[Federal Register Volume 65, Number 215 (Monday, November 6, 2000)]
[Notices]
[Pages 66573-66576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28325]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24719; File No. 812-11982]


AIG Life Insurance Company, et al.

October 30, 2000.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company. Act of 1940 (the ``Act'') granting exemptions 
from the provisions of Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the 
Act and Rule 22c-1 thereunder.

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APPLICANTS: AIG Life Insurance Company (``AIG''), Variable Account I 
(``Variable Account''), American International Life Assurance Company 
of New York (``AIL'') and AIG Equity Sales Corp. (``AIGESC'').

SUMMARY OF APPLICATION: Applicants seek an order of exemption pursuant 
to Section 6(c) of the Act to the extent necessary to permit the 
recapture, under specified circumstances, of credits applied to premium 
payments made under the flexible premium deferred variable annuity 
contract described herein that AIG will issue through the Variable 
Account (the ``Contract''), as well as other contracts that AIG or AIL 
may issue in the future through their existing or future separate 
accounts (``Other Accounts'') that are substantially similar in all 
material respects to the Contract (``Future Contracts''). Applicants 
also request that the order being sought extend to any other National 
Association of Securities Dealers, Inc. (``NASD'') member broker-dealer 
controlling or controlled by, or under common control with, AIG, 
whether existing or created in the future, that serves as distributor 
or principal underwriter for the Contract or Future Contracts 
(``Affiliated Broker-Dealers'').

FILING DATE: The application was filed on February 17, 2000, and was 
amended and restated on October 10, 2000.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
Applicants with a copy of the request, in person or by mail. Hearing 
requests must be received by the SEC by 5:30 p.m. on November 21, 2000, 
and should be accompanied by proof of service on Applicants in the form 
of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons who wish to be 
notified of a hearing may request notification by writing to the SEC's 
Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o AIG Life 
Insurance Company, One Alico Plaza, Wilmington, Delaware 19801, Attn: 
Kenneth D. Walma, Esq.

FOR FURTHER INFORMATION CONTACT: Zandra Y. Bailes, Senior Counsel, or 
Lorna J. MacLeod, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

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

Applicant's Representations

    1. AIG is a stock life insurance company organized under the laws 
of Pennsylvania and reorganized under the laws of Delaware. AIG is a 
subsidiary of American International Group, Inc., which is a holding 
company for a number of companies engaged in the international 
insurance business, both life and general, in approximately 130 
countries and jurisdictions around the world.
    2. The Variable Account was established in 1986 by AIG as a 
segregated asset account under Delaware law for the purpose of funding 
variable annuity contracts issued by AIG. It is registered with the 
Commission as unit investment trust under the Act (File No. 811-5301). 
The Variable Account will fund the variable benefits available under 
the Contract. The offering of the Contract is registered under the 
Securities Act of 1933 (File No. 333-93709).
    3. That portion of the assets of the Variable Account that is equal 
to the reserves and other Contract liabilities

[[Page 66574]]

