[Federal Register Volume 76, Number 61 (Wednesday, March 30, 2011)]
[Notices]
[Pages 17720-17726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7418]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-29617; File No. 812-13842]


American Family Life Insurance Company, et al.

March 24, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under Section 26(c) of the 
Investment Company Act of 1940, as amended (the ``1940 Act'').

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Applicants: American Family Life Insurance Company (the ``Company''), 
American Family Variable Account I (the ``Life Account''), and American 
Family Variable Account II (the ``Annuity Account'') (together, the 
``Applicants'').

Summary of Application: Applicants request an order of the Commission, 
pursuant to Section 26(c) of the 1940 Act, approving the substitution 
of shares of the Vanguard Capital Growth Portfolio (``Replacement 
Portfolio'') of the Vanguard Variable Insurance Fund (``Vanguard 
Fund'') for Service Class 2 Shares of the Fidelity Variable Insurance 
Products Growth Portfolio (``Replaced Portfolio'') of the Fidelity 
Variable Insurance Products Fund (``Fidelity Fund''), currently held by 
the Life Account and the Annuity Account (each an ``Account,'' 
together, the ``Accounts'') to support variable life insurance and 
annuity contracts issued by the Company (collectively, the 
``Contracts'').

DATES: Filing Date: The application was filed on November 10, 2010 and 
amended and restated on February 28, 2011.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving Applicants with a copy of the request, 
personally or by mail. Hearing requests must be received by the 
Commission by 5:30 p.m. on April 20, 2011, and should be accompanied by 
proof of service on Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the requester's interest, the reason for the request, and the 
issues contested. Persons who wish to be notified of a hearing may 
request notification by writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants, c/o David C. Holman, Esq., 
American Family Life Insurance Company, 6000 American Parkway, Madison, 
Wisconsin 53783-0001. Copy to Thomas E. Bisset, Esq., Sutherland Asbill 
& Brennan LLP, 1275 Pennsylvania Ave., NW., Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Michael L. Kosoff, Branch Chief, at 
(202) 551-6754 or Harry Eisenstein, Senior Special Counsel, Office of 
Insurance Products, Division of Investment Management, at (202) 551-
6795.

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

Applicants' Representation

    1. The Company is a stock life insurance company organized under 
Wisconsin law. The Company conducts a conventional life insurance 
business and is authorized to transact the business of life insurance, 
including annuities, in nineteen States. For purposes of the 1940 Act, 
the Company is the depositor and sponsor of each of the Accounts as 
those terms have been interpreted by the Commission with respect to 
variable life insurance and variable annuity separate accounts.
    2. Under the insurance law of Wisconsin, the assets of each Account 
attributable to the Contracts issued through that Account are owned by 
the Company, but are held separately from the other assets of the 
Company for the benefit of the owners of, and the persons entitled to 
payment under, those Contracts. Each Account is a ``separate account'' 
as defined by Rule 0-1(e) under the 1940 Act, and is registered with 
the Commission as a unit investment trust.\1\ Each Account is comprised 
of a number of subaccounts and each subaccount invests exclusively in 
one of the insurance dedicated mutual fund portfolios made available as 
investment vehicles underlying the Contracts. Currently, the Replaced 
Portfolio is available as an investment option under the Company's 
variable life insurance and variable annuity Contracts.
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    \1\ File No. 811-10097 (the Life Account); File No. 811-10121 
(the Annuity Account).
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    3. The Life Account is currently divided into nine (9) subaccounts. 
The assets of the Life Account support variable life insurance 
contracts and interests in the Account offered through such contracts 
have been registered under the Securities Act of 1933, as amended (the 
``1933 Act''), on Form N-6 (File Nos. 333-44956 and 333-147408).
    4. The Annuity Account is currently divided into nine (9) 
subaccounts. The assets of the Annuity Account support variable annuity 
contracts and interests in the Account offered through such contracts 
have been registered under the 1933 Act on Form N-4 (File No. 333-
45592).

[[Page 17721]]

