[Federal Register: May 3, 2006 (Volume 71, Number 85)]
[Notices]
[Page 26122-26130]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my06-112]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-27306; File No. 812-13188]
The Variable Annuity Life Insurance Company, et al., Notice of
Application
April 27, 2006.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of application for an order of approval pursuant to
Section 26(c) of the Investment Company Act of 1940, as amended (the
``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: The Variable Annuity Life Insurance Company
(``VALIC''), VALIC Separate Account A (``Separate Account A'' and,
collectively with VALIC, the ``Applicants''), and VALIC Company I
(``VALIC I'' and, collectively with VALIC and Separate Account A, the
``Section 17 Applicants'').
Summary of Application: Applicants seek an order approving the
proposed substitution of shares of Evergreen Fundamental Large Cap Fund
with Large Cap Core Fund; Evergreen Equity Income Fund with Broad Cap
Value Fund; American Century Ultra Fund with VALIC Ultra Fund; AIM
Large Cap Growth Fund, Janus Fund and Putnam New Opportunities Fund
with Large Capital Growth Fund; MSIF Mid Cap Growth Fund, Putnam OTC &
Emerging Growth Fund and SIT Mid Cap Growth Fund with Mid Cap Strategic
Growth Fund; Evergreen Special Values Fund with Small Cap Special
Values Fund; SIT Small Cap Growth Fund and Evergreen Special Equity
Fund with Small Cap Strategic Growth Fund; Credit Suisse Small Cap
Growth Fund with Small Cap Aggressive Growth Fund; Janus Adviser
Worldwide Fund and Putnam Global Equity Fund with Global Equity Fund;
Templeton Global Asset Allocation Fund with Global Strategy Fund;
Templeton Foreign Fund with Foreign Value Fund; and Dreyfus Basic U.S.
Mortgage Securities Fund with Capital Conservation Fund (the
``Substitution''). Section 17 Applicants seek an order pursuant to
Section 17(b) of the Act to permit certain in-kind transactions in
connection with the Substitution.
Filing Date: The application was originally filed on May 6, 2005,
and an amended and restated application was filed on April 26, 2006.
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 May 22, 2006, 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, 2929 Allen Parkway,
Houston, Texas 77019.
FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel,
or Joyce M. Pickholz, Branch Chief, 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 is available for a fee from the
Public Reference Branch of the Commission, 100 F Street, NE.,
Washington, DC 20549 (202-551-8090).
Applicants' and Section 17 Applicants' Representations
1. VALIC is a stock life insurance company originally organized in
1955 under the laws of Washington, DC and reorganized in Texas in 1968.
VALIC is an indirect wholly-owned subsidiary of American International
Group, Inc., a United States based international insurance and
financial services organization.
2. Separate Account A was established in 1979. Separate Account A
is registered under the Act as a unit investment trust (File No. 811-
3240) and is used to fund variable annuity contracts (the
``Contracts'') (File No. 33-75292) issued by VALIC.
3. VALIC I was incorporated in Maryland on December 7, 1984 and is
registered under the Act as an open-end management investment company
(File Nos. 811-3738 and 002-83631).
4. Purchase payments under the Contracts may be allocated to one or
more divisions (``Divisions'') of Separate Account A. Income, gains and
losses, whether or not realized, from assets allocated to Separate
Account A are, as provided in the Contracts, credited to or charged
against Separate Account A without regard to other income, gains or
losses of VALIC. The assets maintained in Separate Account A will not
be charged with any liabilities arising out of any other business
conducted by VALIC. Nevertheless, all obligations arising under the
Contracts, including the commitment to make annuity payments or death
benefit payments, are general corporate obligations of VALIC.
Accordingly, Applicants represent that all of VALIC's assets are
available to meet its obligations under the Contracts.
5. The Contracts permit allocations of account value to available
Divisions that invest in specific investment portfolios of underlying
registered investment companies (a ``Fund'' and, collectively, the
``Mutual Funds''). VALIC I is one of the available Mutual Funds and
each of the following is a series of VALIC I:
[[Page 26123]]
Large Cap Core Fund, Broad Cap Value Fund, VALIC Ultra Fund, Large
Capital Growth Fund, Mid Cap Strategic Growth Fund, Small Cap Special
Values Fund, Small Cap Strategic Growth Fund, Small Cap Aggressive
Growth Fund, Global Equity Fund, Global Strategy Fund, Foreign Value
Fund, and Capital Conservation Fund (collectively, the ``Replacement
Funds''). The other Funds involved in this application (collectively,
the ``Replaced Funds'') are all registered under the Act as open-end
management investment companies and include the following: AIM Large
Cap Growth Fund, American Century Ultra Fund, Credit Suisse Small Cap
Growth Fund, Dreyfus BASIC U.S. Mortgage Securities Fund, Evergreen
Equity Income, Evergreen Fundamental Large Cap Fund, Evergreen Special
Equity, Evergreen Special Values Funds, Janus Adviser Worldwide Funds,
Janus Fund, MSIF Mid Cap Growth Portfolio, Putnam Global Equity Fund,
Putnam New Opportunities Fund, Putnam OTC & Emerging Growth Fund, Sit
Mid Cap Growth Fund, Sit Small Cap Growth Fund, Templeton Foreign Fund,
and Templeton Global Asset Allocation Fund.
6. The Contracts permit transfers of accumulation value from one
Division to another Division at any time prior to annuitization,
subject to certain restrictions. No sales charge applies to such a
transfer of accumulation value among Divisions.
7. The Contracts reserve the right, upon notice to contract owners
(the ``Contract Owners''), to substitute shares of another mutual fund
for shares of a Fund held by a Division.
8. The Replaced Funds involved in the Substitution include 18
separate portfolios representing ten investment company complexes.
