American Fidelity Assurance Company, et al.; Notice of Application, 50713-50716 [2014-20090]

Download as PDF Federal Register / Vol. 79, No. 164 / Monday, August 25, 2014 / Notices occurred. In both cases, the records should be kept in an easily accessible place for the first two years. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The public may view the background documentation for this information collection at the following Web site, www.reginfo.gov. Comments should be directed to: (i) Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10102, New Executive Office Building, Washington, DC 20503, or by sending an email to: Shagufta_Ahmed@omb.eop.gov; and (ii) Thomas Bayer, Chief Information Officer, Securities and Exchange Commission, c/o Remi Pavlik-Simon, 100 F Street NE., Washington, DC 20549 or send an email to: PRA_Mailbox@sec.gov. Comments must be submitted to OMB within 30 days of this notice. Dated: August 19, 2014. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–20088 Filed 8–22–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. IC–31217; File No. 812–14288] American Fidelity Assurance Company, et al.; Notice of Application August 19, 2014. Securities and Exchange Commission (the ‘‘Commission’’). ACTION: Notice of application for an order approving the substitution of certain securities pursuant to Section 26(c) of the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’). AGENCY: American Fidelity Assurance Company (the ‘‘Insurance Company’’), American Fidelity Separate Account A, American Fidelity Separate Account B, and American Fidelity Separate Account C (the ‘‘Separate Accounts’’). SUMMARY: Summary of Application: The Applicants seek an order pursuant to Section 26(c) of the 1940 Act permitting the substitution of securities issued by a registered investment company currently held by the Separate Accounts (the ‘‘Substitution’’), which securities support the Separate Accounts’ variable annuity contracts emcdonald on DSK67QTVN1PROD with NOTICES APPLICANTS: VerDate Mar<15>2010 17:31 Aug 22, 2014 Jkt 232001 that are issued by the Insurance Company (the ‘‘Contracts’’). DATES: Filing Date: The application was filed on March 12, 2014, and amended and restated applications were filed on June 27, 2014 and August 19, 2014. HEARING OR NOTIFICATION OF HEARING: An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Secretary of the Commission and serving the Applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on September 15, 2014, and should be accompanied by proof of service on the Applicants in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the requester’s interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Secretary of the Commission. ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. Applicants: American Fidelity Assurance Company, Attn: Christopher T. Kenney, 2000 N. Classen, Oklahoma City, Oklahoma 73106. FOR FURTHER INFORMATION CONTACT: Mark N. Zaruba, Senior Counsel at (202) 551–6878, or Mary Kay Frech, Branch Chief, at (202) 551–6821 (Division of Investment Management, Chief Counsel’s Office). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained via the Commission’s Web site by searching for the file number, or for an applicant using the Company name box, at http:// www.sec.gov/search/search.htm, or by calling (202) 551–8090. Applicants’ Representations 1. The Insurance Company is a stock life insurance company incorporated under the laws of Oklahoma. The Insurance Company is the depositor of the Separate Accounts and the investment adviser of the Existing Fund (defined below). 2. Each of the Separate Accounts is a segregated asset account of the Insurance Company, and each Separate Account is registered with the Commission as a unit investment trust. The separate accounts are used by the Insurance Company to issue Contracts. Interests under the Contracts are registered under the Securities Act of 1933. The application sets forth the registration statement file numbers for PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 50713 the Contracts and the Separate Accounts. 3. The American Fidelity Dual Strategy Fund, Inc. (the ‘‘Existing Fund’’) is a registered investment company that is an affiliate of the Applicants because it is advised by the Insurance Company. The Existing Fund is available exclusively through the purchase of one of the Contracts from one of the Separate Accounts. The Existing Fund is not an investment option in any other annuity contracts. In addition, the Existing Fund retains four sub-advisors, each with different principal investment strategies. 4. The Vanguard Variable Insurance Fund Total Stock Market Index Portfolio (the ‘‘Replacement Fund’’) is a member of The Vanguard Group. The Replacement Fund allocates its assets by investing in two separate Vanguard funds—the Vanguard Extended Market Index Fund and the Vanguard Variable Insurance Fund Equity Index Portfolio. 5. The Insurance Company organized Separate Account A to hold the assets that underlie the AFPrime Growth® Variable Annuity contracts. Separate Account A’s Contract is issued as a group contract, and Separate Account A’s assets are invested 100% in the Existing Fund, with no other investment options available to the Separate Account A participants. The prospectus for the Contract offered by Separate Account A contains provisions reserving the Insurance Company’s right to replace the Existing Fund with a comparable fund if the Existing Fund is not available as an investment option. Because Separate Account A offers only one investment option, the Separate Account A Contract does not permit a contract owner or participant in a group account (each, a ‘‘Contract Owner’’) to transfer the Contract value from one sub-account to another sub-account. 6. The Insurance Company established Separate Account B to hold the assets that underlie the AFAdvantage® Variable Annuity contracts and established Separate Account C to hold the assets that underlie the AFMaxx® 457(b) Group Variable Annuity contracts. Separate Account B offers individual contracts, and Separate Account C offers group contracts. Separate Accounts B and C are divided into 16 sub-accounts, and each sub-account invests in the securities of a single underlying mutual fund, including the Existing Fund. The Replacement Fund currently is not an investment option in Separate Account B or C. The prospectuses for the Separate Account B and C Contracts contain provisions reserving the Insurance Company’s right to substitute E:\FR\FM\25AUN1.SGM 25AUN1 50714 Federal Register / Vol. 79, No. 164 / Monday, August 25, 2014 / Notices another eligible investment option for any one of the portfolios available under the Contract. Each Separate Account B and C Contract permits the Contract Owner to transfer Contract value from one subaccount to another subaccount available under the Contract at any time, subject to certain restrictions and charges described in the prospectuses for the Contracts, none of which will apply in connection with the Substitution. 