    5. The Fidelity Fund is registered as an open-end management 
investment company under the 1940 Act (File No. 811-03329) and 
currently offers six (6) investment portfolios, each with multiple 
share classes. The Fidelity Fund issues a series of shares of 
beneficial interest in connection with each portfolio and has 
registered such shares under the 1933 Act on Form N-1A (File No. 002-
75010).
    6. Each portfolio of the Fidelity Fund has entered into an advisory 
agreement with Fidelity Management & Research Company (``FMR'') under 
which FMR acts as investment adviser for the portfolio. Under each 
investment advisory agreement, and subject to the supervision of the 
Fidelity Fund board of trustees, FMR has overall responsibility for the 
selection of investments in accordance with the investment objective, 
policies, and limitations of the portfolio and for handling the 
portfolio's business affairs. FMR or its affiliates, subject to the 
supervision of the Fidelity Fund board of directors, provide the 
management and administrative services necessary for the operation of 
each portfolio. Each portfolio of the Fidelity Fund does, however, pay 
for the typesetting, printing, and mailing of its proxy materials to 
shareholders, legal expenses, and the fees of the custodian, auditor, 
and independent trustees, among other fees and expenses.
    7. FMR Co., Inc. (``FMRC''), an investment adviser affiliate of 
FMR, has entered into a sub-advisory agreement with FMR under which 
FMRC acts as sub-adviser for certain of the portfolios of the Fidelity 
Fund, including the Replaced Portfolio. FMRC has day-to-day 
responsibility for choosing investments for the Replaced Portfolio. FMR 
pays FMRC for providing sub-advisory services.
    8. Fidelity Research & Analysis Company (``FRAC''), an affiliate of 
FMR, also serves as sub-adviser for the Fidelity Fund and may provide 
investment research and advice for the Fidelity Fund, including the 
Replaced Portfolio. Fidelity Management & Research (U.K.) Inc. (``FMR 
U.K.''), Fidelity Management & Research (Hong Kong) Limited (``FMR 
H.K.''), Fidelity Management & Research (Japan) Inc. (``FMR Japan''), 
FIL International Investment Advisors (``FIIA''), FIL Investment 
Advisors (U.K.) Ltd. (``FIIA(U.K.)L''), and FIL Investments (Japan) 
Limited (``FIJ''), all investment adviser affiliates of FMR, assist FMR 
with foreign investments of the Replaced Portfolio.
    9. Neither the Fidelity Fund, any of its portfolios, FMR, FMRC, 
FRAC, FMR U.K., FMR H.K., FMR Japan, FIIA, FIIA(U.K.)L, nor FIJ are 
affiliated with the Applicants. The Fidelity Fund does not have 
manager-of-manager relief for the Replaced Portfolio.
    10. The Vanguard Variable Insurance Fund is registered as an open-
end management investment company under the 1940 Act (File No. 811-
05962) and currently offers fifteen (15) portfolios, including the 
Replacement Portfolio. The Vanguard Fund issues a series of shares of 
beneficial interest in connection with each portfolio and has 
registered such shares under the 1933 Act on Form N-1A (File No. 33-
32216).
    11. Pursuant to an investment advisory agreement between the 
Replacement Portfolio and PRIMECAP Management Company (``PRIMECAP''), 
PRIMECAP provides investment advisory services to the Replacement 
Portfolio. PRIMECAP manages the Replacement Portfolio subject to the 
supervision and oversight of the Vanguard Group, Inc. (``Vanguard'') 
and the Replacement Portfolio's board of directors. PRIMECAP employs a 
multi-portfolio manager approach to managing the Replacement Portfolio. 
Six (6) portfolio managers are primarily responsible for the day-to-day 
management of the Replacement Portfolio and each portfolio manager is a 
principal of PRIMECAP. Each portfolio manager manages a particular 
segment of the Replacement Portfolio autonomously; there is no 
decision-making by committee with respect to the management of those 
segments of the Replacement Portfolio. A small portion of the 
Replacement Portfolio's assets is co-managed by individuals in 
PRIMECAP's research department. The Replacement Fund pays PRIMECAP an 
investment advisory fee quarterly and the fee is a percentage of the 
average daily net assets of the Replacement Fund during the most recent 
fiscal quarter.
    12. Neither the Vanguard Fund, any of its portfolios, nor PRIMECAP 
are affiliated with the Applicants. The Vanguard Fund does not have 
manager-of-manager relief for the Replacement Portfolio.
    13. The Contracts are flexible premium variable annuity and 
variable life insurance contracts. The variable annuity Contracts 
provide for the accumulation of values on a variable basis, fixed 
basis, or both, during the accumulation period, and provide settlement 
or annuity payment options on a fixed basis.\2\ The variable life 
insurance Contracts provide for the accumulation of values on a 
variable basis, fixed basis, or both, throughout the insured's life, 
and for a substantial death benefit upon the death of the insured. 
Under each of the Contracts, the Company reserves the right to 
substitute shares of one fund for shares of another, or of another 
investment portfolio, including a portfolio of a different management 
company.
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    \2\ Because only fixed annuity payment options are available 
under the Contracts, the substitution will not affect Contracts that 
have been annuitized.
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    14. For as long as a variable life insurance Contract remains in 
force or a variable annuity Contract has not yet been annuitized, a 
Contract owner may transfer all or any part of the Contract value from 
one subaccount to another subaccount or to a fixed account. Other than 
the Company's right to impose certain limitations to deter market 
timing activity, the Contracts do not limit the number of transfers 
between the subaccounts or transfers from the subaccounts to the fixed 
account for any period of time. The Company does, however, assess a 
charge of $25 per transfer for transfers in excess of twelve per 
contract year. Guaranteed living benefit rider features are not 
available with the Contracts.
    15. The Company proposes to substitute shares of the Replacement 
Portfolio for Service Class 2 shares of the Replaced Portfolio 
currently held in the Accounts (the ``proposed substitution''). As of 
December 31, 2010, 1.05% of the Replaced Portfolio's assets were 
invested in the Accounts and would be subject to the proposed 
substitution if so invested on the date of the substitution.
    16. Applicants assert that the proposed substitution is part of an 
effort by the Company to provide a portfolio selection within the 
Contracts that: (1) Provides a more competitive fee structure relative 
to other funds in the asset class peer group; (2) provides more 
competitive long-term returns relative to other funds in the asset 
class peer group; and (3) maintains the goal of offering a mix of 
investment options covering basic categories in the risk/return 
spectrum.
    17. In year 2000 when the Company first selected the Replaced 
Portfolio, the Replaced Portfolio met its desire for a large cap growth 
equity investment option. The Replaced Portfolio is positioned on the 
aggressive end of the risk/return spectrum for large cap growth 
investment options and offered Contract owners a large cap growth 
investment option with significant risk. Over the past nine years, the 
Replaced Portfolio has significantly underperformed its peers, as 
discussed below, leading the Company to reassess the position of its 
large cap growth

