Applications, hearings, determinations, etc.: Anchor National Life Insurance Co. et al.,

[Federal Register: May 21, 1999 (Volume 64, Number 98)]

[Notices]

[Page 27831-27835]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr21my99-122]

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-23842; File No. 812-11450]

Anchor National Life Insurance Company; et al.; Notice of Application

May 14, 1999. AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of Application for an order pursuant to Section 26(b) and Section 17(b) of the Investment Company Act of 1940 (``1940 Act'').

[[Page 27832]]

Summary of Application: Applicants seek an order approving the substitution of: (a) Shares of the Government and Quality Bond Portfolio (``Government and Quality Bond Portfolio'') of the Anchor Series Trust (the ``Trust'') for shares of the Fixed Income Portfolio (``Fixed Income Portfolio'') of the Trust; and (b) shares of the Strategic Multi-Asset Portfolio (``Strategic Multi-Asset Portfolio'') of the Trust for shares of the Foreign Securities Portfolio (``Foreign Securities Portfolio'') of the Trust, each held by Variable Annuity Account One of Anchor National Life Insurance Company, Variable Annuity Account One of First SunAmerica Life Insurance Company and Presidential Variable Account One, (collectively the ``Variable Accounts'') as underlying investment vehicles for certain variable annuity contracts (the ``Contract'') offered by the Variable Accounts (the ``Substitutions''). Applicants also seek an order exempting them from Section 17(a) of the 1940 Act to the extent necessary: (a) To permit certain in-kind transactions in connection with the Substitutions; and (b) as part of the Substitutions, to permit divisions of the Variable Accounts holding the same securities to be combined.

Applicants: Anchor National Life Insurance Company (``Anchor National''), First SunAmerica Life Insurance Company (``First SunAmerica''), Presidential Life Insurance Company (``Presidential'' together with Anchor National and First SunAmerica, the ``Life Companies''), Variable Annuity Account One of Anchor National (``AN Account''), Variable Annuity Account One of First SunAmerica (``FS Account''), Presidential Variable Account One (``Presidential Account''), and Anchor Series Trust.

Filing Date: The Application was filedon January 5, 1999, and amended on April 30, 1999.

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 on the application by writing to the Commission's Secretary 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 June 8, 1999, and must 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 which to be notified of a hearing may request notification by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Applicants Anchor National, AN Account, First SunAmerica, FS Account, and Trust c/o Robert M. Zakem, Esq., SunAmerica Asset Management Corporation, The SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204; and Applicant Presidential and Presidential Account, c/o Charles Snyder, Presidential Life Insurance Company, 69 Lydecker Street, Nyack, New York 10906. Copies to Joan E. Boros, Esq., Jorden Burt Boros Cicchetti Berenson & Johnson, 1025 Thomas Jefferson Street, N.W., East Lobby, Suite 400, Washington, D.C. 20007.

FOR FURTHER INFORMATION CONTACT: Joyce Merrick Pickholz, Senior Counsel, or Kevin M. Kirchoff, Branch Chief, Office of Insurance Products, Division of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application is available for a fee from the SEC's Public Reference Branch, 450 Fifth Street N.W., Washington, DC 20549-0102 [tel. (202) 942-8090]

Applicants' Representations

1. Anchor National is a stock life insurance company organized under the insurance laws of the State of California in April 1965 and redomesticated under the laws of the state of Arizona on January 1, 1996. Anchor National is an indirect wholly-owned subsidiary of American International Group, Inc. (``AIG''). Anchor National is authorized to sell annuities and life insurance in the District of Columbia and all states except New York.

2. First SunAmerica is a stock life insurance company organized under the insurance laws of the state of New York on December 5, 1978. First SunAmerica is a wholly-owned subsidiary of AIG. First SunAmerica is authorized to sell annuities and life insurance business in the states of New York, New Mexico, and Nebraska.

3. Presidential is a stock life insurance company organized under the laws of the state of New York in 1965. Presidential is a wholly- owned subsidiary of Presidential Life Corporation, a publicly-owned holding company. Presidential offers life insurance and annuities and is admitted to do business in forty-eight states and the District of Columbia.

