Allianz Life Insurance Company of North America, et al; Notice of Application, 71482-71488 [2019-27917]
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Federal Register / Vol. 84, No. 248 / Friday, December 27, 2019 / Notices
For the Nuclear Regulatory Commission.
Thomas H. Boyce,
Chief, Regulatory Guidance and Generic
Issues Branch, Division of Engineering, Office
of Nuclear Regulatory Research.
[FR Doc. 2019–27882 Filed 12–26–19; 8:45 am]
BILLING CODE 7590–01–P
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[FR Doc. 2019–28031 Filed 12–23–19; 8:45 am]
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SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
33721; File No. 812–14722]
Allianz Life Insurance Company of
North America, et al; Notice of
Application
December 20, 2019.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of application for an
order approving the substitution of
certain securities pursuant to section
26(c) of the Investment Company Act of
1940, as amended (‘‘Act’’) and an order
of exemption pursuant to section 17(b)
of the Act from section 17(a) of the Act.
AGENCY:
Allianz Life Insurance
Company of North America (‘‘Allianz
Life’’) 1 and Allianz Life Insurance
Company of New York (‘‘Allianz NY’’) 2
(together the ‘‘Insurance Company
Applicants’’); their respective separate
accounts, Allianz Life Variable Account
APPLICANTS:
1 Allianz Life is a stock life insurance company
organized under the laws of the state of Minnesota.
Allianz Life offers fixed and variable annuities and
individual life insurance. Allianz Life is licensed to
do direct business in 49 states and the District of
Columbia. Allianz Life is an indirect, wholly-owned
subsidiary of Allianz SE, a European stock
corporation.
2 Allianz NY is a stock life insurance company
organized under the laws of the state of New York.
Allianz NY offers fixed and variable annuities.
Allianz NY is licensed to do direct business in six
states and the District of Columbia. Allianz NY is
a wholly-owned subsidiary of Allianz Life, and an
indirect, wholly-owned subsidiary of Allianz SE.
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A (‘‘Allianz Account A’’),3 Allianz Life
Variable Account B (‘‘Allianz Account
B’’),4 and Allianz Life of NY Variable
Account C (‘‘Allianz Account C’’) 5
(collectively, the ‘‘Separate Accounts’’
and together with the Insurance
Company Applicants, the ‘‘Section 26
Applicants’’); and Allianz Variable
Insurance Products Trust (the ‘‘VIP
Trust’’), Allianz Variable Insurance
Products Fund of Funds Trust (the
‘‘FOF Trust’’), and the PIMCO Variable
Insurance Trust (the ‘‘PIMCO VIT’’)
(collectively with the Section 26
Applicants, the ‘‘Section 17
Applicants’’).
SUMMARY OF APPLICATION: The Section
26 Applicants seek an order pursuant to
section 26(c) of the Act, approving the
substitution of shares issued by certain
investment portfolios of registered
investment companies (the ‘‘Target
Funds’’) for the shares of certain
investment portfolios of registered
investment companies (the ‘‘Destination
Funds’’), held by the Separate Accounts
as investment options for certain
variable life insurance policies and
variable annuity contracts (such policies
and contracts, the ‘‘Contracts’’) issued
by Allianz Life and Allianz NY (the
‘‘Substitutions’’). The Section 17
Applicants seek an order pursuant to
section 17(b) of the Act exempting them
from section 17(a) of the Act to the
extent necessary to permit them to
engage in certain in-kind transactions in
connection with the Substitutions.
FILING DATES: The application was filed
on December 7, 2016 and amended on
May 31, 2017, August 4, 2017, May 31,
2019 and August 13, 2019.
HEARING OR NOTIFICATION OF HEARING:
An order granting the requested relief
3 Allianz Account A is a segregated asset account
of Allianz Life established under Minnesota
insurance laws. Allianz Account A is used to fund
certain variable life insurance policies issued by
Allianz Life. Allianz Account A is divided into
subaccounts, each of which invests in and reflects
the investment performance of a specific underlying
registered open-end investment company or
portfolio thereof (each an ‘‘Investment Option’’).
Allianz Account A is registered as a unit investment
trust under the Act.
4 Allianz Account B is a segregated asset account
of Allianz Life established under Minnesota
insurance laws. Allianz Account B is used to fund
certain variable annuity contracts issued by Allianz
Life. Allianz Account B is divided into
subaccounts, each of which invests in and reflects
the investment performance of a specific
Investment Option. Allianz Account B is registered
as a UIT under the Act.
5 Allianz Account C is a segregated asset account
of Allianz NY established under New York
insurance laws. Allianz Account C is used to fund
certain variable annuity contracts issued by Allianz
NY. Allianz Account C is divided into subaccounts,
each of which invests in and reflects the investment
performance of a specific Investment Option.
Allianz Account C is registered as a UIT under the
Act.
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Federal Register / Vol. 84, No. 248 / Friday, December 27, 2019 / Notices
will be issued unless the Commission
orders a hearing. Interested persons may
request a hearing by writing to the
Secretary of the Commission and
serving applicants with a copy of the
request, personally or by mail. Hearing
requests should be received by the
Commission by 5:30 p.m. on January 14,
2020, and should be accompanied by
proof of service on applicants in the
form of an affidavit or, for lawyers, a
certificate of service. Pursuant to rule 0–
5 under the Act, hearing requests should
state the nature of the requester’s
interest, any facts bearing upon the
desirability of a hearing on the matter,
the reason for the request, and the issues
contested. Persons who wish to be
notified of a hearing may request
notification by writing to Commission’s
Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
Applicants: Allianz Life Insurance
Company of North America, Allianz Life
Variable Account A, Allianz Life
Variable Account B, Allianz Variable
Insurance Products Trust, and Allianz
Variable Insurance Products Fund of
Funds Trust, 5701 Golden Hills Drive,
Minneapolis, MN 55416–1297; Allianz
Life Insurance Company of New York
and Allianz Life of NY Variable Account
C, 28 Liberty Street, 38th Floor, New
York, NY 10005–1423; and PIMCO
Variable Insurance Trust, 650 Newport
Center Drive, Newport Beach, CA
92660.
FOR FURTHER INFORMATION CONTACT:
Jennifer O. Palmer, Senior Counsel,
David J. Marcinkus, Branch Chief,
Daniele Marchesani, Assistant Chief
Counsel, or Nadya B. Roytblat, Assistant
Chief Counsel, at (202) 551–6825 (Chief
Counsel’s Office, Division of Investment
Management).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
website by searching for the file
number, or for an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm, or by
calling (202) 551–8090.
Applicants’ Representations
1. Variable insurance contracts
(variable annuities and variable life
insurance policies) are issued by
insurance companies and typically have
a two-tier structure. The top tier is a
separate account of the insurance
company, registered under the Act as a
unit investment trust (‘‘UIT’’). The
separate account, in turn, has
subaccounts that invest in numerous
(sometimes hundreds of) underlying
mutual funds (open-end management
investment companies registered under
the Act) and exchange-traded funds.
Contract holders allocate their assets
across these various underlying funds
available through the separate account.
2. Allianz Life and Allianz NY offer
Contracts issued by the Separate
Accounts with one or more of the Target
Funds included as an Investment
Option.6 Under the Contracts, the
Insurance Company Applicants reserve
the right, subject to Commission
approval and compliance with
applicable laws, to substitute
Investment Options with other
Investment Options after appropriate
notice. The Contracts also permit the
Insurance Company Applicants to limit
the manner in which a Contract owner
may allocate purchase payments to the
subaccounts that invest in an
Investment Option.7
3. Each Insurance Company
Applicant, on behalf of itself and its
Separate Account(s), proposes to replace
shares of the Target Funds that are held
in subaccounts of their Separate
Accounts with shares of the
corresponding Destination Funds, as
shown in the table below.8 The
Insurance Company Applicants state
that the proposed Substitutions are part
of an ongoing effort to make their
Contracts more attractive to existing and
prospective Contract owners and to
make the Contracts more efficient to
administer. Additional information for
each Target Fund and the corresponding
Destination Fund, including investment
objectives, principal investment
strategies, principal risks, and
performance, as well as the fees and
expenses of each Target Fund and its
corresponding Destination Fund, can be
found in the application.
Substitution
Target fund
Destination fund
1 .........................
2 .........................
Fidelity VIP FundsManager 50% Portfolio, Service Class 2 ...
Templeton Growth VIP Fund, Class 1 .....................................
Templeton Growth VIP Fund, Class 2 .....................................
BlackRock Global Allocation V.I. Fund, Class III .....................
Fidelity VIP FundsManager 60% Portfolio, Service Class 2 ...
Franklin Allocation VIP Fund, Class 2 .....................................
Franklin Income VIP Fund, Class 1 .........................................
AZL Balanced Index Strategy Fund, Class 1.
AZL MSCI Global Equity Index Fund, Class 1.
AZL MSCI Global Equity Index Fund, Class 2.
AZL Moderate Index Strategy Fund, Class 1.
AZL Moderate Index Strategy Fund, Class 1.
AZL Moderate Index Strategy Fund, Class 1.
AZL Fidelity Institutional Asset Management Multi-Strategy
Fund, Class 1.
AZL Fidelity Institutional Asset Management Multi-Strategy
Fund, Class 2.
AZL Fidelity Institutional Asset Management Multi-Strategy
Fund, Class 2.
AZL Fidelity Institutional Asset Management Total Bond
Fund, Class 2.
AZL Russell 1000 Value Index Fund, Class 1.
AZL Russell 1000 Value Index Fund, Class 2.
AZL S&P 500 Index Fund, Class 2.
3
4
5
6
.........................
.........................
.........................
.........................
Franklin Income VIP Fund, Class 2 .........................................
7 .........................
PIMCO All Asset Portfolio, Administrative Class .....................
8 .........................
Franklin Strategic Income VIP Fund, Class 2 .........................
9 .........................
Franklin Mutual Shares VIP Fund, Class 1 .............................
Franklin Mutual Shares VIP Fund, Class 2 .............................
BNY Mellon VIF Appreciation Portfolio, Service Class ...........
10 .......................
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6 The number of Investment Options currently
available under the affected Contracts ranges from
13 to 50.
7 In addition to registering with the Commission
as an investment company under the Act, each
Separate Account has registered with the
Commission its securities under the Securities Act
of 1933 (‘‘1933 Act’’). In doing so, each Separate
Account has filed a registration statement with the
Commission that includes a prospectus describing
the Contracts offered by the Separate Account and
a copy of the form of such Contracts.