with respect to the Variable Account is not chargeable with liabilities 
arising out of any other business of AIG. Any income, gains or losses, 
realized or unrealized, from assets allocated to the Variable Account 
are, in accordance with the Contract, credited to or charged against 
the Variable Account, without regard to other income, gains or losses 
of AIG.
    4. AIL is a stock life insurance company organized under the laws 
of New York and incorporated in 1962. Like AIG, AIL is a subsidiary of 
American International Group, Inc.
    5. AIGESC is the principal underwriter for the Variable Account and 
the distributor of the Contract. AIGESC is registered with the 
Commission as a broker-dealer under the Securities Exchange Act of 1934 
and is a member of the NASD. The Contract is sold by insurance agents 
appointed by AIG who are also registered representatives of AIGESC or 
registered broker/dealers that have entered into distribution 
agreements with AIGESC. AIGESC is a wholly-owned subsidiary of American 
International Group, Inc.
    6. The Contract may be purchased with a minimum initial premium 
payment of $2,000. An owner may make additional payments of at least 
$1,000 at any time or pay scheduled subsequent premiums of $100 or more 
per month by enrolling an automatic investment plan.
    7. Owners of the Contract may allocate their premium payments among 
seventeen investment options--sixteen variable investment options and 
one fixed investment option. Each subaccount of the Variable Account 
invests in shares in one of the variable investment options, which are 
corresponding portfolios of the Alliance Variable Products Series Fund, 
Inc. The fixed investment option is part of AIG's guaranteed account 
and earns a minimum of 3% interest. AIG, at a later date, may decide to 
create additional subaccounts to invest in any additional funding media 
as may now or in the future be available. AIG, from time to time, also 
may combine or eliminate subaccounts, or transfer the assets to and 
from subaccounts.
    8. The Contract has the following charges: (i) a surrender charge 
as a percentage of the premium surrendered declining from 6% in premium 
years 1 and 2 to 0% in premium year 8; (ii) a $30 annual contract 
maintenance fee (waived if the value of the Contract is at least 
$50,000); (iii) a mortality and expense risk charge of 1.25%; (iv) an 
administrative charge of 0.15% (v) a distribution charge of 0.20%; (vi) 
a transfer fee of $10 after the first twelve transfers during a 
contract year; (vii) optional death benefit charges; and (viii) any 
applicable state premium tax.
    9. The Contract provides for various death benefit alternatives--a 
traditional death benefit and two optional death benefits. In addition, 
an owner may select the accidental death benefit. If an owner elects an 
optional death benefit or the accidental death benefit, AIG will assess 
a daily charge against the assets in the Variable Account equal to an 
annual charge as follows:

------------------------------------------------------------------------
 
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Annual Ratchet Plan.......................  0.10%.
Equity Assurance Plan.....................  0.70% (owner's attained age
                                             0-59).
                                            0.20% (owner's attained age
                                             60 and over).
Accidental Death Benefit..................  0.05%.
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    10. AIG will credit an extra amount to the Contract (the 
``Credit'') equal to a maximum of 4% of an owner's premium payment. AIG 
will allocate the Credit pro rata among the investment options in the 
same proportion as the corresponding premium payment. AIG will fund 
Credits from its general account assets and intends to recover the cost 
through charges imposed under the Contract. AIG may discontinue 
offering Credits on additional premium payments at its discretion.
    11. The Credit is not part of the amount an owner will receive if 
he or she exercises the free look provision. Credits applied within 
twenty-four months prior to the date of death are not included in 
amounts payable as a death benefit. Likewise, Credits applied within 
twenty-four months prior to a surrender are not included in the amount 
payable upon surrender. If an owner makes a partial surrender during 
the twenty-four month period following receipt of a Credit, except as 
part of the Contract's systematic withdrawal program, AIG will reduce 
the Credit in the same proportion as the partial surrender bears to the 
value of the Contract and deduct the amount of the reduction from the 
value of the Contract. Only Credits paid within twenty-four months 
prior to the partial surrender are subject to reduction.
    12. Applicants seek exemption pursuant to Section 6(c) from 
Sections 2(a)(32), 22(c), and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder to the extent deemed necessary to permit AIG to issue the 
Contract, which provides for a Credit upon receipt of a premium 
payment, and to recapture the Credit in the following instances: (i) 
when an owner exercises the Contract's free look provision; (ii) when a 
death benefit is payable within twenty-four months after receipt of a 
Credit; and (iii) when a surrender is requested within twenty-four 
months after receipt of a Credit.