After the Substitution, there will be 12 portfolios, all of which will
be portfolios of VALIC I. Applicants represent that the investment
objective and policies of each Replacement Fund will be the same as or
substantially similar to the investment objective and policies of the
corresponding Replaced Fund. Applicants state that the Substitution is
being proposed to reduce the number of overlapping portfolio offerings
in certain classes and eliminate certain portfolios whose performance
levels in the recent years have not maintained the level of performance
that was the basis of their inclusion as variable account options.
Applicants represent that relieving Separate Account A of the
administrative burdens of interfacing with ten unaffiliated investment
company complexes is expected to simplify compliance, accounting and
auditing and, generally, to allow VALIC to administer the Contracts
more efficiently. Applicants state that VALIC will serve as the
investment adviser for each Replacement Fund, and many of the
Replacement Funds will retain as sub-adviser the investment adviser of
the Replaced Fund. Applicants state that, because VALIC I has ``manager
of managers'' exemptive relief, VALIC, as investment adviser, will be
able to act more quickly and efficiently, subject to Board of Directors
approval, to protect Contract Owners' interests if the performance of
one or more of the sub-advisers does not meet expectations.\1\
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\1\ Investment Company Act Release Nos. 23386 (Aug. 12, 1998)
(Notice) and 23429 (Sept. 9, 1998) (Order).
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9. Applicants propose the following substitutions of shares:
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Replacement
Substitution Replaced portfolio portfolio
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A............................... Evergreen Large Cap Core
Fundamental Large Fund.
Cap Fund.
B............................... Evergreen Equity Broad Cap Value
Income Fund. Fund.
C............................... American Century VALIC Ultra Fund.
Ultra Fund.
D............................... AIM Large Cap Large Capital
Growth. Growth Fund.
E............................... Janus Fund........
F............................... Putnam New
Opportunities
Fund.
G............................... MSIF Mid Cap Mid Cap Strategic
Growth Fund. Growth Fund.
H............................... Putnam OTC &
Emerging Growth
Fund.
I............................... SIT Mid Cap Growth
Fund.
J............................... Evergreen Special Small Cap Special
Values Fund. Values Fund.
K............................... SIT Small Cap Small Cap
Growth Fund. Strategic Growth
Fund.
L............................... Evergreen Special
Equity Fund.
M............................... Credit Suisse Small Cap
Small Cap Growth Aggressive Growth
Fund. Fund.
N............................... Janus Adviser Global Equity
Worldwide Fund. Fund.
O............................... Putnam Global
Equity Fund.
P............................... Templeton Global Global Strategy
Asset Allocation Fund.
Fund.
Q............................... Templeton Foreign Foreign Value
Fund. Fund.
R............................... Dreyfus Basic U.S. Capital
Mortgage Conservation
Securities Fund. Fund.
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10. Substitution A: Applicants describe the investment objective
for the Evergreen Fundamental Large Cap Fund and the Large Cap Core
Fund identically. Each Fund invests, under normal conditions, at least
80% of its assets in the common stock of large U.S. companies. Each
Fund's stock selection is based on a diversified style of equity
management that allows it to invest in both value and growth oriented
equity securities. Applicants represent that both the Replaced Fund and
the Replacement Fund have similar investment strategies and have no
significant risk disparities.
Charges for the Replaced Fund include Management Fees of 0.61%,
12b-1 Fees of 0.30%, and Other Expenses of 0.59%.\2\ Charges for the
Replacement Fund include: Management Fees of 0.70% and Other Expenses
of 0.15%; it does not charge a 12b-1 Fee. Respectively, the Replaced
Fund's total gross and net operating expenses are 1.50% and 1.39%
(reflecting a 0.11% fee reduction arrangement). Both total gross and
net annual operating expenses for the Replacement Fund equal 0.85%.
Under the Contracts, both Funds' Separate Account fee is the same.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of the two Funds are nearly identical; and (2) the
Replacement Fund assets will be managed by the same investment adviser
(using the same management style and strategy) as the Replaced Fund.
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\2\ For the descriptions of charges involved in the
Substitution, all percentages for the Management Fees, 12b-1 Fees,
Other Expenses, Fee Reductions, Total Gross and Net Annual Operating
Expenses, and Separate Account Fees represent a percentage of
average annual assets.
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[[Page 26124]]
11. Substitution B: Applicants state that the Evergreen Equity
Income Fund seeks current income and capital growth by investing
primarily in equity securities across all market capitalizations that
on the purchase date pay a higher yield than the average yield of
companies included in the Russell 1000 Value Index. Applicants
represent that the Broad Cap Value Fund seeks total return through
capital appreciation with income as a secondary consideration. The
Replacement Fund invests primarily in large capitalization companies
whose stocks are considered to be undervalued. The Replacement Fund may
also invest in companies with mid-sized or small market capitalizations
and may invest up to 20% in foreign securities. Applicants state that
the investment strategies of the funds differ such that the Replaced
Fund invests in ``growth'' and ``value'' securities whereas the
Replacement Fund invests in what it determines are ``value''
securities. However, Applicants also represent that notwithstanding
these differences, the risk profile of the two funds is very similar.
Charges for the Replaced Fund include Management Fees of 0.59%,
12b-1 Fees of 0.30%, and Other Expenses of 0.34%. Charges for the
Replacement Fund include Management Fees of 0.70%, and Other Expenses
of 0.15%. The Replacement Fund does not charge a 12b-1 Fee. There is no
fee reduction arrangement applicable to either Fund. The total gross
annual operating expenses for the Replaced and Replacement Funds are
1.23% and 0.85%, respectively. Under the Contracts, the Separate
Account fee is the same for both Funds. Applicants represent that the
Replacement Fund is an appropriate substitute for the Replaced Fund
because: (1) The investment objective (current income and capital
growth) and policies of the two Funds are substantially similar; (2)
the income yield of the Replacement Fund has been comparable to the
Replaced Fund for the past five years, and (3) the Replacement Fund's
overall risk profile is very similar to that of the Replaced Fund.
