AIG SunAmerica Asset Management Corp., et al.; Notice of Application, 3946-3950 [E5-310]

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[FR Doc. 05–1456 Filed 1–26–05; 8:45 am] BILLING CODE 6325–39–P SECURITIES AND EXCHANGE COMMISSION [Release No. IC–26725; 812–13047] AIG SunAmerica Asset Management Corp., et al.; Notice of Application January 21, 2005. Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice of application for an order under section 6(c) of the Investment Company Act of 1940 (‘‘Act’’) for an exemption from section 12(d)(3) of the Act, under sections 6(c) and 17(b) of the Act for an exemption from section 17(a) of the Act, and under section 17(d) of the Act and rule 17d– 1 under the Act to permit certain joint transactions. AGENCY: AIG SunAmerica Asset Management Corp. (‘‘AIG SAAMCo’’) and Variable Annuity Life Insurance Company (‘‘VALIC,’’ and together with AIG SAAMCo, the ‘‘Advisers’’). SUMMARY OF APPLICATION: Applicants request an order to permit any existing and future registered investment company or series that offers principal protection (‘‘Principal Protection’’) and has as its investment adviser an Adviser or other registered investment adviser that is in the control of, controlled by, or under common control with an Adviser (collectively, the ‘‘Funds’’) to enter into an arrangement with any entity that now or in the future is in APPLICANTS: PO 00000 Frm 00044 Fmt 4703 Sfmt 4703 control of, controlled by, or under common control with, an Adviser (an ‘‘AIG Affiliate’’) to provide Principal Protection to the Fund, or to serve as a hedging counterparty (‘‘Hedging Counterparty’’) where an unaffiliated third party providing Principal Protection to the Fund seeks to enter into a derivatives contract or reinsurance contract with an AIG Affiliate to hedge all or a portion of the risks under the Principal Protection arrangement.1 FILING DATES: The application was filed on November 25, 2003 and amended on October 26, 2004. HEARING OR NOTIFICATION OF HEARING: An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on February 15, 2005, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer’s interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. Applicants, Robert M. Zakem, Esq., AIG SunAmerica Asset Management Corp., Harborside Financial Center, 3200 Plaza Five, Jersey City, NJ 07311. FOR FURTHER INFORMATION CONTACT: Shannon Conaty, Attorney-Adviser, at (202) 942–0527, or Michael W. Mundt, Senior Special Counsel, at (202) 942– 0564 (Division of Investment Management, Office of Investment Company Regulation). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained for a fee at the Commission’s Public Reference Branch, 450 Fifth Street, NW., Washington, DC 20549–0102 (tel. 202–942–8090). Applicants’ Representations 1. AIG SAAMCo, a Delaware corporation, is registered with the Commission under the Investment Advisers Act of 1940 (the ‘‘Advisers 1 All existing entities currently intending to rely on the requested order have been named as applicants. Any other existing and future entity that relies on the order will comply with the terms and conditions of the application. E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 70, No. 17 / Thursday, January 27, 2005 / Notices Act’’) and serves as investment adviser to nine registered investment companies. It is an indirect, whollyowned subsidiary of AIG SunAmerica Inc., a financial services company and wholly-owned subsidiary of American International Group, Inc., (‘‘AIG’’). VALIC, a Texas company and indirect wholly-owned subsidiary of AIG, is registered with the Commission under the Advisers Act and serves as investment adviser to two registered investment companies. Each Fund will be registered under the Act as, or be a series of, a management investment company. 2. Each Fund proposes to provide Principal Protection, pursuant to which shareholders who hold their Fund shares for a prescribed period of time (the ‘‘Protection Period’’) 2 will be able, at the end of the period (the ‘‘Maturity Date’’), to redeem their shares and receive no less than the amount of their initial investment, subject to certain adjustments (the ‘‘Protected Amount’’). Applicants state that Principal Protection will be achieved primarily through the use of a mathematical formula that allocates assets based on the ‘‘constant proportion portfolio insurance’’ model (the ‘‘Formula’’).3 In addition to using the Formula, the Fund may also enter into a financial guarantee agreement, warranty agreement or other principal protection agreement 4 or may acquire an insurance policy (each a ‘‘Protection Agreement’’), in order to ensure that the Fund can meet its obligation to pay each redeeming shareholder the Protected Amount on 2 The life of a Fund offering Principal Protection will generally be divided into three time periods: (a) An initial offering period during which the Fund will sell shares to the public; (b) the Protection Period during which the Fund will not normally offer its shares to the public and the Fund’s assets will be invested pursuant to the Formula (as defined below); and (c) a period after the Maturity Date (the ‘‘Post-Protection Period’’), during which the Fund will offer its shares on a continuous basis and pursue an objective that does not include Principal Protection, or alternatively, will wind up and cease operations or may commence a new principal protection cycle. 3 The objective of the Formula is to maximize the allocation of a Fund’s assets that may be invested for purposes other than Principal Protection (the ‘‘Portfolio Component’’), thus gaining exposure to one or more sectors of the securities or other markets, while attempting to minimize the risk that the assets and return of the Fund will be insufficient to redeem a shareholder’s account on the Maturity Date for an amount at least equal to the initial value of that shareholder’s investment (a ‘‘shortfall’’) by investing a portion of the Fund’s assets in fixed income securities (the ‘‘Protection Component’’). 4 Other principal protection agreements may take the form of a swap agreement or other privately negotiated derivatives contract with similar economic characteristics requiring the Protection Provider (as defined below) to make payments to the Fund in the event of a shortfall. VerDate jul<14>2003 17:20 Jan 26, 2005 Jkt 205001 the Maturity Date.5 The entity providing Principal Protection (‘‘Protection Provider’’) may be a bank, brokerage firm, insurance company, financial services firm or other financial institution. In certain cases, the Protection Provider may seek to hedge all or a portion of its risks by entering into a derivatives contract or reinsurance contract (‘‘Hedging Transaction’’) with a Hedging Counterparty. Each Fund will pay a fee to the Protection Provider, typically equal to a percentage of the Fund’s average daily net assets. 3. Each Protection Agreement will require the Protection Provider to pay the Fund an amount equal to any shortfall between the aggregate Protected Amount and the net asset value (‘‘NAV’’) of the Fund on the Maturity Date (the ‘‘Shortfall Amount’’). Under the terms of each Protection Agreement, the Fund will be required to manage its assets within certain investment parameters, based in large part on the asset allocations determined by the Formula. If the Fund fails to comply with these allocations or upon the occurrence of certain other conditions (‘‘Trigger Event’’), the Protection Provider may cause the Fund to defease its portfolio and allocate all of its assets to the Fund’s Protection Component (a ‘‘Defeasance Event’’). 