[Federal Register Volume 76, Number 61 (Wednesday, March 30, 2011)]
[Notices]
[Pages 17720-17726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7418]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-29617; File No. 812-13842]
American Family Life Insurance Company, et al.
March 24, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under Section 26(c) of the
Investment Company Act of 1940, as amended (the ``1940 Act'').
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Applicants: American Family Life Insurance Company (the ``Company''),
American Family Variable Account I (the ``Life Account''), and American
Family Variable Account II (the ``Annuity Account'') (together, the
``Applicants'').
Summary of Application: Applicants request an order of the Commission,
pursuant to Section 26(c) of the 1940 Act, approving the substitution
of shares of the Vanguard Capital Growth Portfolio (``Replacement
Portfolio'') of the Vanguard Variable Insurance Fund (``Vanguard
Fund'') for Service Class 2 Shares of the Fidelity Variable Insurance
Products Growth Portfolio (``Replaced Portfolio'') of the Fidelity
Variable Insurance Products Fund (``Fidelity Fund''), currently held by
the Life Account and the Annuity Account (each an ``Account,''
together, the ``Accounts'') to support variable life insurance and
annuity contracts issued by the Company (collectively, the
``Contracts'').
DATES: Filing Date: The application was filed on November 10, 2010 and
amended and restated on February 28, 2011.
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 Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests must be received by the
Commission by 5:30 p.m. on April 20, 2011, 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 requester'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 20549-1090. Applicants, c/o David C. Holman, Esq.,
American Family Life Insurance Company, 6000 American Parkway, Madison,
Wisconsin 53783-0001. Copy to Thomas E. Bisset, Esq., Sutherland Asbill
& Brennan LLP, 1275 Pennsylvania Ave., NW., Washington, DC 20004-2415.
FOR FURTHER INFORMATION CONTACT: Michael L. Kosoff, Branch Chief, at
(202) 551-6754 or Harry Eisenstein, Senior Special Counsel, Office of
Insurance Products, Division of Investment Management, at (202) 551-
6795.
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 by calling (202) 551-8090.
Applicants' Representation
1. The Company is a stock life insurance company organized under
Wisconsin law. The Company conducts a conventional life insurance
business and is authorized to transact the business of life insurance,
including annuities, in nineteen States. For purposes of the 1940 Act,
the Company is the depositor and sponsor of each of the Accounts as
those terms have been interpreted by the Commission with respect to
variable life insurance and variable annuity separate accounts.
2. Under the insurance law of Wisconsin, the assets of each Account
attributable to the Contracts issued through that Account are owned by
the Company, but are held separately from the other assets of the
Company for the benefit of the owners of, and the persons entitled to
payment under, those Contracts. Each Account is a ``separate account''
as defined by Rule 0-1(e) under the 1940 Act, and is registered with
the Commission as a unit investment trust.\1\ Each Account is comprised
of a number of subaccounts and each subaccount invests exclusively in
one of the insurance dedicated mutual fund portfolios made available as
investment vehicles underlying the Contracts. Currently, the Replaced
Portfolio is available as an investment option under the Company's
variable life insurance and variable annuity Contracts.
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\1\ File No. 811-10097 (the Life Account); File No. 811-10121
(the Annuity Account).
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3. The Life Account is currently divided into nine (9) subaccounts.
The assets of the Life Account support variable life insurance
contracts and interests in the Account offered through such contracts
have been registered under the Securities Act of 1933, as amended (the
``1933 Act''), on Form N-6 (File Nos. 333-44956 and 333-147408).
4. The Annuity Account is currently divided into nine (9)
subaccounts. The assets of the Annuity Account support variable annuity
contracts and interests in the Account offered through such contracts
have been registered under the 1933 Act on Form N-4 (File No. 333-
45592).
[[Page 17721]]
5. The Fidelity Fund is registered as an open-end management
investment company under the 1940 Act (File No. 811-03329) and
currently offers six (6) investment portfolios, each with multiple
share classes. The Fidelity Fund issues a series of shares of
beneficial interest in connection with each portfolio and has
registered such shares under the 1933 Act on Form N-1A (File No. 002-
75010).
