted as one of the Contract
Owner's free transfers in a contract year.
(h) Within five business days after the Substitution, Applicants
will send to their affected Contract Owners a written confirmation that
the Substitution has occurred.
(i) The Substitution will, in no way, alter the terms of the
Contracts or the obligations of Applicants under them.
(j) The Substitution will have no adverse tax consequences to
Contract Owners and will, in no way, alter the tax benefits to Contract
Owners.
Conclusion
Applicants assert that, for the reasons summarized above, the
Commission should grant the requested order approving the Proposed
Substitution.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-30461 Filed 12-3-10; 8:45 am]
BILLING CODE 8011-01-P