4. A Protection Agreement and the fee for the Protection Agreement will be subject to approval by the Board of Directors or Trustees of each Fund (the ‘‘Board’’), including a majority of those Directors or Trustees who are not interested persons of a Fund or an Adviser, as defined in section 2(a)(19) of the Act (the ‘‘Independent Trustees’’). In the event that a Fund wishes to consider entering into a Protection Agreement with an AIG Affiliate, or with a Protection Provider that is otherwise not an affiliated person of the Fund or its Adviser, or an affiliated person of such a person (an ‘‘Unaffiliated Provider’’), but that wants to use an AIG Affiliate as its Hedging Counterparty (each, an ‘‘Affiliated Protection Arrangement’’), the Adviser will be required to conduct a bidding process to select the 5 The Protected Amount may be reduced (a) to the extent the Fund incurs extraordinary expenses, such as litigation expenses, which are not covered by the Protection Agreement, (b) if the Adviser is required to make payments to the Protection Provider and/or the Fund (‘‘Adviser Payment’’) under the Protection Agreement as a result of its own negligence or certain other disabling conduct and there is a dispute regarding such payment, or (c) as otherwise described in the Protection Agreement, subject in each case to appropriate prospectus disclosure. The Protected Amount will not be reduced by the Fund’s ordinary fees and expenses, including its advisory fees. PO 00000 Frm 00045 Fmt 4703 Sfmt 4703 3947 Protection Provider. Applicants state that the Adviser will initially solicit at least three other bids in addition to the bid relating to an Affiliated Protection Arrangement, then will engage in negotiations with all of the bidders. At the end of the negotiation process, all bidders who wish to participate will submit final bids. All final bids will be due at the same time and no bidder will be permitted to change its final bid once submitted. After final bids are submitted, no bidder, including an AIG Affiliate, will have access to any competing bids until after the Protection Agreement is entered into by the Fund. In order for the Adviser to recommend the bid relating to an Affiliated Protection Arrangement, the Fund must have also received at least two bona fide final bids that are not Affiliated Protection Arrangements.6 The Adviser will evaluate final bids and recommend a bid for acceptance by the Board, together with an explanation of the basis for this recommendation and a summary of the material terms of any bids that were rejected. Applicants state that in addition to cost, other factors such as creditworthiness will be significant in the Adviser’s evaluation of bids, and thus, the Adviser may recommend to the Board a Protection Provider who does not submit the bid with the lowest fee rate.7 A majority of the Board, including a majority of the Independent Trustees, must approve the acceptance of a bid involving an Affiliated Protection Arrangement, as well as the general terms of the proposed Protection Arrangement. Upon the conclusion of the Adviser’s negotiation of the Affiliated Protection Arrangement, the Board must approve the final Protection Agreement, and determine that the terms of the Affiliated Protection Arrangement, as so finalized, are not materially different from the terms of the accepted bid. 5. The Board will exercise oversight responsibilities in connection with any Protection Agreement and will establish a special committee (the ‘‘Committee’’), a majority of the members of which will be Independent Trustees, if the Fund enters into an Affiliated Protection Arrangement. If a Trigger Event or a Defeasance Event occurs under the Protection Agreement (each, a 6 If an Unaffiliated Provider submits multiple bids, each with a different Hedging Counterparty, each submission will constitute a separate bid. 7 If the Protection Provider recommended by the Adviser does not propose the lowest fee to provide Principal Protection and the Board approves a Protection Agreement with such Protection Provider, the Board minutes will reflect the reasons why the Protection Provider requiring the higher fee was approved. E:\FR\FM\27JAN1.SGM 27JAN1 3948 Federal Register / Vol. 70, No. 17 / Thursday, January 27, 2005 / Notices ‘‘Protection Event’’) or if the Adviser decides to attempt to cure the circumstances leading to a Protection Event pursuant to the terms of the Protection Agreement, the Adviser will be required to notify the Committee as soon as practicable, and absent special circumstances, before a decision is reached by the Protection Provider and the Adviser as to how to effect any cure. On or about the Maturity Date, the Board will review information comparing the aggregate Protected Amount with the Fund’s total NAV on the Maturity Date, and will review and approve the amount of any Shortfall Amount to be submitted for payment to the Protection Provider under the Protection Agreement (including the amount of any required Adviser Payment to the Fund) (the ‘‘Approved Shortfall Amount’’). Applicants’ Legal Analysis A. Section 12(d)(3) of the Act 1. Section 12(d)(3) of the Act generally prohibits a registered investment company from acquiring any security issued by any person who is a broker, dealer, investment adviser, or engaged in the business of underwriting. Rule 12d3–1 under the Act exempts certain transactions from the prohibition of section 12(d)(3) if certain conditions are met. One of these conditions, set forth in rule 12d3–1(c), provides that the exemption provided by the rule is not available when the issuer of the securities is the investment adviser, promoter, or principal underwriter of the investment company, or any affiliated person of such entities. In addition, rule 12d3–1(b) does not permit a registered investment company to (i) own more than five percent of a class of equity securities of an issuer that is engaged in securities-related activities; (ii) own more than ten percent of such an issuer’s debt securities; or (iii) invest more than five percent of the value of its total assets in the securities of any such issuer. Section 6(c) of the Act authorizes the Commission to exempt any person or transaction from any provision of the Act to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policies and provisions of the Act. 2. Applicants state that by virtue of entering into an Affiliated Protection Arrangement with an AIG Affiliate that is a broker, dealer, underwriter or investment adviser to a registered investment company or an investment adviser registered under the Investment VerDate jul<14>2003 17:20 Jan 26, 2005 Jkt 205001 Advisers Act, a Fund may be deemed to have acquired a security from the AIG Affiliate.8 In addition, applicants state that it is possible that a Protection Agreement entered into by the Fund (whether pursuant to an Affiliated Protection Agreement or otherwise) may represent more than ten percent of the debt securities of a Protection Provider that is involved in securities-related activities or more than five percent of the total assets of the Fund. Therefore, applicants seek an exemption from section 12(d)(3) to the extent necessary to permit the Fund to enter into Affiliated Protection Arrangements with an AIG Affiliate or a Protection Agreement with another Protection Provider that is involved in securitiesrelated activities. 3. Applicants state that section 12(d)(3) was intended to prevent investment companies from exposing their assets to the entrepreneurial risks of securities-related businesses and to prevent reciprocal practices between investment companies and securitiesrelated businesses. Applicants assert that the proposed transactions are consistent with the policy and intent underlying section 12(d)(3). In terms of the risk-preventing element of section 12(d)(3), applicants state that the Adviser and Board, when evaluating the credentials of a prospective Protection Provider, will take into account the Protection Provider’s (and any parent guarantor’s) creditworthiness, any ratings assigned by a nationally recognized statistical ratings organization (‘‘NRSRO’’), and the availability of audited financial statements. Applicants state that the purpose of the Fund’s Protection Agreement is to provide Principal Protection for the Fund, not to reward an AIG Affiliate (or any other brokerdealer) for sales of Fund shares. Moreover, applicants believe that the conditions set forth in the application will ensure that each Fund is operated in the interests of its shareholders and not in the interests of an AIG Affiliate or any other Protection Provider. B. Section 17(a) of the Act 1. Section 17(a)(1) and (2) of the Act generally prohibit the promoter or principal underwriter, or any affiliated person of the promoter or principal underwriter, of a registered investment company, acting as principal, 8 Applicants state that depending on the structure of the Protection Agreement, while certain types of Protection Agreements would not meet the definition of ‘‘security’’ contained in section 2(a)(36) of the Act such as insurance contracts, certain types of derivative agreements may be deemed to constitute securities. PO 00000 Frm 00046 Fmt 4703 Sfmt 4703 knowingly to sell or purchase any security or other property to or from such investment company. Section 2(a)(3) of the Act defines an ‘‘affiliated person’’ of another person to include, among other things: (a) Any person directly or indirectly owning, controlling, or holding with power to vote 