6. Each portfolio of the Fidelity Fund has entered into an advisory
agreement with Fidelity Management & Research Company (``FMR'') under
which FMR acts as investment adviser for the portfolio. Under each
investment advisory agreement, and subject to the supervision of the
Fidelity Fund board of trustees, FMR has overall responsibility for the
selection of investments in accordance with the investment objective,
policies, and limitations of the portfolio and for handling the
portfolio's business affairs. FMR or its affiliates, subject to the
supervision of the Fidelity Fund board of directors, provide the
management and administrative services necessary for the operation of
each portfolio. Each portfolio of the Fidelity Fund does, however, pay
for the typesetting, printing, and mailing of its proxy materials to
shareholders, legal expenses, and the fees of the custodian, auditor,
and independent trustees, among other fees and expenses.
7. FMR Co., Inc. (``FMRC''), an investment adviser affiliate of
FMR, has entered into a sub-advisory agreement with FMR under which
FMRC acts as sub-adviser for certain of the portfolios of the Fidelity
Fund, including the Replaced Portfolio. FMRC has day-to-day
responsibility for choosing investments for the Replaced Portfolio. FMR
pays FMRC for providing sub-advisory services.
8. Fidelity Research & Analysis Company (``FRAC''), an affiliate of
FMR, also serves as sub-adviser for the Fidelity Fund and may provide
investment research and advice for the Fidelity Fund, including the
Replaced Portfolio. Fidelity Management & Research (U.K.) Inc. (``FMR
U.K.''), Fidelity Management & Research (Hong Kong) Limited (``FMR
H.K.''), Fidelity Management & Research (Japan) Inc. (``FMR Japan''),
FIL International Investment Advisors (``FIIA''), FIL Investment
Advisors (U.K.) Ltd. (``FIIA(U.K.)L''), and FIL Investments (Japan)
Limited (``FIJ''), all investment adviser affiliates of FMR, assist FMR
with foreign investments of the Replaced Portfolio.
9. Neither the Fidelity Fund, any of its portfolios, FMR, FMRC,
FRAC, FMR U.K., FMR H.K., FMR Japan, FIIA, FIIA(U.K.)L, nor FIJ are
affiliated with the Applicants. The Fidelity Fund does not have
manager-of-manager relief for the Replaced Portfolio.
10. The Vanguard Variable Insurance Fund is registered as an open-
end management investment company under the 1940 Act (File No. 811-
05962) and currently offers fifteen (15) portfolios, including the
Replacement Portfolio. The Vanguard Fund issues a series of shares of
beneficial interest in connection with each portfolio and has
registered such shares under the 1933 Act on Form N-1A (File No. 33-
32216).
11. Pursuant to an investment advisory agreement between the
Replacement Portfolio and PRIMECAP Management Company (``PRIMECAP''),
PRIMECAP provides investment advisory services to the Replacement
Portfolio. PRIMECAP manages the Replacement Portfolio subject to the
supervision and oversight of the Vanguard Group, Inc. (``Vanguard'')
and the Replacement Portfolio's board of directors. PRIMECAP employs a
multi-portfolio manager approach to managing the Replacement Portfolio.
Six (6) portfolio managers are primarily responsible for the day-to-day
management of the Replacement Portfolio and each portfolio manager is a
principal of PRIMECAP. Each portfolio manager manages a particular
segment of the Replacement Portfolio autonomously; there is no
decision-making by committee with respect to the management of those
segments of the Replacement Portfolio. A small portion of the
Replacement Portfolio's assets is co-managed by individuals in
PRIMECAP's research department. The Replacement Fund pays PRIMECAP an
investment advisory fee quarterly and the fee is a percentage of the
average daily net assets of the Replacement Fund during the most recent
fiscal quarter.
12. Neither the Vanguard Fund, any of its portfolios, nor PRIMECAP
are affiliated with the Applicants. The Vanguard Fund does not have
manager-of-manager relief for the Replacement Portfolio.
13. The Contracts are flexible premium variable annuity and
variable life insurance contracts. The variable annuity Contracts
provide for the accumulation of values on a variable basis, fixed
basis, or both, during the accumulation period, and provide settlement
or annuity payment options on a fixed basis.\2\ The variable life
insurance Contracts provide for the accumulation of values on a
variable basis, fixed basis, or both, throughout the insured's life,
and for a substantial death benefit upon the death of the insured.
Under each of the Contracts, the Company reserves the right to
substitute shares of one fund for shares of another, or of another
investment portfolio, including a portfolio of a different management
company.
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\2\ Because only fixed annuity payment options are available
under the Contracts, the substitution will not affect Contracts that
have been annuitized.