7. The Applicants request an order from the Commission pursuant to Section 26(c) of the 1940 Act approving the proposed Substitutions of shares of the Existing Fund held by the Separate Accounts with shares of the Replacement Fund. Comparisons of the investment objectives, investment strategies, principal risks and prior performance of the Existing Fund and the Replacement Fund are included in the application. 8. The following table compares the fees and expenses of the Existing Fund and the Replacement Fund, as of December 31, 2013. Existing fund emcdonald on DSK67QTVN1PROD with NOTICES Management Fees. 12b-1 Fees ........ Administrative Fees. Other Expenses Total Annual Expenses. Expense Waivers. Net Annual Expenses. Replacement fund 0.50% ........ 0.18%. None .......... None .......... None. None. None .......... 0.50% ........ None. 0.18%. None .......... None. 0.50% ........ 0.18%. 9. The Applicants propose the Substitution as part of a continued and overall business plan by the Insurance Company to make its Contracts more attractive to both existing and prospective Contract Owners. Applicants expect that the Substitution will provide significant benefits to Contract Owners, because the Applicants represent that the Replacement Fund generally has a better performance record and lower total expenses than the Existing Fund. 10. The Applicants represent that the Substitution is in response to the continuing decline of sales in Separate Account A and the minimal allocations to the Existing Fund in Separate Accounts B and C. The Applicants submit that, without the Substitution, the Insurance Company would be compelled to increase its investment advisory fee in order to cover the escalating costs of managing the Existing Fund’s portfolio investments, VerDate Mar<15>2010 17:31 Aug 22, 2014 Jkt 232001 which would adversely affect the Contract Owners that are invested in the Existing Fund. 11. The Separate Account B and C Contract Owners will continue to be able to select among a large number of investment options, with a full range of investment objectives, investment strategies and managers. Although Separate Account A offers only one investment option, the Applicants have determined that the objectives and strategies of the Replacement Fund are sufficiently similar to the objectives and strategies of the Existing Fund so that the essential objectives and risk expectations of the Separate Account A Contract Owners that are invested in the Existing Fund will continue to be met after the Substitution. As a result of the Substitution, the number of investment options offered under each of the Contracts will not change. 12. Contract Owners with Contract value allocated to the Existing Fund will experience lower fund net annual operating expenses after the Substitutions as prior to the Substitutions. The Replacement Fund has a management fee that is less than that of the Existing Fund. The overall expenses of the Replacement Fund are less than those of the Existing Fund. Applicants believe that, because the Replacement Fund will be offered over a substantially larger asset base than the Existing Fund, there is a potential that affected Contract Owners will, over time, continue to realize the benefits of additional economies of scale with respect to the advisory fees. Neither the Replacement Fund nor the Existing Fund has a 12b–1 fee. 13. The Substitution is designed to provide Contract Owners with the ability to continue their investment in a similar investment option without interruption and at no additional cost to them. In this regard, the Insurance Company has agreed to bear all expenses incurred in connection with the Substitutions and related filings and notices, including legal, accounting, brokerage, and other fees and expenses. The Contract values of the Contract Owners impacted by the Substitution will not change on the date of the Substitution as a result of the Replacement Fund replacing the Existing Fund. 14. The proposed Substitution will be described in supplements to the Contracts’ prospectuses (the ‘‘Supplements’’), which will be filed with the Commission and delivered to all affected Contract Owners at least 45 days before the date on which the Substitution is to occur (the PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 ‘‘Substitution Date’’).1 All of the affected Contract Owners will receive the relevant Supplement and the prospectus for the Replacement Fund before the Substitution Date. New purchasers of the Contracts will be provided the relevant Supplement, the relevant Separate Account prospectus and the prospectus for the Replacement Fund in accordance with all applicable legal requirements. Prospective purchasers of the Contracts will be provided the relevant Supplement and the relevant Separate Account prospectus. 15. The Separate Account A Supplement will (a) notify the Separate Account A Contract Owners that the Insurance Company has requested and received an order from the Commission authorizing it to engage in the Substitution, (b) indicate the Insurance Company’s intent to implement the Substitution, (c) state the anticipated Substitution Date, (d) advise the Contract Owners that all Contract values in the Existing Fund will be transferred to the Replacement Fund on the Substitution Date, and (e) advise Contract Owners that the Substitution will take place at relative net asset value. 16. The Separate Account B and C Supplements will advise Separate Account B and C Contract Owners that, from the date of the Supplements until the Substitution Date, Contract Owners are permitted to transfer their Contract values out of the Existing Fund subaccount to any other sub-account(s) offered under the Contract or to a certain fixed investment option that is part of the Insurance Company’s general account without the transfer being treated as a transfer for purposes of transfer limitations and fees that would otherwise be applicable under the terms of the Contract. The Separate Account B and C Supplements also will (a) instruct Contract Owners how to submit transfer requests in light of the proposed Substitution, (b) advise Contract Owners that any Contract value remaining in the Existing Fund subaccount on the Substitution Date will be transferred to the Replacement Fund sub-account, (c) advise Contract Owners that the Substitution will take place at relative net asset value, (d) inform Contract Owners that for at least 30 days following the Substitution Date, the Insurance Company will permit Contract Owners to make transfers of Contract value out of the Replacement Fund sub-account to any other subaccount(s) offered under the Contract without the transfer being treated as a 1 The Applicants are targeting November 28, 2014 as the Substitution Date. E:\FR\FM\25AUN1.SGM 25AUN1 emcdonald on DSK67QTVN1PROD with NOTICES Federal Register / Vol. 79, No. 164 / Monday, August 25, 2014 / Notices transfer for purposes of transfer limitations and fees that would otherwise be applicable under the terms of the Contract, and (e) inform Contract Owners that, except in connection with market timing/short-term trading, the Insurance Company will not exercise any rights reserved by it under the Contracts to impose additional restrictions on transfers out of the Replacement Fund