Applicants' Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from the provisions of the Act and the rules 
promulgated thereunder if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. Applicants request that the Commission, 
pursuant to Section 6(c) of the Act, grant the exemptions requested 
with respect to the Contract and any Future Contracts funded by the 
Variable Account or Other Accounts that are underwritten or distributed 
by AIGESC or Affiliated Broker-Dealers. Applicants undertake that 
Future Contracts will be substantially similar in all material respects 
to the Contract. Applicants assert that the requested exemptions are 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.
    2. Subsection (i) of Section 27 of the Act provides that Section 27 
does not apply to any registered separate account funding variable 
insurance contracts, or to the sponsoring insurance company and 
principal underwriter of such account, except as provided in paragraph 
(2) of the subsection. Paragraph (2) provides that it shall be unlawful 
for such a separate account or sponsoring insurance company to sell a 
contract funded by the registered separate account unless such contract 
is a redeemable security. Section 2(a)(32) defines ``redeemable 
security'' as any security, other than short-term paper, under the 
terms of which the holder, upon presentation to the issuer, is entitled 
to receive approximately his or her proportionate share of the issuer's 
current net assets, or the cash equivalent thereof.
    3. Applicants submit that the recapture of the Credit under the 
circumstances set forth in the application would not deprive an owner 
of his or her proportionate share of the issuer's current net assets. 
An owner's interest in a Credit allocated to his or her Contract value 
upon receipt of an initial premium payment is not vested until the 
applicable free look period has expired without return of the Contract. 
Similarly, Applicants state that an owner's interest in the amount of 
any

[[Page 66575]]

