[Federal Register Volume 78, Number 123 (Wednesday, June 26, 2013)]
[Notices]
[Pages 38413-38416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15242]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 30564; File No. 812-14109]
American Family Life Insurance Company, et al.
June 20, 2013.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order approving the substitution
of certain securities pursuant to Section 26(c) of the Investment
Company Act of 1940, as amended (the ``1940 Act'').
-----------------------------------------------------------------------
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: The Applicants seek an order pursuant to
Section 26(c) of the 1940 Act, approving the substitution of shares of
the Vanguard Money Market Portfolio (``Replacement Portfolio'') of the
Vanguard Variable Insurance Fund (``Vanguard Fund'') for Initial Class
Shares of the Fidelity Variable Insurance Products Money Market
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 January 8, 2013, and
the amended and restated application was filed on May 16, 2013.
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 the Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on July 15, 2013, and should be accompanied by
proof of service on the 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: David C. Holman, Esq., American Family Life Insurance
Company, 6000 American Parkway, Madison, Wisconsin 53783-0001; Thomas
E. Bisset, Esq., Sutherland Asbill & Brennan LLP, 700 Sixth Street NW.,
Suite 700, Washington, DC 20001-3980.
FOR FURTHER INFORMATION CONTACT: Patrick Scott, Senior Counsel, or
Michael Kosoff, Branch Chief, Insured Investments Office, 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' Representations:
1. American Family Life Insurance Company conducts a conventional
life insurance business and is authorized to transact the business of
life insurance, including annuities, in twenty-seven 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. The Annuity Account and the Life Account issue Contracts and the
Company owns the assets of each Account attributable to a Contract.
Such assets 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.
---------------------------------------------------------------------------
\1\ File No. 811-10097 (the Life Account); File No. 811-10121
(the Annuity Account).
---------------------------------------------------------------------------
3. The Fidelity Fund is registered \2\ as an open-end management
investment company under the 1940 Act and currently offers five (5)
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 Securities
Act of 1933 (``1933 Act'') on Form N-1A.\3\
---------------------------------------------------------------------------
\2\ File No. 811-05361.
\3\ File No. 33-17704.
---------------------------------------------------------------------------
4. 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.
5. Neither the Fidelity Fund, any of its portfolios, nor
subadvisers are affiliated with the Applicants. The Fidelity Fund
[[Page 38414]]
does not have manager-of-managers relief for the Replaced Portfolio.
6. The Vanguard Fund is registered as an open-end management
investment company under the 1940 Act \4\ and currently offers
seventeen (17) 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.\5\
---------------------------------------------------------------------------
\4\ File No. 811-05962.
\5\ File No. 33-32216.
---------------------------------------------------------------------------
7. Pursuant to an investment advisory agreement between the
Replacement Portfolio and The Vanguard Group, Inc. (``Vanguard''),
Vanguard provides investment advisory services to the Replacement
Portfolio. Vanguard manages the Replacement Portfolio subject to the
supervision and oversight of the Replacement Portfolio's board of
directors.
8. Neither the Vanguard Fund, any of its portfolios, nor Vanguard
are affiliated with the Applicants. The Vanguard Fund and Vanguard have
received an order from the Commission that allows the Vanguard Fund and
Vanguard to utilize a multi-manager structure to manage the assets of
the Replacement Portfolio. Pursuant to the order, Vanguard is permitted
to select sub-advisers that are not affiliates of Vanguard (other than
by virtue of serving as investment advisers to one or more Vanguard
funds) and revise selected advisory agreements without obtaining
shareholder approval, subject to the approval of the Vanguard Fund
board of trustees and certain other conditions.
9. The Contracts are flexible premium variable annuity and variable
life insurance contracts. The variable annuity contracts (file no. 333-
45592) 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. The variable
life insurance contracts (file nos. 333-44956 and 333-147408) 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. Applicant state that the prospectus
for the Contracts and the Accounts contain appropriate disclosure of
this right.
10. 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.
11. The Company proposes to substitute shares of the Replacement
Portfolio for Initial Class shares of the Replaced Portfolio currently
held in the Accounts (the ``proposed substitution'').
12. The application states that, the proposed substitution is part
of an effort by the Company to provide a portfolio selection within the
Contracts that: (1) Provides competitive long-term returns relative to
other funds in the asset class peer group with lower investment risk;
(2) provides a more competitive fee structure 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.
13. The application states that, replacing the Replaced Portfolio
with the Replacement Portfolio is appropriate and in the best interests
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. A comparison of the
investing objectives, strategies, and risks of the Replaced Portfolio
and the Replacement Portfolio is included in the application.