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14. For as long as a variable life insurance Contract remains in
force or a variable annuity Contract has not yet been annuitized, a
Contract owner may transfer all or any part of the Contract value from
one subaccount to another subaccount or to a fixed account. Other than
the Company's right to impose certain limitations to deter market
timing activity, the Contracts do not limit the number of transfers
between the subaccounts or transfers from the subaccounts to the fixed
account for any period of time. The Company does, however, assess a
charge of $25 per transfer for transfers in excess of twelve per
contract year. Guaranteed living benefit rider features are not
available with the Contracts.
15. The Company proposes to substitute shares of the Replacement
Portfolio for Service Class 2 shares of the Replaced Portfolio
currently held in the Accounts (the ``proposed substitution''). As of
December 31, 2010, 1.05% of the Replaced Portfolio's assets were
invested in the Accounts and would be subject to the proposed
substitution if so invested on the date of the substitution.
16. Applicants assert that the proposed substitution is part of an
effort by the Company to provide a portfolio selection within the
Contracts that: (1) Provides a more competitive fee structure relative
to other funds in the asset class peer group; (2) provides more
competitive long-term returns relative to other funds in the asset
class peer group; and (3) maintains the goal of offering a mix of
investment options covering basic categories in the risk/return
spectrum.
17. In year 2000 when the Company first selected the Replaced
Portfolio, the Replaced Portfolio met its desire for a large cap growth
equity investment option. The Replaced Portfolio is positioned on the
aggressive end of the risk/return spectrum for large cap growth
investment options and offered Contract owners a large cap growth
investment option with significant risk. Over the past nine years, the
Replaced Portfolio has significantly underperformed its peers, as
discussed below, leading the Company to reassess the position of its
large cap growth
[[Page 17722]]
investment option. In an attempt to improve overall returns for the
large cap growth investment option while providing for a relatively
lower level of risk, the Company decided to select an alternative large
cap growth investment option. Applicants believe the Replacement
Portfolio meets these goals.
18. The Company believes that an important consideration for the
selection and retention of an investment option under the Contracts is
that the long-term performance (5 years and longer) of the investment
option be competitive as compared to its asset class peer group,
particularly given the limited selection of subaccounts available under
the Contracts. In the Company's judgment, the Replaced Portfolio has
not demonstrated portfolio performance of the standard desired by the
Company. Performance of the Replaced Portfolio has been in the third or
bottom quartile for comparable funds over the last five years, except
for 2007 where performance of the Replaced Portfolio fell within the
first quartile. Further, absolute performance of the Replaced Portfolio
ranks in the bottom quartile for comparable funds over the last 3- and
5-year periods and in the third quartile, close to the bottom quartile,
for the 1-year period.
19. Replacing the Replaced Portfolio with the Replacement Portfolio
is appropriate and in the best interest of Contract owners because the
stated investment objective, principal investment strategies, and
principal investment risks of the Replacement Portfolio are
substantially similar to those of the Replaced Portfolio, so that
Contract owners will have continuity in investment expectations with
somewhat lower risk. In addition, Applicants note that the net expenses
of the Replacement Portfolio are substantially less than those for the
Replaced Portfolio for the year ended December 31, 2009.
20. The following charts set out the investment objectives,
principal investment strategies, and principal investment risks of the
Replaced Portfolio and Replacement Portfolio, as stated in their
respective prospectuses.
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Replaced portfolio Replacement portfolio
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Fidelity VIP Growth Portfolio (Service Vanguard VIF Capital Growth
Class 2 Shares). Portfolio
Investment Objective................... Investment Objective
Capital appreciation................... Long-term capital appreciation.
Principal Investment Strategies........ Principal Investment Strategies
FMR normally invests the fund's assets The Portfolio invests in stocks
primarily in common stocks of considered to have above-
companies FMR believes have above- average earnings growth
average growth potential. Companies potential that is not
with high growth potential tend to be reflected in their current
companies with higher than average market prices. The Portfolio
price/earnings (P/E) or price/book (P/ consists predominantly of
B) ratios. FMR may invest the fund's large- and mid-capitalization
assets in securities of foreign stocks.
issuers in addition to securities of
domestic issuers.
In buying and selling securities for
the fund, FMR relies on fundamental
analysis, which involves a bottom-up
assessment of a company's potential
for success in light of factors
including its financial condition,
earnings outlook, strategy,
management, industry position, and
economic and market conditions.
FMR may lend the fund's securities to
broker-dealers or other institutions
to earn income for the fund. FMR may
also use various techniques, such as
buying and selling futures contracts
and exchange traded funds, to increase
or decrease the fund's exposure to
changing security prices or other
factors that affect security values.