13. Substitution C: Applicants state that the Replaced Fund seeks
long-term capital growth through investments primarily in common stocks
that are considered to have a greater-than-average chance to increase
in value over time. Applicants represent that the Replacement Fund
seeks long term capital growth by investing primarily in common stocks
of growing companies using a strategy that looks for companies with
earnings and revenues that are growing at a successively faster or
accelerating pace. Applicants represent that the Replaced and
Replacement Funds have no significant risk disparities and have nearly
identical investment strategies.
Charges for the Replaced Fund include only a Management Fees of
0.99%; there are no 12b-1 Fees or Other Expenses. The Replacement Fund
charges Management Fees of 0.80% and Other Expenses of 0.15%; there are
no 12b-1 Fees. There is no fee reduction arrangement applicable to the
Replaced or the Replacement Fund. The total gross annual operating
expenses are for the Replaced and Replacement Funds are 0.99% and
0.95%, respectively. Under the Contracts, the Separate Account fee is
1.04% for the Replace Fund and 1.00% for the Replacement Fund.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of the two Funds are nearly identical; and (2) the
Replacement Fund assets will be managed by the same investment adviser
(using the same management style and strategy) as the Replaced Fund.
14. Substitution D: Applicants state that both Replaced and
Replacement Funds seek long-term capital growth through investment in
large-capitalization companies within the range of the Russell 1000
Index. Applicants also represent that (1) the Replaced and Replacement
Funds have no significant risk disparities; (2) AIM serves as adviser
to both funds (though as a co-subadviser for the Replacement Fund); and
(3) the Funds have very similar investment strategies.
Charges for the Replaced Fund include Management Fees of 0.75%,
12b-1 Fees of 0.25%, and Other Expenses of 0.45%. As of January 18,
2006, charges for the Replacement Fund include a new reduced Management
Fee of 0.64% and Other Expenses of 0.15%; it has no 12b-1 Fee.
Respectively, the Replaced Funds' total gross and net annual operating
expenses are 1.45% and 1.37% (reflecting a 0.08% fee reduction
arrangement). The Replacement Fund has no fee reduction arrangement;
its total gross and net annual operating expenses are 0.79%. Under the
Contracts, both Funds' Separate Account fee is identical. Applicants
represent that the Replacement Fund is an appropriate substitute for
the Replaced Fund because: (1) The investment objective and policies of
the two Funds are substantially similar; (2) the investment advisor of
the Replaced Fund, AIM Advisors, will continue to serve as one of the
two sub-advisers of the Replacement Fund; and (3) in subadvising the
Replacement Fund, AIM Advisors will continue using the same style and
strategy as is used in managing the Replaced Fund.
15. Substitution E: Applicants state that the Replaced Fund seeks
long-term growth of capital consistent with preservation of capital
through investment in common stocks of larger, more established
companies selected for their growth potential. The Replacement Fund
seeks long-term growth of capital through investment in common stocks
of well-established, high-quality growth companies no smaller than the
smallest capitalized company included in the Russell 1000 Index.
Applicants represent that the Replaced and Replacement Funds have no
significant risk disparities.
Charges for the Replaced Fund include Management Fees of 0.64%,
Other Expenses of 0.25%, and no 12b-1 Fee. As of January 18, 2006,
charges for the Replacement Fund include a new reduced Management Fee
of 0.64%, Other Expenses of 0.15%, and no 12b-1 Fee. Neither Replaced
nor Replacement Fund has a fee reduction arrangement. Total gross
annual operating expenses for Replaced and Replacement Funds are 0.89%
and 0.79%, respectively. Under the Contracts, Separate Account fees for
both Funds are identical. Applicants represent that the Replacement
Fund is an appropriate substitute for the Replaced Fund because: (1)
The investment objective (long-term capital growth) and policies of the
two Funds are substantially similar; and (2) both the Replaced and
Replacement Fund have similar risk profiles.
16. Substitution F: Applicants state that the Replaced Fund seeks
long-term capital appreciation by investing mainly in common stocks of
U.S. companies, focusing on growth stocks in sectors of the economy the
adviser believes have high growth potential. The Replacement Fund seeks
long-term growth of capital through investment in common stocks of
well-established, high-quality growth companies no smaller than the
smallest capitalized company included in the Russell 1000 Index.
Applicants represent that (1) the Replaced Fund is more likely to be
subject to small and mid-cap risks than the Replacement Fund; (2) the
active trading risk associated with the Replacement Fund is anticipated
as a principal risk only for the Fund's first year of operations; and
(3) both Funds may invest in derivatives, convertible securities and
foreign securities.
Charges for the Replaced Fund include Management Fees of 0.52%,
[[Page 26125]]
12b-1 Fees of 0.25%, and Other Expenses of 0.35%. As of January 18,
2006, charges for the Replacement Fund include a new reduced Management
Fee of 0.64%, Other Expenses of 0.15%, and no 12b-1 Fee. There is no
fee reduction arrangement applicable to either Fund. Total gross annual
operating expenses for Replaced and Replacement Funds are 1.12% and
0.79%, respectively. Under the Contracts, Separate Account fees for
both Funds are identical. Applicants represent that the Replacement
Fund is an appropriate substitute for the Replaced Fund because: (1)
The investment objective (long-term growth of capital) and policies of
both Replaced and Replacement Funds are substantially similar; and (2)
both the Replaced and Replacement Fund have similar risk profiles.
17. Substitution G: Applicants state that the Replaced and
Replacement Funds each seek long-term capital growth by investing
primarily in growth-oriented equity securities of U.S. mid-cap
companies and, to a limited extent, foreign companies. Applicants
represent that for the Replaced Fund, the market capitalization of Mid-
cap companies is generally less than $35 billion. Applicants represent
that the Replacement Fund identifies a company as a mid cap company if,
at the time of purchase, its capitalization is (1) within the range of
companies represented in the Russell Mid Cap Growth Index, or (2)
between $1 billion and $12 billion. Applicants represent that (1) the
Replaced Fund invests up to 10% of its assets in REITs compared to the
Replacement Fund which typically invests only up to 5% in REITs; (2)
the active trading risk associated with the Replacement Fund is
anticipated as a principal risk only for the Fund's first year of
operations; and (3) both Funds may invest in derivatives and initial
public offerings (``IPOs'').