[[Page 17722]]

investment option. In an attempt to improve overall returns for the 
large cap growth investment option while providing for a relatively 
lower level of risk, the Company decided to select an alternative large 
cap growth investment option. Applicants believe the Replacement 
Portfolio meets these goals.
    18. The Company believes that an important consideration for the 
selection and retention of an investment option under the Contracts is 
that the long-term performance (5 years and longer) of the investment 
option be competitive as compared to its asset class peer group, 
particularly given the limited selection of subaccounts available under 
the Contracts. In the Company's judgment, the Replaced Portfolio has 
not demonstrated portfolio performance of the standard desired by the 
Company. Performance of the Replaced Portfolio has been in the third or 
bottom quartile for comparable funds over the last five years, except 
for 2007 where performance of the Replaced Portfolio fell within the 
first quartile. Further, absolute performance of the Replaced Portfolio 
ranks in the bottom quartile for comparable funds over the last 3- and 
5-year periods and in the third quartile, close to the bottom quartile, 
for the 1-year period.
    19. Replacing the Replaced Portfolio with the Replacement Portfolio 
is appropriate and in the best interest of Contract owners because the 
stated investment objective, principal investment strategies, and 
principal investment risks of the Replacement Portfolio are 
substantially similar to those of the Replaced Portfolio, so that 
Contract owners will have continuity in investment expectations with 
somewhat lower risk. In addition, Applicants note that the net expenses 
of the Replacement Portfolio are substantially less than those for the 
Replaced Portfolio for the year ended December 31, 2009.
    20. The following charts set out the investment objectives, 
principal investment strategies, and principal investment risks of the 
Replaced Portfolio and Replacement Portfolio, as stated in their 
respective prospectuses.

------------------------------------------------------------------------
           Replaced portfolio                 Replacement portfolio
------------------------------------------------------------------------
Fidelity VIP Growth Portfolio (Service   Vanguard VIF Capital Growth
 Class 2 Shares).                         Portfolio
 
Investment Objective...................  Investment Objective
 
Capital appreciation...................  Long-term capital appreciation.
 
Principal Investment Strategies........  Principal Investment Strategies
 
FMR normally invests the fund's assets   The Portfolio invests in stocks
 primarily in common stocks of            considered to have above-
 companies FMR believes have above-       average earnings growth
 average growth potential. Companies      potential that is not
 with high growth potential tend to be    reflected in their current
 companies with higher than average       market prices. The Portfolio
 price/earnings (P/E) or price/book (P/   consists predominantly of
 B) ratios. FMR may invest the fund's     large- and mid-capitalization
 assets in securities of foreign          stocks.
 issuers in addition to securities of
 domestic issuers.
In buying and selling securities for
 the fund, FMR relies on fundamental
 analysis, which involves a bottom-up
 assessment of a company's potential
 for success in light of factors
 including its financial condition,
 earnings outlook, strategy,
 management, industry position, and
 economic and market conditions.
FMR may lend the fund's securities to
 broker-dealers or other institutions
 to earn income for the fund. FMR may
 also use various techniques, such as
 buying and selling futures contracts
 and exchange traded funds, to increase
 or decrease the fund's exposure to
 changing security prices or other
 factors that affect security values.
Principal Investment Risks.............  Principal Investment Risks
 