14. The following charts compare advisory fees, other expenses, and
total operating expenses for the year ended December 31, 2012,
expressed as an annual percentage of average daily net assets, of the
Replaced Portfolio and the Replacement Portfolio. Neither the Replaced
Portfolio nor the Replacement Portfolio impose a redemption fee.
---------------------------------------------------------------------------
\6\ FMR has voluntarily agreed to reimburse the Initial Class of
the Replaced Portfolio to the extent total operating expenses
(excluding interest, taxes, brokerage commissions, and extraordinary
expenses) as a percentage of average net assets exceed 0.40%.
\7\ Vanguard and the Replacement Portfolio's board of directors
have agreed to temporarily limit certain net operating expenses in
excess of the Replacement Portfolio's daily yield to maintain a zero
or positive yield for the Portfolio. Vanguard and the Replacement
Portfolio's board of directors may terminate the expense limitation
at any time. The ratio of total expenses to average net assets after
the voluntary expense limitation was 0.06%.
----------------------------------------------------------------------------------------------------------------
Replaced portfolio--
Fidelity VIP money Replacement portfolio--
market portfolio Vanguard money market
(initial class) as of portfolio as of 12/31/
12/31/12 (percent) 12 (percent)
----------------------------------------------------------------------------------------------------------------
Advisory Fees................................................. 0.17 0.12
12b-1 Fee..................................................... N/A N/A
Other Expenses................................................ 0.09 0.04
Total Expenses................................................ \6\ 0.26 0.16
Less Contractual Fee.......................................... N/A N/A
Waivers and Expense
Reimbursements
Net Expenses.................................................. 0.26 \7\ 0.16
----------------------------------------------------------------------------------------------------------------
15. Applicants state that they 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 other investment options under the Contracts.
16. The Replacement Portfolio for the fiscal years ended 2012,
2011, 2010 and 2009 has a significantly lower expense ratio than the
Replaced Portfolio. In light of the substantial level of assets of the
Replacement Portfolio, the continued decline of the level of assets of
the Replaced Portfolio, and the lower expense ratio of the Replacement
[[Page 38415]]
Portfolio, Applicants believe that the Replacement Portfolio is a
viable money market investment option for the Contracts whose expenses
should not trend upward over time.
17. 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. For each
one-year, five-year and ten-year period ended December 31, 2012, the
Replacement Portfolio has had investment performance comparable to that
of the Replaced Portfolio, but with lower investment risk.
Legal Analysis and Conditions
1. The Applicants request that the Commission issue an order
pursuant to Section 26(c) of the 1940 Act approving the proposed
substitution. Section 26(c) of the 1940 Act requires the depositor of a
registered unit investment trust holding securities of a single issuer
to obtain Commission approval before substituting the securities held
by the trust.
2. 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 application
asserts, 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.
3. 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.
4. 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.
5. Supplements to the prospectus for the Contracts dated January
29, 2013, disclosed the Company's intent to seek the order approving
the substitution; moreover the supplements disclosed that from the date
of the supplement 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 supplements disclosed that
from the date of the supplement 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. In addition, prospectuses for the
Contracts dated May 1, 2013 disclosed substantially similar information
as set forth in the supplements.
6. 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.
7. Applicants represent 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.
8. 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 the date
of the supplements 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.
9. The 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 Application.
10. The Applicants represent that they will not receive, for three
years from the date of the substitution, any direct or indirect
benefits paid by the Replacement Portfolio, its advisors or
underwriters (or their affiliates), in
[[Page 38416]]
connection with assets attributable to Contracts affected by the
substitution, at a higher rate than Applicants have received from the
corresponding Replaced Portfolio, its advisors or underwriters (or
their affiliates), including, without limitation, Rule 12b-1 fees,
revenue sharing, or other service fees or arrangements in connection
with such assets. Applicants represent that the substitution is not
motivated by any financial consideration paid or to be paid to the
Company or its affiliates by the Replacement Portfolio, its advisors,
underwriters, or their respective affiliates.
11. 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.
12. The Applicants submit that the proposed substitution meets the
standards set forth in Section 26(c) and assert that the replacement of
the Existing Fund with the Replacement Fund is consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the 1940 Act.
Conclusion:
For the reasons and upon the facts set forth above and in the
application, the Applicants assert that the requested order meets the
standards set forth in Section 26(c) of the 1940 Act and should
therefore, be granted.
For the Commission, by the Division of Investment Management,
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15242 Filed 6-25-13; 8:45 am]
BILLING CODE 8011-01-P