for at least 30 days after the Substitution Date. 17. In addition to the Supplements distributed to Contract Owners, within five business days after the Substitution Date, Contract Owners whose assets are allocated to the Replacement Fund as part of the Substitution will be sent a written notice (the ‘‘Confirmation’’) informing them that the Substitution was completed. With regard to the Separate Account B and C Contract Owners whose assets are allocated to the Replacement Fund as part of the Substitution, a notice accompanying the Confirmation also will reiterate the information set forth in the Supplement to the effect that (a) for at least 30 days after the Substitution Date, Contract Owners may make free transfers out of the Replacement Fund to one or more other investment options, and (b) inform Contract Owners that, except in connection with market timing/shortterm trading, the Insurance Company will not exercise any rights reserved by it under the Contracts to impose additional restrictions on transfers out of the Replacement Fund for at least 30 days after the Substitution Date. 18. Applicants will effect the Substitution after the issuance of the requested order. As of the Substitution Date, shares of the Existing Fund will be redeemed for cash. The Insurance Company, on behalf of the Separate Accounts, will simultaneously place a redemption request with the Existing Fund and a purchase order with the Replacement Fund so that the purchase of the Replacement Fund shares will be for the exact amount of the redemption proceeds. Thus, the Contract values will remain fully invested at all times. The proceeds of the redemption will be used to purchase the appropriate number of shares of the Replacement Fund. 19. The Substitution will take place at relative net asset value, with no change in the amount of any affected Contract Owner’s account value or death benefit, or in the dollar value of his or her investment in the applicable Separate Account. No brokerage commissions, fees or other remuneration will be paid by either the Existing Fund or the Replacement Fund or by affected Contract Owners in connection with the Substitution. The Substitution will not VerDate Mar<15>2010 17:31 Aug 22, 2014 Jkt 232001 result in an increase in contract fees and expenses, including mortality and expense risk fees and administration and distribution fees charged by the Separate Accounts. Additionally, the Substitution will result in decreased net expense ratios. All expenses incurred in connection with the proposed Substitutions, including any brokerage, legal, accounting, and other fees and expenses, will be paid by the Insurance Company. In addition, the Substitutions will not result in adverse tax consequences to Contract Owners and will not alter any tax benefits associated with the Contracts. Legal Analysis 1. The Applicants request that the Commission issue an order pursuant to Section 26(c) of the 1940 Act approving the proposed Substitution. Section 26(c) of the 1940 Act makes it unlawful for the depositor of a registered unit investment trust that invests in the securities of a single issuer to substitute another security for such security without Commission approval. Section 26(c) further states that the Commission shall issue an order approving such a substitution ‘‘if the evidence establishes that it is consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title.’’ 2. As discussed above, the Applicants have reserved the right under the each of the Separate Account’s Contracts to substitute shares of another underlying mutual fund for one of the current underlying mutual funds offered as an investment option under the Contracts. The Contract prospectuses disclose this right. 3. The Replacement Fund and the Existing Fund have sufficiently similar investment objectives and policies to make the Replacement Fund an appropriate candidate as a substitute. The Insurance Company considered the performance history of the Existing Fund and the Replacement Fund and determined that no contract holder would be materially adversely affected as a result of the Substitution. 4. The Substitution will not result in an increase in contract fees and expenses, including mortality and expense risk fees and administration and distribution fees charged by the Separate Accounts. Additionally, the Substitution will result in decreased net expense ratios. After the Substitution, neither the Insurance Company nor any of its affiliates will receive compensation from the charges to the Separate Accounts related to the Contracts or from Rule 12b–1 fees or revenue sharing from the Replacement PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 50715 Fund. Thus, the Substitution protects the Contract Owners who are invested in the Existing Fund by providing a replacement fund that (a) is similar to the Existing Fund, and (b) reduces net operating expense. 5. Because Separate Account A offers only one investment option, the Separate Account A Contract Owners do not have the discretion to re-allocate their Contract values to another investment option if they do not wish to invest in the Replacement Fund. Instead, if the Separate Account A Contract Owners were dissatisfied with the Substitution, the only relief available would be to redeem their interests in Separate Account A and reinvest the proceeds in another unit investment trust or in an open-end company, in which case the Contract Owners could be subject to a new sales load. Accordingly, with regard to Separate Account A, the proposed Substitution is the type of substitution that Congress envisioned when it amended Section 26(c) to require SEC approval of the substitution of one security for another security by the depositor of a registered unit investment trust holding securities of a single issuer. However, although Separate Account A offers only one investment option, the Applicants have determined that the objectives and strategies of the Replacement Fund are sufficiently similar to the objectives and strategies of the Existing Fund that the essential objectives and risk expectations of the Separate Account A Contract Owners will continue to be met after the Substitution. 6. With regard to Separate Accounts B and C, the proposed Substitution is not of the type that Section 26 was designed to prevent. The Separate Account B and C Contracts provide Contract Owners with investment discretion to allocate and reallocate their Contract values among the available sub-accounts that invest in the underlying mutual fund investment options. This flexibility provides Separate Account B and C Contract Owners with the ability to reallocate their assets at any time— either before the Substitution Date or after the Substitution Date—if they do not wish to invest in the Replacement Fund. The likelihood of being invested in an undesired underlying mutual fund is minimized, with the discretion remaining with the Contract Owners, and the Separate Account B and C Contract Owners will continue to be able to select among a large number of investment options, with a full range of investment objectives, investment strategies and managers. As a result of the Substitution, the number of E:\FR\FM\25AUN1.SGM 25AUN1 50716 Federal Register / Vol. 79, No. 164 / Monday, August 25, 2014 / Notices investment options offered under the Separate Account B and C Contracts will not change. The Substitution, therefore, will not result in the type of costly forced redemption that Section 26(c) was designed to prevent. 