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8 The Destination Funds are all series of the VIP
Trust, FOF Trust, or PIMCO VIT, each a Delaware
statutory trust registered as an open-end
management investment company under the Act
and whose shares are registered under the 1933 Act.
Shares of the VIP Trust and the FOF Trust are sold
to separate accounts of Allianz Life and Allianz NY
for the purpose of funding variable annuity
contracts and variable life insurance policies. The
Destination Funds offered by the VIP Trust and FOF
Trust are managed by Allianz Investment
Management LLC (‘‘AIM’’), an affiliate of the
Insurance Company Applicants. AIM is registered
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as an investment adviser under the Investment
Advisers Act of 1940 (‘‘Advisers Act’’). Shares of
the PIMCO VIT are sold to separate accounts of
Allianz Life and Allianz NY, as well as other
insurance companies, for the purpose of funding
variable annuity contracts and variable life
insurance policies. The Destination Funds offered
by the PIMCO VIT are managed by Pacific
Investment Management Company LLC (‘‘PIMCO’’),
an affiliate of Insurance Company Applicants.
PIMCO is registered as an investment adviser under
the Advisers Act.
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Substitution
Target fund
11 .......................
PIMCO Global Multi-Asset Managed Allocation Portfolio, Administrative Class.
PIMCO Global Bond Opportunities Portfolio (Unhedged), Administrative Class.
PIMCO Dynamic Bond Portfolio, Administrative Class ...........
12 .......................
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13 .......................
4. The proposed Substitutions will be
described in supplements to the
applicable prospectuses for the
Contracts filed with the Commission
(‘‘Supplements’’) and delivered to all
affected Contract owners at least 30 days
before the date the proposed
Substitution is effected (‘‘Substitution
Date’’). The Supplements, among other
things, will advise Contract owners that,
for a period beginning at least 30 days
before the Substitution Date through at
least 30 days following the Substitution
Date, Contract owners are permitted to
transfer all of or a portion of their
Contract value out of any subaccount
investing in a Target Fund to any other
available subaccounts offered under
their Contract without any transfer
charge or limitation and without the
transfer being counted as a transfer for
purposes of transfer limitations and fees
that would otherwise be applicable
under the terms of the Contracts.
5. The Section 26 Applicants will
send the Supplements to all existing
Contract owners. Prospective purchasers
and new purchasers of Contracts will be
provided with a Contract prospectus
and the Supplements, as well as
prospectuses and supplements for the
Destination Funds.
6. In addition to the Supplements
distributed to Contract owners, within
five business days after the Substitution
Date, the Insurance Company
Applicants will send Contract owners a
written confirmation of the completed
proposed Substitutions in accordance
with rule 10b–10 under the Securities
Exchange Act of 1934. The confirmation
statement will include or be
accompanied by a statement that
reiterates the free transfer rights
disclosed in the Supplements. The
Insurance Company Applicants also
will send each Contract owner current
prospectuses for the Destination Funds
involved to the extent that they have not
previously received a copy.
7. Each Substitution will take place at
the applicable Target and Destination
Funds’ relative per share net asset
values (‘‘NAV’’) determined on the
Substitution Date in accordance with
section 22 of the Act and rule 22c–1
thereunder. Each Substitution will be
effected by having each Target Fund
subaccount redeem its Target Fund
shares in cash and/or in-kind on the
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Destination fund
PIMCO Balanced Allocation Portfolio, Administrative Class.
PIMCO Global Core Bond (Hedged) Portfolio, Administrative
Class.
PIMCO Total Return Portfolio, Administrative Class.
Substitution Date at NAV per share and
purchase shares of the appropriate
Destination Fund at NAV per share
calculated on the same date.9
8. The Insurance Company Applicants
or an affiliate will pay all expenses and
transaction costs reasonably related to
the proposed Substitutions. No costs of
the Substitutions will be borne directly
or indirectly by Contract owners.
Contract owners will not incur any fees
or charges as a result of the
Substitutions, nor will their rights or the
obligations of the Insurance Company
Applicants under the Contracts be
altered in any way. The proposed
Substitutions will not cause the fees and
charges under the Contracts currently
being paid by Contract owners to be
greater after the proposed Substitutions
than before the proposed Substitutions.
The charges for optional living benefit
riders may change from time to time and
any such changes would be unrelated to
the proposed Substitutions.
9. The Section 26 Applicants state
that the benefits offered by the
guarantees under the Contracts will be
the same immediately before and after
the Substitutions. The Section 26
Applicants further state that the effect
Substitutions may have on the value of
the benefits offered by the Contract
guarantees would depend, among other
things, on the relative future
performance of the Target Funds and
Destination Funds, which the Section
26 Applicants cannot predict. The
Section 26 Applicants further note that,
at the time of the Substitutions, the
Contracts will offer a comparable variety
of Investment Options with as broad a
range of risk/return characteristics.
10. The Section 26 Applicants further
state that they will cause AIM or
PIMCO, as applicable, as the investment
adviser of each Destination Fund, to
enter into a written contract with the
applicable Destination Funds, whereby,
9 The process for accomplishing the transfer of
assets from each Target Fund to its corresponding
Destination Fund will be determined on a case-bycase basis. In some cases, it is expected that the
Substitutions will be effected by redeeming shares
of a Target Fund for cash and using the cash to
purchase shares of the Destination Fund. In other
cases, it is expected that the Substitutions will be
effected by redeeming the shares of a Target Fund
in-kind; those assets will then be contributed inkind to the corresponding Destination Fund to
purchase shares of that fund.
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during the two (2) years following the
Substitution Date, the annual net
operating expenses of each such
Destination Fund will not exceed, on an
annualized basis, the annual net
operating expenses of any
corresponding Target Fund for fiscal
year 2018. The Section 26 Applicants
further represent that separate account
charges for any Contract owner on the
Substitution Date will not be increased
at any time during the two-year period
following the Substitution Date.
Legal Analysis—Section 26(c) of the Act
1. The Section 26 Applicants request
that the Commission issue an order
pursuant to section 26(c) of the Act
approving the Substitutions. Section
26(c) of the Act prohibits any depositor
or trustee of a UIT holding the security
of a single issuer from substituting the
securities of another issuer without the
approval of the Commission. Section
26(c) provides that such approval shall
be granted by order of the Commission
if the evidence establishes that the
substitution is consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the Act. Applicants state
that Congress’ concern underlying
section 26(c) related to the lack of
recourse and potentially additional fees
experienced by investors in a singlesecurity UIT in the case of a
substitution.
2. Applicants submit that each of the
Substitutions is consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the Act. In particular,
Applicants point to the following:
(a) The contracts permit the
substitutions, subject to Commission
approval and compliance with
applicable laws, upon appropriate
notice;
(b) the prospectuses or statements of
additional information for the Contracts
contain appropriate disclosure of these
rights;
(c) the Substitutions will be described
in the Supplements delivered to all
affected Contract owners at least 30 days
before the Substitution Date;
(d) the Supplements also will advise
Contract owners that, for a period
beginning at least 30 days before the
Substitution Date through at least 30
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Federal Register / Vol. 84, No. 248 / Friday, December 27, 2019 / Notices
days following the Substitution Date,
Contract owners are permitted to
transfer all of or a portion of their
Contract value out of any subaccount
investing in a Target Fund to any other
available subaccounts offered under
their Contract without any transfer
charge or limitation and without the
transfer being counted as a transfer for
purposes of transfer limitations and fees
that would otherwise be applicable
under the terms of the Contracts;
(e) each Destination Fund and its
corresponding Target Fund have similar
or substantially similar investment
objectives, principal investment
strategies, and principal risks; 10 and
(f) the total net operating expenses of
each Destination Fund will be the same
or lower than those of the corresponding
Target Fund for at least two years
following the Substitution Date.
Applicants assert that, based on the
terms noted above, and subject to the
conditions set forth below, the proposed
Substitutions do not raise the concerns
underlying section 26(c) of the Act.
Opposition to Certain of the Proposed
Substitutions
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3. As shown in the chart above, some
of the Target Funds are advised by
Franklin Advisers, Inc. or one of its
affiliates (‘‘Franklin’’). Franklin has
submitted several letters to the
Commission opposing the application
and stating its intent to request a
hearing should the Commission issue a
notice on the application without
resolving Franklin’s concerns.11
4. The Franklin Letters assert that the
proposed Substitutions do not meet the
standard for an order under section
26(c) for the following reasons: 12
(a) The Commission should approve
substitutions under section 26(c) only
when the insurance company seeks to
replace a fund due to unforeseen
circumstances, such as impairment of
the fund or fraud, and not in other
10 Applicants note that prior Commission orders
under section 26(c) for similar substitutions provide
guidance as to the funds that may be viewed as
comparable.
11 See letters from Franklin to Sara Crovitz, dated
May 10, 2017, June 8, 2017, and August 22, 2017,
and to Dalia Blass, dated September 12, 2019,
submitted by Morgan Lewis, and letter from the
independent trustees of the Franklin Templeton
Variable Insurance Products Trust to Sara Crovitz,
dated August 18, 2017, submitted by Schiff Hardin
(the ‘‘Franklin Letters’’), available at https://
www.sec.gov/rules/icreleases.shtml#
insprodfundsub. Allianz submitted two letters,
dated August 4, 2017 and September 24, 2019,
responding to the Franklin Letters.
12 The Franklin Letters also argue that the
proposed Substitutions are joint transactions and
thus require an order under section 17(d) of the Act
and rule 17d–1, which the application fails to
request.
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circumstances when the substitution
would benefit the insurance company;
(b) the proposed Substitutions would,
for the most part, replace actively
managed funds with index funds that
have lower performance, so that
Contract owners will suffer a
diminution in the value of the
guarantees purchased by the contract
holders, to the detriment of the contract
holders and to the benefit of the
Insurance Company Applicants; and
(c) as argued in a letter from the
independent trustees of the Franklinadvised Target Funds, the shareholders
remaining in these funds after the
Substitutions would be harmed because
the Substitutions would cause
significant redemptions of shares of the
Franklin-advised Target Funds, which
could impact the ability of such funds
to follow their current investment
strategies and would likely increase
costs to remaining shareholders.