5% or more of the outstanding voting securities of the other person; (b) any person 5% of more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by such other person; and (c) any person directly or indirectly controlling, controlled by, or under common control with, such other person. Section 17(b) of the Act authorizes the Commission to exempt a proposed transaction from the terms of section 17(a) if evidence establishes that the terms of the proposed transaction are reasonable and fair and do not involve overreaching, and the proposed transaction is consistent with the policies of the registered investment company involved and the purposes of the Act. 2. Applicants state that depending on the structure of a Protection Agreement, it might be deemed to be a security or other property, and the Fund’s entering into a Protection Agreement with an AIG Affiliate might be deemed to be the acquisition of a security or other property from an AIG Affiliate. In addition, applicants state that if an AIG Affiliate were to serve as a Hedging Counterparty to an Unaffiliated Provider, the AIG Affiliate might under certain circumstances be deemed to be indirectly involved in the sale of a security or other property to the Fund. Applicants request an exemption under sections 6(c) and 17(b) to permit the proposed transactions. 3. Applicants submit that the involvement of an AIG Affiliate in an Affiliated Protection Arrangement will benefit a Fund and its shareholders given the expertise of the AIG Affiliates in structuring and providing credit enhancements for Principal Protection arrangements, and the alignment of interests that exist between the AIG Affiliates and the Funds. Applicants argue that the relationship of a Fund and Unaffiliated Provider may be more adversarial, with the protection of the Unaffiliated Provider’s rights and remedies being of paramount importance to the Unaffiliated Provider, which could result in the Unaffiliated Provider exhibiting a greater willingness to declare a Defeasance Event or to rely on a clause permitting it to avoid liability to the Fund than would an AIG Affiliate in similar circumstances. Applicants argue that an AIG Affiliate E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 70, No. 17 / Thursday, January 27, 2005 / Notices may assume a greater risk to itself by avoiding a Defeasance Event and allowing a greater portion of the Fund’s assets to remain invested in the Portfolio Component for the same fee charged by an Unaffiliated Provider. Applicants also argue that the use of an AIG Affiliate as Protection Provider may lower the cost of Principal Protection since there is a limited universe of Protection Providers with which a Fund may enter into a Protection Agreement. In addition, because an AIG Affiliate may have a greater comfort level with the Formula and certain investment strategies to be used by the Advisers than an Unaffiliated Provider, applicants state that this may allow the AIG Affiliate to enter into a Hedging Transaction with an Unaffiliated Provider for a lower fee or spread than would be available through a counterparty unaffiliated with the Fund. 4. Applicants submit that the conditions applicable to each Affiliated Protection Arrangement will ensure that such arrangement will be reasonable and fair to each Fund and that no AIG Affiliate will be able to engage in overreaching. Applicants state that a Fund will not be able to participate in an Affiliated Protection Arrangement until after a bidding process has been completed in which the Fund receives at least two bona fide final bids for Principal Protection from an Unaffiliated Provider not seeking to hedge with an AIG Affiliate, and that an AIG Affiliate will not have an unfair advantage over other bidders in winning the bid. A Fund may not accept a bid or subsequently enter into an Affiliated Protection Arrangement unless it has been approved by the Fund’s Board, including a majority of Independent Trustees, who must determine that entering into the Affiliated Protection Arrangement is in the best interests of the Fund and its shareholders and meets the standards specified in section 17(b) of the Act. In addition, applicants state that if a Fund enters into an Affiliated Protection Arrangement, the Fund’s Board will establish a Committee to represent the Fund’s interests if a Protection Event should occur. Lastly, applicants state that the Board will approve the Approved Shortfall Amount to be submitted for payment to the Affiliated Protection Provider and that the Fund will not accept a lesser amount in settlement of its claim without a further Commission exemptive order. 5. Applicants submit that an Affiliated Protection Arrangement will be consistent with the policies of each Fund, as recited its registration statement. Applicants further submit VerDate jul<14>2003 17:20 Jan 26, 2005 Jkt 205001 that an Affiliated Protection Arrangement, subject to the conditions set forth in the application, will be consistent with the purposes fairly intended by the policy and provisions of the Act and will be in the best interests of each Fund and its shareholders. C. Section 17(d) of the Act 1. Section 17(d) of the Act and rule 17d–1 under the Act generally prohibit any affiliated person of, or principal underwriter for, a registered investment company, or any affiliated person of, or principal underwriter, acting as principal, from effecting any transaction in connection with any joint enterprise or other arrangement or profit-sharing plan in which the investment company participates, unless an application regarding the joint transaction has been filed with the Commission and granted by order. Under rule 17d–1, in passing upon such applications, the Commission considers whether the participation of the registered investment company in the joint transaction is consistent with the provisions, policies and purposes of the Act and the extent to which such participation is on a basis different or less advantageous than that of other participants. 2. Applicants state that the fee paid to an AIG Affiliate pursuant to an Affiliated Protection Arrangement (either by the Fund directly under a Protection Agreement or indirectly through a Hedging Transaction) may be deemed to involve a joint enterprise or joint arrangement or profit-sharing plan under section 17(d) and rule 17d–1 because an AIG Affiliate may be in control of, controlled by or under common control with the Adviser of a Fund, and the AIG Affiliate’s compensation as the Protection Provider or Hedging Counterparty will be based on the Fund’s assets. In addition, the AIG Affiliate might make a profit or suffer a loss depending on the performance of the Fund. Applicants also state that an Affiliated Protection Arrangement could be deemed to involve a joint enterprise or joint arrangement because of the coordination and possible ongoing negotiations between a Fund and an AIG Affiliate in managing the Fund’s risk exposure.9 Applicants thus request an order 9 For example, applicants state that an AIG Affiliate could seek to request that a Fund’s assets be invested not to seek to maximize the Fund’s return, but in a manner designed to protect the AIG Affiliate’s interest by over-allocating the Fund’s assets to the Protection Component so as to minimize the risk that an AIG Affiliate would be called upon to make a payment under an Affiliated Protection Arrangement. PO 00000 Frm 00047 Fmt 4703 Sfmt 4703 3949 pursuant to section 17(d) and rule 17d– 1. 