7. With regard to all three of the Separate Accounts, the proposed Substitution is unlike the type of substitution that Section 26(c) was designed to prevent in that by purchasing the Contracts, Contract Owners select much more than a particular investment company in which to invest their Contract values. They also select the specific type of coverage offered by the Insurance Company under the Contracts, as well as numerous other rights and privileges set forth in the Contracts. The Substitution has no impact on these aspects of the Contracts. Conclusion For the reasons set forth in the application, the Applicants submit that the proposed Substitutions and related transactions meet the standards of Section 26(c) of the 1940 Act and that the requested orders should be granted. For the Commission, by the Division of Investment Management, under delegated authority. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–20090 Filed 8–22–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 31218; 812–14251] Persimmon Capital Management LP and Northern Lights Fund Trust III; Notice of Application Notice of an application under section 6(c) of the Investment Company Act of 1940 (the ‘‘Act’’) for an exemption from section 15(a) of the Act and rule 18f–2 under the Act. ACTION: Applicants request an order that would permit them to enter into and materially amend subadvisory agreements without shareholder approval. APPLICANTS: Persimmon Capital Management LP (the ‘‘Adviser’’) and Northern Lights Fund Trust III (the ‘‘Trust’’). FILING DATES: The application was filed on December 16, 2013 and amended on April 17, 2014. Applicants have agreed to file an amendment during the notice emcdonald on DSK67QTVN1PROD with NOTICES SUMMARY OF APPLICATION: 17:31 Aug 22, 2014 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 September 15, 2014, and should be accompanied by proof of service on the applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the 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, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. Applicants: The Trust: Northern Lights Fund Trust III, 17605 Wright Street, Omaha, NE 68130; The Adviser: Persimmon Capital Management LP, 1777 Sentry Parkway West, Gwynedd Hall, Suite 102, Blue Bell, PA 19422. FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel, at (202) 551–6773, or James M. Curtis, Branch Chief, at (202) 551–6712 (Division of Investment Management, Chief Counsel’s Office). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained via the Commission’s Web site by searching for the file number, or an applicant using the Company name box, at http:// www.sec.gov/search/search.htm or by calling (202) 551–8090. HEARING OR NOTIFICATION OF HEARING: Applicants’ Representations August 19, 2014. VerDate Mar<15>2010 period, the substance of which is reflected in this notice. Jkt 232001 1. The Trust is organized as a Delaware statutory trust and is registered as an open-end management investment company with multiple series. Each series of the Trust has its own investment objective, policies and restrictions, and each is managed by various advisers and subadvisers.1 1 The Persimmon Long/Short Fund (the ‘‘Persimmon Fund’’) is a series of the Trust and is the only existing Fund (defined below) that currently intends to rely on the requested order. Applicants also request relief with respect to any existing or future registered open-end management investment company or series thereof that (a) is advised by the Adviser, including the Adviser’s successors and any entity controlling, controlled by or under common control with the Adviser (included in the term ‘‘Adviser’’); (b) uses the manager-of-managers structure (‘‘Manager of Managers Structure’’) described in the application; PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 2. The Adviser is a Delaware limited partnership registered as an investment adviser under the Investment Advisers Act of 1940 (‘‘Advisers Act’’). The Adviser serves as the investment adviser of the Persimmon Fund. The Adviser provides investment management services to the Persimmon Fund pursuant to an investment advisory agreement with the Trust (the ‘‘Advisory Agreement’’).2 The terms of the Advisory Agreement comply with section 15(a) of the Act. The Advisory Agreement was approved by the board of trustees of the Trust (the ‘‘Board’’; the term ‘‘Board’’ also includes the board of trustees or directors of a future Fund), including by a majority of the trustees who are not ‘‘interested persons’’ (as defined in section 2(a)(19) of the Act) of the Trust or Adviser (the ‘‘Independent Trustees’’), and was approved by the initial shareholder of the Persimmon Fund in the manner required by sections 15(a) and (c) of the Act and rule 18f–2 thereunder.3 3. Under the terms of the Advisory Agreement, the Adviser is responsible for the overall management of the Persimmon Fund’s business affairs and selecting investments in accordance with the Persimmon Fund’s investment objectives, policies and restrictions. For the investment management services that it provides to the Funds, the Adviser receives the fee specified in the Advisory Agreements. In addition, pursuant to the Advisory Agreement, the Adviser may retain one or more subadvisers (each, a ‘‘Subadviser’’) for the purpose of managing all or a portion of the assets of the Persimmon Fund. Pursuant to its authority under the Advisory Agreements, the Adviser intends to enter into subadvisory agreements (the ‘‘Subadvisory Agreements’’) with certain unaffiliated and (c) complies with the terms and conditions of the application (together with the Persimmon Fund, the ‘‘Funds’’ and each, individually, a ‘‘Fund’’). The only existing investment company that currently intends to rely on the requested order, the Trust, is named as an applicant. For purposes of the requested order, ‘‘successor’’ is limited to an entity that results from a reorganization into another jurisdiction or a change in the type of organization. 2 The Adviser will enter into substantially similar investment advisory agreements to provide investment management services to future Funds (‘‘Future Advisory Agreements’’). The terms of Future Advisory Agreements will comply with Section 15(a) of the Act, and Future Advisory Agreements will be approved by shareholders and by the Board, including a majority of the Independent Trustees, in the manner required by Sections 15(a) and 15(c) of the Act and rule 18f– 2 thereunder. Applicants are not seeking any exemptions with respect to Future Advisory Agreements. References to any Advisory Agreement or Advisory Agreements include Future Advisory Agreements as they pertain to future Funds. 3 Applicants are not seeking any exemptions with respect to the Advisory Agreements. E:\FR\FM\25AUN1.SGM 25AUN1