4. The Variable Accounts are segregated investment accounts registered under the 1940 Act as unit investment trusts. Each Variable Account is divided into divisions that correspond to the portfolios of the Trust. Each Variable Account is used to fund certain variable annuity contracts issued by the corresponding Life Company.

5. The Trust is a series type open-end management investment company, organized as a Massachusetts business trust on August 26, 1983. The Trust consists of eleven series (``Portfolios''). Shares of the Portfolios are currently available to the public only through the purchase of certain variable annuity contracts issued by the Life Companies. SunAmerica Asset Management Company (``SAAMCo'') acts as the Trust's investment adviser. Wellington Management Company, LLP serves as sub-adviser for all the Portfolios of the Trust. SAAMCo is under common control with and therefore affiliated with Anchor National and First SunAmerica. SAAMCo is not affiliated with Presidential.

6. The Life Companies have decided to discontinue offering divisions investing in the Fixed Income Portfolio and the Foreign Securities Portfolio (the ``Replaced Portfolios'') as investment options under the Contracts and substitute shares of the Government and Quality Bond Portfolio and the Strategic Multi-Asset Portfolio (the ``Substituted Portfolios'') because the Replaced Portfolio have not retained sufficient Contract owner interest and are dwindling in size. Moreover, the small size of the Replaced Portfolio makes it difficult to manage the assets so as to maximize performance.

7. The investment objective of the Fixed Income Portfolio is to obtain a high level of current income consistent with preservation of capital. The Government and Quality Bond Portfolio seeks relatively high current income, liquidity and security of principal. Both Portfolios invest primarily in fixed income securities. The primary differences are that the Government and Quality Bond Portfolio invests a higher percentage of its assets in government securities as compared to the Fixed Income Portfolio; the Government and Quality Bond Portfolio has higher credit rating requirements for its non-government fixed income portfolio securities, and the Fixed Income Portfolio may (but is not required to) invest up to 20% of its assets in convertible debt securities, warrants, non-investment grade debt securities and dividend paying marketable common stock. The Life Companies do not believe that any of these differences

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   are significant, partly because notwithstanding its somewhat more restrictive investment practices and guidelines, the Government and Quality Bond Portfolio generally has outperformed the Fixed income portfolio.

8. The Foreign Securities Portfolio has as its investment objective long-term capital appreciation through investment in a diversified portfolio of primarily equity securities issued by foreign companies and primarily denominated in foreign currencies. The investment objective of the Strategic Multi-Asset Portfolio is to achieve high long-term total investment return by actively allocating its assets among sub-portfolios consisting of a Global Core Equity Sub-Portfolio, a Global Core Bond Sub-Portfolio, a Capital Appreciation Sub-Portfolio and a Money Market Sub-Portfolio. Although the Strategic Multi-Asset Portfolio can invest in a wider range of asset classes than can the Foreign Securities Portfolio, the investment objectives of the two Portfolios are similar, and the Life Companies believe that the Strategic Multi Asset Portfolio is an appropriate replacement for the Foreign Securities Portfolio.

9. The Government and Quality Bond Portfolio has a lower expense ratio (.7%) than the Fixed Income Portfolio (1.0%). While the Foreign Securities Portfolio and the Strategic Multi-Asset Portfolio currently have equivalent expense ratios of 1.4%, the Life Companies believe the addition of assets resulting from the substitutions may reduce the expense ratio of the Strategic Multi-Asset Portfolio whereas the expense ratio of the Foreign Securities Portfolio has risen from 1.2% to 1.5% of average net assets since 1994.

10. As of June 30, 1998, total net assets of the Government and Quality Bond Portfolio were $272.1 million; $17.5 million for the Fixed Income Portfolios; $53.9 million for the Strategic Multi-Asset Portfolio and $35.5 million for the Foreign Securities Portfolio.

11. Total Returns for the Portfolios were as follows:

    [In percent]

    1994

    1995

    1996

    1997

    1998

    Fixed Income Portfolio.........................