3. Applicants state that the purpose of section 17(d) is to avoid overreaching by and unfair advantage to insiders. Applicants submit that the conditions proposed in the application will ensure that a Fund and its shareholders are treated fairly and not taken advantage of by an AIG Affiliate. Applicants submit that a Fund and its shareholders will benefit from the participation of an AIG Affiliate in an Affiliated Protection Arrangement. For these reasons, applicants state that the proposed arrangement satisfies the standards of section 17(d) and rule 17d–1. Applicants’ Conditions Applicants agree that any order granting the requested relief shall be subject to the following conditions: 1. Prior to recommending to the Board that a Fund enter into an Affiliated Protection Arrangement, the Adviser will conduct a competitive bidding process in which the Adviser solicits bids on at least three Protection Agreements that would not constitute Affiliated Protection Arrangements. At a reasonable amount of time prior to the date bids are to be submitted, the Adviser will solicit bids by supplying prospective bidders with a bid invitation letter that includes any requirement for a potential Protection Provider (and its parent guarantor, if any) to include audited financial statements in the Fund’s registration statement, a copy of the relevant sections of a draft prospectus of the Fund, and a term sheet containing the principal terms of a proposed Protection Agreement. Initial bids will be due at the same time, and no bidder will have access to any competing bids prior to its own submission. After initial bids are received, the Adviser will negotiate in good faith with each of the bidders to obtain more favorable terms for the Fund. During these negotiations, all bidders will have access to equal information about competing bids. At the end of this process, all bidders who wish to participate will submit final bids. All such final bids will be due at the same time, and no bidder will be permitted to change its final bid once submitted. After the final bids are submitted, no bidder, including an AIG Affiliate, will have access to any competing bids until after the Protection Agreement is entered into by the Fund. A Fund may not enter into an Affiliated Protection Arrangement unless two bona fide final bids have been received for Protection Agreements that would not constitute Affiliated Protection Arrangements. E:\FR\FM\27JAN1.SGM 27JAN1 3950 Federal Register / Vol. 70, No. 17 / Thursday, January 27, 2005 / Notices 2. If the Adviser recommends that the Board approve an Affiliated Protection Arrangement, the Adviser must provide the Board with an explanation of the basis for its recommendation and a summary of the material terms of any bids that were rejected. 3. The Fund’s Board, including a majority of Independent Trustees, must approve the acceptance of a bid involving an Affiliated Protection Arrangement, as well as the general terms of the proposed Protection Agreement. In evaluating the final bids and the recommendations from the Adviser, the Board will consider, among other things: (i) The fee rate to be charged by a potential Protection Provider; (ii) the structure and potential limitations of the proposed Principal Protection arrangement and any legal, regulatory or tax implications of such arrangement; (iii) the credit rating (if any) and financial condition of the potential Protection Provider (and, if applicable, its parent guarantor), including any ratings assigned by any NRSRO; and (iv) the experience of the potential Protection Provider in providing Principal Protection, including in particular to registered investment companies. If the Affiliated Protection Arrangement approved by the Board does not reflect the lowest fee submitted in a proposal to provide the Principal Protection, the Board will reflect in its minutes the reasons why the higher cost option was selected. 4. Upon the conclusion of the Adviser’s negotiations of the Affiliated Protection Arrangement, including the Protection Agreement, the Fund’s Board, including a majority of Independent Trustees, must approve the final Protection Agreement and determine that the terms of the final Affiliated Protection Arrangement, as so finalized, are not materially different from the terms of the accepted bid. The Board, including a majority of its Independent Trustees, will also determine that entering into the Affiliated Protection Arrangement is in the best interests of the Fund and its shareholders and meets the standards specified in section 17(b) of the Act. The Board will reflect these findings and their basis in its minutes. 5. If an AIG Affiliate is chosen as the Protection Provider or Hedging Counterparty, it will not charge a higher fee for its Protection Agreement or Hedging Transaction than it would charge for similar agreements or transactions for unaffiliated parties that are similarly situated to the Fund. Any AIG Affiliate acting as Hedging Counterparty will not be directly compensated by the Fund and the Fund VerDate jul<14>2003 17:20 Jan 26, 2005 Jkt 205001 will not be a party to any Hedging Transaction. 6. In the event the Fund enters into an Affiliated Protection Arrangement, the Board will establish a Committee, a majority of whose members will be Independent Trustees, to represent the Fund in any negotiations relating to a Protection Event. If a Protection Event occurs under the Protection Agreement or if the Adviser decides to attempt to cure the circumstances leading to a Protection Event pursuant to the terms of the Protection Agreement, the Adviser will notify the Committee as soon as practicable, and, absent special circumstances, before a decision is reached by the Protection Provider and the Adviser as to how to effect any cure. All Protection Events will be brought to the attention of the full Board at the next regularly scheduled Board meeting. 7. The Adviser will present a report to the Board, at least quarterly, comparing the actual asset allocation of the Fund’s portfolio with the allocation required under the Protection Agreement, describing any Protection Events, and summarizing any negotiations that were the subject of the previous condition. 8. At the conclusion of the Protection Period, the Adviser of a Fund will report to the Fund’s Board any Shortfall Amount potentially covered under an Affiliated Protection Arrangement (including, for this purpose, the amount of any required Adviser Payment). The Board, including a majority of Independent Trustees, will evaluate the Shortfall Amount and will determine the amount of the Approved Shortfall Amount under the Protection Agreement to be submitted to the Protection Provider. The Fund will not settle any claim under the Protection Agreement for less than the full Approved Shortfall Amount determined by the Board without obtaining a further exemptive order from the Commission. 9. Prior to a Fund’s reliance on the order, the Fund’s Board will satisfy the fund governance standards as defined in rule 0–1(a)(7) under the Act, except that the Independent Trustees must be represented by independent legal counsel within the meaning of rule 0– 1 under the Act. 10. The Adviser, under the supervision of the Board, will maintain sufficient records to verify compliance with the conditions of the order. Such records will include, without limitation: (i) An explanation of the basis upon which the Adviser selected prospective bidders; (ii) a list of all bidders to whom a bid invitation letter was sent and copies of the bid invitation letters and accompanying materials; (iii) copies of PO 00000 Frm 00048 Fmt 4703 Sfmt 4703 all initial and final bids received, including the winning bid; (iv) records of the negotiations with bidders between their initial and final bids; (v) the materials provided to the Board in connection with the Adviser’s recommendation regarding the Protection Agreement; (vi) the final price and terms of the Protection Agreement with an explanation of the reason the arrangement is considered an Affiliated Protection Arrangement; and (vii) records of any negotiations with the Protection Providers related to the occurrence of a Protection Event and the satisfaction of any obligations under a Protection Agreement. All such records will be maintained for a period ending not less than six years after the conclusion of the Protection Period, the first two years in an easily accessible place, and will be available for inspection by the staff of the Commission. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Margaret H. McFarland, Deputy Secretary. [FR Doc. E5–310 Filed 1–26–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meeting Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold the following meeting during the week of January 31, 2005: A Closed Meeting will be held on Thursday, February 3, 2005, at 2 p.m. Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters may also be present. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (6), (7), (9)(B), and (10) and 17 CFR 200.402(a)(3), (5), (6), (7), 9(ii) and (10), permit consideration of the scheduled matters at the Closed Meeting. Commissioner Campos, as duty officer, voted to consider the items listed for the closed meeting in closed session. The subject matter of the Closed Meeting scheduled for Thursday, February 3, 2005, will be: E:\FR\FM\27JAN1.SGM 27JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 17 (Thursday, January 27, 2005)]
[Notices]
[Pages 3946-3950]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-310]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26725; 812-13047]