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ii. Consideration of Impact on Value of
Guarantees Not Required
6. Since the early 1980s, the
Commission has issued nearly 200
substitution orders under section 26(c)
involving variable insurance contract
UIT subaccounts replacing their
underlying mutual funds. The terms and
conditions of these orders 13 and of the
Allianz application 14 are designed to
address investor protection on the two
points expressly addressed in the
legislative history of Section 26(c).
7. The Franklin Letters argue that in
reviewing a substitution application
under section 26(c), the Commission
also should be concerned about any
diminution in the value of the variable
insurance contracts’ guarantees as the
underlying actively-managed mutual
funds are being replaced with index
mutual funds, to the benefit of the
insurance company. Because typically
the benefit base used for variable
contracts’ living and death benefit
guarantees is reset periodically by
reference to the contract’s account
value, contract holders are
disadvantaged by the replacement of
actively-managed fund options that seek
to ‘‘beat, rather than just meet, a
benchmark.’’ 15 The Commission
believes that this argument should be
rejected for several reasons.
8. First, consistent with prior
substitution orders, the proposed
Destination Funds are substantially
similar to the Target Funds in the
application.16 Second, it is not a
foregone conclusion that replacing an
actively-managed fund with an index
fund will lead to a diminution in the
value of the variable insurance
contract’s guarantee. The application
states that ‘‘[w]hat effect the proposed
[s]ubstitutions may have on the value of
the benefits offered by the Contract
guarantees would depend, among other
things, on the relative future
performance of the [Target Funds] and
[Destination Funds], which [Applicants]
cannot predict. Nevertheless,
[Applicants] note that at the time of the
proposed Substitutions, the Contracts
will offer a comparable variety of
investment options with as broad a
range of risk/return characteristics.’’
Finally, if the consideration of the
impact of substitutions on changes in
the value of contracts’ guarantees were
to factor into the Commission’s review
of substitution applications under
section 26(c), the Commission would be
tasking itself with calculating how
13 As orders are subject to the terms and
conditions set forth in the related applications, a
reference to the terms and conditions of an order
includes the terms and conditions described in the
related application.
14 In this regard, the September 12, 2019 Franklin
Letter stated that ‘‘We have done a preliminary
analysis, and the effect of the proposed
substitutions is that some of the [Destination]
[F]unds would experience an increase in their total
operating expense ratios and one fund would also
lose the benefit of fee breakpoints.’’ Among other
things, the terms and conditions require that the
total net operating expenses of each replacement
fund will be the same or lower than those of the
corresponding target fund for at least two years
following the substitution date.
15 Franklin Letter, dated May 10, 2017, submitted
by Morgan Lewis, at p. 3.
16 See, e.g., AXA Equitable Life Ins. Co., et al., Rel.
Nos. IC–33201 (Aug. 15, 2018) (Notice) and IC–
33224 (Sep. 11, 2018) (Order), File No. 812–14831;
The Guardian Ins. & Annuity Co., Inc., et al., Rel.
Nos. IC–32967 (Jan. 10, 2018) (Notice) and IC–
33003 (Feb. 7, 2018) (Order), File No. 812–14714;
Commonwealth Annuity and Life Ins. Co., et al.,
Rel. Nos. IC–32615 (Apr. 27, 2017) (Notice) and IC–
32644 (May 23, 2017) (Order), File No. 812–14646;
Transamerica Advisors Life Ins. Co., et al., Rel. Nos.
IC–32571 (Mar. 24, 2017) (Notice) and IC–32606
(Apr. 19, 2017) (Order), File No. 812–14487; Allianz
Life Ins. Co. of North America, et al., Rel. Nos. IC–
32207 (Aug. 3, 2016) (Notice) and IC–32242 (Aug.
29, 2016) (Order), File No. 812–14580.
The Application Satisfies the Standards
in Section 26(c)
5. The Commission has considered
these arguments. As noted above,
section 26(c) states that ‘‘The
Commission shall issue an order
approving 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 [the Act].’’
A. The Allianz Application Is Consistent
With Investor Protection
i. Protective Conditions
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substitutions would affect the value of
variable insurance contract guarantees
in the context of hundreds, if not
thousands, of funds. Such calculations
would be complex and rely on
numerous assumptions and other
factors, including estimates of the future
performance of the funds involved over
varying time frames, and the impact of
future performance on the benefit base
used to set the insurance guarantees.
B. The Application Is Consistent With
the Purposes Fairly Intended by the
Policy and Provisions of the Act
i. Section 26(c) of the Act
9. The purposes intended by section
26(c) of the Act, as discussed above,
were to protect the UIT’s shareholders
from having no recourse when the
single portfolio security of the UIT is
replaced and incurring additional fees
in reinvesting any redemption proceeds.
For the reasons discussed above, the
terms and conditions of the application
satisfy these investor protection
purposes.
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ii. Section 1(b)(2) of the Act
10. Another potentially relevant
purpose of the Act is set forth in Section
1(b)(2) of the Act. It states, in relevant
part, that the national public interest
and the interest of investors are
adversely affected when the portfolio
securities of investment companies are
selected in the interest of ‘‘persons
engaged in other lines of business,
rather than in the interest of all classes
of such companies’ security holders.’’ In
a substitution application (including the
Allianz application), the portfolio
securities (the underlying mutual funds)
of the separate account UIT arguably are
being selected in the interest of the
insurance company that had issued the
variable insurance contract. The
Franklin Letters argue that the
Commission should permit
substitutions under section 26(c) only
under exceptional or unforeseen
circumstances, such as when the
existing fund is impaired or in cases of
fraud, and not in other circumstances
when the substitution would benefit the
insurance company. Although the
Franklin Letters do not specifically refer
to section 1(b)(2) of the Act in the
context of this argument, we believe
their argument may echo the concern
reflected in that section.
11. To interpret section 26(c) as
allowing Commission approval of
substitutions only in unforeseen or
exceptional circumstances would be in
conflict with section 26(c), its legislative
history, and the purposes of the Act
more broadly. It also would be a
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18:44 Dec 26, 2019
Jkt 250001
significant departure from prior
practice.17 Further, the Commission
believes any section 1(b)(2) concern is
addressed by the standard terms and
conditions of the substitution orders
under section 26(c), including those in
the Allianz application. These terms
and conditions serve as a check on the
insurance company’s actions in
replacing the mutual funds underlying
its separate account UIT, and are
designed to help investor protection.
The Commission notes that insurance
companies have offered separate
account UITs with numerous
investment options with the expectation
and understanding that they would have
the ability to make changes among the
investment options in appropriate
circumstances.18 The variable insurance
contracts expressly permit such
substitutions.
iii. Section 12(d)(1)(E) of the Act
12. The Commission also has
considered the concern expressed by the
independent directors of the Franklinadvised Target Funds about the loss of
assets in those funds as a result of the
Substitutions. There is no indication in
the legislative history of section 26(c)
that Congress was concerned with the
impact of the substitution on the
company in which the UIT was
invested.19 The application involves
subaccounts of UITs that invest in the
Target Funds in reliance on section
12(d)(1)(E) of the Act.20 The
17 Id.
18 See, e.g., letter dated Jan. 21, 2017 from
Sutherland on behalf of the Hartford Life Insurance
Company, et al. to the Commission in response to
the hearing requests of the American Funds, among
others, on the Hartford Substitution Application, at
3 (stating ‘‘[i]nsurance companies are not able to
offer the significant benefits of various variable
insurance contracts unconditionally. They can be
responsibly offered only with certain unilateral
insurer conditions, e.g., limitations on initial and
subsequent premium amounts; restricting access to
certain underlying funds; age limitations for benefit
availability; and, perhaps most vital to insurers, the
ability to add, delete, merge, close and substitute
fund offerings. Insurance companies use these
contractual rights to manage operational expenses
and insurance risks over the long life of their
guarantees, and to manage contract owners’
changing needs over those same durations’’),
available at https://www.sec.gov/comments/81214446/81214446-1523020-130992.pdf.
19 Legislative history indicates that Congress’s
concern in enacting section 26(c) was the protection
of the contract holder. See Senate Report, supra
note 10 (stating ‘‘[t]he proposed amendment
recognizes that in the case of a unit investment trust
holding the securities of a single issuer notification
to share holders does not provide adequate
protection since the only relief available to the
shareholders, if dissatisfied, would be to redeem
their shares. A shareholder who redeems and
reinvests the proceeds in another unit investment
trust or in an open-end company would under most
circumstances be subject to a new sales load’’).
20 Section 12(d)(1)(E) is a conditional exemption
from the restrictions in section 12(d)(1), which limit
PO 00000
Frm 00139
Fmt 4703
Sfmt 4703
requirements of that section, which
excepts certain fund-of-funds
arrangements from the prohibitions in
section 12(d)(1)(A), (B) and (C), are
concerned with protecting the
shareholders of both the investing UIT
and the underlying fund.21 The
Commission has considered the
concerns underlying section 12(d)(1)(E)
as they might relate to the Franklinadvised Target Funds with respect to
whether the Substitutions are consistent
with ‘‘the purposes fairly intended by
the policy and provisions’’ of the Act.
The Commission believes the fact that
the Franklin-advised funds could lose
assets due to the Substitutions is not a
concern under section 12(d)(1)(E),
which does not limit a UIT’s ability to
redeem its shares from an underlying
fund. A more relevant concern would be
if the insurance company, through its
separate account UIT, was trying to
somehow engage in overreaching with
respect to the Franklin-advised funds
through the threat of redemption. No
allegation has been made that Allianz is
engaged in an attempt to overreach the
Target Funds through a threat of
redemption, and the Commission is not
aware of any overreaching behavior.
iv. Section 17(d) of the Act
13. Finally, the Commission has
considered the argument in the Franklin
Letters that the Substitutions require an
order under section 17(d) of the Act and
rule 17d–1. These provisions generally
prohibit an affiliated person of a
registered investment company from
participating in or effecting a joint
transaction in which the registered
investment company is a participant,
without first obtaining an order of the
Commission.22 The Franklin Letters
so-called ‘‘fund-of-funds’’ arrangements in which
one mutual fund invests in the shares of another.
Section 12(d)(1)(E) exempts a fund acquiring shares
of another fund from the 12(d)(1) limits if, among
other things, the acquired shares are the only
security owned by the acquiring fund. This
exemption is relied upon by, among others, most
insurance company separate accounts, which are
organized as UITs and divided into subaccounts,
each of which invests proceeds from the sale of
interests in variable annuity and variable life
insurance contracts in shares of a mutual fund.