Principal Investment Risks............. Principal Investment Risks
Stock Market Volatility. The value of Stock Market Risk. Stock market
equity securities fluctuates in risk is the risk that stock
response to issuer, political, market, prices overall will decline.
and economic developments. Stock markets tend to move in
Fluctuations can be dramatic over the cycles, with periods of rising
short as well as long term, and prices and periods of falling
different parts of the market and prices.
different types of equity securities Investment Style Risk.
can react differently to these Investment style risk is the
developments. risk that returns from mid-
and large-capitalization
growth stocks will trail
returns from the overall stock
market. Historically, mid-cap
stocks have been more volatile
in price than the large-cap
stocks that dominate the
overall market, and they often
perform quite differently.
Manager Risk. Manager risk is
the risk that poor security
selection or focus on
securities in a particular
sector, category, or group of
companies will cause the
Portfolio to underperform
relevant benchmarks or other
funds with a similar
investment objective.
Foreign Exposure. Foreign securities,
foreign currencies, and securities
issued by U.S. entities with
substantial foreign operations can
involve additional risks relating to
political, economic, or regulatory
conditions in foreign countries. These
risks include fluctuations in foreign
currencies; withholding or other
taxes; trading, settlement, custodial,
and other operational risks; and the
less stringent investor protection and
disclosure standards of some foreign
markets. All of these factors can make
foreign investments, especially those
in emerging markets, more volatile and
potentially less liquid than U.S.
investments. In addition, foreign
markets can perform differently from
the U.S. market.
Issuer-Specific Changes. Changes in the
financial condition of an issuer or
counterparty, changes in specific
economic or political conditions that
affect a particular type of security
or issuer, and changes in general
economic or political conditions can
increase the risk of default by an
issuer or counterparty, which can
affect a security's or instrument's
value. The value of securities of
smaller, less well-known issuers can
be more volatile than that of larger
issuers.
[[Page 17723]]
``Growth'' Investing. ``Growth'' stocks
can react differently to issuer,
political, market, and economic
developments than the market as a
whole and other types of stocks.
``Growth'' stocks tend to be more
expensive relative to their earnings
or assets compared to other types of
stocks. As a result, ``growth'' stocks
tend to be sensitive to changes in
their earnings and more volatile than
other types of stocks.
In response to market, economic,
political, or other conditions, FMR
may temporarily use a different
investment strategy for defensive
purposes. If FMR does so, different
factors could affect the fund's
performance and the fund may not
achieve its investment objective.
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21. The following charts compare advisory fees, other expenses,
total operating expenses, and portfolio turnover rates for the year
ended December 31, 2009, expressed as an annual percentage of average
daily net assets, of the Replaced Portfolio and the Replacement
Portfolio. The Replaced Portfolio is subject to a distribution plan or
shareholder service plan adopted under Rule 12b-1 of the 1940 Act; the
Replacement Portfolio is not subject to such a plan.\3\ Neither the
Replaced Portfolio nor the Replacement Portfolio impose a redemption
fee.
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\3\ With regard to the Replaced Portfolio, the principal
underwriter for the Portfolio has entered into an agreement with the
principal underwriter for the Contracts, a wholly-owned subsidiary
of the Company, for the payment of a fee equal to an annual
percentage of the assets of the Replaced Portfolio attributable to
the Contracts for the performance of certain distribution and
shareholder services. With regard to the Replacement Portfolio,
neither the principal underwriter for the Portfolio nor any of the
Replacement Portfolio's other affiliates have entered into a similar
agreement with the Company, the principal underwriter for the
Contracts or any of the Company's other affiliates. As such, neither
the Company nor any of its affiliates will receive revenue sharing
payments from the principal underwriter of the Replacement Portfolio
or from any other affiliates of the Replacement Portfolio.
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Replaced Replacement
portfolio portfolio
-----------------------------------
Fidelity VIP
Growth Portfolio Vanguard Capital
(Service Class Growth Portfolio
2) (percent) (percent)
As of 12/31/09 As of 12/31/09
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Advisory Fees....................... 0.56 0.41
12b-1 Fee........................... 0.25 N/A
Other Expenses...................... 0.13 0.04
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Total Expenses.................. 0.94 0.45
Less Contractual Fee, Waivers and N/A N/A
Expense Reimbursements.............
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Net Expenses.................... 0.94 0.45
Portfolio Turnover.................. 134 8
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22. The following tables compare the respective asset levels,
expenses ratios and performance data for the Replaced Portfolio and the
Replacement Portfolio for fiscal years 2007, 2008 and 2009 ended
December 31.