Agencies

[Federal Register Volume 79, Number 164 (Monday, August 25, 2014)]
[Notices]
[Pages 50713-50716]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-20090]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-31217; File No. 812-14288]


American Fidelity Assurance Company, et al.; Notice of 
Application

August 19, 2014.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order approving the substitution 
of certain securities pursuant to Section 26(c) of the Investment 
Company Act of 1940, as amended (the ``1940 Act'').

-----------------------------------------------------------------------

APPLICANTS: American Fidelity Assurance Company (the ``Insurance 
Company''), American Fidelity Separate Account A, American Fidelity 
Separate Account B, and American Fidelity Separate Account C (the 
``Separate Accounts'').
SUMMARY:  Summary of Application: The Applicants seek an order pursuant 
to Section 26(c) of the 1940 Act permitting the substitution of 
securities issued by a registered investment company currently held by 
the Separate Accounts (the ``Substitution''), which securities support 
the Separate Accounts' variable annuity contracts that are issued by 
the Insurance Company (the ``Contracts'').

DATES:  Filing Date: The application was filed on March 12, 2014, and 
amended and restated applications were filed on June 27, 2014 and 
August 19, 2014.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving the Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on September 15, 2014, and should be 
accompanied by proof of service on the Applicants in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of the requester's interest, the reason for the 
request, and the issues contested. Persons who wish to be notified of a 
hearing may request notification by writing to the Secretary of the 
Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-1090. Applicants: American Fidelity Assurance 
Company, Attn: Christopher T. Kenney, 2000 N. Classen, Oklahoma City, 
Oklahoma 73106.

FOR FURTHER INFORMATION CONTACT: Mark N. Zaruba, Senior Counsel at 
(202) 551-6878, or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm, or by calling (202) 551-8090.