Charges for the Replaced Fund include Management Fees of 0.50%,
12b-1 Fees of 0.25%, and Other Expenses of 0.13%. Charges for the
Replacement Fund include Management Fees of 0.70%, Other Expenses of
0.15%, and no 12b-1 Fee. There is no fee reduction arrangement
applicable to either Fund. Total gross annual operating expenses for
Replaced and Replacement Funds are 0.88% and 0.85%, respectively. Under
the Contracts, the Separate Account fee is identical for both Funds.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of both Replaced and Replacement Funds are substantially
similar; (2) the investment adviser of the Replaced Fund, Morgan
Stanley Investment Management (``MSIM''), will continue to serve as one
of two sub-advisers of the Replacement Fund; and (3) MSIM will continue
using the same style and strategy as is used in managing the Replaced
Fund.
18. Substitution H: Applicants state that the Replaced Funds seeks
capital appreciation by investing mainly in common stocks of U.S.
companies traded in the over-the-counter market and ``emerging growth''
companies listed on securities exchanges, with a focus on growth
stocks. Applicants state that the Replacement Fund seeks long-term
capital growth by investing primarily in growth-oriented equity
securities of U.S. mid-cap companies and, to a limited extent, foreign
companies. Applicants represent that (1) the Replaced Fund may invest
more of its assets in small-cap companies than the Replacement Fund;
(2) the active trading risk associated with the Replacement Fund is
anticipated as a principal risk only for that Fund's first year of
operations; and (3) both Funds' overall risk profile is very similar.
Charges for the Replaced Fund include Management Fees of 0.62%,
12b-1 Fees of 0.25%, and Other Expenses of 0.54%. Charges for the
Replacement Fund include Management Fees of 0.70%, Other Expenses of
0.15%, and no 12b-1 Fee. Respectively, the Replaced Funds' total gross
and net annual operating expenses are 1.41% and 1.40% (reflecting a
0.01% fee reduction arrangement). The Replacement Fund has no fee
reduction arrangement; its total gross and net annual operating
expenses are 0.85%. Under the Contracts, the Separate Account fee is
identical for both Funds. Applicants represent that the Replacement
Fund is an appropriate substitute for the Replaced Fund because: (1)
The investment objective (long-term capital growth) and policies of
both Funds are substantially similar; and (2) both Replaced and
Replacement Funds have similar risk profiles.
19. Substitution I: Applicants state that the Replaced Funds seeks
long-term capital appreciation by investing in the common stocks of
companies with capitalizations of $2 billion to $15 billion at the time
of purchase. Applicants state that the Replacement Fund seeks long-term
capital growth by investing primarily in growth-oriented equity
securities of U.S. and, to a limited extent, foreign, mid-cap companies
with market capitalization at the time of purchase is between $1
billion and $12 billion or within the range of companies represented in
the Russell Mid Cap Growth Index. Applicants represent that there are
no significant risk disparities between the Replaced and Replacement
Funds.
The Replaced Fund carries a Management Fee of 1.25%, and has no
12b-1 Fees or Other Expenses. Charges for the Replacement Fund include
Management Fees of 0.70%, Other Expenses of 0.15%, and no 12b-1 Fee.
Respectively, the Replaced Funds' total gross and net annual operating
expenses are 1.25% and 1.15% (reflecting a 0.10% fee reduction
arrangement). The Replacement Fund has no fee reduction arrangement;
its total gross and net annual operating expenses are 0.85%. Under the
Contracts, the Separate Account fee is identical for both Funds.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of both Replaced and Replacement Funds are substantially
similar; (2) although the Replaced and Replacement Funds define ``mid-
cap companies'' slightly differently, the investment objective of both
Funds is to seek long-term capital growth; and (3) both the Replaced
and Replacement Fund have similar risk profiles.
20. Substitution J: Applicants state that the investment objective
of both the Replaced and Replacement Funds is to produce capital growth
by investing primarily in common stocks of small U.S. Companies. The
capitalization range is identical for both Funds. Applicants represent
that Replaced and Replacement Funds have no significant risk
disparities.
Charges for the Replaced Fund include Management Fees of 0.78%,
12b-1 Fees of 0.25%, and Other Expenses of 0.34%. Charges for the
Replacement Fund include Management Fees of 0.75%, Other Expenses of
0.15%, and no 12b-1 Fee. Respectively, the Replaced Funds' total gross
and net annual operating expenses are 1.37% and 1.32% (reflecting a
0.05% fee reduction arrangement). The Replacement Fund has no fee
reduction arrangement; its total gross and net annual operating
expenses are 0.90%. Under the Contracts, the Separate Account fee is
identical for both Funds. Applicants represent that the Replacement
Fund is an appropriate substitute for the Replaced Fund because: (1)
The investment objective and policies of the Replaced and Replacement
Funds are substantially similar; (2) the investment adviser of the
Replaced Fund, Evergreen Investment Management (``EIM''), will continue
to serve as one of two sub-advisers of the
[[Page 26126]]
Replacement Fund; and (3) EIM will continue using the same style and
strategy as is used in managing the Replaced Fund.
21. Substitution K: Applicants state that the investment objective
of the Replaced Fund is to maximize long-term capital appreciation by
investing in common stocks of companies with capitalizations of $2.5
billion or less at the time of purchase. Applicants state that the
Replacement Fund seeks capital growth by investing primarily in common
stocks of small U.S. companies whose market capitalization at purchase
is within the range tracked by the Russell 2000 Index. Noting that only
the Replacement Fund may invest in emerging market securities and IPOs,
Applicants represent that the Funds have similar investment strategies
and overall risk profiles.