Stock Market Volatility. The value of    Stock Market Risk. Stock market
 equity securities fluctuates in          risk is the risk that stock
 response to issuer, political, market,   prices overall will decline.
 and economic developments.               Stock markets tend to move in
 Fluctuations can be dramatic over the    cycles, with periods of rising
 short as well as long term, and          prices and periods of falling
 different parts of the market and        prices.
 different types of equity securities    Investment Style Risk.
 can react differently to these           Investment style risk is the
 developments.                            risk that returns from mid-
                                          and large-capitalization
                                          growth stocks will trail
                                          returns from the overall stock
                                          market. Historically, mid-cap
                                          stocks have been more volatile
                                          in price than the large-cap
                                          stocks that dominate the
                                          overall market, and they often
                                          perform quite differently.
                                         Manager Risk. Manager risk is
                                          the risk that poor security
                                          selection or focus on
                                          securities in a particular
                                          sector, category, or group of
                                          companies will cause the
                                          Portfolio to underperform
                                          relevant benchmarks or other
                                          funds with a similar
                                          investment objective.
Foreign Exposure. Foreign securities,
 foreign currencies, and securities
 issued by U.S. entities with
 substantial foreign operations can
 involve additional risks relating to
 political, economic, or regulatory
 conditions in foreign countries. These
 risks include fluctuations in foreign
 currencies; withholding or other
 taxes; trading, settlement, custodial,
 and other operational risks; and the
 less stringent investor protection and
 disclosure standards of some foreign
 markets. All of these factors can make
 foreign investments, especially those
 in emerging markets, more volatile and
 potentially less liquid than U.S.
 investments. In addition, foreign
 markets can perform differently from
 the U.S. market.
 
Issuer-Specific Changes. Changes in the
 financial condition of an issuer or
 counterparty, changes in specific
 economic or political conditions that
 affect a particular type of security
 or issuer, and changes in general
 economic or political conditions can
 increase the risk of default by an
 issuer or counterparty, which can
 affect a security's or instrument's
 value. The value of securities of
 smaller, less well-known issuers can
 be more volatile than that of larger
 issuers.
 

[[Page 17723]]

 
``Growth'' Investing. ``Growth'' stocks
 can react differently to issuer,
 political, market, and economic
 developments than the market as a
 whole and other types of stocks.
 ``Growth'' stocks tend to be more
 expensive relative to their earnings
 or assets compared to other types of
 stocks. As a result, ``growth'' stocks
 tend to be sensitive to changes in
 their earnings and more volatile than
 other types of stocks.
In response to market, economic,
 political, or other conditions, FMR
 may temporarily use a different
 investment strategy for defensive
 purposes. If FMR does so, different
 factors could affect the fund's
 performance and the fund may not
 achieve its investment objective.
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    21. The following charts compare advisory fees, other expenses, 
total operating expenses, and portfolio turnover rates for the year 
ended December 31, 2009, expressed as an annual percentage of average 
daily net assets, of the Replaced Portfolio and the Replacement 
Portfolio. The Replaced Portfolio is subject to a distribution plan or 
shareholder service plan adopted under Rule 12b-1 of the 1940 Act; the 
Replacement Portfolio is not subject to such a plan.\3\ Neither the 
Replaced Portfolio nor the Replacement Portfolio impose a redemption 
fee.
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    \3\ With regard to the Replaced Portfolio, the principal 
underwriter for the Portfolio has entered into an agreement with the 
principal underwriter for the Contracts, a wholly-owned subsidiary 
of the Company, for the payment of a fee equal to an annual 
percentage of the assets of the Replaced Portfolio attributable to 
the Contracts for the performance of certain distribution and 
shareholder services. With regard to the Replacement Portfolio, 
neither the principal underwriter for the Portfolio nor any of the 
Replacement Portfolio's other affiliates have entered into a similar 
agreement with the Company, the principal underwriter for the 
Contracts or any of the Company's other affiliates. As such, neither 
the Company nor any of its affiliates will receive revenue sharing 
payments from the principal underwriter of the Replacement Portfolio 
or from any other affiliates of the Replacement Portfolio.

------------------------------------------------------------------------
                                          Replaced         Replacement
                                          portfolio         portfolio
                                     -----------------------------------
                                        Fidelity VIP
                                      Growth Portfolio  Vanguard Capital
                                       (Service Class   Growth Portfolio
                                        2)  (percent)       (percent)
                                        As of 12/31/09    As of 12/31/09
------------------------------------------------------------------------
Advisory Fees.......................              0.56              0.41
12b-1 Fee...........................              0.25               N/A
Other Expenses......................              0.13              0.04
------------------------------------------------------------------------
    Total Expenses..................              0.94              0.45
Less Contractual Fee, Waivers and                  N/A               N/A
 Expense Reimbursements.............
------------------------------------------------------------------------
    Net Expenses....................              0.94              0.45
Portfolio Turnover..................               134                 8
------------------------------------------------------------------------

    22. The following tables compare the respective asset levels, 
expenses ratios and performance data for the Replaced Portfolio and the 
Replacement Portfolio for fiscal years 2007, 2008 and 2009 ended 
December 31.