Applicants' Representations

    1. The Insurance Company is a stock life insurance company 
incorporated under the laws of Oklahoma. The Insurance Company is the 
depositor of the Separate Accounts and the investment adviser of the 
Existing Fund (defined below).
    2. Each of the Separate Accounts is a segregated asset account of 
the Insurance Company, and each Separate Account is registered with the 
Commission as a unit investment trust. The separate accounts are used 
by the Insurance Company to issue Contracts. Interests under the 
Contracts are registered under the Securities Act of 1933. The 
application sets forth the registration statement file numbers for the 
Contracts and the Separate Accounts.
    3. The American Fidelity Dual Strategy Fund, Inc. (the ``Existing 
Fund'') is a registered investment company that is an affiliate of the 
Applicants because it is advised by the Insurance Company. The Existing 
Fund is available exclusively through the purchase of one of the 
Contracts from one of the Separate Accounts. The Existing Fund is not 
an investment option in any other annuity contracts. In addition, the 
Existing Fund retains four sub-advisors, each with different principal 
investment strategies.
    4. The Vanguard Variable Insurance Fund Total Stock Market Index 
Portfolio (the ``Replacement Fund'') is a member of The Vanguard Group. 
The Replacement Fund allocates its assets by investing in two separate 
Vanguard funds--the Vanguard Extended Market Index Fund and the 
Vanguard Variable Insurance Fund Equity Index Portfolio.
    5. The Insurance Company organized Separate Account A to hold the 
assets that underlie the AFPrime Growth[supreg] Variable Annuity 
contracts. Separate Account A's Contract is issued as a group contract, 
and Separate Account A's assets are invested 100% in the Existing Fund, 
with no other investment options available to the Separate Account A 
participants. The prospectus for the Contract offered by Separate 
Account A contains provisions reserving the Insurance Company's right 
to replace the Existing Fund with a comparable fund if the Existing 
Fund is not available as an investment option. Because Separate Account 
A offers only one investment option, the Separate Account A Contract 
does not permit a contract owner or participant in a group account 
(each, a ``Contract Owner'') to transfer the Contract value from one 
sub-account to another sub-account.
    6. The Insurance Company established Separate Account B to hold the 
assets that underlie the AFAdvantage[supreg] Variable Annuity contracts 
and established Separate Account C to hold the assets that underlie the 
AFMaxx[supreg] 457(b) Group Variable Annuity contracts. Separate 
Account B offers individual contracts, and Separate Account C offers 
group contracts. Separate Accounts B and C are divided into 16 sub-
accounts, and each sub-account invests in the securities of a single 
underlying mutual fund, including the Existing Fund. The Replacement 
Fund currently is not an investment option in Separate Account B or C. 
The prospectuses for the Separate Account B and C Contracts contain 
provisions reserving the Insurance Company's right to substitute

[[Page 50714]]

another eligible investment option for any one of the portfolios 
available under the Contract. Each Separate Account B and C Contract 
permits the Contract Owner to transfer Contract value from one 
subaccount to another subaccount available under the Contract at any 
time, subject to certain restrictions and charges described in the 
prospectuses for the Contracts, none of which will apply in connection 
with the Substitution.
    7. The Applicants request an order from the Commission pursuant to 
Section 26(c) of the 1940 Act approving the proposed Substitutions of 
shares of the Existing Fund held by the Separate Accounts with shares 
of the Replacement Fund. Comparisons of the investment objectives, 
investment strategies, principal risks and prior performance of the 
Existing Fund and the Replacement Fund are included in the application.
    8. The following table compares the fees and expenses of the 
Existing Fund and the Replacement Fund, as of December 31, 2013.

------------------------------------------------------------------------
                                     Existing fund     Replacement fund
------------------------------------------------------------------------
Management Fees.................  0.50%.............  0.18%.
12b-1 Fees......................  None..............  None.
Administrative Fees.............  None..............  None.
Other Expenses..................  None..............  None.
Total Annual Expenses...........  0.50%.............  0.18%.
Expense Waivers.................  None..............  None.
Net Annual Expenses.............  0.50%.............  0.18%.
------------------------------------------------------------------------

    9. The Applicants propose the Substitution as part of a continued 
and overall business plan by the Insurance Company to make its 
Contracts more attractive to both existing and prospective Contract 
Owners. Applicants expect that the Substitution will provide 
significant benefits to Contract Owners, because the Applicants 
represent that the Replacement Fund generally has a better performance 
record and lower total expenses than the Existing Fund.
    10. The Applicants represent that the Substitution is in response 
to the continuing decline of sales in Separate Account A and the 
minimal allocations to the Existing Fund in Separate Accounts B and C. 
The Applicants submit that, without the Substitution, the Insurance 
Company would be compelled to increase its investment advisory fee in 
order to cover the escalating costs of managing the Existing Fund's 
portfolio investments, which would adversely affect the Contract Owners 
that are invested in the Existing Fund.
    11. The Separate Account B and C Contract Owners will continue to 
be able to select among a large number of investment options, with a 
full range of investment objectives, investment strategies and 
managers. Although Separate Account A offers only one investment 
option, the Applicants have determined that the objectives and 
strategies of the Replacement Fund are sufficiently similar to the 
objectives and strategies of the Existing Fund so that the essential 
objectives and risk expectations of the Separate Account A Contract 
Owners that are invested in the Existing Fund will continue to be met 
after the Substitution. As a result of the Substitution, the number of 
investment options offered under each of the Contracts will not change.
    12. Contract Owners with Contract value allocated to the Existing 
Fund will experience lower fund net annual operating expenses after the 
Substitutions as prior to the Substitutions. The Replacement Fund has a 
management fee that is less than that of the Existing Fund. The overall 
expenses of the Replacement Fund are less than those of the Existing 
Fund. Applicants believe that, because the Replacement Fund will be 
offered over a substantially larger asset base than the Existing Fund, 
there is a potential that affected Contract Owners will, over time, 
continue to realize the benefits of additional economies of scale with 
respect to the advisory fees. Neither the Replacement Fund nor the 
Existing Fund has a 12b-1 fee.
    13. The Substitution is designed to provide Contract Owners with 
the ability to continue their investment in a similar investment option 
without interruption and at no additional cost to them. In this regard, 
the Insurance Company has agreed to bear all expenses incurred in 
connection with the Substitutions and related filings and notices, 
including legal, accounting, brokerage, and other fees and expenses. 
The Contract values of the Contract Owners impacted by the Substitution 
will not change on the date of the Substitution as a result of the 
Replacement Fund replacing the Existing Fund.
    14. The proposed Substitution will be described in supplements to 
the Contracts' prospectuses (the ``Supplements''), which will be filed 
with the Commission and delivered to all affected Contract Owners at 
least 45 days before the date on which the Substitution is to occur 
(the ``Substitution Date'').\1\ All of the affected Contract Owners 
will receive the relevant Supplement and the prospectus for the 
Replacement Fund before the Substitution Date. New purchasers of the 
Contracts will be provided the relevant Supplement, the relevant 
Separate Account prospectus and the prospectus for the Replacement Fund 
in accordance with all applicable legal requirements. Prospective 
purchasers of the Contracts will be provided the relevant Supplement 
and the relevant Separate Account prospectus.
---------------------------------------------------------------------------