The Replaced Fund carries a Management Fee of 1.50%, and has no
12b-1 Fees or Other Expenses. Charges for the Replacement Fund include
Management Fees of 0.85%, Other Expenses of 0.15%, and no 12b-1 Fee.
There is no fee reduction arrangement applicable to either Fund. Total
gross annual operating expenses for Replaced and Replacement Funds are
1.50% and 1.00%, respectively. Under the Contracts, the Separate
Account fee is identical for both Funds. Applicants represent that the
Replacement Fund is an appropriate substitute for the Replaced Fund
because: (1) The investment objective and policies of both Funds are
substantially similar; (2) although the Replaced and Replacement Funds
define ``small companies'' slightly differently, the investment
objective of both Funds is to seek capital growth by investing in small
companies; and (3) both the Replaced and Replacement Fund have similar
risk profiles.
22. Substitution L: Applicants state that the investment objective
of both the Replaced and Replacement Funds is to produce capital growth
by investing primarily in common stocks of small U.S. companies. The
capitalization range is identical for both Funds. Applicants represent
that the Replaced and Replacement Funds have no significant risk
disparities.
Charges for the Replaced Fund include Management Fees of 0.89%,
12b-1 Fees of 0.30%, and Other Expenses of 0.36%. Charges for the
Replacement Fund include Management Fees of 0.85%, Other Expenses of
0.15%, and no 12b-1 Fee. There is no fee reduction arrangement
applicable to either Fund. Total gross annual operating expenses for
Replaced and Replacement Funds are 1.55% and 1.00%, respectively. Under
the Contracts, the Separate Account fee is identical for both Funds.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of both Funds are nearly identical; and (2) the
Replacement Fund will be managed by the same portfolio manager (using
the same management style and strategy) as the Replaced Fund.
23. Substitution M: Applicants state that both Replaced and
Replacement Funds seek capital growth through investment in securities
of small U.S. companies. Applicants describe the capitalization range
for both Funds identically and represent that the Replaced and
Replacement Funds are managed by the same portfolio managers and have
similar investment strategies.
Charges for the Replaced Fund include Management Fees of 1.00%,
12b-1 Fees of 0.25%, and Other Expenses of 0.74%. Charges for the
Replacement Fund include Management Fees of 0.85%, Other Expenses of
0.15%, and no 12b-1 Fee. Respectively, the Replaced Funds' total gross
and net annual operating expenses are 1.99% and 1.40% (reflecting a
0.59% fee reduction arrangement). The Replacement Fund has no fee
reduction arrangement; its total gross and net annual operating
expenses are 1.00%. Under the Contracts, the Separate Account fee is
identical for both Funds. Applicants represent that the Replacement
Fund is an appropriate substitute for the Replaced Fund because: (1)
The investment objective and policies of both Funds are nearly
identical; and (2) the Replacement Fund will be managed by the same
portfolio manager (using the same management style and strategy) as the
Replaced Fund.
24. Substitution N: Applicants state that Replaced Fund seeks long-
term growth of capital in a manner consistent with the preservation of
capital by investing in common stocks of companies of any size located
throughout the world. Applicants state that the Replacement Fund seeks
capital appreciation by investing primarily in common stocks of mid-
sized and large companies worldwide. Applicants represent that the
Replacement Fund will invest mainly in developed countries but also may
invest in developing markets. Applicants state that both Funds may
invest in companies of any size.
Charges for the Replaced Fund include Management Fees of 0.60%,
12b-1 Fees of 0.25%, and Other Expenses of 0.31%. Charges for the
Replacement Fund include Management Fees of 0.79%, Other Expenses of
0.30%, and no 12b-1 Fee. Respectively, the Replaced Funds' total gross
and net annual operating expenses are 1.16% and 1.15% (reflecting a
0.01% fee reduction arrangement). The Replacement Fund has no fee
reduction arrangement; its total gross and net annual operating
expenses are 1.09%. Under the Contracts, the Separate Account fee is
identical for both Funds. Applicants represent that the Replacement
Fund is an appropriate substitute for the Replaced Fund because: (1)
The investment objective (capital appreciation by investing in common
stocks of companies worldwide) and policies of both Funds are
substantially similar; and (2) the Replaced and Replacement Funds have
similar risk profiles.
25. Substitution O: Applicants state that both Replaced and
Replacement Funds seek capital appreciation by investing principally in
common stocks of companies worldwide and employ a strategy of investing
primarily in mid-sized and large companies in developed countries.
Applicants state that each Fund may invest in companies of any size and
companies located in developing markets. Applicants represent that the
Funds have no significant risk disparities.
Charges for the Replaced Fund include Management Fees of 0.67%,
12b-1 Fees of 0.25%, and Other Expenses of 0.37%. Charges for the
Replacement Fund include Management Fees of 0.79%, Other Expenses of
0.30%, and no 12b-1 Fee. There is no fee reduction arrangement
applicable to either Fund. Total gross annual operating expenses for
Replaced and Replacement Funds are 1.29% and 1.00%, respectively. Under
the Contracts, the Separate Account fee is identical for both Funds.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of the Replacement Fund are nearly identical to those of
the Replaced Fund; and (2) the Replacement Fund will be managed by the
same portfolio manager (using the same management style and strategy)
as the Replaced Fund.
26. Substitution P: Applicants state that the Replaced Fund seeks
high total return by normally investing in equity securities of
companies of any country, debt securities of companies and governments
of any country, and money market instruments. Applicants state that the
Replacement Fund seeks high total return by investing in equity
[[Page 26127]]
securities of companies in any country, fixed income (debt) securities
of companies and governments of any country, and in money market
instruments. Applicants also represent that the Funds have no
significant risk disparities.