----------------------------------------------------------------------------------------------------------------
                                                                Net assets at
    Fidelity VIP Growth Portfolio (Service Class 2 Shares)      end of period    Expense ratio     Total return
                                                                  (dollars)        (percent)        (percent)
----------------------------------------------------------------------------------------------------------------
2007.........................................................      898,204,000             0.90            26.66
2008.........................................................      447,530,000             0.93          (47.31)
2009.........................................................      528,819,000             0.94            27.97


----------------------------------------------------------------------------------------------------------------
                                                                Net assets at
              Vanguard Capital Growth Portfolio                 end of period    Expense ratio     Total return
                                                                  (dollars)        (percent)        (percent)
----------------------------------------------------------------------------------------------------------------
2007.........................................................      344,000,000             0.42            12.48
2008.........................................................      251,000,000             0.42          (30.36)
2009.........................................................      313,000,000             0.45            34.30
----------------------------------------------------------------------------------------------------------------

    23. The following table shows average annual total returns as of 
December 31, 2009 for the Replaced Portfolio and the Replacement 
Portfolio:

[[Page 17724]]



----------------------------------------------------------------------------------------------------------------
                                                                                             Since
                              Fund                                  1 year      5 year     inception   Inception
                                                                   (percent)   (percent)   (percent)     date
----------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio (Service Class 2).................       27.97       -0.81       -3.73     1/12/00
Vanguard Capital Growth Portfolio...............................       34.30        4.80        9.63     12/3/02
----------------------------------------------------------------------------------------------------------------

    24. Applicants believe that the Replacement Portfolio is an 
appropriate replacement for the Replaced Portfolio for each Contract, 
and that the Replacement Portfolio represents an investment option that 
is more compatible with the Replaced Portfolio than are any investment 
options under the Contracts. The Replacement Portfolio has an 
investment objective substantially identical to that of the Replaced 
Portfolio. Both pursue their investment objective by investing, under 
normal market conditions, in a diversified portfolio of stocks of 
companies with above average earnings growth potential. Each relies 
upon a fundamental analysis of companies in determining whether to 
purchase and sell securities. Each retains the flexibility to invest in 
the securities of foreign issuers and in derivative instruments, such 
as options, futures and swap agreements.\4\ There are, however, some 
distinctions between the way in which the principal investment 
strategies are pursued by the Replaced Portfolio and the Replacement 
Portfolio.
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    \4\ Although both the Replaced Portfolio and the Replacement 
Portfolio retain the flexibility to invest in derivative 
instruments, historically neither Portfolio appears to have 
emphasized investment in such instruments. In that regard, the semi-
annual report dated June 30, 2010 and the annual reports dated 
December 31, 2009 and 2008 for each Portfolio indicate that the 
Portfolio did not invest any assets in derivative instruments as of 
the date of those reports.
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    25. The primary differences in the investment strategies of the 
Replaced Portfolio and the Replacement Portfolio manifest in the extent 
to which the advisers may invest in small-capitalization companies and 
their investment time horizons. For example, the adviser for the 
Replacement Portfolio seeks capital appreciation predominately through 
investment in mid- and large-capitalization stocks, whereas the 
Replaced Portfolio also seeks capital appreciation but does not in any 
manner restrict its investment to mid- and large-capitalization 
companies. Instead, there is no limitation on the amount of assets the 
Replaced Portfolio may invest in small-capitalization companies.
    26. The adviser for the Replacement Portfolio also invests with a 
long-term view of three to five years while the adviser for the 
Replaced Portfolio does not necessarily invest with such a long-term 
view in mind. In each such instance where the Replaced Portfolio's 
investment strategy differs from that of the Replacement Portfolio, the 
Replaced Portfolio takes on more risk than does the Replacement 
Portfolio.
    27. There also is a strong similarity in the principal investment 
risks for the Replacement Portfolio and the Replaced Portfolio. The 
prospectuses and statements of additional information for both the 
Replacement Portfolio and the Replaced Portfolio mention each 
portfolio's exposure to stock market risk, risks associated with 
investment in foreign issuers and use of derivative instruments, as 
well as volatility associated with investment in growth stocks.
    28. Although only the prospectus for the Replacement Portfolio 
lists manager risk (i.e., the risk that poor security selection or 
focus on securities in a particular sector, category or group of 
companies would cause the Portfolio to underperform relevant benchmarks 
or other funds with similar investment objectives), and investment 
style risk (i.e., the risk that returns from mid- and large-
capitalization growth stocks would underperform the overall stock 
market), the Replaced Portfolio invests in the same manner in such 
securities resulting in identical risks. In addition, although only the 
prospectus for the Replaced Portfolio lists the risk of issuer-specific 
changes (i.e., the risk that changes in the financial condition of an 
issuer or counterparty, changes in specific economic or political 
conditions that affect a particular type of security or issuer, and 
changes in general economic or political conditions can increase the 
risk of default by an issuer or counterparty, which can affect a 
security's or instrument's value), the Replacement Portfolio also 
invests in the same manner resulting in similar if not identical risk.
    29. The Replaced Portfolio, however, may invest a larger portion of 
its assets in the securities of small-capitalization companies than the 
Replacement Portfolio. The value of securities of small-capitalization 
companies can be more volatile than that of large- and mid-
capitalization companies. Accordingly, notwithstanding some different 
investment risk disclosure in the prospectus for the Replacement 
Portfolio, an investment in the Replacement Portfolio should not 
necessarily entail any greater risk than an investment in the Replaced 
Portfolio, and most likely would entail less risk.
    30. In addition, although the Replacement Portfolio has not yet 
achieved a level of assets equal to or greater than the Replaced 
Portfolio, the Replacement Portfolio has a significantly lower expense 
ratio than the Replaced Portfolio. Also, historically the Replacement 
Portfolio has had a significantly lower portfolio turnover rate than 
the Replaced Portfolio, which over time may contribute to lower costs 
for Contract owners who allocate Contract value to the Replacement 
Portfolio subaccount.
    31. For those who are Contract owners on the date of the proposed 
substitution, the Company will reimburse, on the last business day of 
each fiscal period (not to exceed a fiscal quarter) during the twenty-
four months following the date of the proposed substitution, the 
subaccount investing in the Replacement Portfolio such that the sum of 
the Replacement Portfolio's total annual fund operating expenses after 
fee waiver and/or expense reimbursement and subaccount expenses \5\ for 
such period will not exceed, on an annualized basis, the sum of the 
Replaced Portfolio's total annual fund operating expenses after fee 
waiver and/or expense reimbursement and subaccount expenses for the 
fiscal year preceding the date of the proposed substitution. In 
addition, for twenty-four months following the proposed substitution, 
the Company will not increase asset-based fees or charges for Contracts 
outstanding on the date of the proposed substitution.
---------------------------------------------------------------------------

