Document ID: SEC-2019-1956-0001
Agency: sec
Document Type: Notice
Title: Application: Allianz Life Insurance Company of North America, et al.
Posted Date: 2019-12-27T05:00Z

[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.

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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'').
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    \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 http://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.

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