Credit allocated within twenty-four months prior to the date of the 
death or the date of the surrender also is not vested. Unless and until 
the amount of any Credit is vested, Applicants submit that AIG retains 
the right and interest in the Credit, although not in the earnings 
attributable to that amount. Thus, Applicants argue that when AIG 
recaptures any Credit, it is merely retrieving its own assets, and the 
owner has not been deprived of a proportionate share of the Variable 
Account's assets because his or her interest in the Credit has not 
vested.
    4. In addition, Applicants state that permitting an owner to retain 
a Credit under a Contract upon the exercise of the free look provision 
would not only be unfair, but would also encourage individuals to 
purchase a Contract, with no intention of keeping it, and return it for 
a quick profit.
    5. Furthermore, Applicants state that the recapture of Credits 
applied within twenty-four months prior to the date of death or the 
date of surrender is designed to provide AIG with a measure of 
protection against anti-selection. The risk here is that, rather than 
spreading premium payments over a number of years, an owner might make 
very large premium payments shortly before death or surrender, thereby 
leaving AIG little time to recover the cost of the Credits. As noted 
earlier, the amount recaptured equals the Credits provided by AIG from 
its general account assets, and any gain would remain a part of the 
owner's Contract value.
    6. Applicants represent that it is not administratively feasible to 
track a Credit in the Variable Account after the Credit is applied. 
Accordingly, the asset-based charges applicable to the Variable Account 
will be assessed against the entire amount held in the Variable 
Account, including the Credit, during the free look period and the 
twenty-four month recapture periods. As a result, during such periods, 
the aggregate asset-based charges assessed against an owner's Contract 
value will be higher than those that would be charged if the owner's 
Contract value did not include the Credit.
    7. Applicants represent that the Credit will be attractive to and 
in the interest of investors because it will permit owners to put up to 
104% of their premium payment to work for them in the selected 
subaccounts. In addition, the owner will retain any earnings 
attributable to the Credits, as well as the principal amount of the 
Credit once vested.
    8. Applicants further submit that the recapture of any Credit only 
applies in relation to the risk of anti-selection against AIG. In the 
context of the death benefit and surrender described in the 
application, anti-selection can generally be described as a risk that 
owners take undue advantage of the credit feature. AIG provides the 
Credit from its general account on a guaranteed basis and generally 
expects to recover its costs, including Credits, while a Contract is in 
force. The right to recapture Credits applied to premium payments made 
with twenty-four months prior to the date of death or the date of 
surrender protects AIG against the risk that an owner will purchase a 
Contract or make larger premium payments shortly before death or 
surrender knowing that the contingency that triggers payment of a 
benefit is likely or about to occur and leave AIG little time to 
recover the costs of the credits. With respect to refunds paid upon the 
return of the Contract during the free look period, the amount payable 
by AIG must be reduced by the amount of the Credit. Otherwise, 
investors could purchase a Contract for the sole purpose of exercising 
the free look provision and making a quick profit.
    9. Applicants assert that the provisions for recapture of Credits 
under the Contract do not violate Sections 2(a)(32) and 27(i)(2)(A) of 
the Act. However, to avoid any uncertainty as to full compliance with 
the Act, Applicants request an exemption from Section 2(a)(32) and 
27(i)(2)(A), to the extend deemed necessary, to permit the recapture of 
any Credit under the circumstances summarized herein, without the loss 
of relief from Section 27 provided by Section 27(i).
    10. Section 22(c) of the Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies and 
to principal underwriters of, and dealers in, the redeemable securities 
of any registered investment company to accomplish the same purposes as 
contemplated by Section 22(a). Rule 22c-1 under the Act prohibits a 
registered investment company issuing any redeemable security, a person 
designated in such issuers' prospectus as authorized to consummate 
transactions in any such security, and a principal underwriter of, or 
dealer in, such security, from selling, redeeming, or repurchasing any 
such security except at a price based on the current net asset value of 
such security next computed after receipt of a tender of such security 
for redemption or of an order to purchase or sell such security.
    11. AIG's recapture of the Credit might be viewed as resulting in 
the redemption of redeemable securities for a price other than one 
based on the current net asset value of the Variable Account. Applicant 
assert, however, that the recapture of the Credit does not violate 
Section 22(c) or rule 22c-1. Applicants argue that the recapture of the 
Credit does not involve either of the evils that Rule 22c-1 was 
intended to eliminate the reduce as far as reasonably practicable, 
namely: (i) the dilution of the value of outstanding redeemable 
securities of registered investment companies through their sale at a 
price below net asset value or repurchase at a price above it, and (ii) 
other unfair results, including speculative trading practices. See 
Adoption of Rule 22c-1 under the 1940 Act, Investment Company Release 
No. 5519 (Oct. 16, 1968). To effect a recapture of a Credit, AIG will 
redeem interests in a Contract at a price determined on the basis of 
the current accumulation unit value(s) of the subaccount(s) to which 
the owner's Contract value is allocated. The amount recaptured will 
equal the amount of the Credit that AIG paid out of it general account 
assets. Although the owner will be entitled to retain any investment 
gain attributable to the Credit, the amount of that gain will be 
determined on the basis of the current accumulation unit value of the 
applicable subaccounts. Thus, no dilution will occur upon the recapture 
of the Credit. Applicants also argue that the second harm that Rule 
22c-1 was designed to address, namely speculative trading practices 
calculated to take advantage of backward pricing, will not occur as a 
result of the recapture of the Credit. However, to avoid any 
uncertainty as to full compliance with the Act, Applicants request an 
exemption from the provisions of Section 22(c) and Rule 22c-1 to the 
extent deemed necessary to permit them to recaptured the Credit under 
the Contract.
    12. Applicants assert that their request for an order that applies 
to the Variable Account and any Other Account established by AIG or 
AIL, in connection with the issuance of the Contract and Future 
Contracts, is appropriate in the public interest. Applicants state that 
such an order would promote competitiveness in the variable annuity 
market by eliminating the need to file redundant exemptive 
applications, thereby reducing administrative's expenses and maximizing 
the efficient use of Applicants' resources. Applicants state that 
investors would not receive any benefit or additional protection by 
requiring Applicants to repeatedly seek exemptive relief that would 
present no issue under the Act that has not already been addressed in 
the application. Applicants assert that having Applicant

[[Page 66576]]

file additional applications would impair Applicants' ability to take 
advantage of business opportunities as they arise. Further, Applicants 
state that if Applicants were required repeatedly to seek exemptive 
relief with respect to the same issues addressed in the application 
described herein, investors would not receive any benefit or additional 
protection thereby.

Conclusion

    Applicants assert, based on the grounds summarized above, that 
their exemptive requests meet the standards set out in Section 6(c) of 
the Act, namely, that the exemptions requested are necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-28325 Filed 11-3-00; 8:45 am]
BILLING CODE 8010-01-M