21 We note that section 12(d)(1)(E)(iii)(bb) requires
section 26(c)-type Commission approval of
substitutions in the fund-of-funds context only
where the acquiring fund is not registered under the
Act.
22 Section 17(d) states: ‘‘It shall be unlawful for
any affiliated person of [. . .] a registered
investment company [. . .], or any affiliated person
of such a person [. . .], acting as principal to effect
any transaction in which such registered company,
or a company controlled by such registered
company, is a joint or a joint and several participant
with such person [. . .], or affiliated person, in
contravention of such rules and regulations as the
Commission may prescribe for the purpose of
limiting or preventing participation by such
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have not articulated why the proposed
Substitutions would involve a joint
transaction, including what would be
the joint transaction and how an
affiliated person of the funds involved,
acting as principal, is participating in
the transaction. In addition, we believe
the Substitutions are similar to other
transactions involving two-tier
structures that are permitted under
section 12(d)(1)(E) where relief from
section 17(d) and rule 17d–1 is not
necessary, regardless of whether the
underlying fund is an affiliate of the
top-tier fund.23 As with those other
structures, relief from section 17(a) is
necessary for in-kind transactions
between the top-tier fund and
underlying fund.24
jbell on DSKJLSW7X2PROD with NOTICES
Legal Analysis—Section 17(a) of the Act
14. The Section 17 Applicants request
that the Commission issue an order
pursuant to section 17(b) of the Act
exempting them from section 17(a)(1)
and (2) of the Act to the extent
necessary to permit them to carry out
the Substitutions by redeeming shares
issued by each applicable Target Fund
in-kind and using the securities
distributed as redemption proceeds to
purchase shares issued by the
applicable Destination Funds (the ‘‘InKind Transactions’’).
Section 17(a)(1) of the Act, in relevant
part, prohibits any affiliated person of a
registered investment company, or an
affiliated person of such person, acting
as principal, knowingly from selling any
security or other property to such
registered investment company. Section
17(a)(2) of the Act, in relevant part,
prohibits any affiliated person of a
registered investment company, or an
affiliated person of such person, acting
as principal, knowingly from
registered or controlled company on a basis
different from or less advantageous than that of
such other participant.’’ Rule 17d–1 prohibits such
joint arrangements, ‘‘unless an application
regarding such joint enterprise, arrangement or
profit-sharing plan has been filed with the
Commission and has been granted by an order
entered prior to the submission of such plan or
modification to security holders for approval, or
prior to such adoption or modification if not so
submitted [. . .].’’ Rule 17d–1 further states that,
‘‘[i]n passing upon such applications, the
Commission will consider whether the
participation of such registered or controlled
company in such joint enterprise, joint arrangement
or profit-sharing plan on the basis proposed is
consistent with the provisions, policies and
purposes of the Act and the extent to which such
participation is on a basis different from or less
advantageous than that of other participants.’’
23 See supra note 20. Section 12(d)(1)(E) is also
relied upon by master-feeder fund arrangements, in
which one or more funds pool their assets by
investing in a single fund with the same investment
objective.
24 See discussion of sections 17(a)(1) and 17(a)(2)
of the Act infra pp. 17–18.
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18:44 Dec 26, 2019
Jkt 250001
purchasing any security or other
property from such registered
investment company. ‘‘Affiliated
person’’ is defined in section 2(a)(3) of
the Act.25
15. At the close of business on the
Substitution Date, the Insurance
Company Applicants will redeem shares
of each Target Fund either in-kind or in
cash, or a combination thereof, and use
the proceeds of such redemptions to
purchase shares of the corresponding
Destination Fund, with each subaccount
of the applicable Separate Account
investing the proceeds of its redemption
from the Target Fund in the
corresponding Destination Fund. Thus,
the proposed transactions may involve a
transfer of portfolio securities by each
Target Fund to Allianz Life and Allianz
NY. Immediately thereafter, Allianz Life
and Allianz NY would purchase shares
of the corresponding Destination Fund
with the portfolio securities and/or cash
received from the applicable Target
Fund. This aspect of the Substitution
may be considered to involve one or
more sales by Allianz Life or Allianz NY
of securities or other property to the
applicable Destination Fund. Based on
the affiliations detailed in the
application, these in-kind transactions
may be prohibited by section 17(a)(1)
and (2) of the Act.
16. Section 17(b) of the Act, in
relevant part, provides that,
notwithstanding subsection (a), any
person may file with the Commission an
application for an order exempting a
proposed transaction from one or more
provisions of section 17(a). Pursuant to
section 17(b), the Commission shall
grant such application and issue such
order of exemption if evidence
establishes that: The terms of the
proposed transaction, including the
consideration to be paid or received, are
reasonable and fair and do not involve
overreaching on the part of any person
concerned; the proposed transaction is
consistent with the policy of each
registered investment company
concerned, as recited in its registration
statement and reports filed under the
25 Section 2(a)(3) defines affiliated person as ‘‘(A)
any person directly or indirectly owning,
controlling, or holding with power to vote, 5 per
centum or more of the outstanding voting securities
of such other person; (B) any person 5 per centum
or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held
with power to vote, by such other person; (C) any
person directly or indirectly controlling, controlled
by, or under common control with, such other
person; (D) any officer, director, partner, copartner,
or employee of such other person; (E) if such other
person is an investment company, any investment
adviser thereof or any member of an advisory board
thereof; and (F) if such other person is an
unincorporated investment company not having a
board of directors, the depositor thereof.’’
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Frm 00140
Fmt 4703
Sfmt 4703
71487
Act; and the proposed transaction is
consistent with the general purposes of
the Act.
17. Accordingly, the Section 17
Applicants seek relief under section
17(b) from section 17(a) for the in-kind
purchases and sales of the Destination
Fund shares. The Section 17 Applicants
submit that the In-Kind Transactions
satisfy the standards for an order under
section 17(b) because: (i) The terms of
the proposed In-Kind Transactions,
including the consideration to be paid
and received, are reasonable and fair
and do not involve overreaching on the
part of any person concerned because
the proposed In-Kind Transactions will
comply with rule 17a–7 under the Act,
other than the requirement relating to
cash consideration (because the In-Kind
Transactions will involve portfolio
securities of the Target Funds and
shares issued by the Destination
Funds); 26 (ii) the In-Kind Transactions
will be consistent with the policies of
each Target Fund and corresponding
Destination Fund as stated in their
respective registration statements and
reports filed with the Commission; and
(iii) the In-Kind Transactions are
consistent with the general purposes of
the Act because they do not raise any
investor protection concerns.
Applicants’ Conditions
The Section 26 Applicants agree that
any order granting the requested relief
will be subject to the following
conditions:
1. The proposed Substitutions will
not be effected unless the Insurance
Company Applicants determine that: (a)
The Contracts allow the substitution of
shares of registered open-end
investment companies in the manner
contemplated by the application; (b) the
proposed Substitutions can be
consummated as described in the
application under applicable insurance
laws; and (c) any regulatory
requirements in each jurisdiction where
the Contracts are qualified for sale have
26 Rule 17a–7 is a conditional exemption from
section 17(a) of the Act that permits purchase and
sale transactions among affiliated investment
companies, or between an investment company and
a person that is affiliated solely by reason of having
a common (or affiliated) investment adviser,
common directors, and/or common officers. In the
adopting release to the original Rule 17a–7, the
Commission stated that the purpose of the rule was
to ‘‘eliminate filing and processing applications
under circumstances where there appears to be no
likelihood that the statutory finding for a specific
exemption under Section 17(b) of the Act could not
be made’’ and that the conditions of the rule ‘‘are
designed to limit the exemption to those situations
where the Commission, upon the basis of its
experience, considers that there is no likelihood of
overreaching of the investment companies
participating in the transaction.’’ Inv. Co. Act Rel.
No. 4697 (Sep. 8, 1966) at 2–4.
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been complied with to the extent
necessary to complete the proposed
Substitutions.
2. The Insurance Company Applicants
or their affiliates will pay all expenses
and transaction costs of the proposed
Substitutions, including legal and
accounting expenses, any applicable
brokerage expenses and other fees and
expenses. No fees or charges will be
assessed to the Contract owners to effect
the proposed Substitutions. The
proposed Substitutions will not cause
the fees and charges under the Contracts
currently being paid by Contract owners
to be greater after the proposed
Substitution than before the proposed
Substitution. For each Substitution, the
combined current management fee and
Rule 12b–1 fee of the Destination Fund
at all asset levels will be no higher than
that of the corresponding Target Fund at
corresponding asset levels.
3. The proposed Substitutions will be
effected at the relative net asset values
of the respective shares in conformity
with section 22(c) of the Act and rule
22c–1 thereunder without the
imposition of any transfer or similar
charges by the Section 26 Applicants.
The proposed Substitutions will be
effected without change in the amount
or value of any Contracts held by
affected Contract owners.
4. The proposed Substitutions will in
no way alter the tax treatment of
affected Contract owners in connection
with their Contracts, and no tax liability
will arise for affected Contract owners
as a result of the proposed
Substitutions.
5. The rights or obligations of the
Insurance Company Applicants under
the Contracts of affected Contract
owners will not be altered in any way.
6. Affected Contract owners will be
permitted to make at least one transfer
of Contract value from the subaccount
investing in the Target Fund (before the
Substitution Date) or the Destination
Fund (after the Substitution Date) to any
other available Investment Option under
the Contract without charge for a period
beginning at least 30 days before the
Substitution Date through at least 30
days following the Substitution Date.
Except as described in any market
timing/short-term trading provisions of
the relevant prospectus, the Insurance
Company Applicants will not exercise
any right they may have under the
Contract to impose restrictions on
transfers between the subaccounts
under the Contracts, including
limitations on the future number of
transfers, for a period beginning at least
30 days before the Substitution Date
through at least 30 days following the
Substitution Date.
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18:44 Dec 26, 2019
Jkt 250001
7. All affected Contract owners will be
notified, at least 30 days before the
Substitution Date about: (a) The
intended Substitution of the Target
Funds with the Destination Funds; (b)
the intended Substitution Date; and (c)
information with respect to transfers as
set forth in Condition 6 above. In
addition, Insurance Company
Applicants will deliver to all affected
Contract owners, at least 30 days before
the Substitution Date, a prospectus for
each applicable Destination Fund.