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Net assets at
Fidelity VIP Growth Portfolio (Service Class 2 Shares) end of period Expense ratio Total return
(dollars) (percent) (percent)
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2007......................................................... 898,204,000 0.90 26.66
2008......................................................... 447,530,000 0.93 (47.31)
2009......................................................... 528,819,000 0.94 27.97
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Net assets at
Vanguard Capital Growth Portfolio end of period Expense ratio Total return
(dollars) (percent) (percent)
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2007......................................................... 344,000,000 0.42 12.48
2008......................................................... 251,000,000 0.42 (30.36)
2009......................................................... 313,000,000 0.45 34.30
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23. The following table shows average annual total returns as of
December 31, 2009 for the Replaced Portfolio and the Replacement
Portfolio:
[[Page 17724]]
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Since
Fund 1 year 5 year inception Inception
(percent) (percent) (percent) date
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Fidelity VIP Growth Portfolio (Service Class 2)................. 27.97 -0.81 -3.73 1/12/00
Vanguard Capital Growth Portfolio............................... 34.30 4.80 9.63 12/3/02
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24. Applicants believe that the Replacement Portfolio is an
appropriate replacement for the Replaced Portfolio for each Contract,
and that the Replacement Portfolio represents an investment option that
is more compatible with the Replaced Portfolio than are any investment
options under the Contracts. The Replacement Portfolio has an
investment objective substantially identical to that of the Replaced
Portfolio. Both pursue their investment objective by investing, under
normal market conditions, in a diversified portfolio of stocks of
companies with above average earnings growth potential. Each relies
upon a fundamental analysis of companies in determining whether to
purchase and sell securities. Each retains the flexibility to invest in
the securities of foreign issuers and in derivative instruments, such
as options, futures and swap agreements.\4\ There are, however, some
distinctions between the way in which the principal investment
strategies are pursued by the Replaced Portfolio and the Replacement
Portfolio.
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\4\ Although both the Replaced Portfolio and the Replacement
Portfolio retain the flexibility to invest in derivative
instruments, historically neither Portfolio appears to have
emphasized investment in such instruments. In that regard, the semi-
annual report dated June 30, 2010 and the annual reports dated
December 31, 2009 and 2008 for each Portfolio indicate that the
Portfolio did not invest any assets in derivative instruments as of
the date of those reports.
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25. The primary differences in the investment strategies of the
Replaced Portfolio and the Replacement Portfolio manifest in the extent
to which the advisers may invest in small-capitalization companies and
their investment time horizons. For example, the adviser for the
Replacement Portfolio seeks capital appreciation predominately through
investment in mid- and large-capitalization stocks, whereas the
Replaced Portfolio also seeks capital appreciation but does not in any
manner restrict its investment to mid- and large-capitalization
companies. Instead, there is no limitation on the amount of assets the
Replaced Portfolio may invest in small-capitalization companies.
26. The adviser for the Replacement Portfolio also invests with a
long-term view of three to five years while the adviser for the
Replaced Portfolio does not necessarily invest with such a long-term
view in mind. In each such instance where the Replaced Portfolio's
investment strategy differs from that of the Replacement Portfolio, the
Replaced Portfolio takes on more risk than does the Replacement
Portfolio.
27. There also is a strong similarity in the principal investment
risks for the Replacement Portfolio and the Replaced Portfolio. The
prospectuses and statements of additional information for both the
Replacement Portfolio and the Replaced Portfolio mention each
portfolio's exposure to stock market risk, risks associated with
investment in foreign issuers and use of derivative instruments, as
well as volatility associated with investment in growth stocks.
28. Although only the prospectus for the Replacement Portfolio
lists manager risk (i.e., the risk that poor security selection or
focus on securities in a particular sector, category or group of
companies would cause the Portfolio to underperform relevant benchmarks
or other funds with similar investment objectives), and investment
style risk (i.e., the risk that returns from mid- and large-
capitalization growth stocks would underperform the overall stock
market), the Replaced Portfolio invests in the same manner in such
securities resulting in identical risks. In addition, although only the
prospectus for the Replaced Portfolio lists the risk of issuer-specific
changes (i.e., the risk that changes in the financial condition of an
issuer or counterparty, changes in specific economic or political
conditions that affect a particular type of security or issuer, and
changes in general economic or political conditions can increase the
risk of default by an issuer or counterparty, which can affect a
security's or instrument's value), the Replacement Portfolio also
invests in the same manner resulting in similar if not identical risk.