AIG SunAmerica Asset Management Corp., et al.; Notice of 
Application

January 21, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from section 
12(d)(3) of the Act, under sections 6(c) and 17(b) of the Act for an 
exemption from section 17(a) of the Act, and under section 17(d) of the 
Act and rule 17d-1 under the Act to permit certain joint transactions.

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Applicants: AIG SunAmerica Asset Management Corp. (``AIG SAAMCo'') and 
Variable Annuity Life Insurance Company (``VALIC,'' and together with 
AIG SAAMCo, the ``Advisers'').

Summary of Application: Applicants request an order to permit any 
existing and future registered investment company or series that offers 
principal protection (``Principal Protection'') and has as its 
investment adviser an Adviser or other registered investment adviser 
that is in the control of, controlled by, or under common control with 
an Adviser (collectively, the ``Funds'') to enter into an arrangement 
with any entity that now or in the future is in control of, controlled 
by, or under common control with, an Adviser (an ``AIG Affiliate'') to 
provide Principal Protection to the Fund, or to serve as a hedging 
counterparty (``Hedging Counterparty'') where an unaffiliated third 
party providing Principal Protection to the Fund seeks to enter into a 
derivatives contract or reinsurance contract with an AIG Affiliate to 
hedge all or a portion of the risks under the Principal Protection 
arrangement.\1\
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    \1\ All existing entities currently intending to rely on the 
requested order have been named as applicants. Any other existing 
and future entity that relies on the order will comply with the 
terms and conditions of the application.

Filing Dates: The application was filed on November 25, 2003 and 
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amended on October 26, 2004.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on February 15, 2005, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, Robert M. Zakem, Esq., AIG SunAmerica Asset 
Management Corp., Harborside Financial Center, 3200 Plaza Five, Jersey 
City, NJ 07311.

FOR FURTHER INFORMATION CONTACT: Shannon Conaty, Attorney-Adviser, at 
(202) 942-0527, or Michael W. Mundt, Senior Special Counsel, at (202) 
942-0564 (Division of Investment Management, Office of Investment 
Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. AIG SAAMCo, a Delaware corporation, is registered with the 
Commission under the Investment Advisers Act of 1940 (the ``Advisers

[[Page 3947]]

Act'') and serves as investment adviser to nine registered investment 
companies. It is an indirect, wholly-owned subsidiary of AIG SunAmerica 
Inc., a financial services company and wholly-owned subsidiary of 
American International Group, Inc., (``AIG''). VALIC, a Texas company 
and indirect wholly-owned subsidiary of AIG, is registered with the 
Commission under the Advisers Act and serves as investment adviser to 
two registered investment companies. Each Fund will be registered under 
the Act as, or be a series of, a management investment company.
    2. Each Fund proposes to provide Principal Protection, pursuant to 
which shareholders who hold their Fund shares for a prescribed period 
of time (the ``Protection Period'') \2\ will be able, at the end of the 
period (the ``Maturity Date''), to redeem their shares and receive no 
less than the amount of their initial investment, subject to certain 
adjustments (the ``Protected Amount''). Applicants state that Principal 
Protection will be achieved primarily through the use of a mathematical 
formula that allocates assets based on the ``constant proportion 
portfolio insurance'' model (the ``Formula'').\3\ In addition to using 
the Formula, the Fund may also enter into a financial guarantee 
agreement, warranty agreement or other principal protection agreement 
\4\ or may acquire an insurance policy (each a ``Protection 
Agreement''), in order to ensure that the Fund can meet its obligation 
to pay each redeeming shareholder the Protected Amount on the Maturity 
Date.\5\ The entity providing Principal Protection (``Protection 
Provider'') may be a bank, brokerage firm, insurance company, financial 
services firm or other financial institution. In certain cases, the 
Protection Provider may seek to hedge all or a portion of its risks by 
entering into a derivatives contract or reinsurance contract (``Hedging 
Transaction'') with a Hedging Counterparty. Each Fund will pay a fee to 
the Protection Provider, typically equal to a percentage of the Fund's 
average daily net assets.
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    \2\ The life of a Fund offering Principal Protection will 
generally be divided into three time periods: (a) An initial 
offering period during which the Fund will sell shares to the 
public; (b) the Protection Period during which the Fund will not 
normally offer its shares to the public and the Fund's assets will 
be invested pursuant to the Formula (as defined below); and (c) a 
period after the Maturity Date (the ``Post-Protection Period''), 
during which the Fund will offer its shares on a continuous basis 
and pursue an objective that does not include Principal Protection, 
or alternatively, will wind up and cease operations or may commence 
a new principal protection cycle.
    \3\ The objective of the Formula is to maximize the allocation 
of a Fund's assets that may be invested for purposes other than 
Principal Protection (the ``Portfolio Component''), thus gaining 
exposure to one or more sectors of the securities or other markets, 
while attempting to minimize the risk that the assets and return of 
the Fund will be insufficient to redeem a shareholder's account on 
the Maturity Date for an amount at least equal to the initial value 
of that shareholder's investment (a ``shortfall'') by investing a 
portion of the Fund's assets in fixed income securities (the 
``Protection Component'').
    \4\ Other principal protection agreements may take the form of a 
swap agreement or other privately negotiated derivatives contract 
with similar economic characteristics requiring the Protection 
Provider (as defined below) to make payments to the Fund in the 
event of a shortfall.
    \5\ The Protected Amount may be reduced (a) to the extent the 
Fund incurs extraordinary expenses, such as litigation expenses, 
which are not covered by the Protection Agreement, (b) if the 
Adviser is required to make payments to the Protection Provider and/
or the Fund (``Adviser Payment'') under the Protection Agreement as 
a result of its own negligence or certain other disabling conduct 
and there is a dispute regarding such payment, or (c) as otherwise 
described in the Protection Agreement, subject in each case to 
appropriate prospectus disclosure. The Protected Amount will not be 
reduced by the Fund's ordinary fees and expenses, including its 
advisory fees.
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    3. Each Protection Agreement will require the Protection Provider 
to pay the Fund an amount equal to any shortfall between the aggregate 
Protected Amount and the net asset value (``NAV'') of the Fund on the 
Maturity Date (the ``Shortfall Amount''). Under the terms of each 
Protection Agreement, the Fund will be required to manage its assets 
within certain investment parameters, based in large part on the asset 
allocations determined by the Formula. If the Fund fails to comply with 
these allocations or upon the occurrence of certain other conditions 
(``Trigger Event''), the Protection Provider may cause the Fund to 
defease its portfolio and allocate all of its assets to the Fund's 
Protection Component (a ``Defeasance Event'').
    4. A Protection Agreement and the fee for the Protection Agreement 
will be subject to approval by the Board of Directors or Trustees of 
each Fund (the ``Board''), including a majority of those Directors or 
Trustees who are not interested persons of a Fund or an Adviser, as 
defined in section 2(a)(19) of the Act (the ``Independent Trustees''). 
In the event that a Fund wishes to consider entering into a Protection 
Agreement with an AIG Affiliate, or with a Protection Provider that is 
otherwise not an affiliated person of the Fund or its Adviser, or an 
affiliated person of such a person (an ``Unaffiliated Provider''), but 
that wants to use an AIG Affiliate as its Hedging Counterparty (each, 
an ``Affiliated Protection Arrangement''), the Adviser will be required 
to conduct a bidding process to select the Protection Provider. 
Applicants state that the Adviser will initially solicit at least three 
other bids in addition to the bid relating to an Affiliated Protection 
Arrangement, then will engage in negotiations with all of the bidders. 
At the end of the negotiation process, all bidders who wish to 
participate will submit final bids. All final bids will be due at the 
same time and no bidder will be permitted to change its final bid once 
submitted. After final bids are submitted, no bidder, including an AIG 
Affiliate, will have access to any competing bids until after the 
Protection Agreement is entered into by the Fund. In order for the 
Adviser to recommend the bid relating to an Affiliated Protection 
Arrangement, the Fund must have also received at least two bona fide 
final bids that are not Affiliated Protection Arrangements.\6\ The 
Adviser will evaluate final bids and recommend a bid for acceptance by 
the Board, together with an explanation of the basis for this 
recommendation and a summary of the material terms of any bids that 
were rejected. Applicants state that in addition to cost, other factors 
such as creditworthiness will be significant in the Adviser's 
evaluation of bids, and thus, the Adviser may recommend to the Board a 
Protection Provider who does not submit the bid with the lowest fee 
rate.\7\ A majority of the Board, including a majority of the 
Independent Trustees, must approve the acceptance of a bid involving an 
Affiliated Protection Arrangement, as well as the general terms of the 
proposed Protection Arrangement. Upon the conclusion of the Adviser's 
negotiation of the Affiliated Protection Arrangement, the Board must 
approve the final Protection Agreement, and determine that the terms of 
the Affiliated Protection Arrangement, as so finalized, are not 
materially different from the terms of the accepted bid.
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    \6\ If an Unaffiliated Provider submits multiple bids, each with 
a different Hedging Counterparty, each submission will constitute a 
separate bid.
    \7\ If the Protection Provider recommended by the Adviser does 
not propose the lowest fee to provide Principal Protection and the 
Board approves a Protection Agreement with such Protection Provider, 
the Board minutes will reflect the reasons why the Protection 
Provider requiring the higher fee was approved.
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    5. The Board will exercise oversight responsibilities in connection 
with any Protection Agreement and will establish a special committee 
(the ``Committee''), a majority of the members of which will be 
Independent Trustees, if the Fund enters into an Affiliated Protection 
Arrangement. If a Trigger Event or a Defeasance Event occurs under the 
Protection Agreement (each, a