    (3.2)

    19.2

    2.4

    9.4

    8.0 Government and Quality Bond Portfolio..........

    (3.1)

    19.4

    2.9

    9.5

    9.2 Foreign Securities Portfolio...................

    (3.2)

    12.6

    11.5

    (1.0)

    10.7 Strategic Multi-Asset Portfolio................

    (2.6)

    22.8

    14.8

    14.3

    15.2

12. The Life Companies have determined that the Substituted Portfolios are appropriate replacements for the Replaced Portfolios, because: (a) the Government and Quality Bond Portfolio has a similar investment objective to the Fixed Income Portfolio, invests in the same types of securities, i.e., fixed income securities, and has generally better performance and lower expenses; and (b) the Strategic Multi- Asset Portfolio has a similar investment objective to the Foreign Securities Portfolio, generally invests a significant portion of its assets in foreign securities, has generally better performance, and has a similar expense ratio, which may decline as a result of the additional assets resulting from the Substitutions Accordingly, each Life Company proposes substituting (a) shares of the Government and Quality Bond Portfolio for shares of the Fixed Income Portfolio; and (b) shares of the Strategic Multi-Asset Portfolio for shares of the Foreign Securities Portfolio.

13. Each of the Life Companies will redeem for cash or in kind all of the shares of each Replaced Fund that it currently holds on behalf of its applicable Variable Account at the close of business on the date selected for the Substitutions. It is anticipated that the redemptions will be partly or wholly in-kind, and thus purchases of the applicable Substitute Portfolios will be paid for partly or wholly with portfolio securities.

14. Each Life Company, on behalf of its Variable Account, will simultaneously place a redemption request with each Replaced Portfolio and a purchase order with the corresponding Substituted Portfolio so that each purchase will be for the exact amount of the redemption proceeds. As a result, at all times, monies attributable to Contract owners (``Owners'') then invested in the Replaced Funds will remain fully invested and will result in no change in the amount of any Owner's contract value or investment in the applicable Variable Account.

15. The Trust will effect the redemptions-in-kind and the transfers of portfolio securities in a manner that is consistent with the investment objectives, policies and restrictions, and federal tax law and 1940 Act diversification requirements applicable to the Substituted Portfolio. The Life Companies each will take appropriate steps to assure that the portfolio securities selected for redemptions-in-kind are suitable investments for the Substituted Portfolios. In effecting the redemptions-in-kind and transfers, the Trust will comply with the requirements of Rule 17a-7 under the 1940 Act to the extent possible and the procedures established thereunder by the Board of Trustees of the Trust.

16. The full net asset value of the redeemed shares held by the Variable Accounts will be reflected in the Owners' accumulation unit or annuity unit values following the Substitution. The Life Companies will assume all transaction costs and expenses relating to the Substitutiuon, including any direct or indirect costs of liquidating the assets of the Replaced Portfolios, so that the full net asset value of redeemed shares of the Replaced Portfolios held by the Variable Accounts will be reflected in the Owners' accumulation unit or annuity unit values following the Substitution.

17. The Trust's investment adviser and subadviser have been fully advised of the terms of the Substitutions. Applicants anticipate that the investment adviser and subadviser, to the extent appropriate, will conduct the trading of portfolio securities in a manner that provides for the anticipated redemptions of shares held by the Variable Accounts.

18. As part of the Substitutions, each Life Company will combine the divisions invested in the Replaced Portfolios with the divisions that currently invest in the corresponding Substituted Portfolios.

19. Each Life Company will supplement the prospectus for its applicable Variable Account to reflect the proposed Substitutions. Within five days after the Substitutions, the Life Companies will send to their respective Owners written notice of the Substitutions (the ``Notice'') identifying the shares of the shares of the Replaced Portfolios which have been eliminated and the shares of the Substituted Portfolios which have been substituted.

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    Owners will already have received a copy of the Trust's current prospectus, which includes a description of the Substituted Portfolios.

20. Owners will be advised in the Notice that, for a period of thirty-one days from the mailing of the Notice, Owners may transfer all assets, as substituted, to any other available division without limitation or charge and without any such transfer counting as one of the limited number of transfers permitted in a contract year free of charge (the ``Free Transfer Period'').