Charges for the Replaced Fund include Management Fees of 0.61% and
Other Expenses of 0.24%; it has no 12b-1 Fee. Charges for the
Replacement Fund include Management Fees of 0.50% and Other Expenses of
0.30%; it also has no 12b-1 Fee. Respectively, the Replaced Funds'
total gross and net annual operating expenses are 0.85% and 0.84%
(reflecting a 0.01% fee reduction arrangement). The Replacement Fund
has no fee reduction arrangement; its total gross and net annual
operating expenses are 0.80%. Under the Contracts, the Separate Account
fee is 1.25% for the Replace Fund and 1.00% for the Replacement Fund.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of the Replaced and Replacement Funds are nearly
identical; and (2) the Replacement Fund will be managed by the same
portfolio manager (using the same management style and strategy) as the
Replaced Fund.
27. Substitution Q: Applicants state that both the Replaced and
Replacement Funds seek long-term capital growth by investing mainly in
equity securities of companies located outside the U.S., including
emerging markets. Applicants further represent that both Funds may
invest in companies of any market capitalization, and they have no
significant risk disparities.
Charges for the Replaced Fund include Management Fees of 0.61%,
12b-1 Fees of 0.25%, and Other Expenses of 0.37%. Charges for the
Replacement Fund include Management Fees of 0.70% and Other Expenses of
0.30%; it has no 12b-1 Fee. There is no fee reduction arrangement
applicable to either Fund. Total gross annual operating expenses for
Replaced and Replacement Funds are 1.23% and 1.00%, respectively. Under
the Contracts, the Separate Account fee is identical for both Funds.
Applicants represent that the Replacement Fund is an appropriate
substitute for the Replaced Fund because: (1) The investment objective
and policies of the Replaced and Replacement Funds are nearly
identical; and (2) the Replacement Fund will be managed by the same
portfolio manager (using the same management style and strategy) as the
Replaced Fund.
28. Substitution R: Applicants state that the Replaced Fund seeks
as high a level of current income as is consistent with the
preservation of capital and invests in mortgage-related securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities to achieve this objective. Applicants represent that
the Replacement Fund seeks the highest possible total return consistent
with the preservation of capital through current income and capital
gains on investments in intermediate and long-term debt instruments and
other income producing securities. Applicants state that the Replaced
Fund invests more significantly in mortgage-related securities than the
Replacement Fund and that the Replacement Fund may invest a larger
portion of its assets in foreign securities such as U.S. dollar
denominated emerging market debt.
Charges for the Replaced Fund include Management Fees of 0.60% and
Other Expenses of 0.21%. Charges for the Replacement Fund include
Management Fees of 0.50% and Other Expenses of 0.20%. Neither Fund has
a 12b-1 Fee or a fee reduction arrangement. Total gross operating
annual expenses for Replaced and Replacement Funds are 0.81% and 0.70%,
respectively. Under the Contracts, the Separate Account fee is
identical for both Funds. Applicants represent that the Replacement
Fund is an appropriate substitute for the Replaced Fund because: (1)
The investment objective and policies of the Replacement Fund are
substantially similar to those of the Replaced Fund; (2) both Funds
invest in fixed-income securities with a focus on current income; (3)
the Replaced and Replacement Funds have similar risk profiles and
similar long-term performance; and (4) considering all of VALIC's
currently offered investment options, the Applicants believe that the
Replacement Fund is the most appropriate substitute for the Replaced
Fund because of its similarities in terms of its investment objectives,
policies, media and risk.
29. Applicants represent that the Substitution will take place at
the Funds' relative net asset values determined on the date of the
Substitution in accordance with Section 22 of the Act and Rule 22c-1
thereunder with no change in the amount of any Contract Owner's account
value or death benefit or in the dollar value of his or her investment
in any of the Divisions. Applicants represent that there will be no
financial impact on any Contract Owner. Applicants assert that the
Substitution will generally be effected by having each of the Divisions
that invests in the Replaced Funds redeem its shares at the net asset
value calculated on the date of the Substitution and purchase shares of
the respective Replacement Funds at the net asset value calculated on
the same date.
30. Applicants represent that, in the alternative, should a
Replaced Fund determine that a cash redemption would adversely affect
its shareholders, it may redeem the interest ``in-kind.'' Applicants
represent that in such a case, the Substitution will be effected by the
Division contributing all the securities it receives from the Replaced
Fund for an amount of Replacement Fund shares equal to the fair market
value of the securities contributed. Applicants assert that all in-kind
redemptions from a Replaced Fund of which any of the Applicants is an
affiliated person will be effected in accordance with the conditions
set forth in the Commission's no-action letter issued to Signature
Financial Group, Inc. (available December 28, 1999).
31. Applicants state that the Substitution was described in a
supplement to the prospectuses for the Contracts (``Supplements'')
dated and filed with the Commission on March 1, 2006 and mailed to
Contract Owners. Applicants represent that the Supplements provided
Contract Owners with notice of the Substitution and described the
reasons for engaging in the Substitution. Applicants further represent
that the Supplements informed Contract Owners with assets allocated to
a Division investing in the Replaced Funds that the Replaced Funds will
not be an available investment option after the date of the
Substitution and that Contract Owners will have the opportunity to
reallocate account value:
Prior to the Substitution, from the Divisions investing in
the Replaced Funds, and
For 30 days after the Substitution, from the Divisions
investing in the Replacement Funds to Divisions investing in other
Funds available under the respective Contracts,
without diminishing the number of free transfers that may be made in a
given contract year and without the imposition of any transfer charge
or limitation, other than any applicable limitations in place to deter
potentially harmful excessive trading.
