[Federal Register Volume 59, Number 151 (Monday, August 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19250]


[[Page Unknown]]

[Federal Register: August 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20437; No. 812-8990]

 

American United Life Insurance Company, et al.

August 2, 1994.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').

ACTION: Notice of Application for an Order under the Investment Company 
Act of 1940 (the ``1940 Act'').

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APPLICANTS: American United Life Insurance Company (``AUL''), AUL 
American Individual Unit Trust (``Variable Account'') and any other 
investment accounts (``Other Accounts'') established by AUL in the 
future to support certain individual variable annuity contracts 
(``Contracts'') as described herein, or that may in the future be 
issued by AUL that are substantially similar to the Contracts but are 
issued through other separate accounts (``Future Contracts) 
(collectively, ``Applicants'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act granting exemption from the provisions of Sections 26(a)(2) 
(C) and 27(c)(2) of the 1940 Act.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction from the assets of the Variable Account of a mortality and 
expense risk charge in connection with the offer and sale of the 
Contracts or Future Contracts.

FILING DATE: The application was filed on May 13, 1994. An Amended and 
Restated Application was filed on July 27, 1994.

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 Commission's Secretary 
and serving the 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 August 29, 1994, and should be accompanied by proof of service 
on Applicants in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicants, c/o Richard A. Wacker, Esq., Associate General 
Counsel, American United Life Insurance Company, One American Square, 
Indianapolis, Indiana 46204.

FOR FURTHER INFORMATION CONTACT: Yvonne M. Hunold, Senior Counsel, or 
Michael V. Wible, Special Counsel, at (202) 942-0670, Office of 
insurance Products (Division of Investment Management).

SUPPLEMENTARY INFORMATION: Following is a summary of the application; 
the complete application is available for a fee from the Commission's 
Public Reference Branch.