    Applicants' Legal Analysis

1. Section 26(b) of the 1940 Act provides, in pertinent part, 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. The purpose of Section 26(b) is both to protect the expectation of investors in a unit investment trust that the unit investment trust will accumulate the shares of a particular issuer and to prevent unscrutinized substitutions which might, in effect, force shareholders dissatisfied with a substituted security to redeem their shares, thereby incurring either a loss of the sales load deducted from initial purchase payments, an additional sales load upon reinvestment of the redemption proceeds, or both. Section 26(b) affords this protection to investors by preventing a depositor or trustee of a unit investment trust holding the shares of one issuer from substituting for those shares the shares of another issuer, unless the Commission approves that substitution.

2. Applicants represent that the purposes, terms and conditions of the Substitutions are consistent with the principles and purposes of Section 26(b) and do not entail any of the abuses it is designed to prevent. Applicants submit that the Substitutions are an appropriate solution to the insufficient size of the Replaced Portfolios, which makes it difficult to achieve consistent investment performance and to reduce operating expenses. Applicants assert that the Substitutions will solve these problems in a manner that is in the Owners' best interests because: (a) the Government and Quality Bond has a similar investment objective to the Fixed Income Portfolio, invests in the same types of securities, i.e., fixed income securities, and has generally better performance and lower expenses; and (b) the Strategic Multi- Asset Portfolio has a similar investment objective to the Foreign Securities Portfolio, invests a portion of its assets in foreign equity securities, has generally better performance, and has a similar expense ratio, which may decline as a result of the additional assets resulting from the Substitutions.

3. Applicants represent that the Substitution will not result in the type of costly forced redemption that Section 26(b) was intended to guard against and is consistent with the protection of investors and the purposes fairly intended by the 1940 Act for the following reasons:

   (a) the Substitute Portfolios will continue to fulfill the Owners' objectives and risk expectations, because the Government and Quality Bond Portfolio has investment objectives, policies, and restrictions substantially similar to the objectives, policies and restrictions of the Fixed Income Portfolio and, of the Trust's Portfolios, the Strategic Multi-Asset Portfolio has investment objectives, policies and restrictions most similar to those of the Foreign Securities Portfolio;

   (b) during the Free Transfer Period, an Owner may request that assets be reallocated to another division selected by the Owner, and Applicants represent that the Free Transfer Period provides sufficient time for Owners to consider their reinvestment options;

   (c) the Substitution will, in all cases, be at the net asset value of the respective shares, without the imposition of any transfer or similar charge;

   (d) the Life Companies have undertaken to assume the expenses, including, but not limited to, legal and accounting fees and any brokerage commissions, in connection with the Substitutions and are effecting the redemption of shares in a manner that attributes all transaction costs to the Life Companies;

   (e) the Substitutions will in no way alter the contractual obligations of the Life Companies;

   (f) the Substitutions in no way will alter the tax benefits to Owners; and

   (g) the Substitutions are expected to confer certain economic benefits on Owners by virtue of the enhanced asset size and lower expenses, as stated above.

   Applicants consent to be bound by the terms and conditions listed immediately above in this paragraph.

4. Applicants represent that they have determined that it is in the best interests of Owners to effect the Substitutions. Applicants have determined that the investment objective and related investments of the Government and Quality Bond Portfolio is substantially similar to those of the Fixed Income Portfolio, that the investment objectives and related investments of the Strategic Multi-Asset Portfolio, among all the Portfolios, are most similar to those of the Foreign Securities Portfolio, and that the proposed Substitutions are consistent with Commission precedent.

5. Applicants state that the Government and Quality Bond Portfolio has a lower expense ratio than the Fixed Income Portfolio. The expense ratio of the Foreign Securities Portfolio has risen from 1.2% to 1.5% of average net assets since 1994. While the Foreign Securities Portfolio and the Strategic Multi-Asset Portfolio currently have equivalent expense ratios, the Applicants believe the addition of assets resulting from the substitutions may reduce the expense ratio of the Strategic Multi-Asset Portfolio.

6. Applicants submit that the investment performance of the Substituted Portfolios are generally higher than the performance of the corresponding Replaced Portfolios. The total returns of the Government and Quality Bond Portfolio have been slightly higher than those of the Fixed Income Portfolio, while the total returns of the Strategic Multi- Asset Portfolio generally have been significantly higher than the total returns of the Foreign Securities Portfolio.