    \5\ Subaccount expenses refer to those asset-based fees and 
charges that are deducted on a daily basis from subaccount assets 
and are reflected in the calculation of subaccount unit values. The 
mortality and expense risk charge is an example of such asset-based 
fees and charges.
---------------------------------------------------------------------------

    32. Currently, each Account makes available nine subaccounts as 
investment options under the variable life insurance contracts or 
variable annuity contracts, as applicable, funded by the Accounts. 
Following the proposed substitution, each Account will continue to make 
available nine subaccounts as investment options under the variable 
life insurance

[[Page 17725]]

contracts or variable annuity contracts it funds.
    33. By the May 1, 2011 prospectuses for the Contracts and the 
Accounts, the Company will notify owners of the Contracts of their 
intention to take the necessary actions, including seeking the order 
requested by this amended and restated application, to carry out the 
proposed substitution as described herein. The current prospectus for 
the Replacement Portfolio, as well as the current prospectuses for all 
other portfolios available as investment options available under the 
Contracts, will be bound together with the May 1, 2011 prospectuses for 
the Contracts and the Accounts.
    34. Applicants represent that the prospectuses for the Contracts 
will describe the proposed substitution and the Replaced Portfolio and 
Replacement Portfolio, including the fees and expenses of each 
Portfolio, and advise the Contract owners that from the date of the 
prospectus until the date of the proposed substitution, the Company 
will not exercise any rights reserved by it under any Contract to 
impose additional charges for transfers until at least 30 days after 
the proposed substitution. Similarly, the prospectuses will disclose 
that, from May 1, 2011 until the date of the proposed substitution, the 
Company will permit Contract owners to transfer Contract value out of 
the subaccount currently holding shares of the Replaced Portfolio to 
other subaccounts and the fixed account without those transfers being 
treated as transfers for purposes of determining the remaining number 
of transfers that may be permitted in the Contract year without a 
transfer charge. The prospectuses will also advise Contract owners that 
if the proposed substitution is carried out, then each Contract owner 
affected by the substitution will be sent a written notice (described 
immediately below) informing them of the facts and details of the 
substitution.
    35. Applicants represent that within five days after the proposed 
substitution, Contract owners who are affected by the substitution will 
be sent a written notice informing them that the substitution was 
carried out. The notice will also reiterate the facts that the Company: 
(1) Will not exercise any rights reserved by it under any of the 
Contracts to impose additional charges for transfers until at least 30 
days after the proposed substitution, and (2) will, for at least 30 
days following the proposed substitution, permit such Contract owners 
to transfer Contract values out of the subaccount holding shares of the 
Replacement Portfolio to other subaccounts and the fixed account 
without those transfers being treated as transfers for purposes of 
determining the remaining number of transfers permitted in the Contract 
year without a transfer charge. The notice as delivered in certain 
jurisdictions may also explain that the right of a Contract owner to 
make transfers following the procedures described above (in connection 
with the proposed substitution) will not affect such Contract owner's 
right, under insurance regulations in those jurisdictions, to exchange 
his or her Contract for a fixed-benefit life insurance contract or a 
fixed-benefit annuity Contract during the 60 days following the 
substitution.
    36. Applicants state that the Company will carry out the proposed 
substitution by redeeming shares of the Replaced Portfolio held by the 
Accounts for cash and applying the proceeds to the purchase of shares 
of the Replacement Portfolio. The proposed substitution will take place 
at relative net asset value with no change in the amount of any 
Contract owner's Contract value or death benefit or in the dollar value 
of his or her investment in either of the Accounts. Contract owners 
will not incur any fees or charges as a result of the proposed 
substitution, nor will their rights or the Company's obligations under 
the Contracts be altered in any way. All applicable expenses incurred 
in connection with the proposed substitution, including brokerage 
commissions and legal, accounting, and other fees and expenses, will be 
paid by the Company. In addition, the proposed substitution will not 
impose any tax liability on Contract owners. The proposed substitution 
will not cause the Contract fees and charges currently being paid by 
existing Contract owners to be greater after the proposed substitution 
than before the proposed substitution.
    37. Applicants represent that the proposed substitution will not be 