Applicants' Representations

    1. AUL is a mutual life insurance company principally engaged in 
offering life and health insurance and annuities. AUL is licensed to do 
business in 45 states and the District of Columbia.
    2. The Variable Account was established by AUL as a separate 
account to fund variable annuity contracts. The Variable Account will 
be registered with the Commission as a unit investment trust under the 
1940 Act and the Contracts will be registered as securities under the 
Securities Act of 1933 (``1933 Act'').
    The Variable Account currently is divided into eleven subaccounts 
(``Subaccounts''), each investing in shares of a corresponding 
portfolio of the following funds: (a) AUL American Series Fund, Inc. 
(``Series Fund''), offering the Equity, Bond, Money Market, and Managed 
Portfolios; (b) the Variable Insurance Products Fund (``VIP''), 
offering the High Income, Growth, and Overseas Portfolios; (c) the 
Variable Insurance Products Fund II (``VIP II''), offering the Asset 
Manager and Index 500 Portfolios; and (d) TCI Portfolios, Inc., offer 
Growth Investors and TCI International Portfolios (individually, 
``Fund'' or collectively, ``Funds''). Each of the Funds is registered 
with the Commission as an open-end management investment company.
    AUL may, at a later date, determine to divide the Variable Account 
into additional subaccounts to invest in other portfolios of the Funds 
or in other securities, mutual funds, or investment vehicles. Shares of 
each Fund are purchased by AUL for the corresponding Subaccount at the 
Fund's net asset value per share. All dividends and capital gain 
distributions received from a Fund will be automatically reinvested in 
such Fund at net asset value, unless otherwise instructed by AUL.
    3. The Series Fund is managed by AUL. Fidelity Management & 
Research Company is the investment adviser to VIP and VIP II and 
Investors Research Corporation is the investment adviser to TCI 
Portfolios, Inc. AUL will be the principal underwriter and distributor 
of the Contracts. AUL, Fidelity Management and Investors Research are 
registered investment advisers under the Investment Advisers Act of 
1940. AUL is a broker-dealer registered under the Securities Exchange 
Act of 1934.
    4. The Contracts are variable annuity contracts used in connection 
with retirement plans (``Plans'') that are either non-tax qualified 
Plans or Plans that qualify for favorable tax-deferred treatment under 
Sections 401, 403(b) or 408(b) of the Internal Revenue Code of 1986, as 
amended. Applicants state that exemptive relief is sought with respect 
to two variations of the Contracts--Flexibile Premium Contracts and One 
Year Flexible Premium Contracts, as well as for any Future Contracts 
that are issued through Other Accounts. These Contracts permit premiums 
to vary in amount and frequency but require certain minimum premium 
payments and restrict maximum payments and additional payments. These 
Contracts further provide for several fixed annuity options under which 
payments will be fixed and guaranteed by AUL, and for accumulation of 
values on either a variable or a fixed basis, or both. Premiums 
allocated to the Fixed Account, a general account of AUL, will earn 
interest at a minimum guaranteed effective annual rate of 3 percent. 
Premiums allocated to the Variable Account will be credited with the 
investment experience of the selected Subaccount; these amounts are not 
guaranteed. Prior to the Annuity Date and during the Contract Owner's 
lifetime all or a portion of the Contract Value may be surrendered, 
subject to certain minimums and constraints on withdrawals or full 
surrenders under Contracts issued in connection with certain retirement 
programs.
    5. The Contracts also will provide for a death benefit equal to the 
Contract Value if the Contract Owner dies at or after age 76. If the 
Contract Owner dies prior to age 76, the death benefit is equal to the 
greater of: (a) the Contract Value at the end of the applicable 
Valuation Period, or (b) the value of net premiums less any amounts 
withdrawn (including withdrawal charges) prior to death, less annual 
fees assessed prior to death, plus interest earned on net premiums 
(less amounts withdrawn and annual fees described above) credited at an 
annual effective rate of 4 % until the date of death.
    6. Various fees and expenses are deducted under the Contracts and 
the Variable Account. An administrative fee equal to the lesser of 2% 
of Contract Value or $30 per year will be deducted proportionately from 
Contract Value allocated among the Subaccounts and the Fixed Account. 
This fee will be deducted annually during the Accumulation Period and 
may be deducted on a pro-rata basis if the Contract is surrendered or 
annuitized on a date other than a Contract Anniversary. The 
administrative fee, which may be waived under certain circumstances, is 
to compensate AUL for the expenses associated with administration of 
the Contracts and operation of the Variable Account. AUL may increase 
the administrative fee, but only to the extent necessary to recover the 
expenses associated with administration of the Contracts and operations 
of the Variable Account.
    7. AUL will assess a charge to reimburse itself for premium taxes 
that it incurs on behalf of a particular Contract, usually when an 
annuity is effected. Premium taxes currently range from 0% to 3.5%, 
subject to change. No charges currently are made for federal, state or 
local income taxes. No charges currently are imposed for transfers 
among the Subaccounts or to or from the Fixed Account; however, AUL 
reserves the right to assess transfer charges at a future date. Each 
subaccount of the Variable Account purchases shares of the 
corresponding Fund at net asset value, which reflects the investment 
advisory fee and other expenses deducted from Fund assets.
    8. No sales charges are deducted from premium payments under the 
Contracts. A contingent deferred sales charge (``CDSC''), described 
below, is assessed for cash withdrawals and surrenders. The amount of 
the CDSC that applies to both variations of the Contracts, based on the 
number of years that the Contract has been in existence (and the number 
of years that a premium has been creditd to Contract Value), is as 
follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     1          2          3          4          5          6          7          8          9          10        11+   
         Contract year          ------------------------------------------------------------------------------------------------------------------------
                                 (Percent)  (Percent)  (Percent)  (Percent)  (Percent)  (Percent)  (Percent)  (Percent)  (Percent)  (Percent)  (Percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Flexible premium...............         10          9          8          7          6          5          4          3          2          1          0
Single premium.................          7          6          5          4          3          2          1          0          0          0          0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    No CDSC will be assessed: (a) on up to 12% of Contract Value at the 
time of the first withdrawal in any Contract Year in which the 
withdrawal is being made; any transfer for Contract Value from the 
Fixed Account to the Variable Account will reduce the free withdrawal 
amount by the amount transferred; (b) premiums paid more than 10 years 
ago for Flexible Premium Contracts and 8 years ago for Single Premium 
Contracts; (c) on or after the Annuity Date; or (d) upon payment of a 
death benefit. In no event will the CDSC, when added to any withdrawal 
charges previously assessed against any amount withdrawn from a 
Contract, exceed 8.5% or 8%, respectively, of total premiums paid under 
a Flexible Premium Contract or a One Year Flexible Premium Contract. 
The CDSC will compensate AUL for certain expenses related to the sale 
of the Contracts. AUL reserves the right to increase or decrease the 
withdrawal charge for any Contracts established on or after the 
effective date of the change.
    9. A daily charge equal to an annual rate of 1.25% of the average 
daily net assets of each Subaccount will be imposed to compensate AUL 
for bearing certain mortality and expense risks it assumes in offering 
and administering the Contracts and in operating the Variable Account. 
Of this amount, .80% is attributable to mortality risks, and .40% is 
attributable to expense risks. The proportion of these charges may 
change but the aggregate charge is guaranteed by AUL not to increase. 
The charge may be a source of profit for AUL which will be added to its 
surplus and may be used for, among other things, the payment of 
distribution expenses not covered by the CDSC.
    10. The mortality risk arises from AUL's contractual obligation to 
make Annuity Payments (determined in accordance with AUL's actuarial 
tables) regardless of how long all Annuitants as a group may live, or 
that an individual Contract Owner or Annuitant may die before the end 
of the CDSC period, in which case the CDSC will not be assessed on 
payment of death benefit proceeds and AUL may not recover its 
distribution expenses. A mortality risk also is assumed in connection 
with payment of the death benefit because it could exceed the Account 
Value.
    11. The expense risk assumed by AUL is that its actual expenses in 
issuing and administering the Contracts and operating the Variable 
Account will exceed the amount recovered through the administrative 
charges.