29. The Replaced Portfolio, however, may invest a larger portion of
its assets in the securities of small-capitalization companies than the
Replacement Portfolio. The value of securities of small-capitalization
companies can be more volatile than that of large- and mid-
capitalization companies. Accordingly, notwithstanding some different
investment risk disclosure in the prospectus for the Replacement
Portfolio, an investment in the Replacement Portfolio should not
necessarily entail any greater risk than an investment in the Replaced
Portfolio, and most likely would entail less risk.
30. In addition, although the Replacement Portfolio has not yet
achieved a level of assets equal to or greater than the Replaced
Portfolio, the Replacement Portfolio has a significantly lower expense
ratio than the Replaced Portfolio. Also, historically the Replacement
Portfolio has had a significantly lower portfolio turnover rate than
the Replaced Portfolio, which over time may contribute to lower costs
for Contract owners who allocate Contract value to the Replacement
Portfolio subaccount.
31. For those who are Contract owners on the date of the proposed
substitution, the Company will reimburse, on the last business day of
each fiscal period (not to exceed a fiscal quarter) during the twenty-
four months following the date of the proposed substitution, the
subaccount investing in the Replacement Portfolio such that the sum of
the Replacement Portfolio's total annual fund operating expenses after
fee waiver and/or expense reimbursement and subaccount expenses \5\ for
such period will not exceed, on an annualized basis, the sum of the
Replaced Portfolio's total annual fund operating expenses after fee
waiver and/or expense reimbursement and subaccount expenses for the
fiscal year preceding the date of the proposed substitution. In
addition, for twenty-four months following the proposed substitution,
the Company will not increase asset-based fees or charges for Contracts
outstanding on the date of the proposed substitution.
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\5\ Subaccount expenses refer to those asset-based fees and
charges that are deducted on a daily basis from subaccount assets
and are reflected in the calculation of subaccount unit values. The
mortality and expense risk charge is an example of such asset-based
fees and charges.
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32. Currently, each Account makes available nine subaccounts as
investment options under the variable life insurance contracts or
variable annuity contracts, as applicable, funded by the Accounts.
Following the proposed substitution, each Account will continue to make
available nine subaccounts as investment options under the variable
life insurance
[[Page 17725]]
contracts or variable annuity contracts it funds.
33. By the May 1, 2011 prospectuses for the Contracts and the
Accounts, the Company will notify owners of the Contracts of their
intention to take the necessary actions, including seeking the order
requested by this amended and restated application, to carry out the
proposed substitution as described herein. The current prospectus for
the Replacement Portfolio, as well as the current prospectuses for all
other portfolios available as investment options available under the
Contracts, will be bound together with the May 1, 2011 prospectuses for
the Contracts and the Accounts.
34. Applicants represent that the prospectuses for the Contracts
will describe the proposed substitution and the Replaced Portfolio and
Replacement Portfolio, including the fees and expenses of each
Portfolio, and advise the Contract owners that from the date of the
prospectus until the date of the proposed substitution, the Company
will not exercise any rights reserved by it under any Contract to
impose additional charges for transfers until at least 30 days after
the proposed substitution. Similarly, the prospectuses will disclose
that, from May 1, 2011 until the date of the proposed substitution, the
Company will permit Contract owners to transfer Contract value out of
the subaccount currently holding shares of the Replaced Portfolio to
other subaccounts and the fixed account without those transfers being
treated as transfers for purposes of determining the remaining number
of transfers that may be permitted in the Contract year without a
transfer charge. The prospectuses will also advise Contract owners that
if the proposed substitution is carried out, then each Contract owner
affected by the substitution will be sent a written notice (described
immediately below) informing them of the facts and details of the
substitution.
35. Applicants represent that within five days after the proposed
substitution, Contract owners who are affected by the substitution will
be sent a written notice informing them that the substitution was
carried out. The notice will also reiterate the facts that the Company:
(1) Will not exercise any rights reserved by it under any of the
Contracts to impose additional charges for transfers until at least 30
days after the proposed substitution, and (2) will, for at least 30
days following the proposed substitution, permit such Contract owners
to transfer Contract values out of the subaccount holding shares of the
Replacement Portfolio to other subaccounts and the fixed account
without those transfers being treated as transfers for purposes of
determining the remaining number of transfers permitted in the Contract
year without a transfer charge. The notice as delivered in certain
jurisdictions may also explain that the right of a Contract owner to
make transfers following the procedures described above (in connection
with the proposed substitution) will not affect such Contract owner's
right, under insurance regulations in those jurisdictions, to exchange
his or her Contract for a fixed-benefit life insurance contract or a
fixed-benefit annuity Contract during the 60 days following the
substitution.