8. Insurance Company Applicants
will deliver to each affected Contract
owner within five (5) business days of
the Substitution Date a written
confirmation which will include: (a) A
confirmation that the proposed
Substitutions were carried out as
previously notified; (b) a restatement of
the information set forth in the
Supplements; and (c) before and after
account values.
9. The Section 26 Applicants will
cause AIM or PIMCO, as applicable, as
the investment adviser of each
Destination Fund, to enter into a written
contract with the applicable Destination
Funds, whereby, during the two (2)
years following the Substitution Date,
the annual net operating expenses of
each such Destination Fund will not
exceed, on an annualized basis, the
annual net operating expenses of any
corresponding Target Fund for fiscal
year 2018. The Section 26 Applicants
further agree that separate account
charges for any Contract owner on the
Substitution Date will not be increased
at any time during the two-year period
following the Substitution Date.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–27917 Filed 12–26–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87806; File No. SR–CBOE–
2019–123]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rule 8.10 To
Remove the Attestation Filing
Requirements in Connection With
Trading Permit Holders’ Policy and
Procedures Regarding the Misuse of
Material, Nonpublic Information
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
Frm 00141
Fmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Rule 8.10 to remove the attestation filing
requirements in connection with
Trading Permit Holders’ (‘‘TPHs’’)
policy and procedures regarding the
misuse of material, nonpublic
information. The text of the proposed
rule change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegal
RegulatoryHome.aspx), at the
Exchange’s Office of the Secretary, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to remove the
Rule 8.10 requirement that TPHs that
file only annual SEC Form X–17A–5
1 15
December 19, 2019.
PO 00000
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
17, 2019, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Exchange filed the proposal as a
‘‘non-controversial’’ proposed rule
change pursuant to Section
19(b)(3)(A)(iii) of the Act 3 and Rule
19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
Sfmt 4703
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
E:\FR\FM\27DEN1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 248 (Friday, December 27, 2019)]
[Notices]
[Pages 71482-71488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27917]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 33721; File No. 812-14722]
Allianz Life Insurance Company of North America, et al; Notice of
Application
December 20, 2019.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order approving the substitution
of certain securities pursuant to section 26(c) of the Investment
Company Act of 1940, as amended (``Act'') and an order of exemption
pursuant to section 17(b) of the Act from section 17(a) of the Act.
-----------------------------------------------------------------------
Applicants: Allianz Life Insurance Company of North America (``Allianz
Life'') \1\ and Allianz Life Insurance Company of New York (``Allianz
NY'') \2\ (together the ``Insurance Company Applicants''); their
respective separate accounts, Allianz Life Variable Account A
(``Allianz Account A''),\3\ Allianz Life Variable Account B (``Allianz
Account B''),\4\ and Allianz Life of NY Variable Account C (``Allianz
Account C'') \5\ (collectively, the ``Separate Accounts'' and together
with the Insurance Company Applicants, the ``Section 26 Applicants'');
and Allianz Variable Insurance Products Trust (the ``VIP Trust''),
Allianz Variable Insurance Products Fund of Funds Trust (the ``FOF
Trust''), and the PIMCO Variable Insurance Trust (the ``PIMCO VIT'')
(collectively with the Section 26 Applicants, the ``Section 17
Applicants'').
---------------------------------------------------------------------------
\1\ Allianz Life is a stock life insurance company organized
under the laws of the state of Minnesota. Allianz Life offers fixed
and variable annuities and individual life insurance. Allianz Life
is licensed to do direct business in 49 states and the District of
Columbia. Allianz Life is an indirect, wholly-owned subsidiary of
Allianz SE, a European stock corporation.
\2\ Allianz NY is a stock life insurance company organized under
the laws of the state of New York. Allianz NY offers fixed and
variable annuities. Allianz NY is licensed to do direct business in
six states and the District of Columbia. Allianz NY is a wholly-
owned subsidiary of Allianz Life, and an indirect, wholly-owned
subsidiary of Allianz SE.
\3\ Allianz Account A is a segregated asset account of Allianz
Life established under Minnesota insurance laws. Allianz Account A
is used to fund certain variable life insurance policies issued by
Allianz Life. Allianz Account A is divided into subaccounts, each of
which invests in and reflects the investment performance of a
specific underlying registered open-end investment company or
portfolio thereof (each an ``Investment Option''). Allianz Account A
is registered as a unit investment trust under the Act.
\4\ Allianz Account B is a segregated asset account of Allianz
Life established under Minnesota insurance laws. Allianz Account B
is used to fund certain variable annuity contracts issued by Allianz
Life. Allianz Account B is divided into subaccounts, each of which
invests in and reflects the investment performance of a specific
Investment Option. Allianz Account B is registered as a UIT under
the Act.
\5\ Allianz Account C is a segregated asset account of Allianz
NY established under New York insurance laws. Allianz Account C is
used to fund certain variable annuity contracts issued by Allianz
NY. Allianz Account C is divided into subaccounts, each of which
invests in and reflects the investment performance of a specific
Investment Option. Allianz Account C is registered as a UIT under
the Act.
Summary of Application: The Section 26 Applicants seek an order
pursuant to section 26(c) of the Act, approving the substitution of
shares issued by certain investment portfolios of registered investment
companies (the ``Target Funds'') for the shares of certain investment
portfolios of registered investment companies (the ``Destination
Funds''), held by the Separate Accounts as investment options for
certain variable life insurance policies and variable annuity contracts
(such policies and contracts, the ``Contracts'') issued by Allianz Life
and Allianz NY (the ``Substitutions''). The Section 17 Applicants seek
an order pursuant to section 17(b) of the Act exempting them from
section 17(a) of the Act to the extent necessary to permit them to
engage in certain in-kind transactions in connection with the
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Substitutions.
Filing Dates: The application was filed on December 7, 2016 and
amended on May 31, 2017, August 4, 2017, May 31, 2019 and August 13,
2019.
Hearing or Notification of Hearing: An order granting the requested
relief
[[Page 71483]]
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission and serving applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on January 14, 2020, and should be accompanied
by proof of service on applicants in the form of an affidavit or, for
lawyers, a certificate of service. Pursuant to rule 0-5 under the Act,
hearing requests should state the nature of the requester's interest,
any facts bearing upon the desirability of a hearing on the matter, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to
Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-1090. Applicants: Allianz Life
Insurance Company of North America, Allianz Life Variable Account A,
Allianz Life Variable Account B, Allianz Variable Insurance Products
Trust, and Allianz Variable Insurance Products Fund of Funds Trust,
5701 Golden Hills Drive, Minneapolis, MN 55416-1297; Allianz Life
Insurance Company of New York and Allianz Life of NY Variable Account
C, 28 Liberty Street, 38th Floor, New York, NY 10005-1423; and PIMCO
Variable Insurance Trust, 650 Newport Center Drive, Newport Beach, CA
92660.
FOR FURTHER INFORMATION CONTACT: Jennifer O. Palmer, Senior Counsel,
David J. Marcinkus, Branch Chief, Daniele Marchesani, Assistant Chief
Counsel, or Nadya B. Roytblat, Assistant Chief Counsel, at (202) 551-
6825 (Chief Counsel's Office, Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's website by searching for the file number, or for an
applicant using the Company name box, at https://www.sec.gov/search/search.htm, or by calling (202) 551-8090.
Applicants' Representations
1. Variable insurance contracts (variable annuities and variable
life insurance policies) are issued by insurance companies and
typically have a two-tier structure. The top tier is a separate account
of the insurance company, registered under the Act as a unit investment
trust (``UIT''). The separate account, in turn, has subaccounts that
invest in numerous (sometimes hundreds of) underlying mutual funds
(open-end management investment companies registered under the Act) and
exchange-traded funds. Contract holders allocate their assets across
these various underlying funds available through the separate account.
2. Allianz Life and Allianz NY offer Contracts issued by the
Separate Accounts with one or more of the Target Funds included as an
Investment Option.\6\ Under the Contracts, the Insurance Company
Applicants reserve the right, subject to Commission approval and
compliance with applicable laws, to substitute Investment Options with
other Investment Options after appropriate notice. The Contracts also
permit the Insurance Company Applicants to limit the manner in which a
Contract owner may allocate purchase payments to the subaccounts that
invest in an Investment Option.\7\
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\6\ The number of Investment Options currently available under
the affected Contracts ranges from 13 to 50.
\7\ In addition to registering with the Commission as an
investment company under the Act, each Separate Account has
registered with the Commission its securities under the Securities
Act of 1933 (``1933 Act''). In doing so, each Separate Account has
filed a registration statement with the Commission that includes a
prospectus describing the Contracts offered by the Separate Account
and a copy of the form of such Contracts.
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3. Each Insurance Company Applicant, on behalf of itself and its
Separate Account(s), proposes to replace shares of the Target Funds
that are held in subaccounts of their Separate Accounts with shares of
the corresponding Destination Funds, as shown in the table below.\8\
The Insurance Company Applicants state that the proposed Substitutions
are part of an ongoing effort to make their Contracts more attractive
to existing and prospective Contract owners and to make the Contracts
more efficient to administer. Additional information for each Target
Fund and the corresponding Destination Fund, including investment
objectives, principal investment strategies, principal risks, and
performance, as well as the fees and expenses of each Target Fund and
its corresponding Destination Fund, can be found in the application.
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\8\ The Destination Funds are all series of the VIP Trust, FOF
Trust, or PIMCO VIT, each a Delaware statutory trust registered as
an open-end management investment company under the Act and whose
shares are registered under the 1933 Act. Shares of the VIP Trust
and the FOF Trust are sold to separate accounts of Allianz Life and
Allianz NY for the purpose of funding variable annuity contracts and
variable life insurance policies. The Destination Funds offered by
the VIP Trust and FOF Trust are managed by Allianz Investment
Management LLC (``AIM''), an affiliate of the Insurance Company
Applicants. AIM is registered as an investment adviser under the
Investment Advisers Act of 1940 (``Advisers Act''). Shares of the
PIMCO VIT are sold to separate accounts of Allianz Life and Allianz
NY, as well as other insurance companies, for the purpose of funding
variable annuity contracts and variable life insurance policies. The
Destination Funds offered by the PIMCO VIT are managed by Pacific
Investment Management Company LLC (``PIMCO''), an affiliate of
Insurance Company Applicants. PIMCO is registered as an investment
adviser under the Advisers Act.
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Substitution Target fund Destination fund
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1...................... Fidelity VIP AZL Balanced Index
FundsManager 50% Strategy Fund, Class
Portfolio, Service 1.