[[Page 3948]]

``Protection Event'') or if the Adviser decides to attempt to cure the 
circumstances leading to a Protection Event pursuant to the terms of 
the Protection Agreement, the Adviser will be required to notify the 
Committee as soon as practicable, and absent special circumstances, 
before a decision is reached by the Protection Provider and the Adviser 
as to how to effect any cure. On or about the Maturity Date, the Board 
will review information comparing the aggregate Protected Amount with 
the Fund's total NAV on the Maturity Date, and will review and approve 
the amount of any Shortfall Amount to be submitted for payment to the 
Protection Provider under the Protection Agreement (including the 
amount of any required Adviser Payment to the Fund) (the ``Approved 
Shortfall Amount'').

Applicants' Legal Analysis

A. Section 12(d)(3) of the Act

    1. Section 12(d)(3) of the Act generally prohibits a registered 
investment company from acquiring any security issued by any person who 
is a broker, dealer, investment adviser, or engaged in the business of 
underwriting. Rule 12d3-1 under the Act exempts certain transactions 
from the prohibition of section 12(d)(3) if certain conditions are met. 
One of these conditions, set forth in rule 12d3-1(c), provides that the 
exemption provided by the rule is not available when the issuer of the 
securities is the investment adviser, promoter, or principal 
underwriter of the investment company, or any affiliated person of such 
entities. In addition, rule 12d3-1(b) does not permit a registered 
investment company to (i) own more than five percent of a class of 
equity securities of an issuer that is engaged in securities-related 
activities; (ii) own more than ten percent of such an issuer's debt 
securities; or (iii) invest more than five percent of the value of its 
total assets in the securities of any such issuer. Section 6(c) of the 
Act authorizes the Commission to exempt any person or transaction from 
any provision of the Act to the extent that such exemption is necessary 
or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
policies and provisions of the Act.
    2. Applicants state that by virtue of entering into an Affiliated 
Protection Arrangement with an AIG Affiliate that is a broker, dealer, 
underwriter or investment adviser to a registered investment company or 
an investment adviser registered under the Investment Advisers Act, a 
Fund may be deemed to have acquired a security from the AIG 
Affiliate.\8\ In addition, applicants state that it is possible that a 
Protection Agreement entered into by the Fund (whether pursuant to an 
Affiliated Protection Agreement or otherwise) may represent more than 
ten percent of the debt securities of a Protection Provider that is 
involved in securities-related activities or more than five percent of 
the total assets of the Fund. Therefore, applicants seek an exemption 
from section 12(d)(3) to the extent necessary to permit the Fund to 
enter into Affiliated Protection Arrangements with an AIG Affiliate or 
a Protection Agreement with another Protection Provider that is 
involved in securities-related activities.
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    \8\ Applicants state that depending on the structure of the 
Protection Agreement, while certain types of Protection Agreements 
would not meet the definition of ``security'' contained in section 
2(a)(36) of the Act such as insurance contracts, certain types of 
derivative agreements may be deemed to constitute securities.
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    3. Applicants state that section 12(d)(3) was intended to prevent 
investment companies from exposing their assets to the entrepreneurial 
risks of securities-related businesses and to prevent reciprocal 
practices between investment companies and securities-related 
businesses. Applicants assert that the proposed transactions are 
consistent with the policy and intent underlying section 12(d)(3). In 
terms of the risk-preventing element of section 12(d)(3), applicants 
state that the Adviser and Board, when evaluating the credentials of a 
prospective Protection Provider, will take into account the Protection 
Provider's (and any parent guarantor's) creditworthiness, any ratings 
assigned by a nationally recognized statistical ratings organization 
(``NRSRO''), and the availability of audited financial statements. 
Applicants state that the purpose of the Fund's Protection Agreement is 
to provide Principal Protection for the Fund, not to reward an AIG 
Affiliate (or any other broker-dealer) for sales of Fund shares. 
Moreover, applicants believe that the conditions set forth in the 
application will ensure that each Fund is operated in the interests of 
its shareholders and not in the interests of an AIG Affiliate or any 
other Protection Provider.