36. Applicants state that the Company will carry out the proposed
substitution by redeeming shares of the Replaced Portfolio held by the
Accounts for cash and applying the proceeds to the purchase of shares
of the Replacement Portfolio. The proposed substitution will take place
at relative net asset value with no change in the amount of any
Contract owner's Contract value or death benefit or in the dollar value
of his or her investment in either of the Accounts. Contract owners
will not incur any fees or charges as a result of the proposed
substitution, nor will their rights or the Company's obligations under
the Contracts be altered in any way. All applicable expenses incurred
in connection with the proposed substitution, including brokerage
commissions and legal, accounting, and other fees and expenses, will be
paid by the Company. In addition, the proposed substitution will not
impose any tax liability on Contract owners. The proposed substitution
will not cause the Contract fees and charges currently being paid by
existing Contract owners to be greater after the proposed substitution
than before the proposed substitution.
37. Applicants represent that the proposed substitution will not be
treated as a transfer of Contract value for the purpose of assessing
transfer charges or for determining the number of remaining ``free''
transfers in a Contract year. The Company will not exercise any right
it may have under the Contracts to impose additional charges for
Contract value transfers under the Contracts for a period of at least
30 days following the proposed substitution. Similarly, from May 1,
2011 until the date of the proposed substitution, the Company will
permit Contract owners to make transfers of Contract value out of the
Replaced Portfolio subaccount to other subaccounts or the fixed account
without those transfers being treated as transfers for purposes of
determining the remaining number of transfers permitted in the Contract
year without a transfer charge. Likewise, for at least 30 days
following the proposed substitution, the Company will permit Contract
owners affected by the substitution to transfer Contract value out of
the Replacement Portfolio subaccount to other subaccounts or the fixed
account without those transfers being treated as transfers for purposes
of determining the remaining number of transfers permitted in the
Contract year without a transfer charge.
38. Applicants acknowledge that reliance on the exemptive relief
requested herein, if granted, depends upon compliance with all of the
representations and conditions set forth in this amended and restated
application.
39. Applicants represent that the Company is also seeking approval
of the proposed substitution from any State insurance regulators whose
approval may be necessary or appropriate.
40. The Applicants request that the Commission issue an order
pursuant to Section 26(c) of the 1940 Act approving the substitution by
the Company of shares of the Replacement Portfolio for Service Class 2
Shares of the Replaced Portfolio currently held by the Accounts.
41. Section 26(c) of the 1940 Act requires the depositor of a
registered unit investment trust holding securities of a single issuer
to receive Commission approval before substituting the securities held
by the trust. Specifically, Section 26(c) states:
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. 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 policy and provisions of
this title.
Section 26(c) was added to the 1940 Act by the Investment Company
Amendments of 1970 (the ``1970 Amendments''). Prior to the enactment of
the 1970 Amendments, a depositor of a unit investment trust could
substitute new securities for those held by the trust by notifying the
trust's security holders of the substitution within five days of the
substitution. In 1966, the Commission, concerned with high sales
charges then common to most unit investment trusts and the
disadvantageous position in which such charges placed investors who did
not want to remain invested in the substituted fund, recommended that
[[Page 17726]]
Section 26 be amended to require that a proposed substitution of the
underlying investments of a trust receive prior Commission approval.\6\
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\6\ In the years leading up to its 1966 recommendation, the
Commission took the position that the substitution of portfolio
securities of a unit investment trust constituted an offer of
exchange under Section 11 of the [1940] Act requiring prior
Commission approval. The Commission proposed Section 26(c) in order
to specifically address substitutions by unit investment trusts
which previously had been scrutinized under Section 11 of the [1940]
Act. See House Committee on Interstate and Foreign Commerce, Report
of the Securities and Exchange Commission on the Public Policy
Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th
Cong., 2d Sess. 337 (1966).
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Congress responded to the Commissioners' concerns by enacting
Section 26(c) to require that the Commission approve all substitutions
by the depositor of investments held by unit investment trusts. The
Senate Report on the bill explained the purpose of the amendment as
follows:
The proposed amendment recognizes that in the case of the unit
investment trust holding the securities of a single issuer
notification to shareholders does not provide adequate protection
since the only relief available to shareholders, if dissatisfied,
would be to redeem their shares. A shareholder who redeems and
reinvests the proceeds in another unit investment trust or in an
open-end company would under most circumstances be subject to a new
sales load. The proposed amendment would close this gap in
shareholder protection by providing for Commission approval of the
substitution. The Commission would be required to issue an order
approving the substitution if it finds the substitution consistent
with the protection of the investors and provisions of the [1940]
Act.\7\
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\7\ S. Rep. No. 184, 91st Cong., 1st Sess. 41 (1969), reprinted
in 1970 U.S. Code Cong. & Admin. News 4897, 4936 (1970).