treated as a transfer of Contract value for the purpose of assessing 
transfer charges or for determining the number of remaining ``free'' 
transfers in a Contract year. The Company will not exercise any right 
it may have under the Contracts to impose additional charges for 
Contract value transfers under the Contracts for a period of at least 
30 days following the proposed substitution. Similarly, from May 1, 
2011 until the date of the proposed substitution, the Company will 
permit Contract owners to make transfers of Contract value out of the 
Replaced Portfolio subaccount to other subaccounts or the fixed account 
without those transfers being treated as transfers for purposes of 
determining the remaining number of transfers permitted in the Contract 
year without a transfer charge. Likewise, for at least 30 days 
following the proposed substitution, the Company will permit Contract 
owners affected by the substitution to transfer Contract value out of 
the Replacement Portfolio subaccount to other subaccounts or the fixed 
account without those transfers being treated as transfers for purposes 
of determining the remaining number of transfers permitted in the 
Contract year without a transfer charge.
    38. Applicants acknowledge that reliance on the exemptive relief 
requested herein, if granted, depends upon compliance with all of the 
representations and conditions set forth in this amended and restated 
application.
    39. Applicants represent that the Company is also seeking approval 
of the proposed substitution from any State insurance regulators whose 
approval may be necessary or appropriate.
    40. The Applicants request that the Commission issue an order 
pursuant to Section 26(c) of the 1940 Act approving the substitution by 
the Company of shares of the Replacement Portfolio for Service Class 2 
Shares of the Replaced Portfolio currently held by the Accounts.
    41. Section 26(c) of the 1940 Act requires the depositor of a 
registered unit investment trust holding securities of a single issuer 
to receive Commission approval before substituting the securities held 
by the trust. Specifically, Section 26(c) states:

    It shall be unlawful for any depositor or trustee of a 
registered unit investment trust holding the security of a single 
issuer to substitute another security for such security unless the 
Commission shall have approved such substitution. The Commission 
shall issue an order approving such substitution if the evidence 
establishes that it is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of 
this title.

    Section 26(c) was added to the 1940 Act by the Investment Company 
Amendments of 1970 (the ``1970 Amendments''). Prior to the enactment of 
the 1970 Amendments, a depositor of a unit investment trust could 
substitute new securities for those held by the trust by notifying the 
trust's security holders of the substitution within five days of the 
substitution. In 1966, the Commission, concerned with high sales 
charges then common to most unit investment trusts and the 
disadvantageous position in which such charges placed investors who did 
not want to remain invested in the substituted fund, recommended that

[[Page 17726]]

Section 26 be amended to require that a proposed substitution of the 
underlying investments of a trust receive prior Commission approval.\6\
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    \6\ In the years leading up to its 1966 recommendation, the 
Commission took the position that the substitution of portfolio 
securities of a unit investment trust constituted an offer of 
exchange under Section 11 of the [1940] Act requiring prior 
Commission approval. The Commission proposed Section 26(c) in order 
to specifically address substitutions by unit investment trusts 
which previously had been scrutinized under Section 11 of the [1940] 
Act. See House Committee on Interstate and Foreign Commerce, Report 
of the Securities and Exchange Commission on the Public Policy 
Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th 
Cong., 2d Sess. 337 (1966).
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    Congress responded to the Commissioners' concerns by enacting 
Section 26(c) to require that the Commission approve all substitutions 
by the depositor of investments held by unit investment trusts. The 
Senate Report on the bill explained the purpose of the amendment as 
follows:

    The proposed amendment recognizes that in the case of the unit 
investment trust holding the securities of a single issuer 
notification to shareholders does not provide adequate protection 
since the only relief available to 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. The proposed amendment would close this gap in 
shareholder protection by providing for Commission approval of the 
substitution. The Commission would be required to issue an order 
approving the substitution if it finds the substitution consistent 
with the protection of the investors and provisions of the [1940] 
Act.\7\
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    \7\ S. Rep. No. 184, 91st Cong., 1st Sess. 41 (1969), reprinted 
in 1970 U.S. Code Cong. & Admin. News 4897, 4936 (1970).