32. Applicants represent that the prospectuses for the Contracts
will contain the substance of the information contained in the
Supplements concerning the Substitution. Applicants represent that each
Contract Owner will
[[Page 26128]]
be provided with a prospectus for the Replacement Funds before the
Substitution and that within five days after the Substitution, VALIC
will send affected Contract Owners written confirmation that the
Substitution has occurred and notice that Contract Owners will have the
opportunity to reallocate account value for 30 days after the
Substitution, from the Divisions investing in the Replacement Funds to
Divisions investing in other Funds available under the respective
Contracts, without diminishing the number of free transfers that may be
made in a given contract year and without the imposition of any
transfer charge or limitation, other than any applicable limitations in
place to deter potentially harmful excessive trading.
33. Applicants state that VALIC will pay all direct and indirect
expenses and transaction costs of the Substitution, including all
legal, accounting and brokerage expenses relating to the Substitution,
and no costs will be borne by Contract Owners. Further, Applicants
represent that affected Contract Owners will not incur any fees or
charges as a result of the Substitution, nor will their rights or the
obligations of the Applicants under the Contracts be altered in any
way. Applicants represent that (1) the Substitution will not cause the
fees and charges under the Contracts currently being paid by Contract
Owners, including Separate Account Fees, to be greater after the
Substitution than before the Substitution; (2) the Substitution will
have no adverse tax consequences to Contract Owners; and (3) the
Substitution will in no way alter the tax benefits to Contract Owners.
34. Applicants believe that their request satisfies the standards
for relief pursuant to Section 26(c) of the Act, as set forth below,
because the affected Contract Owners will have:
(1) Account values allocated to a Division invested in a
Replacement Fund with an investment objective and policies
substantially similar to the investment objective and policies of the
Replaced Fund; and
(2) Replacement Funds whose current total annual expenses are equal
to or lower than those of the Replaced Funds for their 2005 fiscal
years. In addition, VALIC has agreed that, for a period of 24 months
following the Substitution, it will reimburse affected Contract Owners
to the extent the expenses of a Replacement Fund exceed those of the
Replaced Fund for the 2005 fiscal years.
Applicants' Section 26(c) Legal Analysis
1. Section 26(c) of the Act makes it 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 approves the substitution. The Commission may approve
such a substitution if the evidence establishes that it is consistent
with the protection of investors and the purposes fairly intended by
the policy and provisions of the Act.
2. Applicants assert that the purposes, terms and conditions of the
Substitution are consistent with the principles and purposes of Section
26(c) and do not entail any of the abuses that Section 26(c) is
designed to prevent. Applicants have reserved the right to make such a
substitution under the Contracts and represent that this reserved right
is disclosed in the prospectus for the Contracts.
3. Applicants represent that for all 18 Substitutions, the
investment objectives and policies of the Replacement Funds are
sufficiently similar to those of the corresponding Replaced Funds that
Contract Owners will have reasonable continuity in investment
expectations. Accordingly, Applicants believe the Replacement Funds are
appropriate investment vehicles for those Contract Owners who have
account values allocated to the Replaced Funds.
4. For each of the 18 Substitutions, Applicants represent that the
Replacement Funds' current annual expenses are lower than the annual
expenses of the corresponding Replaced Funds for their 2005 fiscal
years. Applicants represent that for the 24 month period following the
date of the Substitution, VALIC agrees that if, on the last day of each
fiscal quarter during the 24 month period, the total operating expenses
of a Replacement Fund (taking into account any expense waiver or
reimbursement) exceed on an annualized basis the net expense level of
the corresponding Replaced Fund for the 2005 fiscal year, it will, for
each Contract outstanding on the date of the Substitution, make a
corresponding reimbursement of Separate Account expenses as of the last
day of such fiscal quarter, such that the amount of the Replacement
Fund's net expenses, together with those of the corresponding Separate
Account will, on an annualized basis, be no greater than the sum of the
net expenses of the corresponding Replaced Fund and the expenses of the
Separate Account for the 2005 fiscal year. Applicants also represent
that VALIC agrees that, notwithstanding any higher maximum permitted
Separate Account Fee disclosed in a prospectus and set forth in a
variable annuity contract, the net Separate Account Fee charged in the
future to a Contract Owner on a Division that invests in a Replacement
Fund will be no higher than the net Separate Account Fee charged in the
most recent fiscal year to that Contract Owner on the Division that
invests in the corresponding Replaced Fund. In addition, Applicants
represent that for 24 months following the Substitution, VALIC will not
increase contractual asset-based fees or charges for Contracts
outstanding on the day of the Substitution.
5. VALIC represents that the Substitution and the selection of the
Replacement Funds were not motivated by any financial consideration
paid or to be paid by the Replacement Funds, their advisors or
underwriters, or their respective affiliates.
6. Applicants represent that the Substitution will not result in
the type of costly forced redemption that Section 26(c) was intended to
guard against and represent that the Substitution is consistent with
the protection of investors and the purposes fairly intended by the Act
because:
(1) Each of the Replacement Funds is an appropriate fund to which
to move Contract Owners with account values allocated to the Replaced
Funds because the new funds have substantially similar investment
objectives and policies.
(2) The direct and indirect costs of the Substitution, including
any brokerage costs, will be borne by VALIC and will not be borne by
Contract Owners. No charges will be assessed to effect the
Substitution.
(3) The Substitution will be at the net asset values of the
respective shares without the imposition of any transfer or similar
charge and with no change in the amount of any Contract Owner's account
value.
(4) The Substitution will not cause the fees and charges under the
Contracts currently being paid by Contract Owners, including Separate
Account Fees, to be greater after the Substitution than before the
Substitution and will result in Contract Owners' account values being
moved to a Fund with the same or lower current total annual expenses.
(5) All Contract Owners will be given notice of the Substitution
prior to the Substitution and will have an opportunity beginning after
such notice and until 30 days after the Substitution to reallocate
account value among other available Divisions without the reallocation
being counted as one of the Contract Owner's free transfers in a
contract year and without the imposition of any transfer charge or
limitation, other than any applicable
[[Page 26129]]
limitations in place to deter potentially harmful excessive trading.