42. Applicants represent that the proposed substitution appears to
involve the substitution of securities within the meaning of Section
26(c) of the 1940 Act.\8\ Applicants therefore request an order from
the Commission pursuant to Section 26(c) approving the proposed
substitution.
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\8\ While Section 26(c), by its terms, applies only to a unit
investment trust holding the securities of one issuer, the
Commission has interpreted Section 26(c) to apply to ``a
substitution of securities in any subaccount of a registered
separate account.'' Adoption of Permanent Exemptions from Certain
Provisions of the Investment Company Act of 1940 for Registered
Separate Accounts and Other Persons, Investment Company Act Rel. No.
12678 (Sept. 21, 1982) (emphasis added).
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43. Applicants represent that all the Contracts expressly reserve
for the Company the right, subject to compliance with applicable law,
to substitute shares of one fund or portfolio held by a subaccount of
an Account for another. The prospectuses for the Contracts and the
Accounts contain appropriate disclosure of this right. The Company has
reserved this right of substitution both to protect itself and its
Contract owners in situations where it believes an underlying fund is
no longer appropriate for Contract owners or where either might be
harmed or disadvantaged by circumstances surrounding the issuer of the
shares held by one or more of its separate accounts, and to afford the
opportunity to replace such shares where to do so could benefit itself
and Contract owners.
44. Applicants maintain that Contract owners will be better served
by the proposed substitution and that the proposed substitution is
appropriate given the Replacement Portfolio, the Replaced Portfolio,
and other investment options available under the Contracts. In the last
four (4) out of the last five (5) years, the Replacement Portfolio has
had investment performance superior to that of the Replaced Portfolio.
In addition, for each one-year, five-year and since inception periods
ended December 31, 2009, the Replacement Portfolio has had investment
performance superior to that of the Replaced Portfolio. The Replacement
Portfolio has also had substantially lower expenses than the Replaced
Portfolio over these same periods.
45. Applicants believe that the Replacement Portfolio and the
Replaced Portfolio are substantially the same in their stated
investment objectives and principal investment strategies as to afford
investors continuity of investment and risk. In addition, Applicants
generally submit that the proposed substitution meets the standards
that the Commission and its staff have applied to similar substitutions
that have been approved in the past.
46. Applicants believe that Contract owners will be better off with
the Replacement Portfolio than with the Replaced Portfolio. The
proposed substitution retains for Contract owners the investment
flexibility that is a central feature of the Contracts. If the proposed
substitution is carried out, all Contract owners will be permitted to
allocate purchase payments and transfer Contract values between and
among the remaining subaccounts as they could before the proposed
substitution.
47. Applicants assert that the proposed substitution is not the
type of substitution that Section 26(c) was designed to prevent. Unlike
traditional unit investment trusts where a depositor could only
substitute an investment security in a manner which permanently
affected all the investors in the trust, the Contracts provide each
Contract owner with the right to exercise his or her own judgment and
transfer Contract values into other subaccounts and the fixed account.
Moreover, the Contracts will offer Contract owners the opportunity to
transfer amounts out of the affected subaccount into any of the
remaining subaccounts without cost or disadvantage. The proposed
substitution, therefore, will not result in the type of costly forced
redemption that Section 26(c) was designed to prevent.
48. Applicants state that the proposed substitution is also unlike
the type of substitution that Section 26(c) was designed to prevent in
that by purchasing a Contract, Contract owners select much more than a
particular investment company in which to invest their Contract values.
They also select the specific type of coverage offered by the Company
under the Contracts, as well as numerous other rights and privileges
set forth in the Contracts. Contract owners may also have considered
the size, financial condition, type, and reputation for service of the
Company, from whom they purchased their Contract in the first place.
These factors will not change because of the proposed substitution.
Conclusion
Applicants request an order of the Commission pursuant to Section
26(c) of the 1940 Act approving the proposed substitution by the
Company. Applicants submit that, for all the reasons stated above, the
proposed substitution is consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
1940 Act.
For the Commission, by the Division of Investment Management
pursuant to delegated authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-7418 Filed 3-29-11; 8:45 am]
BILLING CODE 8011-01-P