    42. Applicants represent that the proposed substitution appears to 
involve the substitution of securities within the meaning of Section 
26(c) of the 1940 Act.\8\ Applicants therefore request an order from 
the Commission pursuant to Section 26(c) approving the proposed 
substitution.
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    \8\ While Section 26(c), by its terms, applies only to a unit 
investment trust holding the securities of one issuer, the 
Commission has interpreted Section 26(c) to apply to ``a 
substitution of securities in any subaccount of a registered 
separate account.'' Adoption of Permanent Exemptions from Certain 
Provisions of the Investment Company Act of 1940 for Registered 
Separate Accounts and Other Persons, Investment Company Act Rel. No. 
12678 (Sept. 21, 1982) (emphasis added).
---------------------------------------------------------------------------

    43. Applicants represent that all the Contracts expressly reserve 
for the Company the right, subject to compliance with applicable law, 
to substitute shares of one fund or portfolio held by a subaccount of 
an Account for another. The prospectuses for the Contracts and the 
Accounts contain appropriate disclosure of this right. The Company has 
reserved this right of substitution both to protect itself and its 
Contract owners in situations where it believes an underlying fund is 
no longer appropriate for Contract owners or where either might be 
harmed or disadvantaged by circumstances surrounding the issuer of the 
shares held by one or more of its separate accounts, and to afford the 
opportunity to replace such shares where to do so could benefit itself 
and Contract owners.
    44. Applicants maintain that Contract owners will be better served 
by the proposed substitution and that the proposed substitution is 
appropriate given the Replacement Portfolio, the Replaced Portfolio, 
and other investment options available under the Contracts. In the last 
four (4) out of the last five (5) years, the Replacement Portfolio has 
had investment performance superior to that of the Replaced Portfolio. 
In addition, for each one-year, five-year and since inception periods 
ended December 31, 2009, the Replacement Portfolio has had investment 
performance superior to that of the Replaced Portfolio. The Replacement 
Portfolio has also had substantially lower expenses than the Replaced 
Portfolio over these same periods.
    45. Applicants believe that the Replacement Portfolio and the 
Replaced Portfolio are substantially the same in their stated 
investment objectives and principal investment strategies as to afford 
investors continuity of investment and risk. In addition, Applicants 
generally submit that the proposed substitution meets the standards 
that the Commission and its staff have applied to similar substitutions 
that have been approved in the past.
    46. Applicants believe that Contract owners will be better off with 
the Replacement Portfolio than with the Replaced Portfolio. The 
proposed substitution retains for Contract owners the investment 
flexibility that is a central feature of the Contracts. If the proposed 
substitution is carried out, all Contract owners will be permitted to 
allocate purchase payments and transfer Contract values between and 
among the remaining subaccounts as they could before the proposed 
substitution.
    47. Applicants assert that the proposed substitution is not the 
type of substitution that Section 26(c) was designed to prevent. Unlike 
traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner which permanently 
affected all the investors in the trust, the Contracts provide each 
Contract owner with the right to exercise his or her own judgment and 
transfer Contract values into other subaccounts and the fixed account. 
Moreover, the Contracts will offer Contract owners the opportunity to 
transfer amounts out of the affected subaccount into any of the 
remaining subaccounts without cost or disadvantage. The proposed 
substitution, therefore, will not result in the type of costly forced 
redemption that Section 26(c) was designed to prevent.
    48. Applicants state that the proposed substitution is also unlike 
the type of substitution that Section 26(c) was designed to prevent in 
that by purchasing a Contract, Contract owners select much more than a 
particular investment company in which to invest their Contract values. 
They also select the specific type of coverage offered by the Company 
under the Contracts, as well as numerous other rights and privileges 
set forth in the Contracts. Contract owners may also have considered 
the size, financial condition, type, and reputation for service of the 
Company, from whom they purchased their Contract in the first place. 
These factors will not change because of the proposed substitution.

Conclusion

    Applicants request an order of the Commission pursuant to Section 
26(c) of the 1940 Act approving the proposed substitution by the 
Company. Applicants submit that, for all the reasons stated above, the 
proposed substitution is consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
1940 Act.

    For the Commission, by the Division of Investment Management 
pursuant to delegated authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-7418 Filed 3-29-11; 8:45 am]
BILLING CODE 8011-01-P