(6) Within five days after the Substitution, VALIC will send to its
affected Contract Owners written confirmation that the Substitution has
occurred.
(7) The Substitution will in no way alter the insurance benefits to
Contract Owners or the contractual obligations of VALIC.
(8) The Substitution will have no adverse tax consequences to
Contract Owners and will in no way alter the tax benefits to Contract
Owners.
(9) No Replacement Fund will rely on the previously granted
``manager of managers'' exemptive relief unless such action is approved
by a majority of the Replacement Fund's shareholders at a meeting whose
record date is after the Substitution has been effected.
Section 17 Applicants' Legal Analysis
1. Section 17(a)(1) of the Act, in relevant part, prohibits any
affiliated person of a registered investment company, or any affiliated
person of such person, acting as principal, from knowingly selling any
security or other property to that company. Section 17(a)(2) of the Act
generally prohibits the persons described above, acting as principal,
from knowingly purchasing any security or other property from the
registered company.
2. Because shares held by Separate Account A are legally owned by
VALIC, VALIC will own of record substantially all of the shares of the
Replacement Funds. In addition, as investment adviser to each
Replacement Fund, VALIC could be deemed to control each Replacement
Fund. Therefore, each Replacement Fund could be deemed to be an
affiliate of VALIC and, to the extent Separate Account A uses assets
received in-kind to purchase shares of a Replacement Fund, the
Substitution may be deemed to involve one or more purchases or sales of
securities or property between persons who are affiliates of
affiliates. Accordingly, the Section 17 Applicants are seeking relief
to the extent necessary from Section 17(a) for the in-kind purchases
and sales of Replacement Fund Shares.
3. Section 17(b) of the Act provides that the Commission may, upon
application, grant an order exempting any transaction from the
prohibitions of Section 17(a) if the 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 records
filed under the Act; and the proposed transaction is consistent with
the general purposes of the Act.
4. The Section 17 Applicants represent that the terms of the
proposed in-kind purchases of shares of the Replacement Funds by
Separate Account A, including the consideration to be paid and received
by each Fund involved are reasonable, fair and do not involve
overreaching on the part of any person concerned. The Section 17
Applicants also represent that the proposed in-kind purchases by
Separate Account A are consistent with the policies of VALIC I and the
individual Replacement Funds. Finally, the Section 17 Applicants submit
that the proposed substitutions are consistent with the general
purposes of the Act.
5. To the extent that Separate Account A's in-kind purchases of
Replacement Fund shares are deemed to involve principal transactions
between entities which are affiliates of affiliates, Applicants assert
that the procedures described herein should be sufficient to assure
that the terms of the proposed transactions are reasonable and fair to
all participants because (1) the proposed transactions will take place
at relative net asset value in conformity with the requirements of
Section 22(c) of the Act and Rule 22c-1 thereunder with no change in
the amount of any Contract Owner's account value or death benefit or in
the dollar value of his or her investment in any Division; (2) Contract
Owners will not suffer any adverse tax consequences as a result of the
substitutions; and (3) the fees and charges under the Contracts will
not increase because of the substitutions.
6. Even though they may not rely on Rule 17a-7, the Section 17
Applicants represent that they will carry out the proposed in-kind
purchases in conformity with all of the conditions of Rule 17a-7 and
each Fund's procedures thereunder, except that: (1) The consideration
paid for the securities being purchased or sold may not be entirely
cash, and (2) the Board of Directors of VALIC I will not separately
review each portfolio security purchased by the Replacement Funds.
Section 17 Applicants assert that the circumstances surrounding the
proposed substitutions will offer the same degree of protection to each
Replacement Fund from overreaching that Rule 17a-7 provides to them
generally in connection with their purchase and sale of securities
under that Rule in the ordinary course of their business. In
particular, Section 17 Applicants assert that VALIC (or any of its
affiliates) cannot effect the proposed transactions at a price that is
disadvantageous to any of the Replacement Funds. Section 17 Applicants
represent that although the transactions may not be entirely for cash,
each will be effected based upon (1) the independent market price of
the portfolio securities valued as specified in paragraph (b) of Rule
17a-7, and (2) the net asset value per share of each Fund involved
valued in accordance with the procedures disclosed in its registration
statement and as required by Rule 22c-1 under the Act. Further, Section
17 Applicants represent that no brokerage commission, fee (except for
customary transfer fees), or other remuneration will be paid to any
party in connection with the proposed transactions.
7. The Section 17 Applicants assert that the sale of shares of
Replacement Funds for investment securities, as contemplated by the
proposed in-kind transactions, is consistent with the investment policy
and restrictions of the Replacement Funds because (1) the shares are
sold at their net asset value, and (2) the portfolio securities are of
the type and quality that the Replacement Funds would each have
acquired with the proceeds from share sales had the shares been sold
for cash. To assure that the second of these conditions is met, Section
17 Applicants represent that each sub-adviser will examine the
portfolio securities being offered to each Replacement Fund and accept
only those securities as consideration for shares that it would have
acquired for each such fund in a cash transaction.
8. Section 17 Applicants assert that the proposed in-kind
transactions (1) are consistent with the general purposes of the Act as
stated in the Findings and Declaration of Policy in Section I of the
Act; (2) do not present any of the conditions or abuses that the Act
was designed to prevent; and (3) the abuses described in Sections
l(b)(2) and (3) of the Act will not occur in connection with the
proposed in-kind purchases.
Conclusions
1. Applicants submit that for the reasons and upon the facts set
forth in their application, the requested order meets the standards set
forth in Section 26(c) and should, therefore, be granted.
2. Section 17 Applicants represent that the proposed in-kind
transactions meet all of the requirements of Section 17(b) of the Act
and that an exemption should be granted, to the extent necessary, from
the provisions of Section 17(a).
[[Page 26130]]
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E6-6660 Filed 5-2-06; 8:45 am]
BILLING CODE 8010-01-P