B. Section 17(a) of the Act

    1. Section 17(a)(1) and (2) of the Act generally prohibit the 
promoter or principal underwriter, or any affiliated person of the 
promoter or principal underwriter, of a registered investment company, 
acting as principal, knowingly to sell or purchase any security or 
other property to or from such investment company. Section 2(a)(3) of 
the Act defines an ``affiliated person'' of another person to include, 
among other things: (a) Any person directly or indirectly owning, 
controlling, or holding with power to vote 5% or more of the 
outstanding voting securities of the other person; (b) any person 5% of 
more of whose outstanding voting securities are directly or indirectly 
owned, controlled or held with power to vote by such other person; and 
(c) any person directly or indirectly controlling, controlled by, or 
under common control with, such other person. Section 17(b) of the Act 
authorizes the Commission to exempt a proposed transaction from the 
terms of section 17(a) if evidence establishes that the terms of the 
proposed transaction are reasonable and fair and do not involve 
overreaching, and the proposed transaction is consistent with the 
policies of the registered investment company involved and the purposes 
of the Act.
    2. Applicants state that depending on the structure of a Protection 
Agreement, it might be deemed to be a security or other property, and 
the Fund's entering into a Protection Agreement with an AIG Affiliate 
might be deemed to be the acquisition of a security or other property 
from an AIG Affiliate. In addition, applicants state that if an AIG 
Affiliate were to serve as a Hedging Counterparty to an Unaffiliated 
Provider, the AIG Affiliate might under certain circumstances be deemed 
to be indirectly involved in the sale of a security or other property 
to the Fund. Applicants request an exemption under sections 6(c) and 
17(b) to permit the proposed transactions.
    3. Applicants submit that the involvement of an AIG Affiliate in an 
Affiliated Protection Arrangement will benefit a Fund and its 
shareholders given the expertise of the AIG Affiliates in structuring 
and providing credit enhancements for Principal Protection 
arrangements, and the alignment of interests that exist between the AIG 
Affiliates and the Funds. Applicants argue that the relationship of a 
Fund and Unaffiliated Provider may be more adversarial, with the 
protection of the Unaffiliated Provider's rights and remedies being of 
paramount importance to the Unaffiliated Provider, which could result 
in the Unaffiliated Provider exhibiting a greater willingness to 
declare a Defeasance Event or to rely on a clause permitting it to 
avoid liability to the Fund than would an AIG Affiliate in similar 
circumstances. Applicants argue that an AIG Affiliate

[[Page 3949]]

may assume a greater risk to itself by avoiding a Defeasance Event and 
allowing a greater portion of the Fund's assets to remain invested in 
the Portfolio Component for the same fee charged by an Unaffiliated 
Provider. Applicants also argue that the use of an AIG Affiliate as 
Protection Provider may lower the cost of Principal Protection since 
there is a limited universe of Protection Providers with which a Fund 
may enter into a Protection Agreement. In addition, because an AIG 
Affiliate may have a greater comfort level with the Formula and certain 
investment strategies to be used by the Advisers than an Unaffiliated 
Provider, applicants state that this may allow the AIG Affiliate to 
enter into a Hedging Transaction with an Unaffiliated Provider for a 
lower fee or spread than would be available through a counterparty 
unaffiliated with the Fund.
    4. Applicants submit that the conditions applicable to each 
Affiliated Protection Arrangement will ensure that such arrangement 
will be reasonable and fair to each Fund and that no AIG Affiliate will 
be able to engage in overreaching. Applicants state that a Fund will 
not be able to participate in an Affiliated Protection Arrangement 
until after a bidding process has been completed in which the Fund 
receives at least two bona fide final bids for Principal Protection 
from an Unaffiliated Provider not seeking to hedge with an AIG 
Affiliate, and that an AIG Affiliate will not have an unfair advantage 
over other bidders in winning the bid. A Fund may not accept a bid or 
subsequently enter into an Affiliated Protection Arrangement unless it 
has been approved by the Fund's Board, including a majority of 
Independent Trustees, who must determine that entering into the 
Affiliated Protection Arrangement is in the best interests of the Fund 
and its shareholders and meets the standards specified in section 17(b) 
of the Act. In addition, applicants state that if a Fund enters into an 
Affiliated Protection Arrangement, the Fund's Board will establish a 
Committee to represent the Fund's interests if a Protection Event 
should occur. Lastly, applicants state that the Board will approve the 
Approved Shortfall Amount to be submitted for payment to the Affiliated 
Protection Provider and that the Fund will not accept a lesser amount 
in settlement of its claim without a further Commission exemptive 
order.
    5. Applicants submit that an Affiliated Protection Arrangement will 
be consistent with the policies of each Fund, as recited its 
registration statement. Applicants further submit that an Affiliated 
Protection Arrangement, subject to the conditions set forth in the 
application, will be consistent with the purposes fairly intended by 
the policy and provisions of the Act and will be in the best interests 
of each Fund and its shareholders.

C. Section 17(d) of the Act

    1. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit any affiliated person of, or principal underwriter for, a 
registered investment company, or any affiliated person of, or 
principal underwriter, acting as principal, from effecting any 
transaction in connection with any joint enterprise or other 
arrangement or profit-sharing plan in which the investment company 
participates, unless an application regarding the joint transaction has 
been filed with the Commission and granted by order. Under rule 17d-1, 
in passing upon such applications, the Commission considers whether the 
participation of the registered investment company in the joint 
transaction is consistent with the provisions, policies and purposes of 
the Act and the extent to which such participation is on a basis 
different or less advantageous than that of other participants.
    2. Applicants state that the fee paid to an AIG Affiliate pursuant 
to an Affiliated Protection Arrangement (either by the Fund directly 
under a Protection Agreement or indirectly through a Hedging 
Transaction) may be deemed to involve a joint enterprise or joint 
arrangement or profit-sharing plan under section 17(d) and rule 17d-1 
because an AIG Affiliate may be in control of, controlled by or under 
common control with the Adviser of a Fund, and the AIG Affiliate's 
compensation as the Protection Provider or Hedging Counterparty will be 
based on the Fund's assets. In addition, the AIG Affiliate might make a 
profit or suffer a loss depending on the performance of the Fund. 
Applicants also state that an Affiliated Protection Arrangement could 
be deemed to involve a joint enterprise or joint arrangement because of 
the coordination and possible ongoing negotiations between a Fund and 
an AIG Affiliate in managing the Fund's risk exposure.\9\ Applicants 
thus request an order pursuant to section 17(d) and rule 17d-1.
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    \9\ For example, applicants state that an AIG Affiliate could 
seek to request that a Fund's assets be invested not to seek to 
maximize the Fund's return, but in a manner designed to protect the 
AIG Affiliate's interest by over-allocating the Fund's assets to the 
Protection Component so as to minimize the risk that an AIG 
Affiliate would be called upon to make a payment under an Affiliated 
Protection Arrangement.
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    3. Applicants state that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to insiders. Applicants submit 
that the conditions proposed in the application will ensure that a Fund 
and its shareholders are treated fairly and not taken advantage of by 
an AIG Affiliate. Applicants submit that a Fund and its shareholders 
will benefit from the participation of an AIG Affiliate in an 
Affiliated Protection Arrangement. For these reasons, applicants state 
that the proposed arrangement satisfies the standards of section 17(d) 
and rule 17d-1.