7. Section 17(a)(1) of the 1940 Act prohibits any affiliated person of a registered investment company, or an affiliated person of such affiliated person, from selling any security or other property to such registered investment company. Section 17(a)(2) of the 1940 Act prohibits any of the persons described above from purchasing any security or other property from such registered investment company. Certain of the Substitutions will be effected partly or wholly in-kind. Moreover, after the Substitutions the Life Companies will combine their respective separate account divisions invested in the Replaced Portfolios with the divisions invested in the corresponding Substituted Portfolios. The combination may be deemed to involve the indirect purchase of shares of the Substituted Portfolios with portfolio securities of the corresponding Replaced Portfolios, and the indirect sale of securities of the Replaced Portfolios for shares of the Substituted Portfolios. Thus each Portfolio would be acting as principal, in the purchase and sale of securities to the other Portfolio, in contravention of Section 17(a). The Commission has taken the interpretive position that divisions of a registered separate account are to be treated as separate investment companies in connection with substitution transactions. The Life Companies are arguably transferring unit values between their separate account divisions. The transfer of unit values may involve purchase and sale transactions between divisions that are affiliated persons. The sale and

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   purchase transactions between divisions may come within the scope of Sections 17(a)(1) and 17(a)(2) of the 1940 Act, respectively. Therefore, the combination of divisions may require an exemption from Section 17(a) of the 1940 Act, pursuant to Section 17(b).

8. Section 17(b) of the 1940 Act provides that the Commission may grant an order exempting transactions prohibited by Section 17(a) upon application if evidence establishes that: (1) the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve over-reaching on the part of any person concerned; (b) the proposed transaction is consistent with the investment policy of each registered investment company concerned, as recited in its registration statement and reports filedunder the 1940 Act; and (c) the proposed transaction is consistent with the general purposes of the 1940 Act. Applicants represent that the terms of the proposed transactions, as described in the Application are: reasonable and fair, including the consideration to be paid and received; do not involve over-reaching; are consistent with the policies of the Portfolios; and are consistent with the general purposes of the 1940 Act.

9. Applicants represent that, for all the reasons stated above with regard to Section 26(b) of the 1940 Act, the Substitutions are reasonable and fair and do not involve overreaching on the part of any person. Applicants expect that existing and future Owners will benefit from the consolidation of assets in the Substituted Portfolios. Applicants state that the transactions effecting the Substitutions will be effected in conformity with Section 22(c) of the 1940 Act and Rule 22c-1 thereunder. Moreover, Applicants state that the partial redemptions-in-kind of portfolio securities of certain of the Replaced Portfolios will be effected in conformity with Rule 17a-7 under the 1940 Act to the extent possible. Applicants submit that Owners' interests after the Substitution, in practical economic terms, will not differ in any measurable way from such interests immediately prior to the Substitution. In each case, Applicants assert that the consideration to be received and paid is, therefore, reasonable and fair. Applicants each believe, based on their review of existing federal income tax laws and regulations and advice of counsel, that the Substitutions will not give rise to any taxable income for Owners.

10. Applicants submit that the investment objectives of each of the Substituted Portfolios are sufficiently similar to the investment objectives of the Replaced Portfolios that, in this regard, the Substitutions are consistent with Commission precedent pursuant to Section 17 of the 1940 Act. Also, the Substitutions are consistent with the general purposes of the 1940 Act, as enunciated in the Findings and Declaration of Policy in Section I of the 1940 Act. The proposed transactions do not present any of the issues or abuses that the 1940 Act is designed to prevent. Moreover, the proposed transactions will be effected in a manner consistent with the public interest and the protection of investors. Owners will be fully informed of the terms of the substitutions through prospectus supplements and the Notice, and will have an opportunity to reallocate investments prior to and following the Substitutions.

    Conclusion

    Applicants submit that, for the reasons summarized above, their requests meet the standards set out in Sections 17(b) and 26(b) of the 1940 Act.

    For the Commission, by the Division of Investment Management, pursuant to delegated authority. Margaret H. McFarland, Deputy Secretary.

    [FR Doc. 99-12816Filed5-20-99; 8:45 am]

    BILLING CODE 8010-01-M