Class 2.
2...................... Templeton Growth VIP AZL MSCI Global Equity
Fund, Class 1. Index Fund, Class 1.
Templeton Growth VIP AZL MSCI Global Equity
Fund, Class 2. Index Fund, Class 2.
3...................... BlackRock Global AZL Moderate Index
Allocation V.I. Fund, Strategy Fund, Class
Class III. 1.
4...................... Fidelity VIP AZL Moderate Index
FundsManager 60% Strategy Fund, Class
Portfolio, Service 1.
Class 2.
5...................... Franklin Allocation VIP AZL Moderate Index
Fund, Class 2. Strategy Fund, Class
1.
6...................... Franklin Income VIP AZL Fidelity
Fund, Class 1. Institutional Asset
Management Multi-
Strategy Fund, Class
1.
Franklin Income VIP AZL Fidelity
Fund, Class 2. Institutional Asset
Management Multi-
Strategy Fund, Class
2.
7...................... PIMCO All Asset AZL Fidelity
Portfolio, Institutional Asset
Administrative Class. Management Multi-
Strategy Fund, Class
2.
8...................... Franklin Strategic AZL Fidelity
Income VIP Fund, Class Institutional Asset
2. Management Total Bond
Fund, Class 2.
9...................... Franklin Mutual Shares AZL Russell 1000 Value
VIP Fund, Class 1. Index Fund, Class 1.
Franklin Mutual Shares AZL Russell 1000 Value
VIP Fund, Class 2. Index Fund, Class 2.
10..................... BNY Mellon VIF AZL S&P 500 Index
Appreciation Fund, Class 2.
Portfolio, Service
Class.
[[Page 71484]]
11..................... PIMCO Global Multi- PIMCO Balanced
Asset Managed Allocation Portfolio,
Allocation Portfolio, Administrative Class.
Administrative Class.
12..................... PIMCO Global Bond PIMCO Global Core Bond
Opportunities (Hedged) Portfolio,
Portfolio (Unhedged), Administrative Class.
Administrative Class.
13..................... PIMCO Dynamic Bond PIMCO Total Return
Portfolio, Portfolio,
Administrative Class. Administrative Class.
------------------------------------------------------------------------
4. The proposed Substitutions will be described in supplements to
the applicable prospectuses for the Contracts filed with the Commission
(``Supplements'') and delivered to all affected Contract owners at
least 30 days before the date the proposed Substitution is effected
(``Substitution Date''). The Supplements, among other things, will
advise Contract owners that, for a period beginning at least 30 days
before the Substitution Date through at least 30 days following the
Substitution Date, Contract owners are permitted to transfer all of or
a portion of their Contract value out of any subaccount investing in a
Target Fund to any other available subaccounts offered under their
Contract without any transfer charge or limitation and without the
transfer being counted as a transfer for purposes of transfer
limitations and fees that would otherwise be applicable under the terms
of the Contracts.
5. The Section 26 Applicants will send the Supplements to all
existing Contract owners. Prospective purchasers and new purchasers of
Contracts will be provided with a Contract prospectus and the
Supplements, as well as prospectuses and supplements for the
Destination Funds.
6. In addition to the Supplements distributed to Contract owners,
within five business days after the Substitution Date, the Insurance
Company Applicants will send Contract owners a written confirmation of
the completed proposed Substitutions in accordance with rule 10b-10
under the Securities Exchange Act of 1934. The confirmation statement
will include or be accompanied by a statement that reiterates the free
transfer rights disclosed in the Supplements. The Insurance Company
Applicants also will send each Contract owner current prospectuses for
the Destination Funds involved to the extent that they have not
previously received a copy.
7. Each Substitution will take place at the applicable Target and
Destination Funds' relative per share net asset values (``NAV'')
determined on the Substitution Date in accordance with section 22 of
the Act and rule 22c-1 thereunder. Each Substitution will be effected
by having each Target Fund subaccount redeem its Target Fund shares in
cash and/or in-kind on the Substitution Date at NAV per share and
purchase shares of the appropriate Destination Fund at NAV per share
calculated on the same date.\9\
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\9\ The process for accomplishing the transfer of assets from
each Target Fund to its corresponding Destination Fund will be
determined on a case-by-case basis. In some cases, it is expected
that the Substitutions will be effected by redeeming shares of a
Target Fund for cash and using the cash to purchase shares of the
Destination Fund. In other cases, it is expected that the
Substitutions will be effected by redeeming the shares of a Target
Fund in-kind; those assets will then be contributed in-kind to the
corresponding Destination Fund to purchase shares of that fund.
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8. The Insurance Company Applicants or an affiliate will pay all
expenses and transaction costs reasonably related to the proposed
Substitutions. No costs of the Substitutions will be borne directly or
indirectly by Contract owners. Contract owners will not incur any fees
or charges as a result of the Substitutions, nor will their rights or
the obligations of the Insurance Company Applicants under the Contracts
be altered in any way. The proposed Substitutions will not cause the
fees and charges under the Contracts currently being paid by Contract
owners to be greater after the proposed Substitutions than before the
proposed Substitutions. The charges for optional living benefit riders
may change from time to time and any such changes would be unrelated to
the proposed Substitutions.
9. The Section 26 Applicants state that the benefits offered by the
guarantees under the Contracts will be the same immediately before and
after the Substitutions. The Section 26 Applicants further state that
the effect Substitutions may have on the value of the benefits offered
by the Contract guarantees would depend, among other things, on the
relative future performance of the Target Funds and Destination Funds,
which the Section 26 Applicants cannot predict. The Section 26
Applicants further note that, at the time of the Substitutions, the
Contracts will offer a comparable variety of Investment Options with as
broad a range of risk/return characteristics.
10. The Section 26 Applicants further state that they will cause
AIM or PIMCO, as applicable, as the investment adviser of each
Destination Fund, to enter into a written contract with the applicable
Destination Funds, whereby, during the two (2) years following the
Substitution Date, the annual net operating expenses of each such
Destination Fund will not exceed, on an annualized basis, the annual
net operating expenses of any corresponding Target Fund for fiscal year
2018. The Section 26 Applicants further represent that separate account
charges for any Contract owner on the Substitution Date will not be
increased at any time during the two-year period following the
Substitution Date.
Legal Analysis--Section 26(c) of the Act
1. The Section 26 Applicants request that the Commission issue an
order pursuant to section 26(c) of the Act approving the Substitutions.
Section 26(c) of the Act prohibits any depositor or trustee of a UIT
holding the security of a single issuer from substituting the
securities of another issuer without the approval of the Commission.
Section 26(c) provides that such approval shall be granted by order of
the Commission if the evidence establishes that the substitution is
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act. Applicants state that
Congress' concern underlying section 26(c) related to the lack of
recourse and potentially additional fees experienced by investors in a
single-security UIT in the case of a substitution.
2. Applicants submit that each of the Substitutions is consistent
with the protection of investors and the purposes fairly intended by
the policy and provisions of the Act. In particular, Applicants point
to the following:
(a) The contracts permit the substitutions, subject to Commission
approval and compliance with applicable laws, upon appropriate notice;
(b) the prospectuses or statements of additional information for
the Contracts contain appropriate disclosure of these rights;
(c) the Substitutions will be described in the Supplements
delivered to all affected Contract owners at least 30 days before the
Substitution Date;
(d) the Supplements also will advise Contract owners that, for a
period beginning at least 30 days before the Substitution Date through
at least 30
[[Page 71485]]
days following the Substitution Date, Contract owners are permitted to
transfer all of or a portion of their Contract value out of any
subaccount investing in a Target Fund to any other available
subaccounts offered under their Contract without any transfer charge or
limitation and without the transfer being counted as a transfer for
purposes of transfer limitations and fees that would otherwise be
applicable under the terms of the Contracts;
(e) each Destination Fund and its corresponding Target Fund have
similar or substantially similar investment objectives, principal
investment strategies, and principal risks; \10\ and
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\10\ Applicants note that prior Commission orders under section
26(c) for similar substitutions provide guidance as to the funds
that may be viewed as comparable.
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(f) the total net operating expenses of each Destination Fund will
be the same or lower than those of the corresponding Target Fund for at
least two years following the Substitution Date.
Applicants assert that, based on the terms noted above, and subject
to the conditions set forth below, the proposed Substitutions do not
raise the concerns underlying section 26(c) of the Act.
Opposition to Certain of the Proposed Substitutions
3. As shown in the chart above, some of the Target Funds are
advised by Franklin Advisers, Inc. or one of its affiliates
(``Franklin''). Franklin has submitted several letters to the
Commission opposing the application and stating its intent to request a
hearing should the Commission issue a notice on the application without
resolving Franklin's concerns.\11\
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\11\ See letters from Franklin to Sara Crovitz, dated May 10,
2017, June 8, 2017, and August 22, 2017, and to Dalia Blass, dated
September 12, 2019, submitted by Morgan Lewis, and letter from the
independent trustees of the Franklin Templeton Variable Insurance
Products Trust to Sara Crovitz, dated August 18, 2017, submitted by
Schiff Hardin (the ``Franklin Letters''), available at https://www.sec.gov/rules/icreleases.shtml#insprodfundsub. Allianz submitted
two letters, dated August 4, 2017 and September 24, 2019, responding
to the Franklin Letters.
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4. The Franklin Letters assert that the proposed Substitutions do
not meet the standard for an order under section 26(c) for the
following reasons: \12\
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\12\ The Franklin Letters also argue that the proposed
Substitutions are joint transactions and thus require an order under
section 17(d) of the Act and rule 17d-1, which the application fails
to request.
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(a) The Commission should approve substitutions under section 26(c)
only when the insurance company seeks to replace a fund due to
unforeseen circumstances, such as impairment of the fund or fraud, and
not in other circumstances when the substitution would benefit the
insurance company;
(b) the proposed Substitutions would, for the most part, replace
actively managed funds with index funds that have lower performance, so
that Contract owners will suffer a diminution in the value of the
guarantees purchased by the contract holders, to the detriment of the
contract holders and to the benefit of the Insurance Company
Applicants; and
(c) as argued in a letter from the independent trustees of the
Franklin-advised Target Funds, the shareholders remaining in these
funds after the Substitutions would be harmed because the Substitutions
would cause significant redemptions of shares of the Franklin-advised
Target Funds, which could impact the ability of such funds to follow
their current investment strategies and would likely increase costs to
remaining shareholders.