Applicants' Legal Analysis

    1. Section 6(c) of the 1940 Act authorizes the Commission, by order 
upon application, to conditionally or unconditionally grant an 
exemption from any provision, rule or regulation of the 1940 Act to the 
extent that the exemption is necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.
    2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant 
part, prohibit a registered unit investment trust, its depositor or 
principal underwriter, from selling periodic payment plan certificates 
unless the proceeds of all payments, other than sales loads, are 
deposited with a qualified bank and held under arrangements which 
prohibit any payment to the depositor or principal underwriter except a 
reasonable fee, as the Commission may prescribe, for performing 
bookkeeping and other administrative duties normally performed by the 
bank itself.
    3. Applicants state that the Commission has taken the position that 
Sections 27(c)(2) and 26(a)(2)(C) of the 1940 Act, in effect, preclude 
assessing a mortality and expense risk charge against the Variable 
Account in the absence of exemptive relief. Consequently, Applicants 
request exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 1940 
Act to the extent necessary to permit the deduction from the assets of 
the Variable Account of a maximum charge of 1.25% for the assumption of 
mortality and expense risks. Applicants believe that the requested 
exemptions are necessary and appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the 1940 Act.
    4. Applicants submit that AUL is entitled to reasonable 
compensation for its assumption of mortality and expense risks. The 
mortality and expense risk charge is a reasonable charge to compensate 
AUL for the risks that: (a) Annuitants under the Contract will live 
longer individually or as a group than has been anticipated in setting 
the annuity rates guaranteed in the Contracts; (b) the Account Value 
will be less than the Death Benefit; and (c) administrative expenses 
will be greater than amounts derived from the administrative charges. 
Applicants represent that the mortality and expense risk charge under 
the Contracts is within the range of industry practicer for comparable 
annuity products. This representation is based upon Applicants' 
analysis of publicly available information about similar industry 
products, taking into consideration such factors as annuity purchase 
rate guarantees, death benefit guarantees, other contract charge, the 
frequency of charges, the administrative services performed by the 
companies with respect to the contracts, distribution methods, the 
market for the contracts, and the tax status of the contracts. 
Applicants represent that they will maintain at their Home Office, 
available to the Commission, a memorandum setting forth in detail the 
products analyzed in the course of, and the methodology and result of, 
Applicants' comparative review.
    5. Applicants acknowledge that, if a profit is realized from the 
mortality and expense risk charge, all or a portion of such profit may 
be available to pay distribution expenses not reimbursed by the CDSC. 
Applicants have concluded that there is a reasonable likelihood that 
the proposed distribution financing arrangements will benefit the 
Variable Account and the Contract Owners. The basis for that conclusion 
is set forth in a memorandum which will be maintained by Banner Life at 
its administered offices and will be available to the Commission.
    6. AUL also represents that the Variable Account will invest only 
in open-end management investment companies that undertake, in the 
event they should adopt a plan under Rule 12b-1 to finance distribution 
expenses, to have a board of directors or trustees, a majority of whom 
are not ``interested persons'' of the company, formulate and approve 
any such plan.
    7. Applicants believe that the terms of the relief requested with 
respect to any Future Contracts funded by Other Accounts are consistent 
with the standards of Section 6(c) of the 1940 Act. Applicants assert 
that, without the requested relief, AUL would have to request and 
obtain exemptive relief for each new Other Account it establishes to 
fund any Future Contract. Applicants submit that such additional 
requests for exemptive relief would present no issues under the 1940 
Act that have not already been addressed in this Application.

Conclusion

    For the reasons set forth above, Applicants represent that the 
exemptions requested are necessary and appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act. 
Accordingly, Applicants request relief from Sections 26(a)(2)(C) and 
27(c)(2) to the extent necessary to permit the assessment and deduction 
of the mortality and expense risk charge with respect to the Contracts 
and any Future Contracts.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-19250 Filed 8-5-94; 8:45 am]
BILLING CODE 8010-01-M