Applicants' Conditions

    Applicants agree that any order granting the requested relief shall 
be subject to the following conditions:
    1. Prior to recommending to the Board that a Fund enter into an 
Affiliated Protection Arrangement, the Adviser will conduct a 
competitive bidding process in which the Adviser solicits bids on at 
least three Protection Agreements that would not constitute Affiliated 
Protection Arrangements. At a reasonable amount of time prior to the 
date bids are to be submitted, the Adviser will solicit bids by 
supplying prospective bidders with a bid invitation letter that 
includes any requirement for a potential Protection Provider (and its 
parent guarantor, if any) to include audited financial statements in 
the Fund's registration statement, a copy of the relevant sections of a 
draft prospectus of the Fund, and a term sheet containing the principal 
terms of a proposed Protection Agreement. Initial bids will be due at 
the same time, and no bidder will have access to any competing bids 
prior to its own submission. After initial bids are received, the 
Adviser will negotiate in good faith with each of the bidders to obtain 
more favorable terms for the Fund. During these negotiations, all 
bidders will have access to equal information about competing bids. At 
the end of this process, all bidders who wish to participate will 
submit final bids. All such final bids will be due at the same time, 
and no bidder will be permitted to change its final bid once submitted. 
After the final bids are submitted, no bidder, including an AIG 
Affiliate, will have access to any competing bids until after the 
Protection Agreement is entered into by the Fund. A Fund may not enter 
into an Affiliated Protection Arrangement unless two bona fide final 
bids have been received for Protection Agreements that would not 
constitute Affiliated Protection Arrangements.

[[Page 3950]]

    2. If the Adviser recommends that the Board approve an Affiliated 
Protection Arrangement, the Adviser must provide the Board with an 
explanation of the basis for its recommendation and a summary of the 
material terms of any bids that were rejected.
    3. The Fund's Board, including a majority of Independent Trustees, 
must approve the acceptance of a bid involving an Affiliated Protection 
Arrangement, as well as the general terms of the proposed Protection 
Agreement. In evaluating the final bids and the recommendations from 
the Adviser, the Board will consider, among other things: (i) The fee 
rate to be charged by a potential Protection Provider; (ii) the 
structure and potential limitations of the proposed Principal 
Protection arrangement and any legal, regulatory or tax implications of 
such arrangement; (iii) the credit rating (if any) and financial 
condition of the potential Protection Provider (and, if applicable, its 
parent guarantor), including any ratings assigned by any NRSRO; and 
(iv) the experience of the potential Protection Provider in providing 
Principal Protection, including in particular to registered investment 
companies. If the Affiliated Protection Arrangement approved by the 
Board does not reflect the lowest fee submitted in a proposal to 
provide the Principal Protection, the Board will reflect in its minutes 
the reasons why the higher cost option was selected.
    4. Upon the conclusion of the Adviser's negotiations of the 
Affiliated Protection Arrangement, including the Protection Agreement, 
the Fund's Board, including a majority of Independent Trustees, must 
approve the final Protection Agreement and determine that the terms of 
the final Affiliated Protection Arrangement, as so finalized, are not 
materially different from the terms of the accepted bid. The Board, 
including a majority of its Independent Trustees, will also determine 
that entering into the Affiliated Protection Arrangement is in the best 
interests of the Fund and its shareholders and meets the standards 
specified in section 17(b) of the Act. The Board will reflect these 
findings and their basis in its minutes.
    5. If an AIG Affiliate is chosen as the Protection Provider or 
Hedging Counterparty, it will not charge a higher fee for its 
Protection Agreement or Hedging Transaction than it would charge for 
similar agreements or transactions for unaffiliated parties that are 
similarly situated to the Fund. Any AIG Affiliate acting as Hedging 
Counterparty will not be directly compensated by the Fund and the Fund 
will not be a party to any Hedging Transaction.
    6. In the event the Fund enters into an Affiliated Protection 
Arrangement, the Board will establish a Committee, a majority of whose 
members will be Independent Trustees, to represent the Fund in any 
negotiations relating to a Protection Event. If a Protection Event 
occurs under the Protection Agreement or if the Adviser decides to 
attempt to cure the circumstances leading to a Protection Event 
pursuant to the terms of the Protection Agreement, the Adviser will 
notify the Committee as soon as practicable, and, absent special 
circumstances, before a decision is reached by the Protection Provider 
and the Adviser as to how to effect any cure. All Protection Events 
will be brought to the attention of the full Board at the next 
regularly scheduled Board meeting.
    7. The Adviser will present a report to the Board, at least 
quarterly, comparing the actual asset allocation of the Fund's 
portfolio with the allocation required under the Protection Agreement, 
describing any Protection Events, and summarizing any negotiations that 
were the subject of the previous condition.
    8. At the conclusion of the Protection Period, the Adviser of a 
Fund will report to the Fund's Board any Shortfall Amount potentially 
covered under an Affiliated Protection Arrangement (including, for this 
purpose, the amount of any required Adviser Payment). The Board, 
including a majority of Independent Trustees, will evaluate the 
Shortfall Amount and will determine the amount of the Approved 
Shortfall Amount under the Protection Agreement to be submitted to the 
Protection Provider. The Fund will not settle any claim under the 
Protection Agreement for less than the full Approved Shortfall Amount 
determined by the Board without obtaining a further exemptive order 
from the Commission.
    9. Prior to a Fund's reliance on the order, the Fund's Board will 
satisfy the fund governance standards as defined in rule 0-1(a)(7) 
under the Act, except that the Independent Trustees must be represented 
by independent legal counsel within the meaning of rule 0-1 under the 
Act.
    10. The Adviser, under the supervision of the Board, will maintain 
sufficient records to verify compliance with the conditions of the 
order. Such records will include, without limitation: (i) An 
explanation of the basis upon which the Adviser selected prospective 
bidders; (ii) a list of all bidders to whom a bid invitation letter was 
sent and copies of the bid invitation letters and accompanying 
materials; (iii) copies of all initial and final bids received, 
including the winning bid; (iv) records of the negotiations with 
bidders between their initial and final bids; (v) the materials 
provided to the Board in connection with the Adviser's recommendation 
regarding the Protection Agreement; (vi) the final price and terms of 
the Protection Agreement with an explanation of the reason the 
arrangement is considered an Affiliated Protection Arrangement; and 
(vii) records of any negotiations with the Protection Providers related 
to the occurrence of a Protection Event and the satisfaction of any 
obligations under a Protection Agreement. All such records will be 
maintained for a period ending not less than six years after the 
conclusion of the Protection Period, the first two years in an easily 
accessible place, and will be available for inspection by the staff of 
the Commission.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-310 Filed 1-26-05; 8:45 am]
BILLING CODE 8010-01-P

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