    \1\ The Applicants are targeting November 28, 2014 as the 
Substitution Date.
---------------------------------------------------------------------------

    15. The Separate Account A Supplement will (a) notify the Separate 
Account A Contract Owners that the Insurance Company has requested and 
received an order from the Commission authorizing it to engage in the 
Substitution, (b) indicate the Insurance Company's intent to implement 
the Substitution, (c) state the anticipated Substitution Date, (d) 
advise the Contract Owners that all Contract values in the Existing 
Fund will be transferred to the Replacement Fund on the Substitution 
Date, and (e) advise Contract Owners that the Substitution will take 
place at relative net asset value.
    16. The Separate Account B and C Supplements will advise Separate 
Account B and C Contract Owners that, from the date of the Supplements 
until the Substitution Date, Contract Owners are permitted to transfer 
their Contract values out of the Existing Fund sub-account to any other 
sub-account(s) offered under the Contract or to a certain fixed 
investment option that is part of the Insurance Company's general 
account without the transfer being treated as a transfer for purposes 
of transfer limitations and fees that would otherwise be applicable 
under the terms of the Contract. The Separate Account B and C 
Supplements also will (a) instruct Contract Owners how to submit 
transfer requests in light of the proposed Substitution, (b) advise 
Contract Owners that any Contract value remaining in the Existing Fund 
subaccount on the Substitution Date will be transferred to the 
Replacement Fund sub-account, (c) advise Contract Owners that the 
Substitution will take place at relative net asset value, (d) inform 
Contract Owners that for at least 30 days following the Substitution 
Date, the Insurance Company will permit Contract Owners to make 
transfers of Contract value out of the Replacement Fund sub-account to 
any other sub-account(s) offered under the Contract without the 
transfer being treated as a

[[Page 50715]]

transfer for purposes of transfer limitations and fees that would 
otherwise be applicable under the terms of the Contract, and (e) inform 
Contract Owners that, except in connection with market timing/short-
term trading, the Insurance Company will not exercise any rights 
reserved by it under the Contracts to impose additional restrictions on 
transfers out of the Replacement Fund for at least 30 days after the 
Substitution Date.
    17. In addition to the Supplements distributed to Contract Owners, 
within five business days after the Substitution Date, Contract Owners 
whose assets are allocated to the Replacement Fund as part of the 
Substitution will be sent a written notice (the ``Confirmation'') 
informing them that the Substitution was completed. With regard to the 
Separate Account B and C Contract Owners whose assets are allocated to 
the Replacement Fund as part of the Substitution, a notice accompanying 
the Confirmation also will reiterate the information set forth in the 
Supplement to the effect that (a) for at least 30 days after the 
Substitution Date, Contract Owners may make free transfers out of the 
Replacement Fund to one or more other investment options, and (b) 
inform Contract Owners that, except in connection with market timing/
short-term trading, the Insurance Company will not exercise any rights 
reserved by it under the Contracts to impose additional restrictions on 
transfers out of the Replacement Fund for at least 30 days after the 
Substitution Date.
    18. Applicants will effect the Substitution after the issuance of 
the requested order. As of the Substitution Date, shares of the 
Existing Fund will be redeemed for cash. The Insurance Company, on 
behalf of the Separate Accounts, will simultaneously place a redemption 
request with the Existing Fund and a purchase order with the 
Replacement Fund so that the purchase of the Replacement Fund shares 
will be for the exact amount of the redemption proceeds. Thus, the 
Contract values will remain fully invested at all times. The proceeds 
of the redemption will be used to purchase the appropriate number of 
shares of the Replacement Fund.
    19. The Substitution will take place at relative net asset value, 
with no change in the amount of any affected Contract Owner's account 
value or death benefit, or in the dollar value of his or her investment 
in the applicable Separate Account. No brokerage commissions, fees or 
other remuneration will be paid by either the Existing Fund or the 
Replacement Fund or by affected Contract Owners in connection with the 
Substitution. The Substitution will not result in an increase in 
contract fees and expenses, including mortality and expense risk fees 
and administration and distribution fees charged by the Separate 
Accounts. Additionally, the Substitution will result in decreased net 
expense ratios. All expenses incurred in connection with the proposed 
Substitutions, including any brokerage, legal, accounting, and other 
fees and expenses, will be paid by the Insurance Company. In addition, 
the Substitutions will not result in adverse tax consequences to 
Contract Owners and will not alter any tax benefits associated with the 
Contracts.