The Application Satisfies the Standards in Section 26(c)
5. The Commission has considered these arguments. As noted above,
section 26(c) states that ``The Commission shall issue an order
approving 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 [the Act].''
A. The Allianz Application Is Consistent With Investor Protection
i. Protective Conditions
6. Since the early 1980s, the Commission has issued nearly 200
substitution orders under section 26(c) involving variable insurance
contract UIT subaccounts replacing their underlying mutual funds. The
terms and conditions of these orders \13\ and of the Allianz
application \14\ are designed to address investor protection on the two
points expressly addressed in the legislative history of Section 26(c).
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\13\ As orders are subject to the terms and conditions set forth
in the related applications, a reference to the terms and conditions
of an order includes the terms and conditions described in the
related application.
\14\ In this regard, the September 12, 2019 Franklin Letter
stated that ``We have done a preliminary analysis, and the effect of
the proposed substitutions is that some of the [Destination] [F]unds
would experience an increase in their total operating expense ratios
and one fund would also lose the benefit of fee breakpoints.'' Among
other things, the terms and conditions require that the total net
operating expenses of each replacement fund will be the same or
lower than those of the corresponding target fund for at least two
years following the substitution date.
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ii. Consideration of Impact on Value of Guarantees Not Required
7. The Franklin Letters argue that in reviewing a substitution
application under section 26(c), the Commission also should be
concerned about any diminution in the value of the variable insurance
contracts' guarantees as the underlying actively-managed mutual funds
are being replaced with index mutual funds, to the benefit of the
insurance company. Because typically the benefit base used for variable
contracts' living and death benefit guarantees is reset periodically by
reference to the contract's account value, contract holders are
disadvantaged by the replacement of actively-managed fund options that
seek to ``beat, rather than just meet, a benchmark.'' \15\ The
Commission believes that this argument should be rejected for several
reasons.
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\15\ Franklin Letter, dated May 10, 2017, submitted by Morgan
Lewis, at p. 3.
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8. First, consistent with prior substitution orders, the proposed
Destination Funds are substantially similar to the Target Funds in the
application.\16\ Second, it is not a foregone conclusion that replacing
an actively-managed fund with an index fund will lead to a diminution
in the value of the variable insurance contract's guarantee. The
application states that ``[w]hat effect the proposed [s]ubstitutions
may have on the value of the benefits offered by the Contract
guarantees would depend, among other things, on the relative future
performance of the [Target Funds] and [Destination Funds], which
[Applicants] cannot predict. Nevertheless, [Applicants] note that at
the time of the proposed Substitutions, the Contracts will offer a
comparable variety of investment options with as broad a range of risk/
return characteristics.'' Finally, if the consideration of the impact
of substitutions on changes in the value of contracts' guarantees were
to factor into the Commission's review of substitution applications
under section 26(c), the Commission would be tasking itself with
calculating how
[[Page 71486]]
substitutions would affect the value of variable insurance contract
guarantees in the context of hundreds, if not thousands, of funds. Such
calculations would be complex and rely on numerous assumptions and
other factors, including estimates of the future performance of the
funds involved over varying time frames, and the impact of future
performance on the benefit base used to set the insurance guarantees.
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\16\ See, e.g., AXA Equitable Life Ins. Co., et al., Rel. Nos.
IC-33201 (Aug. 15, 2018) (Notice) and IC-33224 (Sep. 11, 2018)
(Order), File No. 812-14831; The Guardian Ins. & Annuity Co., Inc.,
et al., Rel. Nos. IC-32967 (Jan. 10, 2018) (Notice) and IC-33003
(Feb. 7, 2018) (Order), File No. 812-14714; Commonwealth Annuity and
Life Ins. Co., et al., Rel. Nos. IC-32615 (Apr. 27, 2017) (Notice)
and IC-32644 (May 23, 2017) (Order), File No. 812-14646;
Transamerica Advisors Life Ins. Co., et al., Rel. Nos. IC-32571
(Mar. 24, 2017) (Notice) and IC-32606 (Apr. 19, 2017) (Order), File
No. 812-14487; Allianz Life Ins. Co. of North America, et al., Rel.
Nos. IC-32207 (Aug. 3, 2016) (Notice) and IC-32242 (Aug. 29, 2016)
(Order), File No. 812-14580.
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B. The Application Is Consistent With the Purposes Fairly Intended by
the Policy and Provisions of the Act
i. Section 26(c) of the Act
9. The purposes intended by section 26(c) of the Act, as discussed
above, were to protect the UIT's shareholders from having no recourse
when the single portfolio security of the UIT is replaced and incurring
additional fees in reinvesting any redemption proceeds. For the reasons
discussed above, the terms and conditions of the application satisfy
these investor protection purposes.
ii. Section 1(b)(2) of the Act
10. Another potentially relevant purpose of the Act is set forth in
Section 1(b)(2) of the Act. It states, in relevant part, that the
national public interest and the interest of investors are adversely
affected when the portfolio securities of investment companies are
selected in the interest of ``persons engaged in other lines of
business, rather than in the interest of all classes of such companies'
security holders.'' In a substitution application (including the
Allianz application), the portfolio securities (the underlying mutual
funds) of the separate account UIT arguably are being selected in the
interest of the insurance company that had issued the variable
insurance contract. The Franklin Letters argue that the Commission
should permit substitutions under section 26(c) only under exceptional
or unforeseen circumstances, such as when the existing fund is impaired
or in cases of fraud, and not in other circumstances when the
substitution would benefit the insurance company. Although the Franklin
Letters do not specifically refer to section 1(b)(2) of the Act in the
context of this argument, we believe their argument may echo the
concern reflected in that section.
11. To interpret section 26(c) as allowing Commission approval of
substitutions only in unforeseen or exceptional circumstances would be
in conflict with section 26(c), its legislative history, and the
purposes of the Act more broadly. It also would be a significant
departure from prior practice.\17\ Further, the Commission believes any
section 1(b)(2) concern is addressed by the standard terms and
conditions of the substitution orders under section 26(c), including
those in the Allianz application. These terms and conditions serve as a
check on the insurance company's actions in replacing the mutual funds
underlying its separate account UIT, and are designed to help investor
protection. The Commission notes that insurance companies have offered
separate account UITs with numerous investment options with the
expectation and understanding that they would have the ability to make
changes among the investment options in appropriate circumstances.\18\
The variable insurance contracts expressly permit such substitutions.
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\17\ Id.
\18\ See, e.g., letter dated Jan. 21, 2017 from Sutherland on
behalf of the Hartford Life Insurance Company, et al. to the
Commission in response to the hearing requests of the American
Funds, among others, on the Hartford Substitution Application, at 3
(stating ``[i]nsurance companies are not able to offer the
significant benefits of various variable insurance contracts
unconditionally. They can be responsibly offered only with certain
unilateral insurer conditions, e.g., limitations on initial and
subsequent premium amounts; restricting access to certain underlying
funds; age limitations for benefit availability; and, perhaps most
vital to insurers, the ability to add, delete, merge, close and
substitute fund offerings. Insurance companies use these contractual
rights to manage operational expenses and insurance risks over the
long life of their guarantees, and to manage contract owners'
changing needs over those same durations''), available at https://www.sec.gov/comments/812-14446/81214446-1523020-130992.pdf.
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iii. Section 12(d)(1)(E) of the Act
12. The Commission also has considered the concern expressed by the
independent directors of the Franklin-advised Target Funds about the
loss of assets in those funds as a result of the Substitutions. There
is no indication in the legislative history of section 26(c) that
Congress was concerned with the impact of the substitution on the
company in which the UIT was invested.\19\ The application involves
subaccounts of UITs that invest in the Target Funds in reliance on
section 12(d)(1)(E) of the Act.\20\ The requirements of that section,
which excepts certain fund-of-funds arrangements from the prohibitions
in section 12(d)(1)(A), (B) and (C), are concerned with protecting the
shareholders of both the investing UIT and the underlying fund.\21\ The
Commission has considered the concerns underlying section 12(d)(1)(E)
as they might relate to the Franklin-advised Target Funds with respect
to whether the Substitutions are consistent with ``the purposes fairly
intended by the policy and provisions'' of the Act. The Commission
believes the fact that the Franklin-advised funds could lose assets due
to the Substitutions is not a concern under section 12(d)(1)(E), which
does not limit a UIT's ability to redeem its shares from an underlying
fund. A more relevant concern would be if the insurance company,
through its separate account UIT, was trying to somehow engage in
overreaching with respect to the Franklin-advised funds through the
threat of redemption. No allegation has been made that Allianz is
engaged in an attempt to overreach the Target Funds through a threat of
redemption, and the Commission is not aware of any overreaching
behavior.
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\19\ Legislative history indicates that Congress's concern in
enacting section 26(c) was the protection of the contract holder.
See Senate Report, supra note 10 (stating ``[t]he proposed amendment
recognizes that in the case of a unit investment trust holding the
securities of a single issuer notification to share holders does not
provide adequate protection since the only relief available to the
shareholders, if dissatisfied, would be to redeem their shares. A
shareholder who redeems and reinvests the proceeds in another unit
investment trust or in an open-end company would under most
circumstances be subject to a new sales load'').
\20\ Section 12(d)(1)(E) is a conditional exemption from the
restrictions in section 12(d)(1), which limit so-called ``fund-of-
funds'' arrangements in which one mutual fund invests in the shares
of another. Section 12(d)(1)(E) exempts a fund acquiring shares of
another fund from the 12(d)(1) limits if, among other things, the
acquired shares are the only security owned by the acquiring fund.
This exemption is relied upon by, among others, most insurance
company separate accounts, which are organized as UITs and divided
into subaccounts, each of which invests proceeds from the sale of
interests in variable annuity and variable life insurance contracts
in shares of a mutual fund.
\21\ We note that section 12(d)(1)(E)(iii)(bb) requires section
26(c)-type Commission approval of substitutions in the fund-of-funds
context only where the acquiring fund is not registered under the
Act.