Legal Analysis

    1. The Applicants request that the Commission issue an order 
pursuant to Section 26(c) of the 1940 Act approving the proposed 
Substitution. Section 26(c) of the 1940 Act makes it unlawful for the 
depositor of a registered unit investment trust that invests in the 
securities of a single issuer to substitute another security for such 
security without Commission approval. Section 26(c) further states that 
the Commission shall issue an order approving such a substitution ``if 
the evidence establishes that it is consistent with the protection of 
investors and the purposes fairly intended by the policy and provisions 
of this title.''
    2. As discussed above, the Applicants have reserved the right under 
the each of the Separate Account's Contracts to substitute shares of 
another underlying mutual fund for one of the current underlying mutual 
funds offered as an investment option under the Contracts. The Contract 
prospectuses disclose this right.
    3. The Replacement Fund and the Existing Fund have sufficiently 
similar investment objectives and policies to make the Replacement Fund 
an appropriate candidate as a substitute. The Insurance Company 
considered the performance history of the Existing Fund and the 
Replacement Fund and determined that no contract holder would be 
materially adversely affected as a result of the Substitution.
    4. The Substitution will not result in an increase in contract fees 
and expenses, including mortality and expense risk fees and 
administration and distribution fees charged by the Separate Accounts. 
Additionally, the Substitution will result in decreased net expense 
ratios. After the Substitution, neither the Insurance Company nor any 
of its affiliates will receive compensation from the charges to the 
Separate Accounts related to the Contracts or from Rule 12b-1 fees or 
revenue sharing from the Replacement Fund. Thus, the Substitution 
protects the Contract Owners who are invested in the Existing Fund by 
providing a replacement fund that (a) is similar to the Existing Fund, 
and (b) reduces net operating expense.
    5. Because Separate Account A offers only one investment option, 
the Separate Account A Contract Owners do not have the discretion to 
re-allocate their Contract values to another investment option if they 
do not wish to invest in the Replacement Fund. Instead, if the Separate 
Account A Contract Owners were dissatisfied with the Substitution, the 
only relief available would be to redeem their interests in Separate 
Account A and reinvest the proceeds in another unit investment trust or 
in an open-end company, in which case the Contract Owners could be 
subject to a new sales load. Accordingly, with regard to Separate 
Account A, the proposed Substitution is the type of substitution that 
Congress envisioned when it amended Section 26(c) to require SEC 
approval of the substitution of one security for another security by 
the depositor of a registered unit investment trust holding securities 
of a single issuer. However, although Separate Account A offers only 
one investment option, the Applicants have determined that the 
objectives and strategies of the Replacement Fund are sufficiently 
similar to the objectives and strategies of the Existing Fund that the 
essential objectives and risk expectations of the Separate Account A 
Contract Owners will continue to be met after the Substitution.
    6. With regard to Separate Accounts B and C, the proposed 
Substitution is not of the type that Section 26 was designed to 
prevent. The Separate Account B and C Contracts provide Contract Owners 
with investment discretion to allocate and reallocate their Contract 
values among the available sub-accounts that invest in the underlying 
mutual fund investment options. This flexibility provides Separate 
Account B and C Contract Owners with the ability to reallocate their 
assets at any time--either before the Substitution Date or after the 
Substitution Date--if they do not wish to invest in the Replacement 
Fund. The likelihood of being invested in an undesired underlying 
mutual fund is minimized, with the discretion remaining with the 
Contract Owners, and the Separate Account B and C Contract Owners will 
continue to be able to select among a large number of investment 
options, with a full range of investment objectives, investment 
strategies and managers. As a result of the Substitution, the number of

[[Page 50716]]

investment options offered under the Separate Account B and C Contracts 
will not change. The Substitution, therefore, will not result in the 
type of costly forced redemption that Section 26(c) was designed to 
prevent.
    7. With regard to all three of the Separate Accounts, the proposed 
Substitution is unlike the type of substitution that Section 26(c) was 
designed to prevent in that by purchasing the Contracts, Contract 
Owners select much more than a particular investment company in which 
to invest their Contract values. They also select the specific type of 
coverage offered by the Insurance Company under the Contracts, as well 
as numerous other rights and privileges set forth in the Contracts. The 
Substitution has no impact on these aspects of the Contracts.

Conclusion

    For the reasons set forth in the application, the Applicants submit 
that the proposed Substitutions and related transactions meet the 
standards of Section 26(c) of the 1940 Act and that the requested 
orders should be granted.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-20090 Filed 8-22-14; 8:45 am]
BILLING CODE 8011-01-P