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iv. Section 17(d) of the Act
13. Finally, the Commission has considered the argument in the
Franklin Letters that the Substitutions require an order under section
17(d) of the Act and rule 17d-1. These provisions generally prohibit an
affiliated person of a registered investment company from participating
in or effecting a joint transaction in which the registered investment
company is a participant, without first obtaining an order of the
Commission.\22\ The Franklin Letters
[[Page 71487]]
have not articulated why the proposed Substitutions would involve a
joint transaction, including what would be the joint transaction and
how an affiliated person of the funds involved, acting as principal, is
participating in the transaction. In addition, we believe the
Substitutions are similar to other transactions involving two-tier
structures that are permitted under section 12(d)(1)(E) where relief
from section 17(d) and rule 17d-1 is not necessary, regardless of
whether the underlying fund is an affiliate of the top-tier fund.\23\
As with those other structures, relief from section 17(a) is necessary
for in-kind transactions between the top-tier fund and underlying
fund.\24\
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\22\ Section 17(d) states: ``It shall be unlawful for any
affiliated person of [. . .] a registered investment company [. .
.], or any affiliated person of such a person [. . .], acting as
principal to effect any transaction in which such registered
company, or a company controlled by such registered company, is a
joint or a joint and several participant with such person [. . .],
or affiliated person, in contravention of such rules and regulations
as the Commission may prescribe for the purpose of limiting or
preventing participation by such registered or controlled company on
a basis different from or less advantageous than that of such other
participant.'' Rule 17d-1 prohibits such joint arrangements,
``unless an application regarding such joint enterprise, arrangement
or profit-sharing plan has been filed with the Commission and has
been granted by an order entered prior to the submission of such
plan or modification to security holders for approval, or prior to
such adoption or modification if not so submitted [. . .].'' Rule
17d-1 further states that, ``[i]n passing upon such applications,
the Commission will consider whether the participation of such
registered or controlled company in such joint enterprise, joint
arrangement or profit-sharing plan on the basis proposed is
consistent with the provisions, policies and purposes of the Act and
the extent to which such participation is on a basis different from
or less advantageous than that of other participants.''
\23\ See supra note 20. Section 12(d)(1)(E) is also relied upon
by master-feeder fund arrangements, in which one or more funds pool
their assets by investing in a single fund with the same investment
objective.
\24\ See discussion of sections 17(a)(1) and 17(a)(2) of the Act
infra pp. 17-18.
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Legal Analysis--Section 17(a) of the Act
14. The Section 17 Applicants request that the Commission issue an
order pursuant to section 17(b) of the Act exempting them from section
17(a)(1) and (2) of the Act to the extent necessary to permit them to
carry out the Substitutions by redeeming shares issued by each
applicable Target Fund in-kind and using the securities distributed as
redemption proceeds to purchase shares issued by the applicable
Destination Funds (the ``In-Kind Transactions'').
Section 17(a)(1) of the Act, in relevant part, prohibits any
affiliated person of a registered investment company, or an affiliated
person of such person, acting as principal, knowingly from selling any
security or other property to such registered investment company.
Section 17(a)(2) of the Act, in relevant part, prohibits any affiliated
person of a registered investment company, or an affiliated person of
such person, acting as principal, knowingly from purchasing any
security or other property from such registered investment company.
``Affiliated person'' is defined in section 2(a)(3) of the Act.\25\
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\25\ Section 2(a)(3) defines affiliated person as ``(A) any
person directly or indirectly owning, controlling, or holding with
power to vote, 5 per centum or more of the outstanding voting
securities of such other person; (B) any person 5 per centum or more
of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote, by such other person;
(C) any person directly or indirectly controlling, controlled by, or
under common control with, such other person; (D) any officer,
director, partner, copartner, or employee of such other person; (E)
if such other person is an investment company, any investment
adviser thereof or any member of an advisory board thereof; and (F)
if such other person is an unincorporated investment company not
having a board of directors, the depositor thereof.''
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15. At the close of business on the Substitution Date, the
Insurance Company Applicants will redeem shares of each Target Fund
either in-kind or in cash, or a combination thereof, and use the
proceeds of such redemptions to purchase shares of the corresponding
Destination Fund, with each subaccount of the applicable Separate
Account investing the proceeds of its redemption from the Target Fund
in the corresponding Destination Fund. Thus, the proposed transactions
may involve a transfer of portfolio securities by each Target Fund to
Allianz Life and Allianz NY. Immediately thereafter, Allianz Life and
Allianz NY would purchase shares of the corresponding Destination Fund
with the portfolio securities and/or cash received from the applicable
Target Fund. This aspect of the Substitution may be considered to
involve one or more sales by Allianz Life or Allianz NY of securities
or other property to the applicable Destination Fund. Based on the
affiliations detailed in the application, these in-kind transactions
may be prohibited by section 17(a)(1) and (2) of the Act.
16. Section 17(b) of the Act, in relevant part, provides that,
notwithstanding subsection (a), any person may file with the Commission
an application for an order exempting a proposed transaction from one
or more provisions of section 17(a). Pursuant to section 17(b), the
Commission shall grant such application and issue such order of
exemption if evidence establishes that: The terms of the proposed
transaction, including the consideration to be paid or received, are
reasonable and fair and do not involve overreaching on the part of any
person concerned; the proposed transaction is consistent with the
policy of each registered investment company concerned, as recited in
its registration statement and reports filed under the Act; and the
proposed transaction is consistent with the general purposes of the
Act.
17. Accordingly, the Section 17 Applicants seek relief under
section 17(b) from section 17(a) for the in-kind purchases and sales of
the Destination Fund shares. The Section 17 Applicants submit that the
In-Kind Transactions satisfy the standards for an order under section
17(b) because: (i) The terms of the proposed In-Kind Transactions,
including the consideration to be paid and received, are reasonable and
fair and do not involve overreaching on the part of any person
concerned because the proposed In-Kind Transactions will comply with
rule 17a-7 under the Act, other than the requirement relating to cash
consideration (because the In-Kind Transactions will involve portfolio
securities of the Target Funds and shares issued by the Destination
Funds); \26\ (ii) the In-Kind Transactions will be consistent with the
policies of each Target Fund and corresponding Destination Fund as
stated in their respective registration statements and reports filed
with the Commission; and (iii) the In-Kind Transactions are consistent
with the general purposes of the Act because they do not raise any
investor protection concerns.
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\26\ Rule 17a-7 is a conditional exemption from section 17(a) of
the Act that permits purchase and sale transactions among affiliated
investment companies, or between an investment company and a person
that is affiliated solely by reason of having a common (or
affiliated) investment adviser, common directors, and/or common
officers. In the adopting release to the original Rule 17a-7, the
Commission stated that the purpose of the rule was to ``eliminate
filing and processing applications under circumstances where there
appears to be no likelihood that the statutory finding for a
specific exemption under Section 17(b) of the Act could not be
made'' and that the conditions of the rule ``are designed to limit
the exemption to those situations where the Commission, upon the
basis of its experience, considers that there is no likelihood of
overreaching of the investment companies participating in the
transaction.'' Inv. Co. Act Rel. No. 4697 (Sep. 8, 1966) at 2-4.
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Applicants' Conditions
The Section 26 Applicants agree that any order granting the
requested relief will be subject to the following conditions:
1. The proposed Substitutions will not be effected unless the
Insurance Company Applicants determine that: (a) The Contracts allow
the substitution of shares of registered open-end investment companies
in the manner contemplated by the application; (b) the proposed
Substitutions can be consummated as described in the application under
applicable insurance laws; and (c) any regulatory requirements in each
jurisdiction where the Contracts are qualified for sale have
[[Page 71488]]
been complied with to the extent necessary to complete the proposed
Substitutions.
2. The Insurance Company Applicants or their affiliates will pay
all expenses and transaction costs of the proposed Substitutions,
including legal and accounting expenses, any applicable brokerage
expenses and other fees and expenses. No fees or charges will be
assessed to the Contract owners to effect the proposed Substitutions.
The proposed Substitutions will not cause the fees and charges under
the Contracts currently being paid by Contract owners to be greater
after the proposed Substitution than before the proposed Substitution.
For each Substitution, the combined current management fee and Rule
12b-1 fee of the Destination Fund at all asset levels will be no higher
than that of the corresponding Target Fund at corresponding asset
levels.
3. The proposed Substitutions will be effected at the relative net
asset values of the respective shares in conformity with section 22(c)
of the Act and rule 22c-1 thereunder without the imposition of any
transfer or similar charges by the Section 26 Applicants. The proposed
Substitutions will be effected without change in the amount or value of
any Contracts held by affected Contract owners.
4. The proposed Substitutions will in no way alter the tax
treatment of affected Contract owners in connection with their
Contracts, and no tax liability will arise for affected Contract owners
as a result of the proposed Substitutions.
5. The rights or obligations of the Insurance Company Applicants
under the Contracts of affected Contract owners will not be altered in
any way.
6. Affected Contract owners will be permitted to make at least one
transfer of Contract value from the subaccount investing in the Target
Fund (before the Substitution Date) or the Destination Fund (after the
Substitution Date) to any other available Investment Option under the
Contract without charge for a period beginning at least 30 days before
the Substitution Date through at least 30 days following the
Substitution Date. Except as described in any market timing/short-term
trading provisions of the relevant prospectus, the Insurance Company
Applicants will not exercise any right they may have under the Contract
to impose restrictions on transfers between the subaccounts under the
Contracts, including limitations on the future number of transfers, for
a period beginning at least 30 days before the Substitution Date
through at least 30 days following the Substitution Date.
7. All affected Contract owners will be notified, at least 30 days
before the Substitution Date about: (a) The intended Substitution of
the Target Funds with the Destination Funds; (b) the intended
Substitution Date; and (c) information with respect to transfers as set
forth in Condition 6 above. In addition, Insurance Company Applicants
will deliver to all affected Contract owners, at least 30 days before
the Substitution Date, a prospectus for each applicable Destination
Fund.
8. Insurance Company Applicants will deliver to each affected
Contract owner within five (5) business days of the Substitution Date a
written confirmation which will include: (a) A confirmation that the
proposed Substitutions were carried out as previously notified; (b) a
restatement of the information set forth in the Supplements; and (c)
before and after account values.
9. The Section 26 Applicants will cause AIM or PIMCO, as
applicable, as the investment adviser of each Destination Fund, to
enter into a written contract with the applicable Destination Funds,
whereby, during the two (2) years following the Substitution Date, the
annual net operating expenses of each such Destination Fund will not
exceed, on an annualized basis, the annual net operating expenses of
any corresponding Target Fund for fiscal year 2018. The Section 26
Applicants further agree that separate account charges for any Contract
owner on the Substitution Date will not be increased at any time during
the two-year period following the Substitution Date.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27917 Filed 12-26-19; 8:45 am]
BILLING CODE 8011-01-P
